[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




             H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999

=======================================================================

                                HEARINGS

                               before the

                   SUBCOMMITTEE ON THE POSTAL SERVICE

                                 of the

                     COMMITTEE ON GOVERNMENT REFORM
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                                   ON

                                H.R. 22

           TO MODERNIZE THE POSTAL LAWS OF THE UNITED STATES

                               ----------                              

                     FEBRUARY 11, AND MARCH 4, 1999

                               ----------                              

                           Serial No. 106-16

                               ----------                              

       Printed for the use of the Committee on Government Reform


        Available via the World Wide Web: http://www.house.gov/
reform                                ------                                
             H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999

             H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999

             H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999

             H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999

             H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999

             H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999



 
             H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999

=======================================================================

                                HEARINGS

                               before the

                   SUBCOMMITTEE ON THE POSTAL SERVICE

                                 of the

                     COMMITTEE ON GOVERNMENT REFORM
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                                   ON


                                H.R. 22

           TO MODERNIZE THE POSTAL LAWS OF THE UNITED STATES

                               __________

                     FEBRUARY 11, AND MARCH 4, 1999

                               __________

                           Serial No. 106-16

                               __________

       Printed for the use of the Committee on Government Reform


     Available via the World Wide Web: http://www.house.gov/reform

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
57-558                      WASHINGTON : 1999




                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                GARY A. CONDIT, California
THOMAS M. DAVIS, Virginia            PATSY T. MINK, Hawaii
DAVID M. McINTOSH, Indiana           CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana              ELEANOR HOLMES NORTON, Washington, 
JOE SCARBOROUGH, Florida                 DC
STEVEN C. LaTOURETTE, Ohio           CHAKA FATTAH, Pennsylvania
MARSHALL ``MARK'' SANFORD, South     ELIJAH E. CUMMINGS, Maryland
    Carolina                         DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia                    ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida                  DANNY K. DAVIS, Illinois
ASA HUTCHINSON, Arkansas             JOHN F. TIERNEY, Massachusetts
LEE TERRY, Nebraska                  JIM TURNER, Texas
JUDY BIGGERT, Illinois               THOMAS H. ALLEN, Maine
GREG WALDEN, Oregon                  HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
JOHN T. DOOLITTLE, California            (Independent)
HELEN CHENOWETH, Idaho


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                      Carla J. Martin, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

                   Subcommittee on the Postal Service

                   JOHN M. McHUGH, New York, Chairman
MARSHALL ``MARK'' SANFORD, South     CHAKA FATTAH, Pennsylvania
    Carolina                         MAJOR R. OWENS, New York
BENJAMIN A. GILMAN, New York         DANNY K. DAVIS, Illinois
STEVEN C. LaTOURETTE, Ohio
DAN MILLER, Florida

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                      Robert Taub, Staff Director
                      Heea Vazirani-Fales, Counsel
                        Abigail Hurowitz, Clerk
           Denise Wilson, Minority Professional Staff Member




                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 11, 1999............................................     1
    March 4, 1999................................................   303
    Text of H.R. 22..............................................     2
Statement of:
    Biller, Moe, president, American Postal Workers Union, AFL-
      CIO; Vince Sombrotto, president, National Association of 
      Letter Carriers; William Quinn, president, National Postal 
      Mail Handlers Union, AFL-CIO; and Steve Smith, president, 
      National Rural Letter Carriers Association.................   253
    Carrico, Ted, president, National Association of Postmasters 
      of the United States; Joe Cinadr, president, National 
      League of Postmasters of the United States; and Ted 
      Keating, vice president, National Association of Postal 
      Supervisors................................................   215
    Cerasale, Jerry, senior vice president, Government Affairs 
      Direct Marketing Association, Inc., on behalf of the 
      Mailers Coalition for Postal Reform; Neal Denton, executive 
      director, Alliance of Nonprofit Mailers; and Robert ``Kam'' 
      Kamerschen, on behalf of the Saturation Mailers Coalition..   372
    Estes, John T., executive director, Main Street Coalition for 
      Postal Fairness, accompanied by John F. Sturm, Newspaper 
      Association of America; Lee Cassidy, National Foundation; 
      David Stover, the Greeting Card Association; Guy Wendler, 
      American Business Press; Kenneth B. Allen, National 
      Newspaper Association; and Charmaine Fennie, chairperson, 
      Coalition Against Unfair USPS Competition..................   428
    Gleiman, Edward J., postal rate chairman, accompanied by W.H. 
      ``Trey'' LeBlanc, vice chairman; George A. Omas, 
      commissioner; Ruth Y. Goldway, commissioner; and Dana B. 
      ``Danny'' Covington, commissioner..........................   129
    Henderson, William, Postmaster General, accompanied by Mary 
      S. Elcano, senior vice president and general counsel, U.S. 
      Postal Service.............................................    68
    Patterson, Donna E., Deputy Assistant Attorney General of the 
      Antitrust Division, Department of Justice..................   313
    Smith, Fred, chairman and chief executive officer, FDX Corp.; 
      and James Kelly, chairman and chief executive officer, 
      United Parcel Service......................................   335
Letters, statements, etc., submitted for the record by:
    Allen, Kenneth B., National Newspaper Association, prepared 
      statement of...............................................   519
    Biller, Moe, president, American Postal Workers Union, AFL-
      CIO, prepared statement of.................................   256
    Burton, Hon. Dan, a Representative in Congress from the State 
      of Illinois, prepared statements of...................... 54, 327
    Carrico, Ted, president, National Association of Postmasters 
      of the United States:
        Additional questions and responses.......................   242
        Prepared statement of....................................   218
    Cassidy, Lee, National Foundation, prepared statement of.....   484
    Cerasale, Jerry, senior vice president, Government Affairs 
      Direct Marketing Association, Inc., on behalf of the 
      Mailers Coalition for Postal Reform, prepared statement of.   376
    Cinadr, Joe, president, National League of Postmasters of the 
      United States:
        Additional questions and responses.......................   251
        Prepared statement of....................................   224
    Davis, Hon. Danny K., a Representative in Congress from the 
      State of Illinois, prepared statement of...................   239
    Denton, Neal, executive director, Alliance of Nonprofit 
      Mailers, prepared statement of.............................   384
    Disbrow, William B., president and CEO, Cox Target Media, 
      Inc., prepared statement of................................   539
    Dzvonik, Michael, chairman, Mail Advertising Service 
      Association International, prepared statement of...........   534
    Estes, John T., executive director, Main Street Coalition for 
      Postal Fairness:
        Additional questions for the record......................   468
        Prepared statement of....................................   431
    Fattah, Hon. Chaka, a Representative in Congress from the 
      State of Pennsylvania, prepared statement of...............    59
    Fennie, Charmaine, chairperson, Coalition Against Unfair USPS 
      Competition, prepared statement of.........................   445
    Gilman, Hon. Benjamin A., a Representative in Congress from 
      the State of New York, prepared statement of...............    62
    Gleiman, Edward J., postal rate chairman:
        Additional questions and responses.......................   194
        Prepared statement of....................................   131
    Goldway, Ruth Y., commissioner, prepared statement of........   173
    Henderson, William, Postmaster General:
        Additional questions and responses.......................    93
        Information concerning advertising.......................    87
        Prepared statement of....................................    71
    Kamerschen, Robert ``Kam'', on behalf of the Saturation 
      Mailers Coalition:
        Additional questions for the record......................   418
        Prepared statement of....................................   395
    Kelly, James, chairman and chief executive officer, United 
      Parcel Service, prepared statement of......................   355
    McFadden, Nancy E., U.S. Department of Transportation, 
      prepared statement of......................................   558
    McHugh, Hon. John M., a Representative in Congress from the 
      State of New York:
        Prepared statement of.................................. 47, 306
        Prepared statement of Lewis Sachs........................   310
    Palladino, Vince, president, National Association of Postal 
      Supervisors, prepared statement of.........................   228
    Patterson, Donna E., Deputy Assistant Attorney General of the 
      Antitrust Division, Department of Justice:
        Additional questions for the record......................   330
        Prepared statement of....................................   316
    Quinn, William, president, National Postal Mail Handlers 
      Union, AFL-CIO, prepared statement of......................   283
    Smith, Fred, chairman and chief executive officer, FDX Corp.:
        Additional questions for the record......................   368
        Prepared statement of....................................   337
    Smith, Steve, president, National Rural Letter Carriers 
      Association:
        Additional questions and responses.......................   295
        Prepared statement of....................................   289
    Sombrotto, Vince, president, National Association of Letter 
      Carriers, prepared statement of............................   269
    Stover, David, the Greeting Card Association, prepared 
      statement of...............................................   501
    Sturm, John F., Newspaper Association of America, prepared 
      statement of...............................................   477
    Wendler, Guy, American Business Press, prepared statement of.   515
    Williamson, Robert C., president, Willmar Associates 
      International Inc., prepared statement of..................   560


             H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999

                              ----------                              


                      THURSDAY, FEBRUARY 11, 1999

                  House of Representatives,
                Subcommittee on the Postal Service,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2154, Rayburn House Office Building, Hon. John M. McHugh 
(chairman of the subcommittee) presiding.
    Present: Representatives McHugh, Gilman, LaTourette, 
Burton, Fattah, and Davis of Illinois.
    Staff present: Robert Taub, staff director; Heea Vazirani-
Fales, counsel; Abigail Hurowitz, clerk; Jane Hatcherson, 
legislative assistant; Denise Wilson, minority professional 
staff member; and Jean Gosa, minority administrative staff 
assistant.
    Mr. McHugh. The Subcommittee on the Postal Service will 
come to order. I would tell you this is the answer of my 
dreams. Every night I wake up and dream I'm sitting here and 
Chairman Burton's down there. And it's finally come true.
    Let me welcome you here this morning to the first hearing 
of this subcommittee for the 106th Congress. I am happy to note 
that, with one exception, virtually all of the members of last 
year's Congress have remained on this subcommittee. Some cynics 
amongst you might suggest that's the legislative equivalent of 
life without parole. I would suggest, however, that it is a 
tribute to the work of this subcommittee and a tribute as well 
to the cooperative effort that we, in my opinion, have enjoyed 
now for some time.
    To say that the purpose of our meeting here this morning is 
well stated would be an overstatement. If nothing else, the 
bill we're considering this morning, H.R. 22, is mature. I will 
not bore all of you with a recitation once again of what I feel 
are its main provisions, if not its main attractions.
    [The text of H.R. 22 follows:]
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    Mr. McHugh. We have four panels this morning and in all 
likelihood into this afternoon. Like all of you, we are here to 
listen to them and to review their comments. I would ask 
unanimous consent that my prepared statement be entered into 
the record in its entirety, as I would also ask unanimous 
consent that all Members have that opportunity to do so, as 
well.
    [The prepared statement of Hon. John M. McHugh follows:]
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    Mr. McHugh. We have today, as I said, four panels. Our lead 
panelist, of course, is the distinguished Postmaster General of 
the United States, William Henderson. This is the PMG's first 
appearance for this year and we're welcoming him once again. 
And, of course, our continued best wishes.
    We also have, on our second panel, the Postal Rate 
Commission members led by its chairman, Edward Gleiman, and 
five of its members. I will extend to him the honor of 
introducing them at the appropriate time. Our third and fourth 
panels will be comprised of the Postal Service's three 
management associations and its four major unions.
    I also wish to state that there is a need to clear the air 
in one regard with what appears to be some confusion about this 
bill, as we may hear from one of the witnesses on a later 
panel.
    As the Postmaster General will point out in his testimony, 
and I know this because I've read it as I've read all of the 
pre-prepared testimony, a price cap replaces cost of service 
regulation with an incentive-based regulatory system. However, 
because of a few provisions of H.R. 22 being adopted from the 
Federal Communications' experience with incentive regulations, 
some in the postal community have suggested that this bill, 
H.R. 22, is the same thing as telecom reform, or even the 
breakup of AT&T, or equivalent to deregulation of such sectors 
as the aviation industry.
    Comparison has been made, in my opinion, to suggest, albeit 
subtly, that the negative effects of some of those efforts will 
somehow be felt again, if and when we modernize our Nation's 
postal laws. I want to state that I believe that analogy is 
certainly inaccurate and, I would argue, it's rather illogical 
as well.
    H.R. 22 is not about breaking up the Postal Service as the 
courts required in the case of AT&T. Nor is it about trying to 
force competition into the postal and delivery sectors as 
Congress did indeed attempt to do when it deregulated both the 
airline industry and the telecom industry.
    The Postal Service is already fiercely competitive. I think 
all of us understand that. H.R. 22 simply recognizes that we 
will doom the Postal Service to failure unless we act to update 
our Nation's laws so that the Service can adapt, compete, grow 
and survive in carrying out its universal service mission well 
into the 21st century.
    And it will take some time for the Postal Service to adapt, 
even if H.R. 22 were enacted today, and I don't believe we're 
going to do that, are we? No, not today. But even if that were 
the case, it would set into motion a series of reforms that 
would probably not be fully implemented until some time in the 
year 2007, which would be the end of the first 5-year rate 
cycle.
    Those who support amendments or alternatives to H.R. 22 
must, I think, keep those kinds of timeframes in mind. 
Certainly reasoned and gradual change is the friend of all who 
wish to see a healthy and efficient Postal Service into the 
next century.
    So with that little editorialization aside, again, I 
welcome you all. Before I yield to my friend from the great 
State of Pennsylvania, the ranking minority member, I would 
like to yield to the chairman of the full committee, the 
gentleman from Indiana, Mr. Burton, for any comments he may 
wish to make, and certainly with our appreciation for his 
joining us here this morning. Mr. Chairman.
    Mr. Burton. Thank you, Chairman McHugh. First of all I want 
to congratulate you and thank you for all the hard work you and 
the ranking member have done over the past 4 years to bring 
this bill to this point. I don't know of anybody else in the 
Congress who would have liked to have done this job.
    I'm not sure that you really wanted to do it but you've 
done an outstanding job, and it's a real testimony to you. And 
I hope your constituents are watching because they ought to 
know how hard you worked on this as well.
    This bill is a very important bill. And it's one that I'm 
particularly interested in. That's why I decided to be a co-
sponsor with Chairman McHugh. I'd like to first state that 
although a lot of the provisions in the bill are extremely 
good, nothing is in concrete. It's still a fairly fluid 
document although we're probably going to use 90 percent of it.
    But I've met with Chairman McHugh and some other people 
from other areas of the postal community and private sector and 
they still have some differences of opinion. I understand that 
there may be as many as 75 to 100 or maybe more amendments. We 
hope to pare that down. But over the next few weeks, we're 
going to be meeting again and Chairman McHugh is going to bring 
me up to date, because I'm not as conversant with this subject 
as I want to be before we bring it to the full committee.
    I'm going to try to make sure that we accommodate as many 
people as possible. There needs to be level playing field so 
that the private sector and the Postal Service can compete 
fairly with one another, and there is still some concern about 
that.
    Last year the then Postmaster came to see me about the 
postal rates and the rate increase that was about to take 
place. And just to let you know that our committee does not 
have the latitude that I would like for it to have, I told him 
that I thought the 1 cent increase in the price of postage was 
not necessary, because there had been over $1 billion in black 
ink in the previous financial statement by the Postal Service 
and last year was well over $500 million. And we didn't think a 
postal rate increase was necessary.
    Nevertheless, the Postal Rate Commission didn't agree with 
us and they went ahead and increased that. Those are some of 
the concerns that we've had in the past and although this bill 
doesn't address them, it's one of the things that I'm concerned 
about in the future. That's why I'm particularly concerned 
about this one provision that you were talking about just a few 
moments ago.
    Let me just make sure I cover all my notes. I don't think I 
want to go into all the details that may be of concern to me in 
the bill because I think most of you are familiar with those. 
But I think in the next 10 years or so we're going to see a 
radical change in the way we communicate with one another.
    Faxes have become a way of life, e-mails have become a way 
of life. And unless we come out with something that realizes 
that fact, we're going to have rates going up in the Postal 
Service, because people will be shifting into these electronic 
means of communication and the Service may suffer as a result 
of that.
    These are things that have to be addressed, so that while 
communication moves into the 21st century we're still providing 
the best service for the people of this country at the lowest 
possible cost.
    I'd like to submit, Mr. Chairman, my entire statement for 
the record, but I want all of those interested parties to know 
that Chairman McHugh has asked me to sit down with him, and 
I've asked him to sit down with me and interested members of 
the various communities who are interested in this bill to talk 
about some final changes that might fine tune this bill to make 
it even better than it already is. And we're going to be 
working very hard to make sure that's accomplished in the next 
few weeks.
    But let me just say one more time that I don't know of 
anybody in the Congress that could have done as good a job as 
Chairman McHugh has over the past 4 years, with all the 
interested parties and all the diverse opinions on how this 
ought to be done, than he has. And so I want to congratulate 
him once again and tell him I'm very proud of him and I look 
forward to working with him to get the final product completed. 
Thank you.
    [The prepared statement of Hon. Dan Burton follows:]
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    Mr. McHugh. Well, thank you, Mr. Chairman. I deeply 
appreciate those kind comments. We've had a lot of great help, 
a lot of support on both sides on the aisle. And particularly, 
Mr. Chairman, with your leadership and your input and 
assistance, we've come a long way and I thank you for that. 
With that it's my pleasure now to yield to the gentleman from 
Pennsylvania, Philadelphia, PA, to be specific, the ranking 
minority member, Chaka Fattah.
    Mr. Fattah. Thank you, Mr. Chairman. And to the full 
committee chairman, it is, I think for all of us an important 
step as we approach the possibility of a mark-up on H.R. 22. 
Postal reform is something, as Chairman Burton has mentioned, 
and also the chairman of this subcommittee has made it very 
clear is important to a number of the stakeholders who are in 
this room and who we will be hearing from today, both the 
unions and the others who are involved in the implementation of 
postal service.
    We have mailers and we have private sector competitors to 
the Postal Service. But there is, in the final analysis, 
another group of shareholders who won't be directly represented 
in the testimony today that we need to keep uppermost in our 
mind, and that is the citizenry of our country who depend every 
day on the U.S. Postal Service to provide a universal service 
to them. They, above and beyond the other stakeholders should 
be the focus of our efforts at reform.
    I know that for my good friend, the gentleman from New 
York, that this will be a central focus of our work as we go 
forward. And that we do want to ease any unfair burden on those 
who are private sector participants in this process. But we 
cannot assume something that is not the case, and that is that 
they somehow are in the same business as the U.S. Postal 
Service.
    There is only one U.S. Postal Service, there is only one 
entity with the burden and the responsibility given to them by 
the Congress to deliver mail anywhere in this country, 
notwithstanding the economics of it, and to do that in an 
efficient and an effective manner. So I want to thank the 
Postmaster General, who we will hear from, for his leadership. 
He is doing an excellent job and also keeping us informed as it 
relates to his work.
    I want to welcome, I understand we have a new committee 
member, Mr. Miller, from Florida, who is not with us yet today, 
but welcome him to the subcommittee. There is a lot going on 
today. I have Secretary Riley down the hall in another 
committee hearing. But there is always a lot going on in the 
Congress so we'll try to manage it as well as we can.
    I'll offer some formal remarks for the record, as we go 
forward. And I look forward to being engaged in this activity. 
The postal reform is now fully on the front burner of the full 
committee. And I think we can tell by the chairman's presence 
here this morning that he intends to have some action in this 
regard. Thank you.
    Mr. McHugh. I thank the gentleman. I particularly thank him 
for his very active leadership on this subcommittee and for his 
role in assisting the effort that we're all concentrating on 
and the purpose for our meeting here this morning. Let me yield 
now to the dean of the New York State delegation, a good friend 
and certainly a leader of longstanding on postal issues, a 
gentleman, as I said, from New York, Mr. Gilman, for any 
comments he may wish to make.
    Mr. Gilman. Thank you, Mr. Chairman, I'll be brief because 
I know we have some important participants this morning that we 
want to hear from. I want to commend you and the ranking 
minority member, Chaka Fattah, for the wonderful work you've 
been doing in taking what occurred over the last session, 
putting it into the new revised H.R. 22, the Postal Reform Act, 
which I'm sure with a lot of good work by all of us can help to 
make our Postal Service even better.
    It's still one of the best in the world, and we commend our 
Postmaster General, who is here, for making certain that we are 
right up there, up front, compared to other postal services 
around the world, and I've had an opportunity to visit a number 
of them.
    But I want to thank you, Mr. Chairman, for your persistence 
and patience in the extensive work you've been doing to bring 
this about. We know the kind of hard work it's been in 
gathering all of the evidence, and listening to all of the 
testimony.
    As the chairman is well aware, there is a great need to 
ensure that our Postal Service will be adequately prepared to 
meet the needs of our ever expanding competitive market in the 
21st century and all of the technological improvements that are 
taking place in communication.
    Since serving on the initial House Post Office and Civil 
Service Committee, and I see some folks who've been with us for 
a number of years out there, I've been a strong advocate of 
making certain that the Postal Service provide adequate service 
to its customers for years to come while simultaneously 
maintaining a good work environment that continues to honor its 
commitment to its employees. The biggest part of our Postal 
Service, of course, is over 700,000 postal workers who serve 
our Nation. And it's so important that they have input and that 
they be assured that there is input in this measure.
    I think the bill before us accomplishes a number of major 
goals, and I'm certain we'll hear some other proposals that 
should be added. It's important to note that the public and all 
postal stakeholders have related opportunities to provide input 
and revisions under H.R. 22, and I'm sure today's testimony 
will give us some additional constructive ideas. In fact, we've 
heard nothing but praise for both the chairman and the open 
process from those who visited with me to discuss this measure.
    In that regard, I was pleased to be able to seek approval 
of an amendment to this measure during our subcommittee's mark-
up in the last Congress, which is included in the chairman's 
introduction of the bill to the Congress. That amendment 
protects the rights, the privileges and benefits of both 
employees of the Postal Service and the labor unions 
representing them, and stems from some of the concerns that 
arose from the Postal Union in regard to the postal regulatory 
portion of the bill.
    Accordingly, with H.R. 22's inclusion of that amendment, 
it's now the sense of the Congress that nothing in a Postal 
Rate Commission section should restrict, expand or otherwise 
affect any of the rights, privileges or benefits of either 
employees of the U.S. Postal Service or labor organizations 
representing those employees, as established under the National 
Labor Relations Act. And this measure may not be a perfect 
bill, but it's close to one. I think the postal community 
should support the shape and operation of our Postal Service.
    Remaining concerns can and I'm certain will be discussed as 
this process continues in the subcommittee, in our full 
committee, and onto the floor. And I want to again commend you 
for moving it forward at this early stage in this session. And 
I encourage all parties who want to be part of the solution to 
come to the table or, as they say, ``If you don't come now the 
train will be leaving the station very shortly.'' Thank you, 
Mr. Chairman.
    [The prepared statement of Hon. Chaka Fattah follows:]
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    Mr. McHugh. I thank you for your comments here today, and 
more importantly, for your work not just now but over so many 
years on behalf of this very important organization.
    Mr. Gilman. Mr. Chairman.
    Mr. McHugh. Yes.
    Mr. Gilman. If you'll forgive me.
    Mr. McHugh. Certainly.
    Mr. Gilman. I'm chairing a mark-up in my own committee, but 
I will be coming back and forth and I will ask my staff to 
stand by. Thank you, Mr. Chairman.
    [The prepared statement of Hon. Benjamin Gilman follows:]
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    Mr. McHugh. I understand. You have my proxy, Mr. Chairman. 
With that, I'd be happy to yield to one of the few Members that 
I'm aware of that actually lobbied to get on this subcommittee. 
I'll leave it to you what that says about him. I think it makes 
him pretty special, but that's one person's opinion. The 
gentleman from Ohio, Mr. LaTourette.
    Mr. LaTourette. Thank you, Mr. Chairman. Under unanimous 
consent request, I'll submit my remarks for the record. I would 
like to say this is the only subcommittee that I requested and 
Chairman Burton was kind enough to give me additional 
responsibilities, as well, not requested, but I look forward to 
serving him.
    The reason I picked this subcommittee is not only because 
of the important work that the Postal Service does and all of 
the industries and businesses that rely on the Postal Service, 
but also because of my admiration for you and the ranking 
member, Mr. Fattah, and the extraordinary work that I witnessed 
in the last two Congresses on H.R. 22, which is the only time 
that I've been here. And if you are going to stick it out and 
get postal reform through the House, the Senate, and signed by 
the President, I'm going to be here with both of you and we'll 
all do it together. So I thank you for that.
    Mr. McHugh. I thank you very much. We're looking forward to 
your presence. You are an invaluable part of this effort. So 
with that, again, Mr. Postmaster General, welcome. It is always 
a pleasure to have you here with us. As I noted, this is our 
opening salvo for the 106th Congress, and, of course, your 
first appearance in this new session. So we're looking forward 
to your comments.
    The rules of the full committee, as those who have been to 
these hearings in the past recall, require that all witnesses 
be sworn in before they present oral testimony. So with that 
I'd ask you to rise and repeat after me.
    [Witnesses sworn.]
    Mr. McHugh. Let the record show that the witnesses have 
responded to the oath in the affirmative. And with that, Mr. 
Postmaster General, without further adieu let me turn our 
attention and the floor to you, sir, and welcome.

STATEMENT OF WILLIAM HENDERSON, POSTMASTER GENERAL, ACCOMPANIED 
 BY MARY S. ELCANO, SENIOR VICE PRESIDENT AND GENERAL COUNSEL, 
                      U.S. POSTAL SERVICE

    Mr. Henderson. Thank you, Mr. Chairman, and thank you for 
the opportunity to testify today. My written testimony I'll 
submit for the record, as I have in the past, rather than read 
back to you a speech you've read, which to me seems a bit 
boring. And I want to introduce Mary Elcano. Mary is our 
general counsel and she is head of the team that drafted the 
amendments that we make to H.R. 22.
    Mr. McHugh. Yes. I welcome you, too, this morning, Ms. 
Elcano, and look forward to your legal interpretations as they 
may occur.
    Ms. Elcano. Thank you.
    Mr. Henderson. For the record, I'm not a lawyer. I do want 
to make some general comments. I do want to go back about 5 
years. We were sitting in a room at Postal Headquarters, and we 
were debating which of two schools of thought ought to be 
adopted by the Postal Service, and that was a debate that was 
occurring among our Governors too.
    Our two schools of thought were, one, to just leave the 
Postal Service alone, allow it to atrophy, through electronic 
diversion of competitors, not change anything.
    The other one was to say that universal service should be 
preserved. Universal service is not defined that often, but I 
think at the core of universal service is regularly scheduled 
delivery and collection of mail throughout this country so that 
a mail carrier will go down your street, whether you have one 
piece of mail or no mail, to check on it. It's hardwired 
delivery throughout the United States. It's not maximized for 
profit, it's sitting there to provide service.
    In discussing this, we, along with all the posts of the 
world having the same discussion, decided that the U.S. Postal 
Service is an American treasure. It's an institution that ought 
to be preserved. It's vital to this economy. It has a work 
force of over 700,000, and that stretches to millions of people 
in this country for employment, millions, along with the 
industries it supplements.
    So out of that came the need to be more commercial, and 
that need was recognized at the same time around the world. And 
the Postal Service became more commercial at the same time. 
What was also happening with the U.S. Postal Service is that 
its quality was being upgraded. And its quality was becoming 
very, very competitive, and its quality improved in terms of 
timely delivery.
    It started to affect private sector competitors who, 
heretofore, had not really focused on the Postal Service 
because it was not an alternative. Suddenly it became an 
alternative. So that creates some complexity to this discussion 
about universal service and about preservation of the Postal 
Service.
    You very wisely introduced a bill for postal reform. In the 
meantime, posts around the world began to do their own 
reformation. Suddenly, what had in the past been bureaucratic, 
kind of slow moving entities, out of that reformation suddenly 
came highly competitive institutions in countries all over 
Europe and around the world.
    A classic example of that is a reformed German post, 
Deutsche Post, whose postage is 66 cents, equivalent to our 33 
cents, who recently bought a $1 billion business in England, a 
logistics company, at a time in which England couldn't invest 
money like Deutsche Post. I happen to have been with John 
Roberts, who is the head of Royal Mail, and Klaus Zumwinkel, 
who is the head of the German Post.
    As a result of that investment in England by the German 
Post, Parliament gave Royal Mail the right, almost immediately, 
to do similar kinds of investments. And they bought the third 
largest package delivery outfit, ``they'' being Royal Mail, in 
Germany. This commercialization of posts around the world is 
changing the entire environment.
    The United States private sector package delivery outfits, 
who have been in Europe and around the world for a long time, 
are suddenly seeing, and rightfully so, these postal entities 
as being very strong competitors. Very strong competitors. Now, 
these postal entities around the world are now focused on each 
other. A little bit of chest beating is going on in Europe. But 
within 3 years, I predict they will be focused on the United 
States.
    They are going to be focused because this is the mother 
lode of market opportunity. They will come over here, they will 
be private, they will be highly capitalized, and they will be 
in the marketplace competing. So as a consequence of this, our 
current U.S. competitors are leery of freeing a postal service 
commercially. They are leery because of the model they have 
seen. They have seen postal services around the world become 
very competitive.
    But I say to you today that it's just as important for the 
Postal Service to be reformed to save universal service. That 
universal service, regularly scheduled delivery and collection 
throughout the United States, is just as important today, if 
not more important than it was 5 years ago. And the forces that 
you observed 4 years ago in the submission of this legislation, 
that is the electronic erosion of mail.
    Five billion dollars are in the mail stream in the form of 
payments. Another $10 billion are associated with those 
payments. And there is no question that bill payment has some 
momentum to move electronically. That hardwired infrastructure 
of universal service would take a big hit from a pricing point 
of view, if that $15 billion were allowed to go away without 
some market improvement, some allowance for the Postal Service 
to be more competitive.
    So when we view H.R. 22, we desperately think that to 
salvage the organization of the U.S. Postal Service, to keep it 
viable as an entity in America, that some commercialization of 
the Postal Service should occur. So we welcomed H.R. 22, and we 
submitted some 30 amendments, that Mary and her team drafted, 
to make H.R. 22 as useable as possible, as workable and as 
manageable as possible so that this entity would stay viable.
    It is very important, as it was 5 years ago, to have a 
healthy U.S. Postal Service. I thank you Mr. Chairman for 
inviting us, and that concludes my comments.
    [The prepared statement of Mr. Henderson follows:]
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    Mr. McHugh. I thank you for your comments. As those who 
have read your testimony understand, as I do, you have, I 
think, a very interesting and very studied perspective on this. 
But I do think it's important to place a couple of things onto 
the record and to clarify where possible, and where I certainly 
think it's necessary.
    I've spent, as my grey hair will attest, quite a few years 
of my adult life in the business of politics in dealing with 
people writing down your words and reporting them at a later 
time. I always believe what I read, but I am always willing to 
learn more than what I've read. But there was a recent article 
that quoted the following:
    Major mailers active in postal reform efforts are beginning 
to suspect that the Postal Service wants to kill H.R. 22. The 
mailers point to the latest batch of Postal Service proposed 
amendments. And when the Senior V.P. of Legislative Affairs 
told the MTAC meeting, These amendments are ``do or die'' for 
the USPS. Well, it had people thinking ``die,'' as in die on 
the vein--``vein'' a little Freudian slip there--``die on the 
vine.''
    Some attendants who were confused by the comments followed 
up with phone calls to Legislative Affairs staffers. That's 
right, they were told, without the USPS proposed amendments, 
H.R. 22 is not helpful to the Postal Service, end quote. And it 
then goes on to point out that not all stakeholders are 
convinced of this line of reasoning, the debate about the 
amendments, et cetera.
    So I want to make it very clear here today, one way or 
another, is it your and the Postal Service's intent to kill 
this effort or are you supportive of this effort as we are 
currently under way? And, as a part of that, are we to 
understand that your position is that, without all of the 
amendments that you have submitted, H.R. 22 is not helpful?
    Mr. Henderson. Well, let me make sure that there is no 
ambiguity. We are absolutely, positively not out to kill H.R. 
22. And, second, as Chairman Burton said, this is work in 
progress. We understand that. And just as you wouldn't draw a 
line in the sand and say ``do or die,'' we absolutely are not 
going to do that. We've submitted amendments that we think 
makes the bill manageable from a Postal point of view. But 
absolutely it's not a do or die situation.
    Mr. McHugh. Good. The record shall so state. You mentioned 
the amendments. The amendments, as you are aware, have caused a 
great deal of controversy. Without trying to read too much into 
the fact that the vast majority of controversy we have become 
aware of is in opposition to the amendments, that's not 
surprising. People rarely call you up and tell you you are 
doing a good job. They like to tell you just the opposite.
    But I'd like to spend a few moments, before I begin to 
yield to the other members, and having you present, with an 
opportunity to go onto the record as to why you think some of 
these amendments are important and in what way they might work. 
For example, one of your amendments proposes to move just about 
all products outside the statutory monopoly to the competitive 
category.
    The concern is, to many mailers and policymakers, that the 
Postal Service, for many of these products and services, is the 
only hard copy provider. If not in law, certainly in reality. 
So, in other words, even in the absence of a statutory 
monopoly, the Postal Service really does hold what they view to 
be dominant market power over those customers, newspapers, 
magazines, those kinds of deliveries, and such.
    The bill, as it currently stands, establishes a market 
dominance, a fact test for the regulatory criteria for 
assigning products to either non-competitive or competitive. 
But in your amendments you change that. The question that it 
presents, and the concerns we've heard, is simply why should 
the determination of whether the Postal Service product be 
competitive or non-competitive come from the Service's own 
regulatory definition of a letter rather than from some 
objective fact of the marketplace?
    Mr. Henderson. Go ahead, Mary.
    Ms. Elcano. What our difference in the amendments versus 
H.R. 22 is that the products we move over from the non-
competitive to the competitive are international, heavy First 
Class Mail, proxy statements, if you will, something like that, 
and some of the special services. And what's there already is 
priority mail, express mail, parcels, you know, et cetera. So 
our view is to move over those products which are positioned 
where there is competition emerging or constant competition, is 
consistent with having express mail, priority mail, parcels. 
The other rationale for that is in reference to the equivalent 
contribution test that comes into the competitive area, that 
there is some need to have a balance against that which we 
consider a very serious and a very strong condition for 
competition. To move those products over there make it more 
into a situation where we think the Postal Service can better 
survive and better compete, as well as meet the obligation for 
universal service.
    Mr. McHugh. I understand. I don't have an objection with 
the intent. Clearly, the outcome of the provisions of H.R. 22 
are to make those kinds of determinations. Where they exist, by 
a formula, a market test, rather, those move over. But concerns 
of some people are that, and you used international mail being 
placed in the competitive category, now there is no statutory 
protection, I'll grant you, of a monopoly for the Postal 
Service. But I think you'd agree, and if you don't, please say 
so, that on market dominance there is no alternative for 
international mail, single mail piece. I mean you're----
    Ms. Elcano. Well, I would have agreed with you up until 
recently. We recently concluded--are in the process of some 
litigation with a particular mailer. As part of some discovery 
in that case, there was evidence that, in fact, they are doing 
some single piece mail in international. So I think it's not a 
non-competitive area. It is with competition, in other words, 
is what I'm saying.
    Mr. McHugh. Well, you've got a court case trying to 
determine that, but a single court case. I don't want to argue 
this ad nauseam but the fact of the matter is, in spite of your 
recent single example where you've got a court case, the 
overwhelming evidence is you have a market dominance in that 
field. But the point being the concern that many have and that 
is, why should the Postal Service through its own discretion be 
the determinate factor here? Why not allow the current formula 
under H.R. 22 to prevail? And you've made your points. If you'd 
like to expand on them?
    Ms. Elcano. The last piece would be just the general policy 
overview on that. And that is, to the extent that something is 
not highly regulated today, we wanted to preserve that status 
quo and not move it into a more highly regulated area, so we 
conceptually left international into the competitive area. But 
I think you've expressed----
    Mr. Henderson. I might add, Mr. Chairman, from a practical 
point of view, single piece international is a dying creature. 
There is a huge amount of erosion in that today electronically. 
And in a few years that will be a rarity, except for packages, 
which is highly competitive.
    Mr. McHugh. So the amendment is a dying amendment, that's 
my interpretation. These are highly technical, and I want to 
submit a number of these for the record. I want to ask one more 
and then I will move to my colleagues. Then if we have some 
time, perhaps I can ask more questions.
    But one of the main objectives of H.R. 22, and one of the 
main justifications with respect to price capping and banding 
and dramatically altering the PRC's oversight role with respect 
to the setting of the price of postage, is to provide 
predictability to your customers and, also, I would argue, to 
provide more affordability. Not that you've been unaffordable, 
but to suggest to them that under this new system you'd be more 
insulated than you are today from the possibility of large, 
perhaps unaffordable rate increases. Would you agree with that?
    Mr. Henderson. Well, the amendments that we propose, where 
we have bands and baskets, would allow us the kind of balance 
between flexibility and predictability. And we think that we 
can live with the amendments, the five baskets versus the four, 
the adding of the non-profits, and the protections of Aunt 
Minnie in basket one, we think that we can operate within 
those. And one of the important principles of that structure is 
being able to average the rates within the baskets so that you 
have some flexibility within those bands.
    It's one of the difficulties of the bill and what we tried 
to think through when I discussed with Mary the philosophy of 
the amendments, is to make sure that we can manage the Postal 
Service. Make sure that we don't come out with a re-regulated 
entity that's simply ineffective. And that's a very important 
principle. And I think you have to use your own management 
experience in trying to interpret this. It's a difficult task.
    It's a very complex bill and your staff has been very 
cooperative. But it is a very complex subject to try to figure 
out when it's said and done and the bill is in concrete. You 
know, will the car still roll?
    Mr. McHugh. And I appreciate that. Again, we're trying to, 
ourselves, reach that balance where we provide the Postal 
Service with our stated objective of the kind of flexibility 
that you, in all likelihood, need to continue to compete but, 
as the chairman and others have suggested, at the same time 
ensuring that you compete fairly where that is possible. And 
that there are consumer benefits as well.
    One of the concerns we've heard with respect to another of 
the amendments, and you spoke to it, is that under your 
proposal that you have what you describe as flexibility, but 
they would describe as a considerable amount of leeway above 
the stated caps of 1\1/2\ percent or more. That, coupled with 
the fact that you can bring in previously banked, unused cap 
allowances, takes away that predictability and, they would 
argue, perhaps that affordability as well.
    So it's very troublesome to those people, and I want to be 
up front about it, it's troublesome to us as well. Because it 
does diminish, at least, and perhaps for a good reason, and you 
stated a reason, but nevertheless it does diminish two of the 
justifications for reconfiguring how you receive your rate 
increases presently. We're going to need to talk about that 
further.
    Mr. Henderson. And I think, Mr. Chairman, pricing 
flexibility is one of the cornerstone elements that we started 
with, prices, products and labor. And our having pricing 
flexibility is very important to our remaining a viable 
organization. I think we've had a very satisfactory arrangement 
with the PRC. It has certainly been during my tenure as COO and 
CEO.
    But the ability to negotiate prices with customers or to 
pass on the values and the NSAs that you provided in the bill, 
is very important to future Postal health. The foreign postal 
administrations that come on our soil are going to have 
commercial freedom, absolute freedom to do whatever they want 
to do. We at least have to be in the ring with them.
    Ms. Elcano. If I may, Mr. Chairman, the other points you 
are raising about the caps above the caps. You can imagine when 
we first started this approach, we had to get some outside 
consultants to assist us in understanding some of the 
principles, understand your bill, understand the principles, 
and craft a response to that. And how they advised us, in terms 
of telecoms and public utilities, other areas, was that in fact 
to manage within the baskets, you really needed some 
flexibility to de-average, and that could even include going 
above a cap in terms of some of the percentage.
    So what we did was to try to design it--and I think that we 
were advised that in some industries, telecoms, they go up as 
high as 3 or 4 percent above the cap on occasion. And so what 
we tried to do was to design a bill that reflected the Postal 
experience, if you will. So the Aunt Minnie basket, No. 1, has 
no ability to go above that cap. The more commercial baskets 
two, three and four have an ability of 1.5 percent. And the 
fifth basket is 0.5 percent which is the non-profits.
    Our view in trying to design that was to pick very tight, 
tight bands if you will, a tight framework. And within that to 
try to have a weighted de-average, a weighted average of 
volume, of revenue weighted averaging within the activities, 
and take it down to the rate cell, to the rate average piece so 
that there can be as tight a band, as tight a control on that 
as possible.
    But they convinced us. And it is somewhat of a leap of 
faith for us because our industry doesn't practice or perform 
in this area in that way. And so, given the expertise we had, 
that was also part of the basis for our amendments.
    Mr. McHugh. I certainly understand how that kind of 
flexibility would be attractive to a management structure. I 
have no doubt about that. But I want you and I feel confident 
you understand that the kind of flexibility that you are 
speaking about, while sounding small in percentages is large in 
terms of the entire structure of the bill.
    And it has to always be coupled with whatever bank of 
previous unused CPI cap you may have used. So, I mean, for 
mailers, particularly small mail-dependent businesses, this is 
a very troubling, uncertain part of the waters about which 
we've heard a great deal of concern.
    I may not know much--I will state it differently--I do not 
know much about utility regulation or deregulation, but with 30 
years in politics I know a little bit about PR. I respectfully 
suggest the last people you want to emanate in the customers' 
eyes are the utility industries. But do as you will. With that, 
I will be happy to yield to the ranking member, Mr. Fattah.
    Mr. Fattah. Thank you, Mr. Chairman. I had a visit from the 
postal leaders from France. And they were here in our country 
examining the operations of the U.S. Postal Service, which they 
used as a bench mark from which to try to determine how they 
could provide better service to the people of their country. 
Somehow I wished that I had done better in my high school 
french class. But we had a facilitator that helped us 
communicate.
    There was a recent AP poll that you didn't have to use a 
foreign language to interpret, and I know there is a lot of 
interest here in the Capitol these days in not paying attention 
to polls, but this one said that three-fourths of the American 
people thought that the Postal Service was doing a very good 
job.
    I use those two comments to really kind of get into this a 
little bit. And I'm going to try to talk in english so that 
people can understand what's really going on here, because I 
think that the chairman is absolutely right that there is room 
and a reason for reform.
    But sometimes the best efforts at reform lead to retarding 
processes rather than moving them forward. And we have to be 
careful here since we're dealing with an item, a public good 
that I think is essential to our economy and is also a 
responsibility that no one else in this business has, which is 
this notion of universal service. So I just want to walk 
through this. The U.S. Postal Service as it is presently 
constituted doesn't receive any public subsidy for its 
operation, is that correct?
    Mr. Henderson. Yes. Except for the blind and frank mail 
there is no real public subsidy. We live off our revenues, 
that's absolutely accurate.
    Mr. Fattah. OK. So you've got 700,000-plus employees, 
you've got a service that you provide, you collect revenues 
from it that essentially pay for this operation?
    Mr. Henderson. That's correct.
    Mr. Fattah. But unlike a private concern, you also have 
some responsibilities that are given to you by the Government, 
one of which is this notion of universal service?
    Mr. Henderson. That's correct.
    Mr. Fattah. To deliver mail to anywhere in the country, 
notwithstanding the economics of it, right?
    Mr. Henderson. That's right.
    Mr. Fattah. I don't know if it was Ralph Waldo Emerson or 
someone else who said, ``If I make my home in the forest.'' You 
know, if somebody wants to live wherever they want to live, 
whether they have a better mouse trap or not, you have to 
deliver the mail to them?
    Mr. Henderson. That's right. Everywhere, everyone, every 
day.
    Mr. Fattah. And now in addition to which the Congress has 
put other limitations on your operation, which is that you 
can't close a post office because it's not economical.
    Mr. Henderson. That's in the law, that's right.
    Mr. Fattah. Is that right?
    Mr. Henderson. That's accurate.
    Mr. Fattah. You can have a post office in one location in 
which the services that are being sold to the public there are 
not keeping pace with its cost, but you have to operate it?
    Mr. Henderson. That's right. The 20,000 smallest post 
offices of America do not take in enough revenue to cover their 
expenses, that's accurate.
    Mr. Fattah. OK. So now on the other side of this, there are 
a few things that you do which there are people in the private 
sector that do it, and those are what are being discussed as 
competitive items in this basket, right?
    Mr. Henderson. There are very few things that we do that 
don't have some form of competition, be it head to head 
competitors or alternatives.
    Mr. Fattah. OK. So these services, you have to perform at a 
rate and at a price which is sensitive to your competition in 
the marketplace?
    Mr. Henderson. That's right.
    Mr. Fattah. And this is like the overnight mail and special 
services that, particularly, business customers are interested 
in?
    Mr. Henderson. That's correct. Priority mail is in that 
category.
    Mr. Fattah. So now when you provide these services to--
well, let's start here. If you didn't provide these services 
and you didn't have the revenues that were generated from those 
services, the delivery of a First Class letter to an everyday 
American, would it cost more or less?
    Mr. Henderson. It would cost more. And there would be no 
real pricing sensitivity in the marketplace. There would be no 
not-for-profit product, so all of the products would likely be 
higher priced than they are today.
    Mr. Fattah. Well, now, as we go forward in this reform, 
this H.R. 22, here are some things that the Postal Service, 
that you think are very good about H.R. 22, at least move us in 
the right direction. There are some amendments that you 
suggested for modifications. It would be helpful for me if you 
could outline where you see the major impact of H.R. 22, 
unamended, for the Postal Service and for its customers.
    Mr. Henderson. I think that the biggest issue which 
precedes H.R. 22 is embedded in H.R. 22, and it's what we've 
submitted amendments for, it's pricing flexibility. If we need 
that pricing flexibility in order to stay competitive in the 
marketplace, and that's not a complex notion, and I 
understand----
    Mr. Fattah. It's not complex for those of us who are 
fortunately or unfortunately mired down in these issues. But 
for the general public, right now what happens when you want to 
change prices? This issue of flexibility in pricing, can you 
talk about it in English?
    Mr. Henderson. Well, today we have two models for setting 
prices, one in international, in which our Governors can 
approve a price increase, and the second one is the Postal Rate 
Commission. As I said earlier, the Postal Rate Commission, 
during my experience, has been a very responsible body.
    What we're interested in, though, is more particular rates 
for individual mailers, the ability to pass on savings of their 
efficiency in the mail stream. Now we have one price fits all, 
or group pricing. And our competitors, direct competitors in 
the marketplace, have 100 percent pricing freedom. A product 
like overnight service loses ground primarily because we don't 
have the pricing flexibility to give volume discounts and 
things like that. So pricing flexibility is an important point 
to us.
    Mr. Fattah. Is there something else you'd like to add?
    Mr. Henderson. No.
    Mr. Fattah. OK. Now, this issue of flexibility in pricing, 
you are saying it's for your best customers, in terms of 
volume, that you'd like to be able to negotiate some type of 
individual pricing mechanism?
    Mr. Henderson. Right. Well, for all customers. I mean it 
would be the large volume customers whose efficiency we'd like 
to pass back to them in terms of pricing.
    Mr. Fattah. Now, at this moment you can't do that at all?
    Mr. Henderson. We can do it for groups of people, if we go 
through the Postal Rate Commission. But we can't negotiate face 
to face, except in international where we do negotiate face to 
face with customers.
    Mr. Fattah. OK. Now the Postal Rate Commission, which we're 
going to hear from in a little while, they handle your pricing 
issues through a regulatory review process, they gather public 
response to it. How long does that process take?
    Mr. Henderson. Approximately 10 months and about 6 months 
in preparation that we do internally to go to the hearing. And 
they conduct a full hearing with all constituencies. And then 
they provide a recommendation to our Governors who make a final 
decision.
    Mr. Fattah. All right. Thank you very much. I'm going to 
yield.
    Mr. McHugh. I thank the gentleman. I yield to the chairman 
of the full committee, Mr. Burton.
    Mr. Burton. Thank you very much, Mr. Chairman. I just have 
a couple of questions I'd like to ask. First of all, you were 
talking about the German Postal Service acquiring a private 
package delivery firm, and that triggered the English, the 
British, doing the same thing. What I was wondering is you said 
that you want to be competitive with them so that you don't 
lose market share because they are going to be coming into the 
United States, is that correct? I mean, that you want to have a 
mechanism to be competitive with them?
    Mr. Henderson. Well, they are here today in the United 
States.
    Mr. Burton. But they are going to be getting more market 
share and you want to be able to make sure that you keep your 
percentage?
    Mr. Henderson. Well, I think it's that this market in the 
United States is viewed as the most lucrative in the world.
    Mr. Burton. Right.
    Mr. Henderson. And, therefore, they will focus on the 
United States both in shipping letter mail internationally. It 
is my belief also that eventually they will focus on the 
package business which not only competes with us but competes 
with UPS and Federal Express too.
    Mr. Burton. How would you envision the Postal Service being 
competitive with them, what steps would have to be taken to be 
competitive with them?
    Mr. Henderson. I think, again, the real key is pricing 
freedom, to be able to negotiate with your customers, like an 
L.L. Bean or Spiegel, the ability to negotiate prices based on 
their efficiencies. Everybody else in the marketplace, but the 
U.S. Postal Service, today has complete pricing flexibility.
    Mr. Burton. So in order to be competitive with them you'd 
like to have the flexibility, so that if you were bidding 
against them for a contract you could lower your bid and be 
competitive?
    Mr. Henderson. That's right. It's like selling. I'll give 
you an analogy. If you were selling cars, as an example, and 
you didn't have any pricing flexibility, you would not be the 
alternative of choice unless you had the highest value and it 
was obvious to everyone. And that's what you get today with 
priority mail. I mean, it's a low priced, very high quality 
product. That's why it's growing.
    Mr. Burton. Well, the next question I'd like to ask then 
is, how do the private sector carriers, like UPS and Federal 
Express, and the others in the United States, if you are 
bidding against the Germans and the English and you are 
lowering your prices to be competitive, how do they survive? I 
mean, don't you have the ability as a government entity to be 
able to cut prices below what their pricing structure would 
allow?
    Mr. Henderson. No. I don't believe that to be true. I think 
the question of the future of those two organizations is an 
important one. I think that there is a threat that foreign 
postal administrations, and I believe they believe this, will 
ultimately be a threat to their existence. When they come into 
this country as, for example, the Dutch have and bought 
MailCom, a major interest in MailCom, they come with very deep 
pockets. And it is an important question that you raised.
    Mr. Burton. I think that's something we really ought to 
take a look at because they're competitors with the private 
sector in this country, and then you are going to add to that 
through postal reform I think you hope, your ability to be 
competitive with those foreign entities, which puts additional 
pressure on the private carriers in this country.
    A lot of us believe that free enterprise is the best way 
for an economy to flourish. And if the government sector comes 
in and is able to drive the private sector out of business, 
then you end up with government control over large segments of 
your economy, not just the Postal Service but others.
    So I'm just trying to figure out in my own mind how this is 
going to work in the long haul, and that's why I'm asking this 
question. Maybe you can flesh this out for me in the next few 
weeks by giving me more information. I'm not sure I'm going to 
get it all today.
    Mr. Henderson. I can give you a twist on it today. The 
private sector is primarily focused on business-to-business 
packages, that's the dominance. If you look at residential, 
they surcharge residential by adding $1, and in some cases $2, 
in some cases delivery every 4 days. The Postal Service doesn't 
have any of that business, literally speaking. It's focused on 
residential package delivery. So, in a sense, they are not in 
the same arenas.
    And if we're taken out of that business, if we're not in 
the business of package delivery, for example, then you have to 
take several billion dollars and amortize it across the rest of 
the classes of mail. And, to me, that doesn't seem to be in the 
interests of the American public to do something like that.
    Mr. Burton. I understand the example that you were using, 
Mr. Postmaster, just a few minutes ago, was one of the mail 
order delivery systems companies. I think you mentioned Lands' 
End?
    Mr. Henderson. L.L. Bean, yes.
    Mr. Burton. Yes, L.L. Bean. And that is one that I think 
the private sector has been, for the most part, delivering for. 
And so that's a concern. And I think maybe you can have your 
staff and you illuminate that issue a little bit more for me in 
the next few weeks. I think it's something that we really need 
to take a look at.
    The other thing I was interested in was how this new 
formula for postal rate increases works. And I was asking the 
staff up here, when the chairman yielded to me. I really would 
like to know how that works because I think maybe I'm wrong. I 
was trying to catch all of what you said there a minute ago. I 
thought you said that if you weren't able to deliver the 
packages, and do your package deliveries and the things that 
you've been doing, that the postal rates for other classes of 
mail, like First Class Mail, might go up?
    Mr. Henderson. That's accurate.
    Mr. Burton. That is accurate. OK. I just have a couple of 
questions and they may be very academic questions. The Postal 
Service for the last 2 or 3 years has had a fairly substantial 
profit. It was about $1\1/2\ to $2 billion 3 years ago, and 
about $1\1/2\ billion last year. I think it was about $580 
million just this current past year. And yet they had a 1 cent 
per stamp delivery increase from 32 to 33 cents, and I could 
never figure that out.
    If, in effect, the package delivery is helping make the 
First Class Mail rates less, then how do you account for that 
profit. I just don't understand that. Maybe you can explain 
that to me?
    Mr. Henderson. Well, the Postal Service enjoys, 
unfortunately, a negative net equity, which means that we've 
lost more money than we've made since 1971. And, obviously, we 
have a break-even mandate. Additionally, we have some new 
capital expenditures, such as our new point-of-sale system. We 
also have a $700 million delivery confirmation effort that we 
are putting in place.
    We are trying to upgrade the service of the Postal Service, 
and the 1 cent was the smallest increase in our history. In 
fact our popularity with our customers, for the first time in 
our history, actually went up. And so we don't think it's a 
burden on America to increase the price of postage.
    Mr. Burton. I know. I was just questioning the necessity 
for the rate increase since they've been in the black for 3 
straight years. And I think you amortize the things that you 
are talking about over, what, about a 10 year period, or 
something like that?
    Mr. Henderson. The $700 million is the outlay that we made 
to buy the scanners, so it's not depreciated over a period of 
time.
    Mr. Burton. OK. I guess that's about all I need to ask 
about right now, other than I'd still like to see that formula 
on how you are going to increase the rates for First Class Mail 
and, I guess, bulk mail and other mail. If the electronic mail 
takes a larger and larger part of your volume, let's say your 
volume goes down by 25 percent, does the formula include that 
being factored into the new rates?
    Mr. Henderson. Sure. If you lose revenue, and to some 
degree much of our infrastructure is hardwired because of our 
universal service obligation, and you have a break-even 
mandate, you have to generate those revenues from some other 
source.
    Mr. Burton. So that's why you think the package delivery is 
very instrumental because if you lose market share in, say, 
First Class Mail because of electronic transmissions then 
you're going to try to pick that up through the package 
deliveries and others?
    Mr. Henderson. We think package delivery is important 
because we're the residential deliverer in America. We're the 
person that goes by your house every day, by your mailbox.
    Mr. Burton. I understand. But you are anticipating that if 
you lose market share in, say, First Class Mail that you are 
going to try to pick that up through the delivery of the 
packages?
    Mr. Henderson. Well, we're going to try to grow, literally, 
all aspects of our business, but you are accurate in that 
statement.
    Mr. Burton. And one last question and then I'll thank the 
chairman. How much money did Postal Service pay in advertising 
for package deliveries last year? Because I see that on TV all 
the time, and I just wondered----
    Mr. Henderson. I don't have that number off the top of my 
head but I'll be happy to provide it.
    Mr. Burton. Somebody told me it was around $230-some 
million.
    Mr. Henderson. Not for packages alone, no. No.
    Mr. Burton. I'd really like to have that figure. If we 
could get that, Mr. Postmaster, I'd really appreciate it. Thank 
you very much. Thank you, Mr. Chairman.
    [The information referred to follows:]
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    Mr. McHugh. Mi casa, su casa, Mr. Chairman. I think the 
chairman's original first question brings up a good point, it 
kind of goes to the issue of another of your amendments. As the 
chairman stated, certainly the Postal Service does enjoy the 
powers of a Government agency, along with the statutory 
monopoly that you have with respect to delivery mail.
    One of the concerns that we've been trying to meet, and one 
of the objections we've persistently tried to overcome, is that 
you should not compete, as I think the chairman was suggesting 
very clearly, with private companies while you use, 
particularly, your non-competitive products to pay for the 
overhead costs, unfairly pay. So the issue of how do we end 
cross subsidies has been an integral part of the debate, as I 
know you are aware.
    H.R. 22 attempts to do that through the cost coverage rule 
which, as you know, Mr. Postmaster General, is simply the 
requirement that the competitive products collectively must 
contribute as a group at least an equal percentage of overhead 
costs as all non-competitive and competitive products combined.
    There is no way, it seems to me, we're going to be able to 
solve the chicken or the egg debate that apparently has been 
going on in this industry for years, where one side says you 
cross subsidize and the other side says, no we don't. So what 
we have been attempting to do is not solve the debate, but to 
settle the argument for the future through that cost coverage 
rule.
    And yet, you, in one of your amendments, have suggested 
that cost coverage rule be sunsetted after 5 years. And I 
believe your contention--and if I'm misstating it, please 
correct me--but I believe your contention was that there are 
sufficient safeguards elsewhere in H.R. 22 to prevent cross 
subsidies so that the cost coverage rule is ``problematic,'' 
the word I believe your descriptive materials use.
    So I'd like to have you expand upon that, because, as 
you've heard from the chairman and I know you've heard, as we 
have, from others, the issue of the activity of cross subsidies 
is a very, very important one, and one that the cost coverage 
rule is intended solely to address. If you sunset that after 5 
years, the resulting concern is that, well, there they go 
again. So could you comment on that amendment and on the issue 
in general?
    Mr. Henderson. Sure. First, let me say we are sensitive to 
cross subsidies. Today in America, urban America subsidizes 
rural America because it's very inefficient to deliver in rural 
areas. So there is a built in kind of hand shake within the 
institution of the organization.
    What we're sunsetting after 5 years is the equal 
contribution, not the issue of cross subsidy. The competitive 
and non-competitive have to have an equal contribution. What 
we're saying is that after 5 years we think that issue will go 
by the wayside. But we're not trying to hide some cross subsidy 
in the bill.
    Mr. McHugh. I'm not sure why you think it will go by the 
wayside after 5 years.
    Mr. Henderson. I think the organization will be fairly well 
defined. Once the process is put in place to define the costs, 
which we proposed in one of our amendments, because today we 
operate under a set of institutional attributable costs that go 
into determining a rate case, we assume that that whole 
assignment of a cost is going to be examined.
    We will cooperate with the Postal Rate Commission in 
putting the process together to examine those costs. We will 
then hardwire what our costs are, and there won't be a question 
anymore of attributable institutional costs. We will design 
that system.
    Ms. Elcano. The other safeguard, if you will, is that there 
is currently in H.R. 22 a requirement that those products cover 
their attributable costs. And in our amendments we accept that 
and understand the rationale for that, and so those are 
covered. Those are reported to the Rate Commission. That's the 
other safeguard that exists in the bill.
    Mr. McHugh. Well, again, the amendment, it seems to me, 
becomes more problematic than the problem you are trying to 
solve, in that the cost coverage rule, as I've said repeatedly, 
is intended to forestall a debate that has raged here and that 
seems to me has no conclusion in terms of proving who is right 
and who is wrong.
    So you institute a system that better defines the issue, 
No. 1 and then, No. 2, requires that certain accounting things 
occur without the assumption that the system will change or 
what you and the PRC may or may not agree to. There are, 
apparently, a lot of things that are embodied in a number of 
your amendments that are making assumptions as to what may or 
may not exist a few years down the road.
    Now, I'm not saying you're wrong in those assumptions, but 
those who are relying upon the service and upon the system that 
we adapt to provide for them the kind of mail service they are 
accustomed to and need, those kinds of assumptions are very 
troubling.
    Ms. Elcano. There are a couple of other points and, again, 
it's in the eye of the beholder. As I behold it, it would look 
like this. There is an acceptance in the competitive area that 
they would be covered by anti-trust and anti-competitive 
statutes, and so there would begin to be some other analysis 
and other forums to address that.
    The other thing we're concerned about, why that 5 year rule 
is in there, that 5 year sunset, is that some of the best 
information that we can get, and different conversations with 
different experts, is that maybe some of the bill payment 
activity that would go into e-commerce, the bill presentment 
might have a 3 to 5 year horizon.
    So to the extent that that begins to crush down in the non-
competitive side, there may well be changes in prices in the 
non-competitive side that then become an anchor on the 
competitive and drag it down in terms of pricing to the extent 
the equal contribution stays. And so, again, from our view of 
this, the equal contribution is not really fixing or defining 
cross subsidy at that point. It's a price definition, it's a 
control on pricing in the competitive area that's different 
from being market driven, market based.
    While we understand that there needs to be a transition, we 
thought a 5-year time period was reasonable for things to begin 
to settle out in terms of the e-commerce issue, in terms of 
setting up systems that extend better financial accounting, 
better evaluation of assets and liabilities, as well as some of 
the more specific product pricing that would go on in 
competitive being market driven. The other view is that as you 
define H.R. 22 the competitive products would need to be funded 
eventually, not by the Federal Financing Board, you know, not 
the Department of Treasury, but eventually from the private 
markets. The view of the world from the private, financial 
advisors tell us that you need to have a system in place where 
it's very clear who is funding what, who is borrowing what, and 
who is paying something back.
    And so, again, from our vantage point, putting all those 
factors together, we thought a 5-year sunset lets the bill take 
its new shape, lets the Postal Service adapt, addresses the 
cross subsidy through the anti-trust, the attributable cost 
tests, which we would be reporting to the Postal Rate 
Commission, and begins to put the Postal Service in a position 
that if, in fact, there is a big drop off in that protected 
non-competitive area, that it doesn't drag down the other part 
of the competitive.
    Mr. McHugh. Well, again, from a managerial perspective, I 
don't fault the Postal Service for wanting to have a bill here 
that provides them flexibility on the future as they may see 
it. But, as I know you understand, not everyone shares that 
same set of assumptions or sees that same vision.
    Ms. Elcano. That's right.
    Mr. McHugh. So you are suggesting, I take it, that, if 
there was a cross subsidy, that would be a violation of an 
anti-trust law?
    Ms. Elcano. I'm not sure that that would be the violation 
of the anti-trust law. I think that what I'm saying is that we 
would be subject to anti-trust laws. We understand that 
products have to cover their attributable costs and that this 
is structured in a way--I have zero experience in anti-trust 
law so I'd like to either reserve an answer on that or just 
tell you that we understand we'll be covered by anti-trust law.
    Mr. McHugh. OK. Well, you used that as an example of 
preventing cross subsidies so I thought you were making a 
statement. But I'm no expert either, that's why I asked the 
question. Let me move onto a final point, a final concern.
    As you may be aware, if you are not, and others in the room 
you probably will soon be, there have been a number of concerns 
raised with respect to so-called ``Title 39 provisions,'' the 
current postal laws that apply to the mailing of obscene and 
pornographic materials.
    When we were first formulating this bill some 3 years ago, 
as we did in a number of law enforcement areas, we went to the 
Inspection Service and others and said, ``Is there anything, 
while we're at this activity of reform, that you might like to 
see enacted that would make the job easier or more effective, 
et cetera?''
    One of the things that the Inspection Service gave us was 
language on how to redefine, in their opinion, more precisely 
the current Title 39 provisions with respect to pornographic 
materials through the mails, unsolicited. We were told that the 
language that they presented would enhance their ability to 
pursue those kinds of potential violators and ultimately to 
prosecute them. That language has stood virtually unchanged in 
every version of H.R. 22 for the last 3 years.
    Recently a particular individual, but purportedly 
representing a wider universe of individuals, has raised an 
alarm, saying, amongst other things, that the purpose of this 
redesignation of Title 39 is to end effective enforcement over 
the mailing of pornographic materials--that the change would 
result in fewer, not more prosecutions, that it would subject 
recipients of mail to all kinds of unsolicited pornographic 
materials.
    This is kind of off-the-beaten path with respect to Title 
39, but clearly something I am concerned about. When we are 
given language by the Inspection Service, purportedly to 
toughen pornographic mailing penalties, and there is even the 
slightest suggestion that we are going in the opposite 
direction and that, as well, there may be some hidden agenda as 
to why we are doing it, is disturbing to me.
    This is not something I would expect you to respond to in 
detail today, although if you could, I would appreciate it. 
But, at a minimum, I would request on the record that you look 
at the language of Title 39, perhaps discuss it with the 
Inspection Service, to ensure that the language is as you and 
the Inspection Service wish it, and get back to us. And I'd 
certainly appreciate it, if you have any comments.
    Ms. Elcano. Just the main comment is you are absolutely 
right. There is no intention to weaken that statute or 
enforcement of that statute on behalf of the Postal Service. 
That we want to strengthen it, not weaken it.
    Mr. Henderson. We will provide you with a response.
    Mr. McHugh. I appreciate that. I yield to the ranking 
member, Mr. Fattah.
    Mr. Fattah. I think it's abundantly clear that there is 
significant and sincere interest in the economic circumstances 
of UPS and Federal Express. These are companies that I think 
you know complement the economic activity in our country in a 
very significant way.
    They were established and conduct themselves in the 
business arena where they've made the decisions to get into 
this business with the full knowledge of the operations of the 
U.S. Postal Service. I mean, the U.S. Postal Service didn't 
show up yesterday nor did Federal Express or UPS.
    I think it's very important, as we go forward here, that we 
not do permanent damage to the mandate given to the Postal 
Service and its opportunity to meet its mandate with some ill 
fated attempt to assist the private sector when the private 
sector is quite capable of assisting itself in many respects. 
And I won't bore you with the details of this, but I just think 
we need to be careful as we go forward.
    It's very important here, given what you've said, and I 
think you're right, that there are going to be more significant 
activities from international competitors in this marketplace. 
And the whole issue of both attributable costs, and cost 
coverage, and the like, we need to, speaking in English, have 
people understand what it is that we're talking about.
    The first issue here is that we have taxpayers in this 
country who today receive First Class Mail for 33 cents and in 
most cases, 90 percent or better, 1 day after it's put in the 
mail box, it's delivered. And to the degree that we make any of 
these changes, it needs to be clear to people what impact it's 
going to have on that service, which is principally the service 
that most people are involved in in terms of the U.S. Postal 
Service. Is it going to cost them more, and is the letter that 
they receive going to be received in the same level of 
efficiency it is received now?
    And then, as we move beyond that, you know, questions about 
how the Postal Service interacts in the marketplace both among 
your private sector competitors and now questions in terms of 
international competition. So I want to thank you for your 
comments today, but, obviously, we're going to have a lot of 
work to do as we go forward. It is of interest and of note that 
the U.S. Postal Service has these statutory burdens, that we 
talked about earlier, but also has, I think, a responsibility 
to try to within reason meet the terms of economic competition 
from those who decide to compete with you.
    I think there is a difference between those that decide to 
compete with you and those you decide at some later date to 
then get in competition with in the private sector. And I think 
that is a distinction to be drawn there as we go forward in 
this work. So, thank you.
    Mr. McHugh. I thank the gentleman. Before I call for the 
second panel, I had been handed a note that Chairman Burton had 
to go on to another meeting. We appreciate his spending such a 
significant amount of time with us.
    But he wanted to clarify his request, Mr. Henderson, with 
respect to the advertising costs. He wanted to make it clear 
that he'd like the detail by product. In other words, I assume, 
as much a line item by item breakdown as you could, rather than 
just a lump sum advertising budget.
    Mr. Henderson. We'll provide that.
    Mr. McHugh. Thank you. With that, we do have a substantial 
number of questions, as I'm sure you understand and as is the 
rule, to present to you for the record. As you have done in the 
past, we would appreciate your consideration of those and 
respond by providing us with that material as well.
    Again, Postmaster General William Henderson, General 
Counsel Mary Elcano, we thank you for being here this morning 
and, based on your response to my very first question, I'm 
looking forward to working with you further on H.R. 22.
    Mr. Henderson. Thank you, Chairman McHugh. And I'm going to 
be leaving, I have a commitment. It's not out of lack of 
interest in what the other witnesses say, but I do have a 
commitment out of the country this evening. So ``Adios'' is not 
being uninterested. Thank you.
    Mr. McHugh. Well, we understand. Have a safe journey and 
come back to us soon. Thank you.
    [Additional questions for Postmaster General William J. 
Henderson and responses follow:]
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    Mr. McHugh. Our next panel, as I mentioned earlier, is 
comprised of the five commissioners of the Postal Rate 
Commission. Chairman Edward Gleiman; Vice Chairman Trey 
LeBlanc; Commissioner George Omas, a face not unfamiliar to us 
who have plied the House Chamber, a good friend and former 
staff member at the committee; also, Commissioner Ruth Goldway; 
and Commissioner Dana, also known as ``Danny'' Covington. So we 
welcome you all here today. Before you are seated, while you 
are up standing, let me rise and we can administer the oath.
    [Witnesses sworn.]
    Mr. McHugh. The record will show that all of the 
commissioners responded in the affirmative. So, again, welcome. 
We're glad you are here this morning. I will open with Chairman 
Gleiman, who is certainly no stranger to this committee room or 
certainly to this subcommittee. And I add, we welcome you back.
    Having spent a good part of my last several days reading 
your extensive testimony, it was enthralling I assure you, page 
after page after page of it. I sound facetious and I should 
not. It was very thorough, very, very responsive and detailed. 
I do appreciate that because you gave us a great deal of not 
just food for thought but substance for thought, as well.
    As I know you understand, time totally precludes us from 
your presenting that in its entirety. So we will, of course, 
submit that for the record in its entirety. We'd appreciate if 
you could point out those particular highlights that you think 
are most relevant here this morning. Although having read it, I 
can tell you that whatever you choose to focus upon will be 
relevant, because it was all very relevant and very helpful. 
So, welcome and thank you for being here.

    STATEMENTS OF EDWARD J. GLEIMAN, POSTAL RATE CHAIRMAN, 
ACCOMPANIED BY W.H. ``TREY'' LeBLANC, VICE CHAIRMAN; GEORGE A. 
OMAS, COMMISSIONER; RUTH Y. GOLDWAY, COMMISSIONER; AND DANA B. 
               ``DANNY'' COVINGTON, COMMISSIONER

    Mr. Gleiman. I do feel at home with Jack Brooks staring 
down at me. I sat up there and had him do that occasionally 
during my 10 years as a staffer on the predecessor committee, 
the Government Operations Committee. I was somewhat relieved 
when I heard your opening, which indicated that this was not 
the impeachment hearing room. I was actually very relieved, 
because I know you read our testimony, and I was concerned that 
after reading it you might want to make it the impeachment 
hearing room.
    Mr. McHugh. Not at all.
    Mr. Gleiman. We do have a lengthy submission for the 
committee today. Before I start, let me introduce my 
colleagues, if I may? Vice Chairman LeBlanc is with us today, 
as well as Commissioners Omas, Goldway, and our newest 
commissioner, Commissioner Covington.
    I have a summary that I've attempted of the testimony. I 
also have the short version, the shorter version and the 
shortest version. I think inasmuch as you've read the 
testimony, and I hope others will read the testimony, I'm going 
to go to the shortest version. If you want more, you'll tell 
me.
    H.R. 22 with some fine tuning, save the private law 
corporation where we have some serious concerns, would appear 
to be workable. It would appear to provide an opportunity for 
the goals that were established at the outset, concerns over 
unfair competition, non-postal products, and losses of revenue 
due to decline in volume--not market share but volume--that the 
Postal Service is facing. These problems can be adequately 
addressed, with some tinkering, by H.R. 22.
    Having said that, it is our considered opinion, by and 
large, that the Postal Service amendments are directly contrary 
to many of the bedrock principles of H.R. 22. The Postal 
Service amendments seem to erase many of the checks and 
decalibrate almost all of the balances that have been carefully 
and thoughtfully incorporated into the bill in response to the 
concerns of interested parties.
    I could discuss at length the private law corporation at 
this time, if you would prefer, but, if not, we can go right to 
your questions.
    [The prepared statement of Mr. Gleiman follows:]
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    Mr. McHugh. Let me ask about the private law corporation. 
Before we do that, Commissioner Goldway has presented testimony 
which we will submit its entirety in the record. Commissioner, 
we thank you for that extra effort and welcome you, all of you, 
of course, but I believe this is your first hearing? Welcome. 
Be careful what you pray for, Commissioner.
    [The prepared statement of Ms. Goldway follows:]
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    Ms. Goldway. Thank you
    Mr. McHugh. I am aware, Mr. Chairman, that you have 
concerns about the private law corporation and we do need to 
probe those and discuss them. But, first, let us spend a little 
time on the Postal Service amendments. A great deal of your 
prepared testimony was spent, I felt, in addressing those 
issues.
    Now, you heard me discuss, for example, the cost coverage 
rule, the 5 year sunset of that, and the suggestion by the 
Postal Service that they be the determiners of what is non-
competitive and competitive, versus the process defining H.R. 
22, involving more market oriented procedures, and such.
    Let's spend a little time, if you would, filling out the 
record in a counterpoint, for lack of a better description, of 
what the Postmaster General just said. Let's start with the 
cost coverage rule.
    I know you heard my comments, the concerns about doing away 
with that provision after 5 years. You heard in response both 
the PMG and the General Counsel's view about a future of the 
Postal Service and a process by which, after 5 years, that cost 
coverage rule becomes moot, in their view, at best, and at 
worst becomes a negative thing in terms of a pricing burden on 
a product that in theory is supposed to be competitive. I'd 
like to hear your views on that.
    Mr. Gleiman. Well, first let me say that, as I recall, H.R. 
22, as reported out of the committee last fall and as 
reintroduced this year, does contain a provision that allows 
the Postal Service to approach the Postal Regulatory Commission 
and ask for adjustments in the nature of the equal contribution 
provision. So, to the extent that something is going to happen 
over the next 5 years, or however many years, that could impact 
negatively, there is a mechanism built in now.
    The big problem with the Postal Service's proposal to 
sunset the contribution requirements on the competitive side 
has to do with where the money to cover overhead is going to 
come from. There is an issue that we've all been wrestling with 
about when the first class monopoly volume is really going to 
decline. And one of the reasons that we're all involved in this 
and have been for a number of years is the fear that we need 
some way to cover overhead costs.
    The Postal Service's proposal that in 5 years there doesn't 
have to be any contribution rule, or any contribution for that 
matter, would indicate that we're not going to be able to solve 
the problem associated with declining first class volume. Even 
assuming that the Postal Service is positioned to shed volume 
variable costs, it will still have substantial fixed, overhead 
costs that it will have to cover. I don't know where it expects 
that money to come from, if it doesn't expect, in year 6, for 
the competitive products to make some contribution. But doing 
away with the mark-up is exacerbated in a sense, as are several 
other provisions of the bill, by the Postal Service's proposal 
to define product at the subclass level. If all you have to do 
is cover costs at the subclass level, and you don't even have 
to make a contribution, just think about what happens with 
offerings or rate categories within a particular subclass. 
Where they think they've got something close to market 
dominance, which they can have under their proposal in the 
competitive area, they would be encouraged to go for higher 
rates and maybe below costs rates for subordinate units, as the 
bill calls them. And I think that there is potential for a 
great deal of hanky-panky.
    Ms. Elcano, as I understood her, said, ``Don't worry about 
it, there are provisions in here which apply the anti-trust 
laws.'' Well, you know, a lot of the Postal Service amendments 
would weaken the antitrust protections and the other playing 
field leveling provisions that you have included in H.R. 22. 
And even assuming that she's right, anti-trust suits take 1\1/
2\ years, 2 years, 3 years, I don't know. I have a law degree, 
but I haven't been to court in an anti-trust case.
    I imagine that with the opportunity not to have to worry 
about marking up your products and only covering costs, and 
then having some sub-units where you could be below cost, that 
you could do some fair damage to the private sector.
    Mr. McHugh. Also, let me say, when I address my questions 
to the chairman they are by inference addressed to any of the 
commissioners. If any of you at any time want to add or expand 
upon anything that the chairman is saying, please feel free to 
do so.
    Mr. Gleiman. You'll be disappointed to know that Vice 
Chairman LeBlanc has laryngitis today and probably won't be 
able to offer additional comments.
    Mr. McHugh. I'm heartbroken. Well, I wish you a speedy 
recovery sometime later this afternoon. You also heard the 
response to the concerns that we have heard that I conveyed to 
the PMG, with respect to their amendment that would propose 
that they define competitive versus non-competitive.
    You may have also heard the general counsel's response with 
respect to single piece international mail and the fact that 
they have a court case going now. And that again in the future 
they envision a time when it would indeed be competitive. Do 
you view that amendment as a helpful one or as one that better 
balances the playing field, as we like to say, in this process?
    Mr. Gleiman. I do not think it better balances the playing 
field. I also heard the Postmaster General comment at another 
point in his presentation, in response to a question that you 
asked, that almost every Postal Service product, or something 
to the effect of, has competition in one way, shape or form.
    As for the argument that there is something in a lawsuit 
somewhere that may imply that single piece international should 
be in competitive, I guess you could extend that argument and 
say that, well, letter mail, which is part of the monopoly, is 
in competition, we've all heard it time and time again, with 
evolving technologies.
    Everybody is worried about electronic bill paying, so why 
don't we just move everything into the competitive basket or 
the competitive side of the ledger and get it over with now? 
That's how I would read the Postal Service's position. I just 
think it's not well taken.
    Mr. McHugh. You have, and let me state for the record, in 
the body of your testimony a series of amendments that you 
suggested that, in your opinion, could make the bill more 
``finely tuned,'' to use your phrase.
    I will respond that, just at first blush, many of those 
amendments did indeed appear to be some things that we not only 
can, but should and will, take under consideration. I won't go 
into a list of those now, but we undoubtably will want to get 
back to you on ensuring that, as we go forward, we're 
formulating something that you indeed intended and envisioned, 
and I appreciate that.
    Mr. Gleiman. Mr. Chairman, perhaps I should have said this 
at the front end, but Bill Henderson talked about the 
relationship between the Postal Service and the Postal Rate 
Commission in the past few years, and he was right. It's a much 
better relationship than it has been during many years since 
postal reorganization in the early 1970's. A lot of that has to 
do with Bill Henderson's attitude.
    I think it's important for you to know that we talk with 
the Postal Service frequently about the bill. They initiate the 
conversations. We initiate discussions with them. We don't 
always agree with them, but they have a perspective that they 
need to present, and I understand that where one sits is where 
one stands on issues.
    I think it's important for you and for everyone else who is 
involved in this to understand where the Rate Commission sits. 
It is an interesting place because we, and you can take me at 
my word, are not presenting views which are intended to 
perpetuate a bureaucracy.
    Our concern is that whatever comes out in the way of H.R. 
22, if and when it's enacted into law, is good for the American 
public, the mailing public, the Postal Service. Our amendments 
and the proposals that we offered, as well as our critique of 
the Postal Service amendments, are all offered in that vein.
    Mr. McHugh. I do take you at your word. I do take it not 
just as your word today, but, in some of your previous 
testimony, some of your frankest observations have been with 
respect to what you view as the possible inability of the PRC, 
under the current structure, to do a task that was being 
envisioned. That's a very frank assessment.
    I took from that, as you just noted here today, that your 
overriding interest is that whatever we craft is, when taken 
together, better than what we have today and continues to 
provide the kind of postal service that Americans have come to 
expect and to enjoy. But I certainly understand and appreciate 
your comments.
    I was speaking about some of the suggested amendments that 
you had made and how we felt there was some room to move on a 
number of those. One of the suggestions that you made is with 
respect to work sharing discounts. You spoke about how you felt 
there was the need to put in language that somehow stipulated 
that work sharing discounts should only be allowed when there 
is a cost savings realized.
    Understanding right now that that is the motivator of work 
sharing, explain or expand, if you will, a bit on why it is 
your concern that the Postal Service may find itself in the 
future doing work sharing agreements that don't result in cost 
savings. I mean, it seems to me it's kind of a sine qua non of 
the process. How does it get turned around?
    Mr. Gleiman. Well, if you are interested in retaining 
volume that you have and or competing with, whether it is 
Deutsche Post, the Royal British Post Office, UPS, or Federal 
Express, you might be moved to provide discounts which are in 
excess of what is appropriate under certain economic 
considerations.
    One of the principles, I think, that underlies this effort 
that you've undertaken is that we have an efficient system. I 
use the economic concept, efficient component pricing, in 
conjunction with the discussion of work sharing discount.
    What we're talking about here is that the Postal Service, 
should offer discounts that reflect the costs that are avoided 
as a consequence of work sharing--not more and not less. That's 
what we strive for under the current ratemaking process, 100 
percent pass through of cost avoidances. If the Postal Service 
sticks to that then mailers, users of the mail, are in a 
position to make decisions based on the economic dollars and 
cents.
    If the Postal Service passes through 100 percent, and I can 
do it cheaper, then I'm not going to use the Postal Service. 
That's good for the overall economy. If I can't do it cheaper, 
then I am going to use the Postal Service, and that's good for 
the overall economy too, as well as for the Postal Service. So 
we think it's a very important concept that ought to be 
specifically included in the legislation.
    Mr. McHugh. So you are simply concerned about, in the 
competitive area, volume and not losing volume at any cost to a 
potential competitor?
    Mr. Gleiman. You could have work sharing discounts in the 
non-competitive area, both monopoly and non-monopoly non-
competitive areas. I think that it's a concept that should be 
applied across the board. The Postal Service could, for 
example, introduce a drop ship discount for First Class Mail 
which does not now exist.
    One would assume that the sensible thing would be to have a 
discount that reflects the costs that are avoided as a 
consequence of mailers drop shipping. I don't see any good 
reason for the Postal Service to offer larger discounts but, 
theoretically, they could under the price cap scheme. I don't 
think that they should. It would not be an efficient thing to 
do.
    Mr. McHugh. In a similar vein, NSAs. Under H.R. 22, there 
is a prior notification requirement to the PRC, et cetera, 
another one of the amendments that the Postal Service has 
submitted. I did not raise this question directly to the PMG, 
but we will submit it in written form--that they would delete 
that prior PRC review.
    The question I would have for you is, what would the 
effects of that be in your judgment, good or bad or 
indifferent? Assuming you are concerned about the loss of that 
provision, could something like a public notice, even without 
PRC prior review, take care of some of those concerns? Or is 
there some other role that we could develop for the PRC that 
might make the Postal Service's amendment, in your view, more 
workable?
    Mr. Gleiman. I think at the very least there has to be 
public notice. What the Postal Service is proposing is to have 
something akin to secret, non-tariff rates. The bill, H.R. 22, 
provides an opportunity currently for parties to raise 
questions about negotiated service agreements. If they are 
secret, how are you going to know whether to raise a question?
    If they are secret and you are similarly situated to the 
party that the Postal Service is dealing with, and the bill 
provides that the NSA should be extended to similarly situated 
mailers, how are you going to know that there is something 
that, you want that somebody else is already getting?
    So I think at the very least there needs to be public 
notice in advance. I mean a full public notice so that others 
can understand what it is that they might want to go after 
themselves.
    Mr. McHugh. Well, is the ``very least'' good enough? I hear 
what you are saying and you feel that that's an absolute 
necessity, but where is your comfort zone?
    Mr. Gleiman. Well, my comfort zone is with the bill. I 
suspect we could live with a little less, as long as everybody 
understood there was an after-the-fact review; and, that there 
were, indeed, liquidated damages provisions that could be 
enforced in the event that the Postal Service either noticed, 
or didn't notice, an agreement to the public that was a poor 
agreement and/or where the other party to the agreement did not 
live up to its end of the bargain. But I would much prefer the 
provision in the bill.
    Mr. McHugh. How long a period of review do you think is 
necessary by the PRC? In other words, if the bill were to 
mandate a certain review period, do you have an idea what that 
timeframe might be?
    Mr. Gleiman. That's a tough one because we're getting into 
a new area and there are some underlying questions. The 
thinking at the Postal Rate Commission has evolved 
substantially on negotiated service agreements. Whereas we had 
some really serious reservations before, our reservations are 
somewhat limited now.
    But there are issues involving how the negotiated service 
agreements would be costed out; whether the costing would be 
bottoms up, subclass costing, or whether it would be a tops 
down cost avoidance approach. This is what is used now in 
ratemaking. Those issues have to be discussed in order to 
determine how long it is that we need to review an agreement.
    The other issue is, who knows how many agreements there are 
going to be? Just like the Postal Service wants flexibility, I 
guess we would like a little flexibility on this one, too.
    Mr. McHugh. Fair enough. Going back to an original 
question, and just so I've got it on the record, and I think I 
could deduce it from the previous answer. But, is my assumption 
correct that you would not agree that, under the current 
system, international Aunt Minnie mail ought to be competitive?
    Mr. Gleiman. I think the bill has it split up right on that 
one, as it stands. We do have some questions, though, about 
some aspects of priority mail. If you use the market dominance 
test as a determinant, what goes into the competitive arena? It 
appears to us, although we don't know for sure, and we would 
have to have some information to look at to make a better 
determination, it looks to us as if in some areas the Postal 
Service may have what's tantamount to market dominance.
    So while I like most of what is in the bill, in terms of 
how it has split up competitive and non-competitive, I think 
that we all, the committee, the Postal Service and the Postal 
Rate Commission have to look a little bit more carefully at 
these fairly large service offerings like priority mail.
    Mr. McHugh. Well, that's what you like about the bill. 
Let's go to something that you may not find, you do not find as 
attractive, and that's the provisions of the private law 
corporation. Rather than form a leading question, I'd like to 
just allow you the opportunity to kind of define or describe 
your view and your position, and maybe we can go from there.
    Mr. Gleiman. I don't want to hog the microphone, and I 
would invite my colleagues to jump in at any time on this.
    Mr. McHugh. Especially if they disagree with you on this 
one, I would urge them as well.
    Mr. Gleiman. As I recall, when we first started talking 
about postal reform, and this may have been before you arrived 
on the scene, although it was mostly talk and no action before 
you arrived on the scene, there were a couple of problems and 
concerns that people had.
    One of the concerns was expressed by the private sector, 
which felt that the Postal Service was embarking on non-postal 
activities and was using monopoly moneys to underwrite their 
forays into these new non-postal areas. Some of these 
activities had no nexus whatsoever to anything postal. So the 
question was: How do you make sure that there is a level 
playing field and that a monopoly is not there as the 
underwriter?
    The other big concern was that--let me step back a minute. 
The Postal Service felt, and many large mailers supported them, 
that it had to get involved in non-postal activities because 
that was a source of new revenue. We all know the Postal 
Service is going to need new revenue to underwrite its 
universal service obligations when First Class Mail volume, and 
perhaps other mail volumes, flatten out or decline.
    Now, let's look at what we've got. We've got a private law 
corporation, which I believe was intended to address those 
problems by helping out on the finance side of things. There is 
no requirement, and I want to emphasize ``requirement,'' 
because I know there is a provision saying something can 
happen, but there is no requirement that if the private law 
corporation is wildly successful and makes a lot of money, that 
it has got to feed any of that money back in to underwrite the 
universal service obligation.
    We recommend that if you do go ahead with the private law 
corporation, than at the very least there be a requirement that 
if the corporation make money, that money be paid back to the 
Postal Service to underwrite the universal service obligation--
to deal with the problem we all know is 3, or 5, or 10 years 
down the road.
    On the product side of things, we have the monopoly in a 
position where it's going to indirectly fund non-postal 
products. By the way, it's not altogether clear the Postal 
Service will ever make any money with non-postal products. The 
track record, as evidenced by a GAO report prepared for you, 
indicates that the Postal Service is not all that strong when 
it comes to getting out there and competing in a non-postal 
area.
    The money for the private law corporation, in the bill, 
comes from the competitive product fund. The fund can transfer 
excess contributions or surpluses, after the equal contribution 
requirement is met. That's not all that bad. It certainly is an 
improvement over the current situation. But it appears as 
though the Postal Service wants to take PLC funding much 
further.
    And even before you get to the Postal Service amendments, 
there is a discussion--and these discussions have taken place 
at the staff level and higher between the Postal Service and 
the Rate Commission, the committee is aware of them--of 
mechanisms for funding the private law corporation.
    For example, there has been a suggestion that one thing you 
can do when you distribute the assets to the competitive box 
and the non-competitive box, is have the competitive side sell 
its assets and lease them back. Then you can take the revenue 
that the competitive side has earned from selling its assets to 
the Postal Service's non-competitive side, and use this money 
to further fund the private law corporation above and beyond 
what I think your bill initially considered, which is that 
surplus in the competitive fund.
    Now, along comes the Postal Service, and the Postal Service 
wants to sell stock to the public. I suspect that if stock is 
sold to the public, that the stockholders are going to put 
pressure to be paid dividends, which is going to lessen the 
likelihood that any moneys are going to flow back over the 
fence to the Postal Service side. You know, it just gets very 
dicey.
    Probably most troublesome, by the way, is the question a 
moment ago about the sunset after 5 years of the equal 
contribution provision. The Postal Service doesn't say that 
it's not going to mark up competitive products. It just says 
that it does not want to have to be worried about making a 
contribution over to the Postal Service side. It wants to have 
all the money that it makes on competitive products, both 
related to the cost of the products and related to any mark-up 
over the cost of those products, to be transferred into the 
private law corporation.
    Step back to another Postal Service amendment. The Postal 
Service wants to be able to transfer whatever it wants, without 
regard, over to the competitive side. Anything that's not 
monopoly can go over to the competitive side. So you are left 
with First Class, Standard A letters, and a few other little 
things, that are covered by the monopoly. Everything else goes 
over into the competitive product area. Then you take all the 
money you make in a competitive product area, and you throw it 
over the fence into the private law corporation.
    I thought we were all concerned about the monopoly captive 
audience. I thought we were all concerned about doing something 
to ensure that we were going to be able to meet the universal 
service obligations. The Postal Service's amendments seem to 
indicate that it is not all that interested in that, that it is 
more interested in the competitive aspects of this and in the 
private law corporation aspects. In terms of, you know, the 
financing has evolved, the role has also evolved.
    I thought that you wanted them to be able to undertake some 
activities again in the non-postal area. Now the feeling is 
that it could transfer postal products. You could read the bill 
to allow the Postal Service to transfer everything, and I do 
mean everything, including the monopoly products, over the 
fence to the private law corporation.
    The bill says that the Postal Service has an obligation to 
meet this universal service obligation. It does not say that 
that Postal Service has to have letter carriers, it does not 
say that the Postal Service has to have mail handlers, it does 
not say that the Postal Service has to have clerks to collect, 
process and deliver that mail.
    The private law corporation provision is, and this is a 
constructive criticism, please understand, it is written in a 
manner which would allow the Postal Service to contract with 
the private law corporation, which is not obligated, by the 
way, to use union labor, to perform all the functions that are 
necessary to fulfill its obligation, leaving you with a hollow 
virtual Postal Service, if you will; a couple of floors at 475 
L'Enfant Plaza where there are some contracting officers; a few 
policy people; maybe somebody to come up and testify 
occasionally. Those are some of the concerns that we have.
    But, again, when it comes to non-postal products, the 
private law corporation in the narrow sense is a better 
approach than what we now have, where there is a free ride on 
the back of monopoly revenues.
    Mr. McHugh. Well, I won't say it sounds like a chapter in 
the X files, but you've thought the line out to----
    Mr. Gleiman. It may be a chapter from the X factors, 
though.
    Mr. McHugh. Flashback.
    Mr. Gleiman. I think that the comments that we've made are 
fairly far reaching. But we've also noted that the private law 
corporation first appeared in H.R. 22 when it was marked up 
last fall. This is the first time there has been a hearing 
where anybody has had an opportunity to comment. In this set of 
hearings, it's the first time anybody will have had an 
opportunity to really talk about H.R. 22's private law 
corporation provision.
    I take you at your word when you have said repeatedly that 
this is a work in progress. We would like to see it progress, 
but we would like to see it progress in a manner which is going 
to deal with the problems that we all thought we were trying to 
deal with at the outset.
    Mr. McHugh. Your point on the first opportunity is correct. 
A lot of what you said is a fundamental, or I should say a 
philosophical, question, much like is there cross subsidy or 
not. We could argue or discuss for quite some time. As I know 
you understand, the current system has no requirement that 
there be clerks and postal delivery people. Indeed, if you turn 
to some of the gentlemen behind you, I think they would readily 
voice concerns about what they view to be the privatization in 
place, if you will, already of many traditional postal services 
through contracting out and such. So I don't know as I would 
agree we may not be solving that problem, but I don't agree 
we'd be creating it anew here.
    Mr. Gleiman. Mr. Chairman, what the bill does is put the 
imprimatur of law behind contracting out. You are absolutely 
right. It's not prohibited under current law, but there is 
nothing under current law that can be read point blank to 
endorse that type of activity. I think there are reasonable 
people who will read the provisions and assume that it says 
this is OK.
    But, you know, I think that the real issue here is taking a 
couple of steps back and asking the question, does the Postal 
Service really have to be involved in non-postal activities? 
The only reason I raise this is because we're all concerned, I 
think, about finding a way to make sure that we have a Postal 
Service that has sufficient funds, in the face of declining 
volume at some point in the future, to continue to provide the 
services that the ranking member talked about earlier.
    Mr. McHugh. The necessity in a political world to craft a 
bill that can be passed and signed into law, and a bill that 
tries to, as effectively as it can, respond to the very 
legitimate concerns of corporate America and private enterprise 
that feel that indeed under the current structure they are 
being asked, totally contrary to their philosophical view of 
capitalism in the longest lived democracy in the history of the 
world, to compete against a highly subsidized one in terms of 
government monopoly. And that's the challenge we have.
    I want to just go back to the point about what H.R. 22 does 
or does not do. Without rejecting out of hand your 
interpretation, I would suggest again that practice has shown 
that the current structure has no prohibitions against 
privatization, and it is being done. H.R. 22 does in no way 
expand upon what currently exists in that regard, 
notwithstanding your concerns and not discounting your 
concerns.
    But I don't want any one to leave this room under the 
impression of a point that I don't think you are making. There 
is nothing explicitly in H.R. 22 that calls for or in any way 
expands upon current law. I understand the point you've made 
twice now, but let me just add a couple of other things.
    One of the other intents of the private law corporation, 
beyond those you described that talk about the monopoly 
underwriting the competitive or non-postal activities, the need 
to provide opportunities in the future for the Postal Service 
to add to its current fiscal structure through non-postal 
opportunities, but it was also to try to shield captive rate 
payers from the current practice where they and they alone are 
the financial carriers of any kind of ill-advised experiment in 
non-postal products.
    You mentioned very accurately, and I think we all know this 
through our own experience, but as the GAO report, as you said 
we requested, recently illustrated, the track record of the 
Postal Service on these non-postal products in terms of the 
economics of it, and they would argue, by the way, we've not 
had a long enough history of it, there are many other reasons 
for it but, nevertheless, the picture as it stands today has 
not been positive. Those failures have been, would you agree, 
have been borne totally by the captive rate payer?
    Mr. Gleiman. There is no question about that. Let me repeat 
again what I said before, and what is in our testimony. In that 
regard, H.R. 22 is an improvement over current law. It shields, 
to a degree, a monopoly player from bearing a burden of 
allowing the Postal Service to get involved in non-postal 
activities. Also, as there are no requirements today that 
postal employees be unionized, there is no prohibition in H.R. 
22 that any future activities they would do through the private 
law corporation would not be unionized.
    Mr. McHugh. And I suspect that when as H.R. 22 requires the 
shareholders and the sole interest in the private law 
corporation must be held by the U.S. Postal Service, that when 
our union friends go to the bargaining table in 2008, the year 
after I said if we had started today H.R. 22 would be in 
effect, they might indeed be talking about the activities of 
the private law corporation to the CEO and chairman, who I 
assume would be the Postmaster General, about the opportunities 
for union employees in the private law corporation.
    Mr. Gleiman. I'm sorry, did I--I don't know whether I 
understood you just now----
    Mr. McHugh. Good, because I didn't understand a lot of what 
you said either. What I'm suggesting is there is nothing in 
H.R. 22 that would preclude--you mentioned there is nothing 
that requires employees that they hire be union. And I said 
there is no requirement for that currently on the baseline 
within the Postal Service. And in the comment I said there is 
nothing that would preclude, under H.R. 22, any employee hired 
under the private law corporation to in fact be union.
    And that I suspect, and this is based only on about 15 
years of experience in negotiating various employee contracts 
at both the State and Federal level, that when the union 
representatives for the more than 700,000 union employees of 
the Postal Service would go in and talk to the Postal Service 
management, who also would be the representatives of the sole 
stakeholder in the private law corporation, they might talk 
about hiring union employees as part of the private law 
corporation. Not that there would be any direct fiscal link or 
legal link, but I bet that would happen.
    So all I'm suggesting is, I don't know as it is a valid 
critique--it's valid but I don't know as it's relevant to say 
there is nothing that would require those employees to be 
union, other than to get the attention of the first row here 
[indicating union representatives].
    Mr. Gleiman. Mr. Chairman, all I'm suggesting is that this 
is a new concept that was added to a bill that was marked up 
last fall. It has not been examined in great detail in public. 
I think there is ample opportunity for people to agree with you 
and/or with me. What I think is necessary, and what we said in 
the written statement, is that we think that there needs to be 
a careful and thoughtful examination of just what's intended. I 
go back to my original point: If the private law corporation, 
whatever it does, is not going to provide sufficient revenues, 
and those revenues are not required by the bill to be plowed 
back into the monopoly side or the non-competitive side, then 
I'm not sure what useful purpose the bill serves.
    You said the purposes were opportunities to add to the 
current stable of products and develop new funds and to shield 
the monopoly. I don't disagree with you. I just think that we 
have to look at the realities of the situation and some parts 
of the bill as drafted. If we want the money that the 
corporation may make, whatever you ultimately decide it should 
be allowed to do, to benefit the monopoly, then we ought to 
have a requirement to that end.
    We ought to have some checks and balances to make sure that 
if those Postal Service amendments are accepted, that the 
Postal Service hierarchy doesn't just use the Postal Service as 
a cash cow to fund the private law corporation. It's down to 
that. I assume we'll have some discussion. I would like to 
think we'll have some discussions about it.
    Mr. McHugh. We will. And your points are excellently taken. 
So to sum up on that issue. You are concerned about the 
permissive nature of H.R. 22 which permits, allows for, a 
contribution back. You feel it would be more appropriate if 
there was some sort of requirement of a contribution back. I'm 
not terribly troubled by that component. What the challenge 
then becomes is, how do we do that percentage, based on what 
determination? So we need to talk.
    Mr. Gleiman. Please listen carefully. This may be the only 
time in my life I ever give a one word answer. Yes.
    Mr. McHugh. Good. I would be happy to yield to the ranking 
member, Mr. Fattah.
    Mr. Fattah. Thank you. I'm at somewhat of a disadvantage. I 
told you I had Secretary Riley over in the other room. But let 
me thank you for coming forward. And, as I understand from your 
written testimony, and I wasn't here for some of the back and 
forth, well, let me ask you like this. The price cap issue, 
your position on that is what? And it doesn't have to be one 
word, but brevity is helpful.
    Mr. Gleiman. I think with some fine tuning the price cap 
approach can work. There are a couple of issues that I think 
need to be dealt with. We understand and feel that the price 
caps would be set at the rate element level--the rate cell 
level, excuse me. Most of us think that this is an appropriate 
place to set the price caps.
    The Postal Service feels it should be done a different way. 
We disagree with them. The way they would propose it, to set it 
at the subclass level, would allow for below-cost pricing under 
the subclass. We don't think that's consistent with one of the 
basic premises of the bill, which says everybody ought to pay 
his cost.
    The Postal Service also proposes some modifications to the 
nature of price caps. And these modifications are a bit 
troublesome in that they would provide for larger increases. 
Now, when this question was asked, and I can't recall whether 
it was you or one of the other Members who asked the question 
of Mr. Henderson, the response was that, well, when it comes to 
the first basket, First Class letter mail, don't worry, we 
can't go over the price cap. And that's right. They've set a 
band of 2 points below the price cap and zero above, but 
they've only set that for First Class letter mail, the Aunt 
Minnie basket. When it comes to baskets two, three and four in 
the Postal Service proposal, which has business First Class 
Mail, and has Standard A mail, and periodicals, the Postal 
Service has given itself a bit more discretion. There it says 
that prices can go up as much as 1\1/2\ points above the cap.
    If you use an example, and I don't want to confuse anybody 
with this, but if you assume inflation is 3 percent, and then 
under the proposal in the bill the Rate Commission knocked off 
1 percent so that the price cap was 2 percent, rate increases 
for all mail would be somewhere between 0 and 2 percent.
    Under the Postal Service's proposal, again 3 percent 
inflation but no adjustment factor, it would have you set rates 
at anywhere between 2 points below the cap, which in its case 
is 3 percent, or 1.5 percent above the cap. So, under the 
Postal Service amendments, the rate increase, in the same 
situation with the same inflation, could range for advertising 
mail or periodicals, what have you, between 1 percent and 4.5 
percent.
    I would submit that if one of the basic premises of the 
bill is to tighten up, then we don't want to have a range of 
price increases from plus 1 to plus 4.5. We want to have a 
range of price increases between 0 and 2. It's better for the 
mailer, and it's better for the economy as a whole.
    Mr. Fattah. The interaction, as you see it, and H.R. 22, as 
proposed, that would rearrange to some degree the third 
principle you talk about in your comments, this competition, 
notion of a fair playing field. It's hard, as I grapple with 
this.
    The Postal Service is more than just a competitor to these 
other players in the market. It has these other burdens, other 
responsibilities, and other restrictions on it. And I'm 
interested in how you see, assuming H.R. 22 is passed without 
amendment, without any of the amendments that have been offered 
by the Postal Service, do you think that would create a fair 
playing field?
    Mr. Gleiman. I'm sorry, I couldn't hear you?
    Mr. Fattah. Do you see H.R. 22, as it exists in its present 
form, creating a fair playing field, in terms of competition?
    Mr. Gleiman. By and large, yes. We've offered a list of 
what we think are relatively modest amendments; proposals that 
I think would sharpen up the bill. But by and large, yes. When 
I say that, let me just say that I have some heartburn about 
the private law corporation. But if you are dealing with how 
the rates are going to be set, boxes one and two, of the three 
boxes, the non-competitive and competitive, I think it's 
workable. I think it's doable.
    Mr. Fattah. The private law corporation issue, I understand 
you have some concerns about it, is an opportunity for mischief 
to take place?
    Mr. Gleiman. I think that we need to explore it further. 
And, we had some specific suggestions there, also. For example, 
we think that more of an arm's length relationship has to exist 
if there is going to be a private law corporation. Right now 
the directors of the corporation are appointed by the directors 
of the Postal Service.
    There may be, and I don't have off the top of my head 
another way of getting those folks in place, but perhaps there 
is another way that would insulate them somewhat from dealings 
with the Postal Service, make it arms length. Also we're 
concerned about postal employees moving over to get higher 
salaries in the private law corporation.
    Mr. Fattah. I know this is a pet peeve of yours, so I don't 
want to get too mired down in this yet. But let us just go back 
to this issue of competition for a minute. Is it your view that 
the public's interest is served by this fairer competition that 
would be an outcome of H.R. 22? I'm differentiating the mailers 
and the other stakeholders from the public in general.
    Mr. Gleiman. I think all of you, especially the chairman, 
have worked very hard at this and if you haven't leveled the 
playing field, you've come darn close to it. I'm not sure, how 
much closer you can come. In that sense, I think, yes, the 
public would generally be served. We have some concerns, again, 
about the burden shifting and the like, but I think that they 
can be dealt with in a reasonable manner with modest 
amendments.
    Mr. Fattah. I'm going to yield back.
    Mr. McHugh. Well, I thank the gentleman for his questions. 
Again, I would invite any of your fellow commissioners----
    Mr. Gleiman. I'll lean back and push the mic away.
    Mr. McHugh. I'm not trying to move you off stage, Mr. 
Chairman, but I just have some very knowledgeable people here. 
Commissioner Omas.
    Mr. Omas. Mr. Chairman, I don't know that I have a whole 
lot to add. I do agree with the chairman on many of the issues. 
But I, too, share his concerns about the management of the 
private law corporation, how do you separate the Postal Board 
of Governors and the management structure of the governing body 
of the private law corporation? That is probably my biggest 
concern.
    I think the bill as drafted is fine and you should be 
commended. H.R. 22 is a good bill and I think it's a workable 
bill. Mr. Chairman are to be commended on how you've managed to 
get everybody to the table. I thank you for this opportunity.
    Mr. McHugh. Thank you, George. Well, and as I said in my 
opening remarks to the chairman, and the chairman's comments, I 
understand, are the collective thoughts and works of the entire 
Commission, there was a very substantial amount of work and 
thought and analysis that went into that and I do deeply 
appreciate it. And there are areas that we want to explore 
further, as I indicated to you, particularly where you have 
made, as you indicated to the ranking member, some suggestions 
for changes. We want to pursue those.
    I will go back to my comment about the willingness that I 
have to re-examine the issue of contribution from the private 
law corporation to the Postal Service to the non-competitive, 
and what might be able to be constructed, if anything, to make 
that more clear than it currently is. I do not discount your 
concerns. More than that, I understand them and share them and 
if we can develop an approach, I would support that.
    So as with past practice and as I indicated to the 
Postmaster General we will have some written questions. In the 
past you have been very gracious in responding to them and we'd 
appreciate that in the future. But thank you all for your good 
and hard work, and we're looking forward to working with you. 
We appreciate it.
    Mr. Gleiman. Thank you for the opportunity and we look 
forward to working with you, too.
    Mr. McHugh. Thank you, Mr. Chairman.
    [Additional questions submitted to Mr. Gleiman follow:]
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    Mr. McHugh. The next panel is comprised of the management 
associations. As we're in the process of changing the name 
placards, we are pleased to welcome today the president of the 
National Association of Postmasters of the United States, Ted 
Carrico; the president of the National League of Postmasters of 
the United States, Joe Cinadr; and the president of the 
National Association of Postal Supervisors, Vince Palladino. 
Welcome, gentleman.
    We have a substitute in the line up. Now playing, Vince 
Palladino will be----
    Mr. Keating. My name is Ted Keating. I'm the executive vice 
president for the National Association of Postal Supervisors. 
Mr. Palladino was called home to New York last night. His 
father is critically ill. He expresses his regrets at not being 
here this morning.
    Mr. McHugh. Well, that's very, very sad and troubling. 
Please express our best wishes to him, and particularly his 
father, our concern that he have a full and speedy recovery. 
But we do welcome you and thank you for being here and for 
sitting in in representation of the National Association of 
Postal Supervisors.
    I'm sorry I allowed you to be seated before we administered 
the oath, so if you will bear with me, please rise.
    [Witnesses sworn.]
    Mr. McHugh. The record will show that all three witnesses 
responded in the affirmative to the oath. With that we will, as 
in the past two panels, say that all of your prepared testimony 
will be submitted in its entirety to the record. We would ask 
as we yield to you if you would summarize your comments and 
make those kinds of observations as you see fit.
    So, again, welcome. And we'll proceed in the order in which 
you are represented here today, beginning with President 
Carrico of the National Association of Postmasters. Welcome. 
Good to see you again.

 STATEMENTS OF TED CARRICO, PRESIDENT, NATIONAL ASSOCIATION OF 
   POSTMASTERS OF THE UNITED STATES; JOE CINADR, PRESIDENT, 
 NATIONAL LEAGUE OF POSTMASTERS OF THE UNITED STATES; AND TED 
    KEATING, VICE PRESIDENT, NATIONAL ASSOCATION OF POSTAL 
                          SUPERVISORS

    Mr. Carrico. Thank you Mr. Chairman, members of the 
subcommittee. I am Ted Carrico, the Postmaster of Palisade, CO. 
I also have the honor of serving as the national president for 
the National Association of Postmasters. We represent more than 
45,000 active and retired postmasters who ultimately are 
responsible for the quality of mail service provided to cities 
large and small, as well as to those areas which have no 
definable municipality.
    Palisade, CO, is located in a rural area of western 
Colorado, much like the hamlet in upstate New York that you 
call home. As you know, we have some different needs in rural 
America than the rest of the community. H.R. 22, I think, 
addresses those needs very well.
    Postmasters want to ensure that delivery is provided to 
each and every one of our customers every day, everywhere, and 
I think that your bill does that. For a long time, though, 
detractors have alleged that the Postal Service is a lumbering 
dinosaur whose time for extinction has long passed, and that 
the private sector can do things a lot better than the Postal 
Service.
    I've not seen that in rural America. Rural America depends 
upon, I guess it's what I would call the subsidy that is 
provided by the larger markets, the big cities in America. I've 
heard many discussions about all the baskets and stuff. And, 
you know, postmasters aren't concerned about baskets, we're 
concerned about delivering the mail. We're concerned about fair 
play.
    And we realize that mail can be delivered in the larger 
cities a lot cheaper than it can be delivered in the small 
towns. We rely on new ideas to build upon that revenue, the 
growth coming in, new products, new services. And I think the 
Postal Service is doing an outstanding job. If you look at the 
recent polls, and I think all politicians look at polls, the AP 
poll found that 75 percent of Americans believe that the Postal 
Service is doing an excellent or a good job. Last year a Pew 
Research Survey concluded that the Postal Service enjoys a 90 
percent approval rating. And in the most recent Price 
Waterhouse survey, it was determined that 93 percent of over-
night First Class Mail is being delivered on time.
    Americans demand a strong Postal Service that will provide 
essential value to everyone. Postmasters know your goal is to 
strengthen the agency so it can support uniform service to 
every community in the Nation, thus enabling the Postal Service 
to expand its revenue and to support the infrastructure making 
universal service possible.
    Let me assure you postmasters, side by side with the entire 
Postal management team and the loyal hardworking craft 
employees, will continue to work to see that these new 
revolutionary products and services are provided to the 
American public.
    I have a concern that our competitors would like to do some 
cherry picking, and that's where we have to protect the 
American people. There has been many times in my career that 
postmasters or the postmaster organization doesn't always agree 
with the Postal Service.
    We take public service real seriously. And there is 
probably no other group that's engaged with communities across 
this country more than postmasters. Many times the Postal 
Service will make a proposal that will find us on the other 
side of the table, whether it be the box rent issue that we had 
2 or 3 years, or the closing of small post offices.
    This bill must take care of rural America and intercities 
but it must also strengthen the Postal Service so we can do 
this. I think your job and my job first and foremost must be to 
take care of all Americans. We have a service that's set in 
place. We do not have to redefine that whole service but we 
have to fine tune it to make sure that that service is there 
for our kids and our grandkids. Those are the concerns that I 
have. I've summarized it pretty briefly.
    It's a very competitive industry out there. We all know 
that e-commerce, foreign posts, many different things are going 
to affect service in the future years, but I think we're taking 
a step in the right direction. And I just want to let you know 
that postmasters are willing to work with you or anyone else 
who is willing to enhance the service that we have and protect 
the interests of the American people. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Carrico follows:]
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    Mr. McHugh. Thank you, President Carrico for your comments 
and also for your cooperation. Next, President Cinadr, National 
League of Postmasters of the United States. Welcome, sir.
    Mr. Cinadr. Thank you. It's a pleasure to be back with you. 
As you stated, I am Joe Cinadr. I am the postmaster of 
Mansfield, OH, and I have been serving the National League of 
Postmasters for the last 5 years as vice president, executive 
vice president, and now as national president.
    I do appear before this committee today on behalf of the 
Nation's postmasters, retired postmasters and associate members 
of the League of Postmasters. And I do thank you, Mr. Chairman, 
for allowing my entire written testimony to become part of the 
record. As you requested I will simply highlight what I 
consider to be the most important parts of that testimony.
    First, representative postmasters from our 50 States, 
commonwealths, and territories will be here in Washington, DC, 
the first week of March to personally express their opinions of 
H.R. 22 and many pieces of legislation to their own Congressmen 
and Senators.
    Our primary focus is for the U.S. Postal Service to remain 
the best Postal Service in the world, and for postmasters to 
maintain their leadership role. The results of the legislation 
being considered must allow us to continue to provide all 
Americans with universal service at reasonable prices. We do, 
as Mr. Henderson stated earlier, need the authority to offer 
reasonable volume discounts, again, for us to remain 
competitive and engage in what are commonly accepted as good 
business practices.
    Almost everyone, some more grudgingly than others know how 
good we are. As Ted mentioned, the Pew Research Center survey 
and the Associated Press survey this past month proved that. We 
do what no one else does or even wants to do, and that is to 
provide excellent mail service to towns and hamlets like 
Pierrepont Manor, NY; Pineland, SC; Wayland, OH; Suplee, PA; 
Bethel, NY; Lee Center, IL; and many, many others too numerous 
to mention.
    I am reminded, as I sit here, of Senator Ted Stevens' 
remarks as I review with concern that this bill could become a 
vehicle for undercutting the basic principles of the Postal 
Reorganization Act of 1970. What he said was, ``Our Postal 
Service is a national treasure. A vital organization made up of 
outstanding people.'' We in the League certainly value his 
judgment and thank him for his continued support.
    We had serious problems in the 1960's and needed corrective 
and farsighted legislation. What I see now is an attempt by our 
competitors to regulate or re-regulate the most successful 
Postal Service in the world. I ask why we need organizations 
and or individuals with little or no postal experience or 
knowledge making decisions that will impact our futures, our 
pay, our benefits, and most importantly universal services?
    The issues are not taxes, tickets and tags. The real issues 
are prices and universal service. I look forward to our 
postmaster visits to the Hill on March 2nd. Postmasters are 
valuable contributing members of our communities and our 
country, and they serve much more than just collecting, 
processing and delivering the mail.
    I do pledge to work with this committee as long as this 
bill, as reported out, continues to allow postmasters to 
provide excellent mail service and keep the customer first. I 
thank you for allowing me to testify. I will entertain your 
questions.
    Mr. McHugh. Thank you, President Cinadr.
    [The prepared statement of Mr. Cinadr follows:]
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    Mr. McHugh. Finally, we move to Vice President Ted Keating, 
who is, as we've heard, sitting in for President Vince 
Palladino of the National Association of Postal Supervisors. 
Mr. Keating, welcome.
    Mr. Keating. Good afternoon Mr. Chairman, members of the 
committee. My organization has appeared before this committee 
in the past and expressed concerns about the make up of the 
original version of H.R. 22, and subsequent versions. You and 
your committee have addressed those concerns by making changes 
and we would like to thank you at this time for that.
    President Palladino's testimony is on the record. I'm not 
going to read the entire thing, but he did ask me to make a 
couple of comments which would be that we reserve the right, 
with your permission, to come back and make final comments on 
the final language of H.R. 22, whenever that may be.
    He did ask me particularly to read his closing remarks, 
which is page 4 of his testimony, which is as follows.

    In closing Mr. Chairman, I caution that as we focus on the 
details of H.R. 22, as clearly we must, we do not at the same 
time lose sight of what we are putting together here.
    Accordingly, I must respectfully propose to you and your 
distinguished colleagues the question of overriding concern to 
me. You could call it food for thought. I'll state it as simply 
as I can. As we rush headlong into creating a Postal Service 
that walks, talks and otherwise operates like a public 
corporation, are we truly crafting an entity that has a genuine 
chance of survival?
    More to the point, Mr. Chairman, what commercial enterprise 
in this country would remain in business long if its officers 
had to operate under a host of Federal statutes governing the 
types of products and services it could offer and at what 
price, and under the watchful eye of, all at the same time, a 
Board of Governors, our Directors, Postal Rate Regulatory 
Commission and Inspector General and, with all due respect, a 
Congressional oversight committee or two? I pray you probably 
know the answer to that question.

    We thank you again for the opportunity again to appear 
before you. It's always a privilege to work with the committee 
and look forward to future testimony on this. Thank you very 
much.
    Mr. McHugh. Thank you, Vice President Keating. And, again, 
please pass our best wishes on to Vince Palladino and wish his 
father, as I said, a speedy and full recovery.
    Mr. Keating. Thank you.
    [The prepared statement of Mr. Palladino follows:]
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    Mr. McHugh. I think to President Palladino's last comment, 
as you read it into the record, I would simply say and respond 
with another question. What commercial enterprise continues to 
operate under the same set of regulations, guidelines and 
mandates that it did nearly three decades ago? What we're faced 
with here is the U.S. Postal Service is, indeed, that kind of 
enterprise.
    The road to hell, as I said in the past, and I didn't make 
this up myself as you know, is paved with good intentions. 
Recognizing that, the intention has always been at the core of 
this to preserve and to ensure the continuation of the kinds of 
services that President Carrico, particularly, raised in his 
testimony a few moments ago. That provision in places like 
Pierrepont Manor, and what a coincidence you mentioned that 
first, I was stuck by that, and in places like Philadelphia, 
PA.
    I go to a small post office when I'm home every day. Mary 
Ann Aubin, the postmaster, is an important part of that 
community and does a terrific job. I have a perspective and 
place a value on that that may or may not be unique. I suspect 
it isn't. I suspect most Americans view their postal employees 
and view the postal workers almost as a part of their family 
because they see them with such frequency.
    And I think that's reflected in the polling data. 
Politicians do indeed pay attention to polling data. We only 
tend to talk about the ones we like, but clearly the vast 
majority of Americans have a great deal of admiration for what 
you do and who you are. We respect that and not only respect 
it, we would want to make every effort to continue it.
    But I think, as you know, the pressures that the Postal 
Service is coming under, and the pressures we know are down the 
line with respect to new types of communications, are really 
going to demand some kind of change. Whether we do it in H.R. 
22 in an atmosphere of relative calm, or whether we do it, as 
occurred back in the 60's, in an atmosphere of crisis is our 
choice. And we'll see which path we'll choose.
    But let me just ask you to comment on the few of the 
specifics that you mentioned both as you presented your summary 
and your written testimony, because the comments that you made, 
I think, are important ones. I want to be able to reconcile on 
the record what we believe is not just the intention, but the 
effects of H.R. 22, versus what you interpret and you have 
stated some concerns. President Cinadr, for example, you just 
said that this bill could become a vehicle by which we undercut 
the provisions and the forces of the 1970 act. I was curious, 
the ``basic principles,'' I believe is the phrase you used. 
Could you explain or kind of expound, or expand upon rather, on 
what provisions of the 1970 act do you think were jeopardized? 
Because if that's the case, we indeed need to take a very 
careful look at that.
    Mr. Cinadr. Well, I think it reflects on the universal 
service requirement, that the Post Office is unique in having 
that responsibility. I am concerned about how the funding of 
the private corporation would affect universal service. And I 
believe you did address that issue with the prior panel, with 
the Postal Rate Commissioners. So, as you are well aware, I 
prepared this testimony before knowing what they were going to 
say.
    Mr. McHugh. Right. So am I hearing, and that's totally fair 
if it's true, that you learned some things that at least 
lessened or narrowed that concern?
    Mr. Cinadr. Yes.
    Mr. McHugh. OK. Well, good. All of you, all of the 
presentations in one way or another, some a little bit more 
directly than others, voice again concern about how this bill 
may, the phrasing used, ``re-regulate'' or ``regulate'' the 
Postal Service as it does not currently exist. Concerns, 
understandably, about turning over to non-postal individuals 
control of issues like pay, and employee working conditions, 
and such, that would be enormously troubling to me as well.
    And I very much would want to meet those concerns. So I'm 
wondering if you could define for us some of the specific parts 
of the bill that you think do that so that we could take a 
further look at those? President Carrico.
    Mr. Carrico. Could you clarify your question please?
    Mr. McHugh. Well, all of you had said that the bill could 
re-regulate and as another step put non-postal people in 
control of issues like employee wages. For example, President 
Cinadr says we could penalize postal employees in some aspects 
of H.R. 22.
    I'm just trying to understand if you are concerned about 
that happening, and I don't have a problem with that. Change is 
always an issue for concern. If it is a matter of your being 
troubled by doing it differently and possibly something 
happening bad, I'm Irish Catholic, I know how that works. I sit 
home and think about that every night.
    However, if there are specific provisions of this bill that 
in your view, for example, as was stated, gives further control 
of the Congress to meddle, as President Carrico suggested in 
his testimony, to meddle in the Postal Service, that's not our 
intent. If there are provisions in the bill where we can go in 
and alleviate your concern, we want to do that. So I'm just 
trying to pinpoint----
    Mr. Carrico. I see what you are getting at now. Yes. I 
believe there is a problem with the PRC appropriation. I think 
we can springboard off Chairman Gleiman. Chairman Gleiman 
really is the watch dog and I think he's done that very well.
    I have some concern that if the bill authorizes 
congressional appropriations, more congressional 
micromanagement would result. And I don't think that's anything 
that we need. The PRC is doing a great job protecting our 
interests there right now.
    Mr. McHugh. So the provision of the bill that calls for a 
change in how the Postal Rate Commission receives its funding, 
currently it comes through the Postal Service, we would now 
have it as an appropriation from Congress, concerns you because 
you think Congress could then use that to control the Postal 
Service?
    Mr. Carrico. Well, I think that's what the Postal 
Reorganization Act in 1970 did was it took it out of the hands 
of Congress. Now it seems to me like this part wants to come 
back in. That also could make funding and different 
appropriations become more political and our competition could 
use their political clout to drive a wedge in there.
    Mr. McHugh. But that happens right now. You need only to go 
to last year to see that, under the Postal Treasury 
Appropriations bill, a provision was presented to affect 
everything from your pack-and-send to international mail and 
the international postal union. So I understand what you are 
saying but I want you to be assured, and this isn't of much 
comfort, that we're not going to do anything worse to you under 
this bill than we already do.
    Mr. Carrico. And that concerns me.
    Mr. McHugh. And that appropriation to the PRC is not, as 
you understand, not a direct appropriation to the Postal 
Service, obviously.
    Mr. Cinadr. Mr. Chairman.
    Mr. McHugh. Sure.
    Mr. Cinadr. I view my testimony as my opportunity to 
express to you and the other members of the committee what the 
concerns and the worries of my constituents are, and those are 
the postmasters of this country. And I defend postmasters of 
this country to the utmost. And if I sound too proud, I've 
spent 37 years in the Postal Service and I am very proud of 
what it has done, what it accomplishes, and what it continues 
to accomplish under the present set up.
    I am concerned on how that will change and what effect it 
will have on postmasters and the rest of the postal community. 
And the point I'm trying to make is that we are presenting a 
level view of the playing field, and I don't see that when my 
competitors testify.
    Mr. McHugh. Well, as you will find, those who are on the 
other side of the fence in this equation are not particularly 
happy in all aspects of the bill either, which in this town 
means that maybe we're on to something. But, first of all, you 
have not only every right but every reason to be very proud of 
nearly four decades of service in the Postal Service. Those of 
us who are in politics wish we had half as much to be proud of 
as you do.
    And I do not for a moment, gentleman, question not only 
again your right but your responsibility to view concerns that 
are held by your members. You've all done that very, very well, 
and I commend you for it. The main point I wanted to make as I 
read your testimony is not objecting to the concerns you share, 
but trying to make it clear to you that if you have specific 
concerns in the bill that we can talk about and address, we 
want to do that. Because, and let me narrow it, my objective is 
much along the lines of yours, to ensure that universal service 
at a uniform price continues as it has in the past.
    So that when I go to the post office in Pierrepont Manor, 
No. 1, it's there and it's open and No. 2, that I can receive 
the mail in the effective, efficient, affordable way I can 
today. I mean that's the underlying premise here.
    So we want to be able to work with you. Where you have 
concerns of a specific nature, we would not just encourage you 
but plead with you to come with us and share those and we'll do 
everything we can to work that out. That's all I wanted to say 
on that. President Carrico, you look like you want to say 
something?
    Mr. Carrico. Yes. I would like to look at the double 
postage rule on the priority mail because I do have some 
concerns on that one also. And I guess my concerns, again, go 
back to rural America. Priority mail is a very popular product 
both in the cities, but primarily in the rural areas, because 
it does speed up the service.
    It would be very easy for me to deliver 1,000 pieces in 
Washington, DC, and make a pretty decent profit. But for me to 
deliver 1,000 pieces in rural America, it would be very 
difficult to make a profit. Under the bill, I think there is a 
six-time postage rule which would make postage for priority 
mail go as cheap as $1.98. I think that could really have some 
devastating effects on some of the outlying areas. And I think 
priority mail as a product that we know today would probably 
dwindle, if that were to occur.
    Mr. McHugh. I understand that. No. 1, I think it's 
instructive that the Postal Service has not objected to that 
provision. And I think the reason is simply that, once you are 
through all the math calculations, the result of that is that 
it puts into play only 3 percent of the current monopoly 
business that you hold.
    But, most importantly, and I think if you went and talked 
to the Postmaster General and others, the reason they support 
that 3 percent that it puts into play, it doesn't mean you are 
going to lose it, just that there is now open competition on 
that 3 percent. That in return for that they receive a 
substantial menu of competitive tools that they now don't 
enjoy. So you know----
    Mr. Carrico. It's a tradeoff.
    Mr. McHugh. It is. And I'm not trying to shoot down the 
Postal Service's position here, but any time you can retain 97 
percent of what you got and get back quite a bit in return, 
that's a probably pretty good deal. And it's probably what 
we're going to hear as some of the opposition to this bill, but 
I won't tell them, if you don't. OK? But I understand your 
concerns, I think.
    We, I should note, have been joined by Representative Danny 
Davis, from the great State of Illinois, who has been a loyal 
and very productive member of the subcommittee, and we welcome 
him back this year. I would, at this time, yield to the ranking 
member, the gentleman from Philadelphia, Mr. Fattah.
    Mr. Fattah. Thank you very much. I'm trying to see if we 
can just identify--let me start here. I know we all have a 
tremendous amount of appreciation for the work and labor that's 
been put into developing H.R. 22 to this point. But we still 
need to understand where there are disagreements or concerns, 
because to the degree that this train leaves the station, you 
know, it is something that your Members are going to have to 
live with and the public is going to have to live with for a 
very long time.
    So I'm going to see if we can crystallize, to whatever 
degree it's possible, some of these issues. Now, as I stated in 
my opening statement, and I think that is a concern of the 
chairman, this question of universal service and whether or not 
there is anything in H.R. 22 that creates concerns, legitimate 
concerns down this road, that somehow the Postal Service 
requirement and burden in terms of universal service would be 
infringed upon in any way, shape or form.
    So I'd like to see if each of you would just make a comment 
on your view, relative to the universal service and the reforms 
or the changes as outlined in H.R. 22. Let's start with 
President Cinadr.
    Mr. Cinadr. The problem I see is, again, how the funds if 
this private corporation is set up, how they would be used. And 
when I look at how funds are used in private corporations 
today, I see much the same testimony that Mr. Gleiman gave, 
that is that part of those funds are used to, obviously, pay 
back stockholders or shareholders, and part of them are used to 
reward the successful employees of that company. And, as I've 
stated before, if the bill is going to address the other use of 
that fund to support the infrastructure, then I believe that 
would be the correct way to go.
    Mr. Fattah. The requirement in the bill, as drafted, first 
things first, is that there would be a study done to determine 
the parameters about what should be universal service.
    Mr. Cinadr. OK. Maybe the biggest problem with testifying 
here today was my information was that this bill was in a state 
of flux or very fluid. And that's why I have pointed out the 
main concerns of postmasters, rather than getting into 
specifics of the bill.
    Mr. Fattah. I understand.
    Mr. Cinadr. OK.
    Mr. Fattah. Do you have any other comments, President 
Cinadr?
    Mr. Carrico. My only concerns are that when you are talking 
government agency and the private sector, the private sector is 
going to go where the money is. And if they take that part of 
the market and just leave rural America, my concerns are really 
what's going to happen to the postage rates. I think the way it 
is addressed on universal service, you guys are on top of that.
    I don't have a problem with that part of it but that's 
something that we always need to be aware of. And I know 
earlier in the testimony we talked about airline deregulation 
and what that's done to rural America. Those are things, the 
potential is out there, but I don't have great concerns. I know 
you guys are aware of those.
    Mr. McHugh. Vice President Keating.
    Mr. Keating. I don't have anything to add to that, no.
    Mr. McHugh. OK. Thank you.
    Mr. Fattah. I yield.
    Mr. McHugh. Thanks, gentlemen. Mr. Davis.
    Mr. Davis. Thank you very much, Mr. Chairman. Mr. 
Palladino, you mentioned----
    Mr. Keating. Mr. Palladino is not here. My name is Ted 
Keating, I'm representing Mr. Palladino.
    Mr. Davis. OK. In Mr. Palladino's testimony he mentioned 
concerns about labor management relationship and the various 
summits that netted perhaps some results. That still 
constitutes a big part of the discussion and a big part of the 
problem. Do you have any suggestions or recommendations in 
terms of how some recourse of movement toward solution could be 
built into the legislation that we're discussing?
    Mr. Keating. Not directly into legislation, sir. But I 
believe we commented in President Palladino's testimony that 
the summit, which I believe was Congressman McHugh's idea, 
seems to be working.
    I give you the background that I've only been in this 
position for 6 months, so I've only been to meetings that took 
place in that last 6 months. But I have seen signs of progress. 
And the very fact that you have management organizations, the 
Postal Service, and all of its respective unions sitting at the 
table together, that's the direction to go and I believe we 
should continue that.
    Mr. Davis. Let me just ask one of the other gentlemen. I 
also got this notion that training requirements may have 
something to do with the level of difficulty that's being 
experienced, and especially for management personnel or 
supervisory personnel.
    Mr. Cinadr. I'm not sure where you are going with that, but 
I would say that my personal experience with the summit 
meetings is that, again, I would compliment the chairman for 
that idea. I think it is working, we are making progress, that 
we do need to take the lessons that we are learning from the 
summit meeting and possibly utilize them in the structure of 
the Postal Service, in particular with the Board of Governors.
    Mr. Davis. Go ahead.
    Mr. Carrico. I do think that the summit process is a system 
that's bringing us together. I probably share a different view 
than either of my colleagues. If there is one item that affects 
postmasters that keeps us apart right now, it's the pay system, 
the way we consult--and we use the word ``consult'' because I 
get chastised if I use the ``N'' word, ``negotiate''--because 
we don't have any real power to determine the basis of our pay 
systems.
    Back in 1970, NAPUS was the only organization that 
supported postal reorganizations. And as a result of that, we 
are the only organization that does not have some kind of third 
party intervention in pay consultations. I say ``we,'' I mean 
the postmasters are the only party that does not have some kind 
of third party intervention. At the last pay talks, it's the 
first time in history that postmasters did not reach a pay 
agreement. And there is so much ill will out there as a result 
of that, that it's tearing us apart. The pay package that they 
imposed on, especially, our lower level postmasters did not do 
what it was supposed to do. They said they wanted a teamwork 
incentive program. And they provided a program called EVA that 
rewards the people at the top tremendously, several thousands 
of dollars. And then at the very bottom end of the scale, the 
people who are doing the work, they may get a couple of hundred 
dollars.
    The whole pay system needs to be looked at as far as 
managers. Through the summit process, I did ask for mediation. 
And I've been in the dog house with headquarters ever since. 
But I've asked, through Congressman McHugh's office, that GAO 
look at that pay practice. And you are doing that, and I thank 
you for that. I know it's not going to be 100 percent my way 
and it doesn't have to be that way, but it needs to really be 
looked hard at.
    Mr. Davis. Let me ask either one of you gentlemen, there is 
a lot of conversation about price caps. And, of course, many 
people think that when you talk about price caps that you are 
also talking about wage caps, that you can't go up one way 
unless you are going up the other way. Could you respond to the 
impact you feel that price caps may have on the ability to 
bargain wages?
    Mr. Keating. Speaking for my organization, I'm not sure 
it's relevant. I don't have a concern in that area.
    Mr. Carrico. I think I would echo that too, that price caps 
probably more affect our colleagues in the unions more than 
they do us.
    Mr. Davis. So you have no real concerns about the price cap 
notion. Thank you. Thank you very much, Mr. Chairman.
    Mr. McHugh. Thank you, Mr. Davis.
    [The prepared statement of Hon. Danny K. Davis follows:]
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    Mr. McHugh. Gentleman, I appreciate your being here. And at 
the risk of being incredibly repetitive, nevertheless, I'll say 
it again. As you go through this and you do have specific 
concerns, as those understandable and very legitimate general 
concerns crystallize, as I hope they won't but as they may, 
that you feel free to come to us and try to see if there is 
some way that we can work through those.
    To Vice President Keating, I would tell you that no 
representative of the National Association of Postal 
Supervisors has done as good a job as you. I would tell you 
that but your president, Vince Palladino, has come into the 
room and I wouldn't dare say that because of the great job he 
has done.
    Mr. Fattah. Could I just ask a quick question?
    Mr. McHugh. Sure.
    Mr. Fattah. President Carrico. At this point in time, 
universal service, as you understand it to be maintained by the 
Postal Service, means what?
    Mr. Carrico. Universal service means that each and every 
community would maintain a post office, that they would 
maintain frequent delivery just like we have now. I don't feel 
that people should be penalized for living in rural America, 
that they are entitled to the same service that is given to 
the----
    Mr. Fattah. The same service at the same price?
    Mr. Carrico. Yes.
    Mr. Fattah. Thank you.
    [Additional questions submitted for the record to Mr. 
Carrico and Mr. Cinadr follow:]
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    Mr. McHugh. Well, I stand corrected. My old ears heard 
``Vince Palladino'' and apparently Vince Sombrotto has come in. 
So my feeble attempt at humor didn't even come close.
    Mr. Keating. Mr. Chairman, they are both from New York so 
you probably couldn't tell the difference.
    Mr. McHugh. Well, we're delighted that Vince Sombrotto is 
with us, but remain sorry that Vince Palladino is not. But, 
again, thank you all very much for being here, and we look 
forward to continue working with you.
    Mr. Keating. Thank you, Mr. Chairman.
    Mr. McHugh. Last, certainly not least, the four unions. The 
American Postal Workers Union, President Moe Biller; as I just 
said, President Vince Sombrotto, National Association of Letter 
Carriers; President William Quinn, the National Postal Mail 
Handlers Union; and President Steve Smith, the National Rural 
Letter Carriers Association.
    As we're changing placards and drawing those up, we'll take 
about a 40-second break here.
    [Brief recess.]
    Mr. McHugh. If you'll stand, I'll administer the oath now.
    [Witnesses sworn.]
    Mr. McHugh. Let the record show all four presidents 
responded affirmatively to the oath. Gentlemen, welcome. We 
thank you very, very much for being here and we look forward to 
your comments. Here, too, I have read all of your prepared 
testimony and we will submit into the record in its entirety 
those submissions. I would ask if you could summarize them 
today. And, as in the past, we'll go by order of the 
announcement.
    President Moe Biller, welcome. Good to see you, how have 
you been?
    Mr. Biller. Pretty good. A little injured knee, that's all. 
I broke my hearing aid, so be careful.
    Mr. McHugh. You injured your hearing aid?
    Mr. Biller. I injured my knee and broke a hearing aid.
    Mr. McHugh. Oh. I need a hearing aid, apparently. Well 
then, if I say bad things about you, I'll do it quietly. We're 
truly pleased you are here and, please, the floor is yours.

 STATEMENTS OF MOE BILLER, PRESIDENT, AMERICAN POSTAL WORKERS 
     UNION, AFL-CIO; VINCE SOMBROTTO, PRESIDENT, NATIONAL 
   ASSOCIATION OF LETTER CARRIERS; WILLIAM QUINN, PRESIDENT, 
 NATIONAL POSTAL MAIL HANDLERS UNION AFL-CIO; AND STEVE SMITH, 
     PRESIDENT, NATIONAL RURAL LETTER CARRIERS ASSOCIATION

    Mr. Biller. Mr. Chairman, members of the subcommittee, I'm 
pleased to appear again before you today to represent the views 
of the 361,000 members of the American Postal Workers Union, 
AFL-CIO on the subject of postal reform and your latest 
proposal for reform, H.R. 22.
    May 8th of this year, I will begin my 63rd year in postal 
activity, and 68 years in the trade union movement. Mr. 
Chairman, I want to make it clear that I greatly appreciate the 
sincere effort and concern you have brought to bear on this 
difficult topic. Unfortunately, as has been true with respect 
to similar bills that were introduced in the last session of 
Congress, we still have several fundamental problems with H.R. 
22, and therefore cannot support this legislation that was 
introduced unless these matters are corrected.
    Our objections have been expressed many times before. The 
bill continues to have a pre-fixed formula specifying a rate 
cap on non-competitive mail. Unlike the telecommunications 
industry or other industries which have tried this form of 
regulation, the Postal Service remains a labor intensive 
operation.
    From our perspective, this means that if there are 
unanticipated adverse changes and expenses, market demand, or 
competition, the Postal Service's sole recourse, if it is to 
stay within the cap is to impose concessions on its workers. We 
cannot be sure whether such concessions will take the form of 
wage and benefit give backs or harsher working conditions 
applied for the purpose of achieving greater output.
    But we can be sure that in a labor intensive industry, a 
price cap inevitably pushes downside risk of adverse changes in 
price or market conditions onto workers while, as has been true 
over the last several years, the upside benefits of low 
inflation and a growing economy are retained by mailers and 
managers. We cannot acquiesce to the creation of this sort of 
scenario.
    I am pleased to report to you that we recently reached and 
ratified a collective bargaining agreement with the Postal 
Service. This is the first such agreement reached without 
resort to interest arbitration in over 11 years. The contract 
was overwhelmingly ratified by 64 percent of the APWU 
membership. It was not easy and both sides worked hard to 
resolve a number of complex issues.
    The wage bargaining was, of course, the most difficult 
problem, given the uncertainty and volatility of the worldwide 
economy. I cannot imagine how we could have worked our way 
through all of these problems if, in addition to everything 
else on the table, we had to factor in the potential impact and 
risks associated with a congressionally imposed price cap on 
mail services.
    Indeed, it is clear to me that the existence of an external 
formula shifting downside risk of market and material changes 
onto workers will make voluntary agreements, such as the one we 
just achieved, far less likely and interest arbitration the 
inevitable norm.
    While the price cap issue is our most fundamental concern, 
it is not our only concern. We continue to object to the bill's 
specification, in Section 503, that a letter may be carried out 
of the mail stream when the amount paid for private carriage is 
at least six times the postage for the first ounce of First 
Class Mail. While I recognize that the floor for private 
carriage is higher than in previously introduced legislation, 
the fact remains that the proposal is obviously the first step 
toward postal privatization. Indeed, former Postmaster General 
Marvin Runyon stated that this proposed rollback of the Private 
Express statutes places $4 billion of the USPS' First Class 
Mail market at risk.
    Under the present format of the bill, the impact of this 
loss of revenue will inevitably be borne by workers. Beyond the 
impact on our members, though, allowing USPS' competitors to 
skim the cream off of a major piece of the USPS' market, in the 
way proposed by H.R. 22, will obviously jeopardize the Postal 
Service's capacity to provide universal mail service at uniform 
rates. Universal postal service is a fundamental feature of 
American life and we cannot endorse any proposal which places 
it in jeopardy.
    Finally, we believe the proposed study of labor-management 
relationships in the Postal Service by the National Academy of 
Public Administration, set forth in Section 601, is totally 
unnecessary. If the goal here is to improve labor-management 
relationships in the USPS, I would submit that we have made a 
quantum leap in that area through the recent APWU-USPS 
contract. This contract was, for the first time since 1987, 
agreed to by both parties, without the interference of an 
outside arbitrator.
    If you think this is insignificant, then please allow me to 
share with you the following from the Washington Post, on 
January 9, 1999. ``I am delighted with the outcome,'' 
Postmaster General Henderson said, ``This is an agreement that 
is clearly in the best interests of our employees and all of 
America.'' Henderson added, ``My hat's off to Moe Biller, and 
his negotiating team, and our negotiating team for having the 
patience and the forbearance to bring a long, hard set of talks 
to conclusion.''
    Labor-management relationships in the USPS have been 
studied to death. We are presently involved in ongoing work 
with the Federal Mediation and Conciliation Service to resolve 
long term problems. And that agency, at least, has the benefit 
of direct experience with resolving labor-management conflict. 
I see nothing to be gained by inserting yet another outside 
party into this mix.
    Time has shown that we all do best when our efforts are 
focused on improving the collective bargaining relationship and 
our mutual capacity to resolve problems. A Republican American 
President with traditional conservative views, Richard M. 
Nixon, understood this when he approved collective bargaining 
in the Postal Reorganization Act of 1970. His insight is 
equally valid today.
    To be sure, consistent with the overall goal of H.R. 22, we 
are interested in authorizing the USPS to enter into new 
markets and to compete in them. Our union has, in fact, agreed 
to certain competitive projects with respect to work that has 
been contracted out.
    However, the price exacted by the bill for allowing us to 
compete, price caps in the USPS' major markets and yet another 
rollback of the Private Express statutes, is too high. Based on 
this, and notwithstanding its many constructive elements, we 
cannot support H.R. 22.
    Mr. Chairman, that concludes our testimony. I would be 
pleased to answer any questions you or other members of the 
subcommittee may have.
    Mr. McHugh. If I get a letter from Richard Nixon, will you 
support it?
    Mr. Biller. I'll get you that letter.
    [The prepared statement of Mr. Biller follows:]
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    Mr. McHugh. OK. Thanks. We have a vote under way, as you've 
heard. We understand there will be that single vote and then 
more discussion on other amendments. So if we could suspend, I 
apologize. And, hopefully, we can move over there and vote and 
come back as quickly as possible. So if we could stand in 
adjournment for just a few moments. And I apologize, gentlemen.
    [Recess.]
    Mr. McHugh. Why don't we, with the indulgence of the 
minority, continue with the statements? Because, as I indicated 
earlier, and as he did as well, the ranking member is in 
another committee meeting and he is trying his best and doing 
very well in coming back and forth. So if we could continue 
with the presentations, I think we can expedite matters.
    And with that, we are pleased to welcome President Vince 
Sombrotto, the National Association of Letter Carriers. Vince, 
you do not look like Vince Palladino in any shape or fashion, 
but we're glad you're here and we look forward to your 
comments.
    Mr. Sombrotto. It's some good news if you think I'm 
Palladino. I just gained a number of members and I'll improve 
their performances in the Postal Service. I thank you Chairman 
McHugh and members of the subcommittee for the opportunity to 
discuss this important piece of legislation. I'm Vincent R. 
Sombrotto, president, National Association of Letter Carriers, 
AFL-CIO, and I'm pleased to be here representing some 310,000 
members of the NALC.
    A recent survey conducted by Pew Research Center for the 
people and the press stated that the public gave the Postal 
Service an 89 percent favorability rating, higher than any 
other Federal agency. Another study by ICR of Media, PA, said 
that nearly three fourths of Americans believe the Postal 
Service is doing an excellent or good job. This is a tribute to 
the hardworking men and women who make the system work on a 
daily basis.
    As the public face of the Postal Service, letter carriers 
take great pride in receiving such recognition for the 
outstanding service we provide. While every American has come 
to rely on these vital services, few understand the way the 
USPS operates. I can even remember a time, Mr. Chairman, when 
you yourself acknowledged being surprised by the intricacies 
involved with timely and efficient mail delivery. You are to be 
congratulated for dedicating yourself to learning about the 
Postal Service and taking on this effort to enhance its 
performance through the introduction of H.R. 22, the Postal 
Modernization Act of 1999.
    As the members of the subcommittee are well aware, the 
fundamental principle which guides the USPS is universal 
service at uniform rates. This means that Postal Service 
employees must continue to provide normal 6-day delivery to all 
addresses at the same reasonable rate. The public demands 
nothing less, and the NALC believes that any proposed postal 
reform must fit into that framework.
    Rather than taking time today to go through the bill 
section by section, I'd like to focus on a few key points which 
are critical for meaningful postal reform. We are encouraged by 
some of the changes that have been made in H.R. 22 since its 
introduction. Chief among those is the elimination of the 
mailbox demonstration program proposed in the original draft of 
the bill.
    As you know, the relationship between letter carriers and 
the public they serve is one of trust and security. Some of our 
competitors would like nothing more than to destroy that trust, 
sacrificing a public service in the name of profits. We view 
that removing of the mailbox demonstration program from the 
bill as an acknowledgement of the desire to maintain the high 
level service and professionalism the American people have come 
to expect from letter carriers.
    We are pleased with Congressman Gilman's efforts to ensure 
that the proposed Postal Regulatory Commission envisioned in 
the bill will not undermine the collective bargaining process. 
The language discourages the new commission from using its 
expanded authority to interfere with matters best left up to 
labor and management representatives. We applaud this 
suggestion and encourage its adoption with the full force of 
law and not just the sense of the Congress.
    Also, I'd like to thank Congressman Fattah for his proposal 
which would create a labor seat on the Postal Board of 
Directors as created in H.R. 22. Since its inception in 1971, 
50 individuals have served on the Postal Board of Governors. 
Members of the business community, former congressional staff, 
and even dentists have served on the Board, but not one person 
has come from the ranks of organized labor. Mr. Chairman, there 
are hundreds of thousand of union employees within the USPS.
    Sound business practice would dictate that someone serve on 
the Board who understands the challenges facing these 
hardworking employees. I know there are Members of the Congress 
who have legitimate concerns over reserving specific seats on 
the Board. At the same time, I thank the subcommittee for 
acknowledging the inequity that has existed for all these 
years.
    I am aware that the Postal Service is proposing a number of 
changes to H.R. 22. We have recently received some of these 
proposed measures and are working so that we may fully 
understand their impact. Given their far reaching scope, it 
would be imprudent for the NALC to express a position on them 
at this time. We take these proposed changes as well intended, 
and are eagerly awaiting the reaction of the mailers, other 
customers and competitors.
    While most of the groups paying attention to this bill have 
the public's best interests at heart, we at the NALC are 
concerned with some competitors of the Postal Service who are 
trying, at all costs, to break the Postal Service's mandate of 
universal service. It is imperative that H.R. 22 not become a 
vehicle for their self-serving attempts to weaken the Postal 
Service. Such an effort would undermine the constructive spirit 
which has characterized the healthy debate surrounding H.R. 22.
    As you are well aware, Mr. Chairman, there have been 
questions raised recently about authority over the Universal 
Postal Union, much of which was initiated during appropriations 
process. An apparent compromise was satisfactorily reached. I 
think it's fair to say all sides gave a little in order to 
reach that point.
    My concern is not over a good faith debate about proper 
policy and objects, instead, I would suggest these issues be 
considered and brought up using the normal legislation process. 
I am convinced that if we had worked through the committees of 
proper jurisdiction with the necessary background on the 
subject matter, not only would we have been able to reach a 
faster resolution, but probably would have avoided 2 years of 
rancor and disagreement.
    I want to be very clear with the members of the 
subcommittee. Despite the misinformation being spread by Postal 
competitors, competition within the mailing market is fierce. 
Private companies are free to charge different rates for 
delivery to different addresses or, in the alternative, they 
may choose to provide no service at all.
    In addition to taking on the Postal Service's business 
internationally, some of our competitors have stepped up their 
attacks on profitable enterprises such as priority mail, a 
product on which millions of Americans depend on a daily basis. 
The revenue generated by such products helps us maintain 
universal service. At best, the tactics used by these companies 
refuses to acknowledge this necessity. At worst, they simply 
don't care. Without this stream of revenue, the Postal Service 
will not be able to meet with your constituents' demand for 
service.
    Given my years of dealing with the Postal Service and their 
many issues, I appreciate the difficulty of trying to pass a 
postal reform bill through the Congress. There are a number of 
organizations seeking to place their imprint on this bill. 
Chairman McHugh, you and your staff have been accessible and 
open-minded in taking on this monumental project.
    As you were recently quoted by the Associated Press, ``The 
person who brings the mail is almost a member of the family who 
visit each and every day.'' We want to continue that 
relationship and dedicated service. On behalf of the National 
Association of Letter Carriers, I'd like to thank you for your 
tireless efforts to improve the public service provided by the 
Postal Service. As this bill progresses and continues to take 
shape, we look forward to working with you.
    Mr. McHugh. Thank you, Vince, I appreciate your comments. 
And more to the point, I appreciate you and George Gould, and 
everybody's efforts to make this a better bill.
    [The prepared statement of Mr. Sombrotto follows:]
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    Mr. McHugh. With that, we will now turn to President Quinn, 
the president of the National Postal Mail Handlers Union. 
Welcome, sir, good to see you again. We look forward to your 
comments.
    Mr. Quinn. Good to see you, Mr. Chairman. Thank you again, 
and to the distinguished members of the subcommittee, I'm Billy 
Quinn. I'm the national president of the National Postal Mail 
Handlers Union. On behalf of the more than 50,000 mail handler 
union members employed by the Postal Service, I appreciate the 
opportunity to testify about postal reform and H.R. 22, the 
Postal Modernization Act of 1999.
    Our approach to postal reform is relatively simple because 
it is motivated by two fundamental principles. First, as we 
stated in our joint statement with the letter carrier unions 
last year, if it is to be enacted at all, postal reform must 
maintain and indeed enhance the operations of the Postal 
Service.
    By this we mean that the key ingredient to any type of 
postal legislation is to protect the ability of the Postal 
Service to provide universal service to the mailing public. 
Postal employees must continue to process and deliver letters 
and packages to every one, every where, every day. This 
universal service has to be maintained at affordable rates, but 
these rates must be sufficient to protect and support the 
infrastructure that universal service requires and to provide 
postal employees with a decent and fair standard of living. We 
understand that this subcommittee agrees with the fundamental 
goal of universal service, and we commend your painstaking 
efforts to ensure that any reform legislation furthers this 
goal.
    Second, and equally fundamental, we also strongly believe 
that Congress should not impede upon the often complex 
relationship between the Postal Service and its employees. This 
relationship, though at times difficult if not contentious, is 
best carried out within the framework of collective bargaining. 
The collective bargaining process should be treated as sacred, 
and should not be adversely affected either intentionally or 
inadvertently by enactment of postal reform.
    Indeed, as you may know, the Postal Service and the 
National Postal Mail Handlers Union just recently signed a new 
2 year collective bargaining agreement, demonstrating once 
again that face-to-face negotiations can and should be the 
means for resolving labor disputes.
    In simple terms, this means that any reform legislation 
should not allow or encourage interference in Postal labor 
relationships, either directly from Congress through the 
statute itself, or less directly through the Postal Rate 
Commission, or the Postal Regulatory Commission, or some other 
legislatively imposed party.
    On another more complex level, this means that the 
collective bargaining process must be allowed to function 
without artificially imposed constraints such as price caps 
that effectively become wage caps. The bargaining process must 
be allowed to set wages and benefits. And the Postal Service 
must realize it needs to pay for its labor costs through 
appropriate postal rates. These two fundamental principles 
dictate our approach to postal reform.
    We therefore support legislative efforts to truncate the 
overly cumbersome ratemaking process and generally support the 
pricing flexibility sought by the Postal Service. With equal 
vigor we oppose any legislative reform that effectively would 
limit that pricing flexibility with an unfair and unreasonable 
cap on rates. If fair and decent wages require an increase in 
postal rates, then the Postal Service must be allowed to raise 
its rates without jumping through the overly cumbersome hoops 
that exist under the current PRA.
    Two additional points deserve mention. First, the NPMHU 
generally supports the amendments adopted by the subcommittee 
last September, especially those that would add a labor 
representative to the Board of Governors, provide re-employment 
assistance if any Postal workers are displaced by automation or 
privatization, and to prevent any reform legislation from 
adversely affecting employee or union rights.
    Finally, I would be remiss if on the record I did not alert 
the subcommittee to a lurking danger that is known by everyone 
in this room, but that few are willing to acknowledge openly. 
Namely that the driving force behind particular provisions of 
H.R. 22 should be the public interest and not the interests of 
certain large profit-driven corporations such as Federal 
Express or the United Parcel Service.
    For more than 200 years the Postal Service and its 
employees have served the Nation by ensuring universal service 
of postal communications at reasonable rates. Postal reform 
that puts the Postal Service or its employees at risk does not 
serve the public interest, but rather will be remembered only 
as legislation that destroys one of the unique aspects of the 
American experience.
    Thus, the primary factor in your consideration of H.R. 22, 
during the coming weeks and months, must be the interests of 
the public in maintaining the strength and viability of Postal 
Service and its 800,000 employees. I dare say, even if others 
are hesitant to say so publicly, that Federal Express of FedEx, 
UPS, and other competitors of the Postal Service are motivated 
by other factors.
    I know the members of this subcommittee recognize this 
reality. We look forward to continuing to work with the 
subcommittee and its staff during the next few months to ensure 
that H.R. 22, if reported out of committee, is legislation that 
the NPMHU can support. Thank you for the chance to testify 
today. I would be happy to answer any questions that you may 
have.
    Mr. McHugh. Thank you very much, Billy, I appreciate it. 
And to you, as well, thanks on behalf of all the subcommittee 
for your efforts and untiring work to try to have this bill 
better reflect the interests of your members.
    [The prepared statement of Mr. Quinn follows:]
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    Mr. McHugh. Last, certainly not least, the president of the 
National Rural Letter Carriers Association, Steve Smith. Mr. 
President, good to see you. Thanks for being with us. And the 
floor is yours, sir.
    Mr. Smith. Thank you, sir, and thank you for the 
opportunity. Good afternoon, Mr. Chairman and members of the 
committee. I am Steve Smith, president of the 97,000 member 
National Rural Letter Carriers Association. Most rural carriers 
drive their own vehicles while serving as a post office on 
wheels. Daily, we travel more than 3 million miles to 27.4 
million delivery points on some 63,000 rural routes across the 
United States.
    Chairman McHugh, in response to changing competition, 
expanding alternatives to the Postal Service, and postal 
officials' requests, you began to examine the regulatory 
framework imposed by that legislation. You conducted 
comprehensive hearings, you held endless private meetings with 
all organized groups concerned and affected by reform 
legislation. You even utilized the Internet.
    You and your staff have crafted a comprehensive proposal 
for change in the Postal universe. In the process of arriving 
at a proposal, you have been thoughtful, open and creative. 
This is why the NRLCA will remain supportive of your efforts to 
enact comprehensive reform capable of carrying the Postal 
Service into the 21st century. We remain cautiously optimistic 
pending proposed amendments and the natural ebbs and flows of 
the legislative process in both chambers and conference 
committee.
    We hope our competitors learn the U.S. Postal Service is 
not the principle reason for their market share decline. The 
Postal Service did not cause the UPS strike, or business loss 
in Europe as the result of European postal competition, 
referring to the Wall Street Journal article on January 18, 
1999.
    The Postal Service has merely 6 percent of the parcel post 
business. Our competitors further cite the proposition that 
USPS does not pay for tags nor taxes on vehicles. When this 
accusation is made, they omit the fact that most rural carriers 
use their own vehicles to deliver the mail. Rural carriers 
certainly do buy tags and pay all appropriate State and local 
taxes on their vehicles.
    NRLCA has always remained somewhat skeptical of the 
separate accounting concept for the competitive products. We 
simply do not see how dividing the competitive and non-
competitive products for accounting purposes is done easily; 54 
percent of rural letter carriers work out of post offices with 
one or two rural routes; 82 percent of rural letter carriers 
work out of one to five route post offices. Every day we carry 
both types of mail in varying volumes. In those offices there 
is no alternative to rural carriers delivering all types of 
mail. How can one accomplish separate accounting of personnel 
and vehicles.
    The proposed legislation would allow the USPS to form a 
private law corporation for non-postal products and engage in 
strategic alliances in or with private companies. The Postal 
Service has enhanced your concept with its proposed amendments 
by suggesting this corporation should issue stock. However, 
once stockholders are involved, the obligation of the company 
would shift to satisfying the shareholders. NRLCA believes that 
those shareholders wouldn't be very interested in sharing 
profits with the competitive and monopoly side of the ledger.
    Additionally, let us look at a few examples of USPS 
attempts at non-traditional business products such as caps, 
mugs, ties, t-shirts, auto flyers and mailing on-line. Each 
enterprise prompted small business owners to appeal to their 
congressional Representatives to stop the Postal Service from 
selling these goods. NRLCA suspects that even after postal 
reform there will be continuing congressional oversight of the 
USPS.
    In the final analysis, the public and its elected 
representatives are going to demand that the U.S. Postal 
Service stick to the basic public policy mandate of serving the 
public by collecting and delivering mail every where, to every 
one, every day. Mr. Chairman, and members of the committee, 
thank you.
    [The prepared statement of Mr. Smith follows:]
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    Mr. McHugh. Thank you, President Smith. And to you and your 
membership a great appreciation for your very constructive and 
positive role. As with the management associations it's 
obviously very clear to me and everyone on this subcommittee, 
that all of you bring a very fierce loyalty for your 
membership. That's not just understandable, it's the right 
thing. Your members are collectively very, very well served.
    As you know, President Sombrotto, and Smith, and Quinn, you 
chose to stay involved and be at the table, and I thank you for 
that. President Biller chose a different tact. I wished he 
hadn't. Not so much that it would have helped or hurt him 
personally, but rather I think their presence at the table 
would have been enormously beneficial to us and to our work 
product.
    However, even at that, as President Biller said, Moe said 
in his opening comments, we are very well aware of the concerns 
and the objections to the bill that you have. So you have 
certainly represented your membership well in that regard, as 
well. There probably is no other part of this process that has 
been amended more times than that with respect to employee 
relations.
    In spite of the pledge that I took very early on in this 
process, that we were not intending in this bill to in any way 
negotiate or to settle any of the management-labor differences, 
we have still time and time again tried to respond to the very 
legitimate concerns that in the main you people brought to us.
    President Quinn mentioned the amendments that the ranking 
member and others through the last mark-up brought with respect 
to adding a member of labor to the Board of Governors, with 
respect to doing legislative language that would try to ensure 
that whatever happens does not have an adverse impact on the 
Postal employees.
    We, as well, have tried to build in H.R. 22 a number of 
changes that Vince Sombrotto and others have mentioned with 
respect to eliminating the mailbox test because of the concerns 
that you expressed.
    We have put in language that very clearly, I think, says 
that, No. 1, the Postal Rate Commission has no authority, no 
role in the collective bargaining process, that none of its 
deliberations can or should have any impact on that process. 
And, No. 2, to provide a very specific provision in the bill to 
ensure that the PRC can actually grant to the Postal Service 
additional pass-throughs above CPI, where there are the kinds 
of expenses beyond the cap that a union contract might indeed 
produce. So those are the kinds of things, the issues that you 
brought to us, and we tried to address those. As President 
Smith said, we expect that process will continue. We look 
forward to your additional comments and input. I'd invite Moe 
Biller back to at least talk to us, as that process goes 
forward. The door is open at any time in that regard.
    But let me just make a couple of comments about wages, and 
about union contracts and collective bargaining, because it is 
important. The economist that President Biller's union has 
engaged, Dr. Popkin, has presented testimony to the 
subcommittee on this issue. It's been reflected in a variety of 
ways since then. And I don't want to repeat myself.
    But, again, if we can go back to the specific language that 
talks about how nothing in the rate caps is intended in any way 
to affect the collective bargaining process, that, again, there 
is a direct provision for an additional pass-through on rates 
above CPI where the union contracts do become an added cost 
driver, I think it's important to point out a couple of things, 
and this point has been raised by some of you at the table as a 
source of pride, and understandably.
    The fact of the matter is, when we close the text books on 
the economic discussions and theory, as interesting as they 
are, the experience of Postal employees is clear and it's 
undeniable. Your wages have not kept pace with CPI. So even if 
CPI and the wage cap were a hard ceiling, which I again argue 
they are not, but even if they were, had your contracts 
reflected CPI, your members would be earning more money than 
they are right now, No. 1.
    No. 2, as you know, one of the things we wanted most to 
change was to institute a bonus system that brings the people 
into the benefit package that, in my opinion, do the lion's 
share of the work, your members. Right now it's basically 
management levels that share the bonus.
    We did a calculation that shows that had the bonus 
provisions of H.R. 22 been in force over just the past 4 years, 
the average employee, and many obviously are above average, but 
the average employee would have received nearly $1,700, would 
have received $1,689 in each 1 of those past 4 years. That 
would have meant $6,800 more in pocket to your members, each 
and every member, had this bill been in place.
    The point is we made every effort, it seems to me, to try 
to ensure that employees are not harmed by this, that, indeed, 
they are helped by this. Because, as Moe Biller said, this is a 
highly labor intensive organization. When you have 800,000 or 
750, depending on whose figures you use, over 700,000 hard 
working Americans in an organization that really is equatable 
to about 80 percent of the operating costs, you've got to pay 
attention to them if you are going to do anything remotely 
positive. And we've always tried to keep that in mind.
    So at the end of the day, we want to ensure that this is 
good for your members, it is good for Postal employees. And I'm 
not troubled by that. I'm not worried about anybody labeling me 
as a lackey of this group or a lap dog of that one, because the 
Postal Service that I know is successful for one reason, 
because of those people who go out and make it work in the 
Pierrepont Manors, and in the Philadelphias, and in every town, 
hamlet, village, and city of this Nation. So I wanted to put 
that on the record to reassure you, if nothing else, of our 
intent.
    I, frankly, don't have any questions for you gentlemen. And 
that's for one reason. We have been with you at the table and 
exchanging information and I don't think we have any areas of 
misunderstanding or in need of clarification, No. 1. And, No. 
2, I feel very confident we are going to continue to work 
together. Now what that means is at the end of the day it will 
be your judgment to make. And I'd like to try to persuade you 
but I'm not going to try to do that. You are far too loyal on 
behalf of your members to have that kind of effort succeed any 
way. So we're really looking forward to that continuing.
    And in reading your testimony, by and large, it confirmed 
the relatively positive feeling in that regard that I have. So 
I could sit here and throw a few out for the record, if it 
would make everybody happy. But, by and large, I think we need 
to continue to do what we have been doing. At the end of it, 
hopefully we will have done some good. So that's my speech. Has 
anybody got one back at me? President Smith.
    Mr. Smith. I would like to thank you for the opportunity to 
come to you, as you gave us the opportunity, to address those 
issues that we were concerned with. And you gave us that 
opportunity.
    I was struck by your remarks a moment ago about all of us 
being fiercely loyal to our members, but you know we and our 
members are fiercely loyal to the Postal Service. We want the 
Postal Service to succeed. And all of us want whatever comes 
out of this bill to be good for the Postal Service because it 
in turn is good for us. Thank you for the opportunity to 
participate.
    Mr. McHugh. Thank you. And, by the way, you should always 
as a politician remember you are never sure how your words are 
going to be interpreted. I meant ``fiercely loyal'' as a 
compliment. I hope you took it that way?
    Mr. Smith. Yes.
    [Additional questions for Mr. Smith follow:]
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    Mr. McHugh. Well, with that, gentlemen, thank you again. I 
look forward to working with you. Let me thank everyone in the 
room here today for your incredible patience, perhaps your lack 
of sanity, but your incredible patience. This has been as open 
a process as we have been able to maintain. We are going to 
continue to try to do that. You know the staff, and we look 
forward to working with you.
    We have a Y2K hearing on February 23rd, if you are really 
looking for some excitement. But the next hearing on this issue 
will be conducted March 4th. I don't know if it will be in this 
room. After my treatment of him this morning, the chairman will 
probably never let me back in here. But we'll let you know 
where, and we hope you'll share some time with us then. And 
with that, the hearing is adjourned.
    [Whereupon, at 2:25 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]
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             H.R. 22, THE POSTAL MODERNIZATION ACT OF 1999

                              ----------                              


                        THURSDAY, MARCH 4, 1999

                  House of Representatives,
                Subcommittee on the Postal Service,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1:07 p.m., in 
room 2154, Rayburn House Office Building, Hon. John M. McHugh 
(chairman of the subcommittee) presiding.
    Present: Representatives McHugh, Sanford, LaTourette, 
Burton, Owens, and Davis.
    Staff present: Jane Hatcherson, legislative assistant; 
Abigail D. Hurowitz, clerk; Tom Sharkey; Robert Taub, staff 
director; Heea Vazirani-Fales, counsel; Denise Wilson, minority 
professional staff member; and Jean Gosa, minority staff 
assistant.
    Mr. McHugh. Let me call the meeting to order. Good 
afternoon. I want to welcome you all to what is the third 
hearing for the Postal Subcommittee in this Congress. Three 
weeks ago, as many of you heard and witnessed, we received 
testimony from the Postal Service, the Rate Commission, and the 
postal employee groups on the current version of H.R. 22, as 
reported by the subcommittee last fall.
    Our 4-year journey continues today as we hear from Cabinet 
departments, it says--I guess it should read Cabinet department 
and I will say a little bit about that in a moment--and a 
variety of competitors and customers of the Postal Service, 
both live and for the record.
    Such a hearing, I feel, is consistent with our longstanding 
approach of attempting to ensure that we obtain as many points 
of view on this legislation as practical. As in the past, I 
look forward to yet another full and frank exchange with all 
four panels, or three-and-a-half panels, as the case may be.
    As I have tried to consistently maintain, the goal of H.R. 
22 has been and remains twofold: to provide the Postal Service 
greater freedom to compete, both today and into tomorrow, in 
order to successfully carry out its universal service mission, 
while at the same time establishing new rules to ensure fair 
competition and protect the public interest.
    We will hear today from some who suggest that the best 
alternative is to generally keep the status quo and restrict 
the Postal Service to its noncompetitive products, leaving it 
unresponsive, as demand for those services continues to 
decline.
    Of course, many of these same groups also demand the Postal 
Service somehow provide lower rates and better service. Given 
such statements, I believe it is important to underscore that, 
because of H.R. 22's price caps, strong oversight, and overall 
incentives for greater competitiveness and efficiency, this 
bill would almost surely result in lower rates and better 
Postal Service for noncompetitive customers compared to what 
rates and service will be if H.R. 22 is not, in my opinion, 
ultimately enacted.
    H.R. 22, I believe, strengthens consumer protections 
through such provisions, among others, as quality of service 
reviews, complaint processes with much greater enforcement 
power, subpoena power, and annual audits.
    Let us take price caps as one example. Rather than being a 
totally untested and unknown process, as a few of the 
testimonies submitted today imply, in reality, eight foreign 
nations presently use price-cap plans to regulate their post 
office's rates. So it is not some blind journey into the 
unknown.
    While price caps would provide the Postal Service new 
pricing freedom, they would also rectify a problem with the 
1970 act. Currently, the Service has sole discretion to 
determine the overall level of revenues to be extracted from 
captive customers and, as such, has little reason to control 
costs.
    Clearly, an independently administered system of price caps 
would represent a vast improvement in protecting the public 
interest. Some mailers apparently feel that they are riding a 
winning trend with respect to their particular rates, as 
determined in the last few rate cases, and, therefore, assume 
that this trend will continue, in their minds, forever. 
However, I would suggest we don't have the luxury of enjoying 
the future until it has, in fact, become the past. When you 
have a system, as we do, that is without constraint and at a 
meaningful measure as to the overall level of revenues that the 
Postal Service can demand in a rate case, then no one should 
feel secure about their likely position come tomorrow.
    Perhaps a few of those folks who somehow feel warm and 
fuzzy about their future rate trends and protections under the 
existing framework might wish to speak to the nonprofit mailers 
testifying today who would, I think, provide a somewhat 
different perspective.
    While this may be the last of 4 years of subcommittee 
hearings on H.R. 22, the last subcommittee hearing on H.R. 22--
[laughter.]
    We are at step 1 of the legislative process, and there 
still is a long way to go. At the conclusion of today's 
hearing, as we have since the beginning, we will fully digest 
all of the comments received and, where we can, modify the bill 
to respond to those constructive concerns and suggestions that 
have been put forward, and there are many.
    I would be remiss if I did not note a special coincidence 
today. In fact, at this moment, there is a memorial service 
being held on the House floor for a legendary and well-
respected Member of the House, Mo Udall. As many know, 
Congressman Udall was one of the key forces in making the 
Postal Reorganization Act a reality back in 1970. Indeed, as 
just one example of how far that Postal Service has come from 
its challenges in those old days, some of us may be able to 
recall Mr. Udall's joking remedy for the inflation this Nation 
was dealing with in 1972, when he said, ``Let's turn inflation 
over to the post office. That will slow it down.'' [Laughter.]
    I know our dear, departed friend would be pleased to know 
that through the work he helped to begin, and especially 
because of the hardworking postal workers, that joke no longer 
works. Times have certainly changed, and the postal system he 
helped create has served this Nation so very well for more than 
a generation. As we continue the journey of modernizing our 
Nation's postal laws, I know that we will succeed if we infuse 
our efforts with the vision and the bipartisanship that 
Congressman Udall and his colleagues brought to the table 
nearly 30 years ago.
    So, with that, again, I welcome you all. I would be happy 
to yield to my friend on my right, Danny Davis, the acting 
ranking member, for any comments he may wish to make.
    [The prepared statement of Hon. John M. McHugh follows:]
    [GRAPHIC] [TIFF OMITTED] T7558.231
    
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    Mr. Davis. Well, thank you. Thank you very much, Mr. 
Chairman. And as you have already indicated, this may very well 
be the last in a set of hearings that we will have had on this 
very important matter. Therefore, I would like to thank all of 
those who have come before us as witnesses and those who have 
come today.
    I am very much interested in hearing from all of them as we 
continue to engage in what I like to call this information-
sharing process. Obviously, H.R. 22 is one of the biggest 
measures aimed at reforming or revamping, if you will, the U.S. 
Postal Service, and this is indeed a very complex bill. I must 
say that I still have some concerns with the long-term outcome 
of the price cap and the private law corporation as set up in 
the bill and how that pertains to and continues to protect and 
promote the rights of the consumer.
    At the heart of this bill, as this committee deliberates on 
how to make the Postal Service compete more efficiently, I want 
to again pose the question and trust that all of us will 
continue to consider it, and that is at the bottom line, who 
does this bill really serve? Is it in the best interests of the 
individual consumer? We cannot get away from what the Postal 
Service's No. 1 priority ought to and must be, and that is 
delivering mail to the consumer in the most efficient and 
effective manner that we can generate. This means ensuring that 
both those who live in urban and rural areas get the mail for 
the same price and basically in the same manner.
    Delivering mail has to be the top priority of our Postal 
Service and of our postal system. The consumer interest must be 
the bottom-line priority. I trust that we will get there, and I 
am sure that we will. So with you, Mr. Chairman, I look forward 
to hearing the witnesses and, again, thank you for the 
opportunity to comment and look forward to a very productive 
session.
    Thank you very much.
    Mr. McHugh. I thank the gentleman. I thank him and all of 
the Members on his side for their, not just cooperation, but 
their active participation in this process. It has been very 
helpful.
    Before we go to our first witness, I would be happy to 
yield to the vice-chairman of the subcommittee, the gentleman 
from South Carolina, Mr. Sanford, if he has any opening 
comments he would like to make.
    Mr. Sanford. Thank you for doing so, but, no, I do not have 
opening comments.
    Mr. McHugh. I thank the gentleman.
    I mentioned during my opening statement that we had a last-
minute change in the roster. We had, at the request of the 
minority, happily invited the Department of Treasury to present 
testimony, both for the record and in person, and until 1 
o'clock--or 1:03 p.m.--we were under the impression that they 
were still going to appear. The empty seat you see is obvious 
testimony to the fact they did not appear, and apparently did 
not intend to, without ever informing at least our side.
    I should note that I am very disappointed not only for what 
I think is a pretty clear act of a lack of common courtesy, in 
notifying people of your intentions, particularly when those 
intentions go contrary to your original statements, but also 
because I feel they had something to offer.
    I am going to ask unanimous consent that Department of 
Treasury's written testimony be submitted for the record, 
although I have to admit to you I am somewhat tempted to strike 
it out because it is not all positive from my perspective, as 
you understand. But, in fairness, they do bring some valid 
concerns to the table.
    I would like to believe that someone shared with them my 
scintillating, probing questions, and they were too frightened 
to show their faces, but that is probably not the case. It is 
probably something other than that.
    So I am disappointed in Treasury and the absence of Lewis 
Sachs, who is Deputy Assistant Secretary of Government 
Financial Policy, who both submitted the testimony and we had 
expected to be here.
    [The prepared statement of Mr. Sachs follows:]
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    Mr. McHugh. But, nevertheless, in no way diminishing the 
first panel, we still are very fortunate to have with us a 
representative of the Department of Justice, Deputy Assistant 
Attorney General of the Antitrust Division, Donna Patterson, 
whom we welcome here this afternoon.
    I will say for the public record what I said earlier, happy 
birthday.
    Ms. Patterson. Thank you.
    Mr. McHugh. You are welcome. And I know you are looking 
forward to finally drinking legally. [Laughter.]
    With that, Ms. Patterson, again, in all seriousness, 
welcome. We are particularly happy now that you are here 
because we wouldn't have a panel 1 without you. [Laughter.]
    And also because of your testimony. I have read your 
testimony and, as with all panels and witnesses, would ask 
unanimous consent that their prepared statements be entered in 
their entirety for inclusion in the record.
    Also, before we begin, consistent with full committee 
rules, every witness before either the full committee or any of 
its subcommittees is required to take an oath. So if you would 
rise, please, and raise your right hand and affirm after me.
    [Witness sworn.]
    Mr. McHugh. The record will show that Ms. Patterson 
affirmed the oath.
    Welcome. If you could summarize your statement, that would 
perhaps expedite things.
    So, welcome, and we are all ears.

  STATEMENT OF DONNA E. PATTERSON, DEPUTY ASSISTANT ATTORNEY 
    GENERAL OF THE ANTITRUST DIVISION, DEPARTMENT OF JUSTICE

    Ms. Patterson. Thank you, Mr. Chairman.
    I am pleased to be here this afternoon to present the views 
of the Antitrust Division on H.R. 22, the Postal Modernization 
Act of 1999. My written statement and remarks present only the 
views of the Antitrust Division. The Division's comments should 
not be read as addressing issues outside our area of expertise 
or as reflecting the position of the Department of Justice or 
the administration with respect to overall postal reform.
    Since passage of the Sherman Act in 1890, the United States 
has committed itself to protecting free and unfettered 
competition in the vast majority of markets in our economy. 
This reliance on free-market competition has served us well and 
provided numerous benefits to consumers, including more 
innovation, a greater choice of products, and lower prices.
    The primary antitrust enforcement tools are sections 1 and 
2 of the Sherman Act, which prohibit conspiracies and restraint 
of trade and monopolization, respectively, and section 7 of the 
Clayton Act, which prohibits mergers or acquisitions that may 
tend to substantially lessen competition.
    In addition to our primary law enforcement activities, the 
Antitrust Division engages in a program of competition 
advocacy. Since the enactment of the Postal Reorganization Act 
of 1970, we have provided views with respect to postal issues 
in a variety of arenas. We have challenged the efforts of the 
Postal Service to expand the scope of the protections afforded 
under the private express statutes and have suggested the need 
for a comprehensive review of competition in domestic and 
international markets for mail services.
    A number of our prior efforts are listed in my written 
statement. Most recently, we supported the legislative 
amendment transferring responsibility for international postal 
policy from the Postal Service to the State Department. We 
applaud the subcommittee's efforts in spearheading and enacting 
that legislation. We believe it will have beneficial 
competitive consequences.
    The Division's position with respect to the key competition 
policy issues affecting domestic and international mail 
consistently has been to promote competition where feasible. 
Accordingly, we have criticized attempts by the Postal Service 
to use its regulatory authority to expand the scope of the 
private express statutes, and we have opposed efforts to erect 
restrictions on competition in international mail services.
    These positions are consistent with our general view that 
statutory exceptions to the Federal antitrust laws should be 
avoided whenever possible.
    Federal competition policy objectives are best served when 
the Federal antitrust laws are applied uniformly rather than 
allowing the distortions that arise when special protections 
are given to classes of competitors or to selected industries.
    I would like to turn now to the proposed legislation. First 
and foremost, I want to commend the subcommittee for ensuring 
that competitive principles play an important role in Postal 
Service reform. Today, competitors have entered a number of the 
activities formerly carried out only by the Postal Service. At 
the same time, it appears unlikely that other entities 
currently have the infrastructure necessary or the desire to 
compete for general First Class Mail delivery at the size and 
scope necessary to preserve universal service of mail delivery.
    The policy question that the proposed legislation addresses 
is whether an acceptable system can be devised to put the 
Postal Service on roughly the same footing as others in the 
areas in which it faces competition, while ensuring that the 
Postal Service continues to have the ability to meet the 
requirements of its universal service obligation efficiently.
    H.R. 22 recognizes the distinction between the Postal 
Service's universal service obligation and its participation in 
newly competitive markets by treating these services 
differently.
    From the perspective of competition policy, the goal and 
intent of the legislation to enhance the ability of the Postal 
Service to participate in competitive markets, while at the 
same time addressing concerns about cross-subsidization, is a 
step in the right direction.
    A significant aspect of the legislation is the move from 
cost-based to price-cap regulation for the Postal Service's 
monopoly products. In many instances, price-cap regulation 
systems have advantages over cost-based price regulation 
because price cap systems tend to create greater incentives to 
lower costs and to increase efficiency.
    One of the keys to implementing the regulatory pricing 
scheme contained in the legislation will be to ensure that an 
appropriate cost-allocation methodology is adopted. Another 
important component of the new structure is the application of 
the antitrust laws to the Postal Service for activities 
relating to its nonmonopoly products.
    I would like to turn now to comments on two specific 
provisions of the bill, section 305 and section 603. Section 
305 appears to create a regulatory scheme under which the 
Postal Regulatory Commission would proscribe regulations to 
enforce statutory requirements that the Postal Service not, 
among other things, create any competitive advantage for itself 
or any other party. We would like to discuss this section with 
the subcommittee.
    We are concerned that, without clarification, the standards 
in this section may diverge from the antitrust laws. We are 
also concerned that future interpretations of the section could 
lead to unintended consequences such as disputes over the 
meaning of competitive advantage or the chilling of legitimate 
procompetitive behavior. We welcome the opportunity to work 
with the subcommittee on this issue.
    Section 603 would require the Department of Justice to 
prepare a comprehensive report identifying Federal and State 
laws that apply differently to competitive products of the 
Postal Service than to products of other companies. The 
Department of Justice is not an appropriate agency for such an 
assignment. We are concerned that such a requirement would 
require us to divert scarce resources from our law-enforcement 
activities and, therefore, detract from the appropriate 
enforcement of the antitrust laws. We respectfully request that 
if this reporting requirement is retained as the legislation 
goes forward, the job be assigned to a more appropriate agency.
    I would like to finish my remarks by again noting that the 
promotion of competition, where possible, should be an 
important goal in any Postal Service reform, and I thank the 
subcommittee for taking important steps in that direction.
    I am ready to answer your questions.
    [The prepared statement of Ms. Patterson follows:]
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    Mr. McHugh. Thank you very much, Ms. Patterson.
    I had planned to bring the two departments, Treasury and 
Justice, together at least insofar as discussion of what I 
think are important issues regarding competitiveness and the 
areas of concern raised by Treasury. That is not going to be 
possible here today.
    Let me just ask you a particular question. It is actually a 
generic question. Is it fair of me to say that, whether we are 
dealing with a Postal Service or any other business-type 
organization, the questions of borrowing and banking and such 
are indeed an issue of competitiveness, and that inequitable 
treatment between two sectors can, in fact, lead to an unlevel 
playing field? So, in other words, if one borrower has a 
particular advantage or a particular situation, that by law 
enriches it above another, isn't that an issue of 
competitiveness?
    Ms. Patterson. I am not prepared to comment on the Treasury 
Department's views on this.
    Mr. McHugh. Just the question I asked.
    Ms. Patterson. With respect to competitiveness and a level 
playing field, our goal in enforcing the antitrust laws and 
thinking about appropriate antitrust laws, is always to have 
competitors subject to the same scheme of laws and regulations.
    By a level playing field, I think what we generally mean is 
an equal opportunity to compete, not absolute equality in every 
characteristic. Indeed, I would be hard pressed to think of an 
industry where every competitor had the same characteristics, 
the same borrowing power or the same quality of trademark. So I 
think differences among competitors are inherent in 
competition, and it is the opportunities afforded them to 
compete that need to be level.
    Mr. McHugh. Mr. Sachs, what do you have to say for 
yourself? Oh, he is not here. [Laughter.]
    I appreciate that. But given the absence of Treasury, I 
will just move to two quick questions I have specifically 
relating to your testimony and two things that you mentioned.
    The first being, and both of them are on page 9 of your 
testimony, you talked about the concerns that you have with 
respect to the assignation of responsibilities that Justice has 
in identifying certain Federal and State laws that inure 
certain benefits or apply differently to the Postal Service, 
and you asked that it be assigned to a more appropriate agency. 
I don't disagree with that but I am curious, do you have a 
suggestion as to which more appropriate agency we might assign 
them to?
    Ms. Patterson. I don't have a particular agency in mind. We 
don't have any comparative advantage with respect to State laws 
or, indeed, with respect to all Federal laws. We really only 
know about the antitrust laws.
    I believe there are other agencies that do--regulatory and 
reporting agencies--that do such studies from time to time, and 
I would think one of them would be more appropriate.
    Mr. McHugh. If we could ask then that you and your people 
give some thought to that, because we are perfectly willing to 
consider it. It wasn't really an attempt to punish you, I 
assure you, and you may view it differently.
    Ms. Patterson. We didn't interpret it that way.
    Mr. McHugh. But we want to, where possible, assign these 
kinds of things to the most appropriate agency. So if you have 
any specific thoughts, as we go along, we would be very 
interested.
    Ms. Patterson. We would be happy to provide you with our 
thoughts.
    Mr. McHugh. Thank you very much. The other is your 
reference to section 303, which was stated above that. We are 
somewhat concerned that the standards contained in the 
mentioned section appear to diverge from the antitrust laws and 
about the availability of different forums for addressing the 
same conduct. It could be possible that legitimate and 
procompetitive business practices may be inhibited by this 
action. You then go on to say that we want additional 
discussion. I appreciate that.
    But I just thought for the purposes of your appearance here 
today, do you have any specific examples or generically 
specific examples about what kind of procompetitive business 
practices may, in fact, be inhibited? What kinds of areas are 
we likely----
    Ms. Patterson. With respect to subsection 4 of section 305, 
I think it is possible that that prohibition on the Postal 
Service could prevent the Postal Service from providing 
information to its customers about all competitors who provide 
a certain service, and I think that would be legitimate 
procompetitive behavior that would be affected by that 
subsection.
    Mr. McHugh. Well, there are two. You offered kindly for 
further discussion, and we will certainly take you up on that. 
I appreciate it.
    I am going to, with great appreciation, recognize the 
chairman of the full committee, who has joined us and, who I 
should say, before I do yield, has been a great leader and a 
great supporter in this process. He was at our last 
subcommittee hearing as well, and we're delighted he has been 
able to take at least a few minutes to be with us here today, 
the gentleman from Indiana, Chairman Burton.
    Mr. Chairman, welcome.
    Mr. Burton. Thank you, Mr. Chairman.
    I just came here to be educated, and I really appreciate 
all of the hard work you have done.
    I have a statement for the record I would like to submit.
    Mr. McHugh. Without objection, sir.
    [The prepared statement of Hon. Dan Burton follows:]
    [GRAPHIC] [TIFF OMITTED] T7558.245
    
    Mr. Burton. Do you know where Mr. Sachs is?
    Mr. McHugh. Well, funny you should ask. Actually, Mr. 
Chairman, I expressed a great level of disappointment. We 
learned at 1 o'clock, or perhaps a few minutes after, that 
Treasury did not intend to send a representative.
    Mr. Burton. Was there any reason they gave or anything?
    Mr. McHugh. To this moment, we have not, to my knowledge, 
received, on our side, any kind of indication. Apparently, 
there was some contact with the minority side, but I think they 
would agree with me that it was late, and it was less than 
decisive, and we received no indication at all.
    Mr. Burton. Mr. Chairman, let me just say that if you 
require witnesses to be here and they choose not to be here, we 
will be very happy to assist you by issuing a subpoena to make 
sure they are here. We will contact Mr. Sachs and find out why 
he wasn't here because you deserve the respect that is due your 
position. You have worked on this issue for about 4 or 5 years. 
So we will talk to Mr. Sachs and make sure he never does this 
again.
    Thank you.
    Mr. McHugh. Thank you, Mr. Chairman, and we will keep that 
in mind. I would prefer to subpoena people who support the 
bill, however. [Laughter.]
    Before we proceed to the minority for questioning, we have 
been joined, also, by the gentleman from Ohio, Mr. LaTourette, 
one of the original subcommittee members who, as I mentioned 
last time, continues to voluntarily serve, so that deserves 
recognition. I would be happy to yield to him if he has any 
opening comments.
    Mr. LaTourette. I will wait.
    Mr. McHugh. I thank the gentleman.
    At this time I would yield to the gentleman from New York, 
Mr. Owens, for any comments or questions.
    Mr. Owens. No questions.
    Mr. McHugh. Well, Ms. Patterson, we thank you.
    Oh, I am sorry, Mark. Mr. Sanford----
    Mr. LaTourette. Mr. Chairman, I am sorry. I thought you 
were asking me for opening remarks.
    Mr. McHugh. I am asking you for whatever you want to throw 
out there, Steve.
    Mr. LaTourette. Then hang on just a second. I apologize.
    I was going to save my opening remarks until my pithy 
questions, and I just have, Ms. Patterson, a couple of 
questions that relate to the last hearing with the Postmaster 
General, and I think he, in his testimony, made some 
observations that were a little alarming to me and some other 
members of the subcommittee as well.
    We always hear about foreign government subsidization of 
industry. People in the steel industry are now coming to us 
saying their companies are subsidizing the steel industry and 
putting our industries at a disadvantage. I think he mentioned 
Germany in particular, and I think he mentioned England as 
well; wherein, they had sort of gotten big time into the mail 
business. The concern was that with the leverage created by not 
only the Government being behind that enterprise, but also 
their involvement in private corporations, that they were going 
to be putting the U.S. Postal Service at a disadvantage.
    Relative to your comments and observations on antitrust, I 
am just wondering whether or not the Department of Justice has 
ever taken a look at the potential antitrust implications of 
someone other than the U.S. Postal Service or some of the 
competitors that are going to testify before us today as it 
comes to a monopolization of mail products abroad.
    Ms. Patterson. I don't believe that we have ever had 
concerns of that sort addressed to us in the context of 
specific behavior. Generally, we investigate specific behavior 
that is alleged to be harming competition at the time.
    Mr. LaTourette. Then the second question is we are going to 
hear from not only customers, but also competitors of the U.S. 
Postal Service today. Are you aware of any information the 
Department of Justice has on complaints or cases against the 
major competitors of the U.S. Postal Service relative to 
antitrust violations or monopolization?
    Ms. Patterson. Not as I sit here today, I am not aware of 
any specific investigations that are underway, although we get 
complaints from time to time from a lot of quarters about a lot 
of things, and we generally investigate them at the level that 
we believe appropriate at the time.
    Mr. LaTourette. And, last, as I read your testimony and 
also heard you testifying about, you had some concerns about 
the responsibilities that H.R. 22 would deliver to the 
Department of Justice under section 603, and it is your 
observation that that should go to a more appropriate agency 
than Department of Justice because of manpower constraints and 
things? Do you have a suggestion as to who would be more 
appropriate?
    Ms. Patterson. As I said to the chairman, I don't have a 
suggestion about a specific agency, but we have agreed to give 
that some thought and get back to the subcommittee with any 
suggestions we have.
    Mr. LaTourette. Thank you very much.
    Ms. Patterson. Thank you.
    Mr. LaTourette. I thank the Chair.
    Mr. McHugh. Again, Ms. Patterson, thank you for being here. 
As we have already discussed on several occasions, we are 
looking forward to working with you, particularly on those two 
sections and we appreciate that opportunity.
    Ms. Patterson. Thank you. We look forward to working with 
the committee.
    [Additional questions for the record follow:]
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    Mr. McHugh. Thank you very much. Thanks for being here, 
too. [Laughter.]
    The next panel is made up of two very distinguished 
gentlemen: Mr. Fred Smith, who is chairman and chief executive 
officer of the Federal Express Corp.; and Mr. James P. Kelly, 
who is president and chief executive officer of United Parcel 
Service.
    I asked staff if they were here, and someone said, ``Gee, I 
haven't seen them, and I hope they are not with Mr. Sachs.'' 
[Laughter.]
    So these two guys walk into a bar. The first guy says--
[laughter.]
    They are checking to see if they are in a holding room. I 
didn't know we had one, but--[laughter.]
    [Pause.]
    Mr. McHugh. Have you gentlemen seen Lew Sachs? [Laughter.]
    To let you in on that, he was the gentleman on the first 
panel who didn't show up, and we were beginning to worry you 
three were together somewhere. [Laughter.]
    Mr. Smith. We were right behind the door, but it still took 
us 10 minutes to get here.
    Mr. McHugh. I said awfully nice things about you while you 
were out of the room. I will show you the record later.
    I do deeply appreciate you two gentlemen being here. You 
both have extraordinarily busy schedules, extraordinarily 
successful companies, and are most gracious in agreeing to be 
here today and to give up some of your valuable time in helping 
us to go over this issue. In that regard, we have also 
appreciated very much the opportunity to work with both of you 
personally, but on a continuing basis with your representatives 
who have been fully engaged in this process, as you know. You 
have provided a great service, certainly to the subcommittee, 
but I think to the entire country on this important matter.
    As I mentioned with the abbreviated first panel, we have 
made both of your statements part of the record and entered 
them in their entirety, and we appreciate the work and thought 
that went into those. I have read them both. I would yield to 
you now for the opportunity to make an oral presentation. But 
before we do, the subcommittee and committee rules require, as 
I think both of you have done in the past, ask you to rise and 
to affirm an oath. If you would do that, please, gentlemen and 
raise your right hands.
    [Witnesses sworn.]
    Mr. McHugh. The record will show both witnesses responded 
in the affirmative.
    With that, welcome. I am going to, for no other reason than 
this is how they are listed here--this is no reflection on 
seniority, no reflection on success, no reflection on anything 
other than that this is how they were typed--I will yield first 
to Mr. Smith who, as I said, is chairman and CEO of FDX, and 
welcome him and pay our attention to you, sir, as you make 
whatever comments you would like to at this time.

STATEMENTS OF FRED SMITH, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 
   FDX CORP.; AND JAMES KELLY, CHAIRMAN AND CHIEF EXECUTIVE 
                 OFFICER, UNITED PARCEL SERVICE

    Mr. Smith. Thank you very much, Mr. Chairman. I am 
delighted to be here representing tens of thousands of 
employees and independent operators that drive the FDX system, 
two primary components of which are Fed Ex and RPS.
    I am delighted to be here with my friend, Jim Kelly, as 
well, representing the fine folks at UPS. I think both our 
companies have many more similarities in outlook on this matter 
than disagreements. In fact, I think we would both very much 
like to end up in exactly the same place, and whatever 
disagreements we have are probably as to how best to get there.
    In that regard, as you know, we support H.R. 22 and think 
that it is a good piece of legislation, well thought out, that 
takes the country, and our industry and, for that matter, the 
Postal Service in the direction that it should and must go in 
the 21st century.
    I think it is important to look at this issue from a 
broader perspective than is often the case. In that regard, the 
way I characterize what the Postal Service is trying to do 
today is what private business would call a diversification.
    As you well know, the Postal Service was given a monopoly 
in 1871 to carry letters. And the primary justification for 
that was to provide universal service and the primary 
commercial ties for an expanding nation.
    In the early part of the 20th century, the Postal Service 
began to add, in addition to their letter traffic, the movement 
of publications and physical goods, and over a number of years 
developed a substantial business in that regard.
    Then in the middle part of this century--and Mr. Kelly 
could tell you a lot more about it than I can because his 
company was right in the middle of it--the Postal Service, in 
essence, withdrew from the goods delivery business. One of the 
reasons that they did was that they found that the operating 
systems--the vehicles, the post offices and so forth--could 
either be optimized for the delivery of letters, and 
publications and small items or they could be optimized for the 
delivery of packages, but not both. To put it in very 
simplistic terms, it is one thing to be delivering letters in a 
small jeep vehicle with a right-hand drive in your 
neighborhood, and it is quite something else to be delivering 
parcels which require the capabilities of step vans of the type 
operated by UPS or Fed Ex or RPS.
    UPS became the primary parcel delivery entity in this 
country, and only recently has the USPS begun to turn its 
attention away from the delivery of letters and small items 
back to the delivery of goods, both in this country, and more 
worrisome, as a matter of fact, in the international sphere 
where they are under far less oversight.
    The reason that they are doing that, at least according to 
their own statements, is that they fear technological 
obsolescence of the movement of letter mail, and they feel that 
they should be allowed to be competitive in areas which are 
also served by the private sector.
    Quite frankly, we find no compelling public argument to 
support that position of the Postal Service. It is hard for me 
to fathom why it is in the public interest. The Postal Service 
is exempt from antitrust regulation, is exempt from most tort 
claims--at least according to them that they are--is 
represented by taxpayer-funded lawyers, does not pay any sales, 
excise or property taxes, is exempt from zoning regulations, 
does not buy license plates for their cars or their trucks, has 
no zoning restrictions on it and, in fact, only pays parking 
tickets if it voluntarily agrees to do so. With the Postal 
Service enjoying all of those advantages--not to mention the 
fact that for every dollar of profit that we return to our 
shareholders, we pay, at the moment, about 41 cents out of 
every dollar to the Federal Government--we can't for the life 
of us find any compelling public-interest argument for the 
Postal Service to be able to diversify into the goods movement 
sector.
    But having said that, there is a very large private 
interest in the Postal Service becoming something that has a 
viable mission in the 21st century, and the political realities 
of that are so stark that we believe that H.R. 22 is a good 
compromise, dividing the Postal Service's operations into the 
sector which benefits from all of those advantages that I just 
listed--and many more, plus the monopoly rents that they can 
command by virtue of their letter monopoly--and a competitive 
sector which has the appropriate controls, and opportunities 
and risks that our companies take in the marketplace every day.
    So on that basis, we think H.R. 22 is a well thought out 
first step toward the commercial operations of the Postal 
Service becoming privatized. It recognizes the private 
interests of postal workers and the interests of the people who 
have come to depend on the mails, but also recognizes the 
realities of the world economy and the realities of the 
marketplace for the 21st century.
    One of the areas of particular concern, before I conclude 
my remarks and turn it over to Mr. Kelly, is the Postal 
Service's forays into the international marketplace. As you 
know from the Postal Service's own figures, they lose money. In 
fact, as well reported, they lost a considerable amount of 
money. That money has been paid for by the taxpayers of the 
United States in lost income taxes not paid by the commercial 
transportation companies that would have handled that traffic 
or by the first class letter mailers who would have enjoyed 
lower rates for the movement of their traffic had it not been 
for these efforts of the Postal Service to get involved in 
those sectors.
    In that sector, in particular, they are not under the same 
control elements and auspices of the Postal Rate Commission, as 
you know. And I think Jim Kelly, who has been very vocal about 
this and compared some of the rates being charged in the 
international sector compared to the domestic sector, makes a 
very, very compelling case as to how this is neither desirable 
nor fair.
    I think, with that, I will stop and, hopefully, I have 
given you the very broad perspective of our view on the Postal 
Service's situation and the legislation itself.
    [The prepared statement of Mr. Smith follows:]
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    Mr. McHugh. Thank you, sir. You have indeed. I normally 
don't recommend reading to anyone, but anyone who might be 
interested in this process, the testimony that you have 
submitted is among the more complex and thoughtful that we have 
had, and I would recommend it to anyone who would care to 
review it.
    That isn't only my interpretation because you are generally 
supportive, although it probably helped. [Laughter.]
    I would now be happy and delighted to yield to our next 
witness, Mr. James Kelly, who is chairman and chief executive 
officer of United Parcel Service. As I said earlier, sir, we 
are delighted and honored that you are with us. Without further 
ado, let me yield to you and our attention is yours.
    Mr. Kelly. Thank you very much, Mr. Chairman. It is my 
pleasure to be here, and good afternoon to members of the 
subcommittee.
    UPS was founded in 1907 as the world's largest express 
carrier and package delivery company----
    Mr. McHugh. Excuse me, Mr. Kelly. Would you pull the 
microphone a little bit closer to you, please. Thank you.
    Mr. Kelly [continuing]. Serving more than 200 countries and 
territories around the world.
    There is no single issue of greater importance to the 
future of UPS and our 330,000 employees and owners than postal 
reform, and thank you for inviting me here today to share our 
views.
    I would like to take a moment to thank you, Mr. Chairman, 
for your tireless work and patience in grappling with what must 
often seem like a thankless task. You have always been willing 
to listen to both sides of this controversial issue, and your 
hard work and leadership over the past few years have helped to 
define many of the problems and challenges at hand and to shape 
possible solutions.
    This is an extremely complex issue with profound 
ramifications for all Postal customers, as well as private 
competitors, like UPS. We have listened to all of the arguments 
made by the Postal Service that they need even greater 
flexibility over their prices to compete in the marketplace. 
They say they must maintain their monopoly on letter mail and 
remove what little oversight they now observe. Otherwise, they 
say they will not be able to deliver mail at affordable prices, 
stamp prices will go sky high, universal service will die, 
rural post offices will close and the doctrine of a service to 
``bind the Nation together'' will die. And we all know none of 
this is true.
    Mr. Chairman, the logic leads us in the wrong direction. It 
perpetuates the fundamental problem with the Postal Service as 
a privileged competitor to private business and a Government 
agency.
    Let me pose two fundamental questions that goes to the 
heart of this debate:
    What is the role of this Government agency and is the 
proper role of the Government to leverage a monopoly power to 
compete with private business?
    You have stated the objective of reform should be to 
enhance the core mission of providing universal letter-mail 
services at uniform, affordable prices, and we agree. 
Unfortunately, we believe, in its present form, significant 
portions of H.R. 22 would create even greater danger of 
monopoly abuse by the Postal Service.
    Reform should not grant the Postal Service additional 
freedoms to abuse its monopoly to compete with the private 
sector. Yet, that is exactly what we believe the current bill 
would do. That is not the role Congress intends for a 
Government-granted monopoly.
    The Postal Service is currently operating under a hybrid 
status where it is neither subject to the same controls as a 
Government agency nor is it under the same discipline or 
obligations that private businesses face. The Postal Service 
enjoys a host of exemptions from regulations such as taxes, 
licensing requirements, zoning regulations and so on. The 
result of this structure is a Postal Service that has abandoned 
its focus of providing superior first-class service for all 
Americans. This is all in efforts to garner market share from 
private-sector competitors, through abuses of its monopoly 
power, under the guise of protecting universal service in a 
changing marketplace.
    For the past decade or so, the Postal Service has ventured 
into new markets and products never envisioned by Congress when 
reforming the Postal Service in 1970. The Postal Service is 
engaged in predatory competition by using revenues from 
captive, first class monopoly customers and taking every 
advantage of its Government status to undercut prices of 
private-sector competitors.
    Last month, the postmaster general testified before this 
committee about the threat of the highly commercialized and 
capitalized foreign postal administrations entering the U.S. 
market. Mr. Henderson stated that the Postal Service would not 
have the ability to cut deals with foreign postal 
administrations and offer products priced below competitors, 
such as UPS and Federal Express.
    On Monday, the Postal Service announced an alliance with 
DHL Worldwide. They will offer a 2-day guaranteed service 
between the United States and Europe. The price for this 
service is significantly less than the prices charged by 
Federal Express, UPS, or DHL's own branded products. I ask the 
committee how can this be possible? Apparently, despite the 
rhetoric, the Postal Service isn't that terrified of foreign 
postal administrations entering the U.S. market, as DHL is 
owned, in part, by the Deutsche Post AG.
    Should we allow the Postal Service greater flexibility to 
make such arrangements with foreign governments or is it time 
to reign them in? We believe it is the latter. It is time to 
have this Government agency refocus on its primary mission of 
providing superior universal letter mail delivery.
    Absence the elimination of the monopoly, Congress should, 
at a minimum, strengthen the Postal Rate Commission to increase 
the Postal Service's accountability to consumers and taxpayers. 
Currently, the PRC does not have all of the basic tools to get 
information it needs from the Postal Service to make informed 
and rational decisions.
    In the international arena, the PRC has no jurisdiction, 
and the Postal Service has total freedom to set at any rate and 
service.
    Again, I ask what is the role of this Government agency? 
The PRC should be granted subpoena power and the authority to 
make final binding decisions on all postal rates, including 
full jurisdiction over international rates. And to encourage 
cost efficiency of the Postal Service, the Commission should be 
given authority over the Postal Service's revenue requirement. 
As long as the Postal Service maintains a Government-granted 
monopoly and is in direct competition with the private sector, 
these short-term basic reforms are needed to help provide 
consumers, taxpayers and private competitors with the 
accountability Americans expect of a $60 billion Government 
agency.
    No monopoly should have the unchecked authority the Postal 
Service is seeking. These reforms will also help simplify and 
streamline the rate-setting process. A stronger system of 
accountability will be an important first step in whatever 
long-term reforms come to pass.
    Again, I thank the committee for your attention on this 
very important matter and for listening to UPS' views today and 
in the past. I certainly welcome any questions that you may 
have.
    [The prepared statement of Mr. Kelly follows:]
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    Mr. McHugh. I thank the gentleman for his comments and, as 
I said, his participation.
    I think it is good to have two industry leaders, such as 
yourselves, side-by-side because the natural inclination may, 
in fact, be to think that you would be united from step one to 
step last on how this puzzle should be approached and 
ultimately pieced together. And as Mr. Smith said in his 
opening comments, that is not necessarily the case. Objectives 
may be the same, but perspectives along that process are not 
always shared exactly, and that is where we are today.
    I am tempted to ask that the two of you just chat and see 
if one can prevail over the other, but I don't know if that 
would really come to any good. So let me just ask a couple of 
questions and then go to my colleagues.
    First of all, let me say to Mr. Kelly I couldn't agree 
more. Clearly, one of the main reasons we are in this process 
is to attempt to level that playing field, to use the old 
cliche, that I think undeniably exists, and you mentioned a few 
of the examples that most trouble you and most concern you. 
Without trying to convince you of the merits of the bill, I 
would only note that the USPS, the Postal Service, venture with 
DHL couldn't have occurred, as it did, under H.R. 22; that, in 
fact, depending on how the argument came out, if it were a new 
competitive postal product or a new nonproduct as a joint 
venture, it would either have to go through the Competitive 
Products Fund, which would mean it would be under the auspices 
of the Postal Rate Commission, or it could only be done under 
the Private Law Corp., which would subject it to all of the 
kinds of pressures that you as private business people 
experience, and as Mr. Smith spoke about, taxes, the need to 
adhere to local zoning, land-use, and public-use regulations, 
and putting license plates that you actually paid for on your 
delivery trucks, et cetera. Also, the issues of providing, in 
the process of the Competitive Product Funds, the opportunity 
for the Postal Rate Commission to do a better job to get at the 
data it needs by granting it subpoena power and by requiring 
that products, through the equal cost coverage rule, contribute 
back in an equal way.
    So I think we have tried to address that. Obviously, Mr. 
Kelly, you don't seem to think that we have gone quite far 
enough. You mentioned in your testimony that we need to do 
more.
    So I just throw a general question out there. If you could 
have us add any one or two or three things into this area 
within the structure of this bill, what it might be?
    Mr. Kelly. Yes, Mr. Chairman. We certainly believe that the 
committee is very sincere in attempting to do exactly what you 
just characterized, and we are working as hard as we can to 
help try to put our point of view to have that happen.
    Certainly, we are concerned about the dual ratemaking 
process that is involved in----
    Mr. McHugh. I am sorry. I didn't hear you. The what?
    Mr. Kelly. Dual ratemaking process, where cost becomes less 
of an issue in the competitive products. We are concerned about 
the Postal Service's ability to discount and increase its 
subsidies against competitive products.
    The Private Law Corp., as I understand it, it calls for 
them to do additional competitive products. We don't believe 
there is any reason for a Government agency to have to enter a 
competitive area. We just don't see why that exists, and we 
think the abuse that they use with their current monopoly 
should be limited and not allow them to extend that monopoly to 
other competitive situations.
    And, certainly, we believe the PRC needs more power, needs 
more teeth. The Postal Service has demonstrated over the years 
that they need that kind of control. They have, again, today, 
as I read, refused to give information to the PRC in order for 
them to do their job properly. We believe that the PRC has to 
have subpoena power.
    Mr. McHugh. But that is in the bill.
    Mr. Kelly. We believe they have to have the final say in 
ratesetting, and there are a number of issues.
    Mr. McHugh. Forgive me. I didn't mean to interrupt. But the 
subpoena power is in the bill.
    Let me go back to the Private Law Corp. You would agree--
and don't let me put words in your mouth--would you agree, as I 
think you testified to in your statement, that today, over your 
very understandable and strong objection, the Postal Service 
does, indeed, compete in just about any way it chooses with the 
private sector? Isn't that true?
    Mr. Kelly. Well, they have certainly become more aggressive 
in where and how they compete with the private sector, and we 
believe that that should be reduced and eliminated.
    Mr. McHugh. So the answer is, yes, they do do that. I mean, 
they offer phone cards, they offer mugs----
    Mr. Kelly. Yes, they do.
    Mr. McHugh. They offer ties, they offer mouse pads, they 
offer t-shirts----
    Mr. Kelly. And what next?
    Mr. McHugh. DHL----
    Mr. Kelly. Yes, they do.
    Mr. McHugh. Well, I don't know, but they do. So that is a 
given.
    I guess there are two ways to meet your concern. One is to 
say Postal Service go to your core business, as there has been 
legislation introduced. Do nothing else ever.
    And the other is to say, if you are going to continue in 
nonpostal products and compete in the private sector, you can 
only do it through the Private Law Corp., and that is our 
solution.
    So I am assuming what you are saying is that you object to 
the Postal Service offering any kind of nonpostal product at 
all, ever.
    Mr. Kelly. Well, long-term, that is obviously what we 
believe.
    Mr. McHugh. OK. That is fine.
    Mr. Kelly. I think the reality of what exists today could 
make the second proposition doable if, in fact, you could build 
the firewall thick enough and tall enough that things couldn't 
be tossed back and forth across. And we don't believe, and we 
think it has been demonstrated over the years, that they can't 
be prevented from doing that without stronger language.
    Mr. McHugh. Then I would ask you, as we have asked in the 
past, that we need to see the language as to how to build that 
wall any thicker, because we have created, and even the 
chairman of the Postal Rate Commission has said, in his words, 
``an almost perfect system.'' He doesn't like it. He dislikes 
it for other reasons, but he admits that the way in which it is 
done, he doesn't see how the issue of firewalls and backwash 
subsidies could be any better precluded.
    The reason there aren't more in there is not because we are 
``agin 'em,'' but because nobody can think of them. And to 
preserve the Private Law Corp. and to build upon it, we are 
happy to do that.
    Let me, with that, go to Mr. Smith because he takes a much 
different view, as I recall his testimony on the Private Law 
Corp. and the issue, and I would be interested in hearing his 
views.
    Mr. Smith. Mr. Chairman, you mentioned a moment ago that 
there, in essence, are only two solutions to this problem. The 
first solution would be to tell the USPS go to your core 
business and you are precluded from being involved in anything 
that a commercial enterprise can do, and the second is a track 
along this line.
    As I said in my opening remarks, and I want to reiterate 
right now, if I had the power to prescribe the best public 
policy for the United States of America, and for that matter, 
for the Postal Service itself and the private sector, it would 
be to do the former, not the latter.
    The Postal Service would be much better off if it were 
relegated to carrying first class letters, and small packets 
with a limit of, say, 2 pounds because I am very confident--and 
I am sure Jim will agree with me based on the extensive 
knowledge both of us have in terms of the structure of pickup 
and delivery, and sortation facilities and what have you--the 
overall costs for the public would go down.
    On the other side of the coin, we serve every address in 
the United States of America with the exception of a very few 
points in Alaska, and I know UPS does too. The price of 
delivering goods to addresses should be reflective of the 
actual cost. If there is one thing that the last 50 years has 
taught the world, it is the great silliness of having 
governments misallocate capital and human resources. The whole 
problem in China and the former Eastern bloc is precisely that. 
People put money into ventures not because that was what the 
market was willing to pay or that was the most efficient 
allocation of resources, but because somebody was able to get 
the money and do that.
    That is really what the Postal Service is doing. It is a 
significant misallocation of resources for the Postal Service 
to be attempting to do what they are currently doing, which is 
diversifying into many of those sectors, but in particular into 
the goods movement sector. They don't have a congressional 
mandate to do that. They don't have, quite frankly, the 
infrastructure to do that. They actually got out of that 
business one time because of that consideration. They are doing 
it to diversify.
    So that would be the best public policy. But we don't think 
you can get there, given the political realities, and that is 
why we support H.R. 22 because it is the second-best 
alternative.
    Mr. McHugh. I appreciate that. You have always been very 
clear about that as well.
    Can I assume, then, because I take very seriously a man of 
the stature of Jim Kelly when he is concerned, and I understand 
that, and I have said repeatedly I am not foolish enough to 
think anyone who has a responsibility, as each of you do, and 
Mr. Kelly does, for a corporation of the magnitude and the 
success of UPS, to walk blindly down an alley just because I 
would like it. I mean, that is ridiculous, and I don't.
    So I want to try to do what we can to build on the Private 
Law Corp. because I come down the same place you do. Regardless 
of how I may feel about all of the other things going on, they 
are going on. I don't see, quite frankly, in this Congress, in 
this administration, a likelihood of changing it to that 
reality, if that were my interest. So we are looking at the 
second reality.
    Are you content or satisfied that the Private Law Corp., as 
constructed, will, indeed, do what it is intended to do, and 
that is to preclude, to the greatest extent possible, the kinds 
of abuses, and misuse and misappropriation of public finances 
and the public privilege that the Postal Service now enjoys in 
those future products?
    Mr. Smith. I would certainly hope so, Mr. Chairman. I think 
a lot of it depends on just how tough the PRC is in enforcing 
it. History shows that entities like the USPS, who are not 
accountable to the marketplace, per se, and to private 
interests, have a terrible tendency to abuse the powers that 
they have, and I would submit to you that Jim Kelly is 
absolutely right. That is what they are doing right now.
    So it largely depends on just how tough that oversight 
system is. I would hope that, if it is not tough enough, that 
the legislative history of this act would be such that the 
private sector could come to the Congress, if there are abuses, 
and seek amendments.
    The Postal Service has been intractable on occasions, as 
Jim pointed out, in providing information, in obfuscation. I 
think this may be just the heritage of the organization. I 
think it was before this committee, the Postmaster General--who 
may be here, I don't know--was testifying the same day Mr. 
Kelly and I were, and someone asked him and said, ``Do you 
think that you are subsidized?'' and he said no. Well, I got 
out of this room, and I talked to our folks, and I said that is 
the damndest thing I ever heard in my life, that the postmaster 
general would say that he is not subsidized when he has all of 
those advantages that I listed a little while ago and that are 
in his testimony. One of our very able lawyers said, ``Well, 
you have got to understand that he is coming from the postal 
world and what that means to him is that he is not getting a 
direct subsidy of taxpayer funds.''
    Well, I think a lot of the problem here is that the 
marketplace that UPS and FDX work in is very brutal, and very 
tough, and it has a lot of penalties for making a mistake. 
There is a mentality inside the Postal Service that is somewhat 
insulated from that, and it leads to a hubris. I think that it 
is a real danger that they would attempt, in the interest of 
what they thought was their mission, to be a little bit trying 
to the oversight mechanisms that are in H.R. 22.
    Mr. McHugh. Well, any system of law, of corporations, of 
whatever you wish to cite, is only as good as those who oversee 
it, I would grant you. But we took very definitive steps, some 
of which came from your gentlemen's camps, as to how we can 
empower the PRC through subpoena power, through preapproval of 
negotiated service agreements, et cetera, so that that kind of 
thing doesn't happen. I don't know if it does or it doesn't. 
Obviously, you all feel very strongly, and I imagine we can 
find a large body of people to testify on your behalf. But you 
also recognize the Postal Service equally, and in an equally 
adamant way, denies that. So rather than trying to solve the 
``chicken or the egg'' dispute, we tried to make sure there 
were no more chickens and no more eggs and fix the problem.
    Mr. Smith. And, again, Mr. Chairman, that is why we support 
the bill. You asked me do I think it is strong enough, and I 
said it depends on how strong the PRC is, and if it doesn't 
work, we will just have to come back.
    Mr. McHugh. I appreciate that.
    I would be happy to yield to Mr. Owens.
    Mr. Owens. Mr. Chairman, you have a long list of witnesses, 
and I think you have thoroughly explored this subject.
    I was curious to know why they weren't agreeing with each 
other, considering they are the two giants in this business. I 
think, after the conclusion of the dialog between the two of 
you, you both do agree. You, Mr. Smith, are saying you take off 
your businessman's hat, and you put on your politician's hat, 
and you said the reality is that we are going to go forward 
with the present situation, and we have to learn to live with 
it. Is that what you are saying?
    Mr. Smith. Yes, sir. Jim is probably better at this than I. 
I mean, I have gotten my brains kicked in a couple of times up 
here. [Laughter.]
    So I just am more mindful, perhaps, of the reality of 
trying to get where we need to go without going through this 
intermediate step. But that would be a fair way to put it, yes.
    Mr. Owens. Memphis is my hometown.
    Mr. Smith. Oh, it is? Great.
    Mr. Owens. So say hello to the folks back home.
    Mr. McHugh. I thank the gentleman.
    Mr. LaTourette.
    Mr. LaTourette. Thank you, Mr. Chairman.
    Both of you gentlemen, when you were testifying, talked a 
little bit about the international market, and the ability of 
the Postal Service to compete in the international market. I 
think, Mr. Smith, you were talking about the fact that it is 
pretty well documented that they were losing money on some of 
their international shipments.
    Mr. Kelly, when you talked, I wrote down three times you 
asked the sort of rhetorical question, What is the role of 
Government? I was wondering if you would care to talk a little 
bit about the international aspects of the postal market, and I 
will ask you what you think the role of Government is in the 
expansion and development of international markets vis-a-vis 
the U.S. Postal Service and the businesses that you represent?
    Mr. Kelly. Thank you.
    I believe the Postal Service should continue to focus on 
the universal delivery of letter mail, and that is what they 
are there to do, and that is what they should continue to focus 
on.
    I think the whole international arena partially answers the 
question of why the Private Law Corp. gives to ZAJADA. When you 
talk about Postal Services expanding into competitive areas, 
when you talk about Postal Services acquiring private 
companies, we have a history that is only 2, 3, 4 years old in 
Europe of where exactly that has happened.
    The Deutsche Post, for example, has purchased 6, 8, 10 
private delivery companies in Europe. DHL, that the United 
States Postal Service formed the alliance with this week, is 
owned, in part, by the Deutsche Post.
    Another 25 percent of DHL is owned by Lufthansa. So, in 
effect, the relationship between the United States Postal 
Service and DHL, the only one who is going to benefit from that 
is the German Government. The American taxpayers are going to 
be disadvantaged by the subsidy of providing first class 
revenue to support that service in one case, and in the second 
case, there is no U.S. company that is going to derive any 
revenue or that is going to pay any taxes on that because it is 
going to wind up in Germany.
    There are some very complex and difficult issues that exist 
in Europe regarding postal services, and many of them are 
unfair. The situation is quite different because of the numbers 
of countries, of course, that exist in Europe. So they are 
competing with each other. In the United States, there is only 
one. If they give them the same kind of rights that the 
Deutsche Post is looking for, it would be devastating to 
private competitors in this country.
    There are virtually no private companies left in Europe.
    Mr. LaTourette. One of the comments that I think has come 
from UPS, in particular, that I have seen, has been criticism 
of the Postal Service's global package link.
    When we talk about issues of competitiveness, and I think 
that Chairman McHugh's excellent work on H.R. 22 is designed to 
get at competitiveness, but make it truly a level playing field 
and not a tilted scale, when we talk to the Postal Service 
about the global package link, they say that it is based upon 
economies of scale.
    So what you are doing when you complain about the fact that 
they are able to use their subsidization or monopolization to 
compete unfairly in the international market, well, they are 
just sending a lot of stuff and so they can do it cheaper. Do 
you have any thoughts or comments about that?
    Mr. Kelly. Yes. I mean, they price that service, as I have 
mentioned a number of times, for a package to go from San 
Francisco to London is less expensive than it is to go from San 
Francisco to Los Angeles. The pricing makes no sense.
    The scale that they are talking about has to do with 10,000 
packages, but it is not any ``X'' amount of packages per day. 
That is over the cost of the year. You can't gain the economies 
of scale that the Postal Service talks about gaining by 
spreading out those packages over the course of an entire year.
    Mr. LaTourette. I was interested in your discussion with 
the chairman about the Private Law Corp., in particular. Have 
you reached a conclusion that there is no firewall big enough 
or wide enough to fix this problem?
    Mr. Kelly. I am reluctant to say that. But if you look at 
the topic you have just discussed and you think of what they do 
with the global package link, and you think of what they do 
with subsidies today, to allow them to compete in additional 
areas, to allow them to buy private companies, it scares me to 
death of what they will do going forward. So, yes.
    Mr. LaTourette. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. McHugh. I thank the gentleman. I want to probe that a 
little bit further because it is an important point.
    My understanding, and I believe it is reflected in Mr. 
Smith's testimony as well, is the Deutsche Post is actually 
selling their publicly held postal assets to directly utilize 
those funds for the purchase of the companies you are concerned 
about, and I am 99.9 percent certain that is true.
    H.R. 22 would totally prohibit that. It could not happen. 
The DHL-Postal Service joint venture shows that they can do 
these things today. As you know, they can actually go out and 
buy--the USPS could buy a company tomorrow, if one person, the 
Secretary of Transportation, signs off--Treasury, excuse me.
    So that, in large measure, we are responding, trying to, to 
the very concerns you voice because the world that you fear of 
tomorrow is, I would suggest, far scarier from your perspective 
without H.R. 22 than it is with it. And I think, again, for a 
selfish reason, why I urge people to read Mr. Smith's testimony 
is because those issues are addressed.
    I do not, in any way, Mr. Kelly, belittle or wish to treat 
in a less than serious way the things you have stated. They are 
real, and I think fairness and the American system of 
capitalism, in theory, dictates that we look at it. That was 
part of the motivation and it is truly one of the things that I 
think is most directly addressed and the concerns that we have. 
So I just want to put that on the record. I am pleased that Mr. 
Davis is back, and I would be happy to yield to him.
    Mr. Davis. Thank you very much, Mr. Chairman.
    Gentlemen, let me apologize for having missed your verbal 
testimony.
    The Postal Service has presented a series of amendments. 
They encompass a number of things, including ratesetting 
process, pricing flexibility, the Private Law Corp. and others. 
Could you comment on these amendments, and then I would like to 
know if you think it would be possible that you would support 
the bill if those amendments were adopted.
    Mr. Kelly. Are you talking about the 32 amendments from the 
Postal Service?
    Mr. Davis. Yes, sir.
    Mr. Kelly. No. We certainly believe that they are 
subsidized now. We believe that all of the amendments will give 
them additional ability to compete unfairly with the private 
sector, and we absolutely and unequivocally would oppose the 
bill with the incorporation of the 32 amendments.
    Mr. Davis. I then ask you if you could comment on how your 
proposals would effect postal employees or if you think that 
your proposals could adversely effect postal employees.
    Mr. Kelly. We have no intention of adversely affecting any 
employee group. And we think by focusing on First Class Mail 
delivery, the Postal Service, through its monopoly, provides an 
enormous amount of security for its folks that no private 
company, and, in fact, no other Government group, can provide. 
But we support that, and we are not looking for anyone to lose 
their job as a result of anything we are saying here. Our 
concern, of course, is to, in addition to that, to protect the 
employees of UPS and Fed Ex and not have them lose their jobs 
as a result of unfair competition with the Postal Service.
    But the Postal Service First Class Mail is continuing to 
increase, and all of the fears about all of the First Class 
Mail going away and no one having a job, if the compounded 
average growth of First Class Mail is 2 or 3 percent over the 
last 5 years, I don't think that fear has any foundation.
    Mr. Davis. Do you believe that the current or proposed new 
bill is better than what currently exists in the arena of 
competitiveness or promoting a more competitive atmosphere or 
environment?
    Mr. Smith. I think the short answer to that would be that 
Jim does not agree with that and we do. We would think it would 
be better with the bill than without.
    Let me also say that we would oppose the Postal Service's 
amendments for exactly the same reason that he did and, 
secondarily, that it is my belief that the postal workers of 
the United States would have more job security, better future 
outlook, if the Postal Service concentrated on the movement of 
letters and small items because, regardless of the firewalls 
and what have you, there will be management diversion and 
inattention and the cost of letter and small items traffic will 
be greater with that diversification than without.
    The best way to preserve postal jobs is to have the most 
efficient and lowest cost letter and small package shipment 
service in the country.
    Mr. Davis. Recognizing the fact that sometimes it is 
virtually impossible to arrive at agreement, although we try, I 
mean, we are always looking for, I think, the common ground or 
the middle road or the place where there can be co-existence, 
how far apart do you think you and the Postal Service are in 
terms of a common ground that might be reached?
    Mr. Kelly. When you talk about a common ground, let me 
again reiterate that we recognize and appreciate the amount of 
hard work and the amount of change that has gone into this 
bill, and it is a complex, difficult issue.
    There are a few things that concern us, and there are a few 
things that concern us a great deal, and at this point in time 
we are not able to support. But if you are talking about a 
compromise solution that is an interim solution, and when does 
the rest of it get fixed, and how does the rest of it get 
fixed, if you want to provide the Postal Service with the 
ability to compete more, the monopoly has to come away first, I 
believe.
    I don't believe you can provide them with additional 
competitive authority and allow them to keep the current 
monopoly that they have. Postal issues really haven't been 
addressed in a meaningful fashion in 30 years. So if we develop 
an interim solution, it is going to be a long time down the 
road before it is fixed again, I would feel.
    Mr. Davis. So you are saying that there would need to be 
additional competitive regulation put on the Postal Service to 
put it more in line with what happens in other parts of the 
industry.
    Mr. Smith. From FDX's standpoint, we support H.R. 22. So 
the answer to your question is we have gone as far as we can go 
with H.R. 22. We would not support the postal amendments.
    I think what Jim is saying is, H.R. 22 doesn't go far 
enough in the direction of the appropriate levels of control.
    Mr. Kelly. That is correct.
    Mr. Smith. I mean, that is the only difference. There may 
be thismuch difference.
    So we certainly wouldn't go toward the Postal Service's 
position.
    Mr. Davis. Thank you very much, gentlemen.
    Mr. McHugh. I thank the gentleman.
    We could do this all day, but we won't because you have 
been very gracious with your time. I am deeply appreciative, as 
is the entire subcommittee, for that. Just a wild guess on my 
part, but I bet we will talk again. We are looking forward to 
that.
    Once again, I do appreciate your participation and your 
efforts to assist the subcommittee in what has been a very 
interesting journey.
    So thank you, gentlemen.
    Mr. Kelly. Thank you very much.
    Mr. Smith. Thank you very much, Mr. Chairman.
    [Additional questions for Mr. Frederick W. Smith follow:]
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    Mr. McHugh. Panel 3, as we switch placards and turn chairs 
and such, is comprised of Mr. Jerry Cerasale, who is senior 
vice president of Government Affairs for DMA, Direct Marketing 
Association; Mr. Neal Denton, who is executive director of the 
Alliance of Nonprofit Mailers; Mr. Robert ``Kam'' Kamerschen, 
who is speaking on behalf of the Saturation Mailers Coalition.
    Gentlemen, welcome. Good to see you all. You know the 
drill. Stand up and raise your right hands.
    [Witnesses sworn.]
    Mr. McHugh. The record will show that all three of the 
panelists attested to the oath in the affirmative.
    Thank you, gentlemen, for being here. As most everyone 
knows in this room, you all represent sizable numbers of those 
who, in different ways, perhaps, but in equally important 
fashion, both work with and depend upon the U.S. Postal 
Service. We welcome, too, our efforts to work with you on 
behalf of your organizations. So thank you for that effort.
    Without any further ado, keeping with my very well thought-
out plan of earlier, I am going to recognize you in the order 
in which it was printed on the page, which coincides with the 
way in which I read it.
    So let me yield, first, to Jerry Cerasale, who as I 
mentioned, is senior vice president of Government Affairs of 
DMA. Jerry, thank you for being here. We are awaiting your 
testimony and your spoken words. We have entered all three of 
your gentlemen's written submissions in their entirety. So, if 
you could summarize for us, we would greatly appreciate it.

STATEMENTS OF JERRY CERASALE, SENIOR VICE PRESIDENT, GOVERNMENT 
 AFFAIRS DIRECT MARKETING ASSOCIATION, INC., ON BEHALF OF THE 
  MAILERS COALITION FOR POSTAL REFORM; NEAL DENTON, EXECUTIVE 
  DIRECTOR, ALLIANCE OF NONPROFIT MAILERS; AND ROBERT ``KAM'' 
   KAMERSCHEN, ON BEHALF OF THE SATURATION MAILERS COALITION

    Mr. Cerasale. Thank you very much, Mr. Chairman, members of 
the subcommittee.
    The Mailers Coalition for Postal Reform is honored to be 
here today. The members of the Coalition, the Advertising Mail 
Marketing Association, American Express Corp., the Direct 
Marketing Association, Magazine Publishers of America, the Mail 
Order Association of America, and Parcel Shippers Association, 
represent mailers who use all classes of mail and also are 
significant users of competitors of the Postal Service as well.
    I am Jerry Cerasale, senior vice president, Government 
Affairs for the DMA, and I have the privilege, I guess, of 
appearing before you representing the Coalition today.
    The Coalition joined together in an effort to effect postal 
reform. All of us want a financially viable Postal Service in 
the 21st century and believe that without reform that goal is 
not obtainable.
    Our Nation is in the midst of the greatest peacetime 
economic growth in its history. However, during this economic 
boom, First Class Mail, upon which the financial stability of 
the Postal Service is very dependent, has not grown very much.
    H.R. 22 is not a guarantee that the Postal Service will 
survive in the 21st century, but it does provide the tools to 
the Postal Service to have a fighting chance. The burden then 
will be on the Postal Service management and its workers to 
improve the competitive edge of the Postal Service by improving 
productivity dramatically and providing products that meet the 
needs of the marketplace.
    The basic structure of H.R. 22, which separates classes of 
mail into competitive and noncompetitive categories and 
provides rate flexibility to the Postal Service, through 
indexing of the noncompetitive classes being one, is sound and 
has the Coalition's full support.
    Let me focus on those provisions of H.R. 22, which the 
Coalition believes are central to any postal reform, the 
competitive and noncompetitive products.
    Noncompetitive products should be defined as those products 
over which the Postal Service has a monopoly by law or through 
market dominance. Mailers who use such classes need the 
protections afforded by the indexed rate provisions in H.R. 22.
    However, we agree with the amendments suggested by the 
Postal Service that only the Service may initiate a request to 
the Postal Regulatory Commission to change a product's 
classification from noncompetitive to competitive. The Postal 
Service should have some control over its product offerings. 
However, once a product becomes competitive, it may not be 
reclassified as noncompetitive.
    Allowing the Postal Service to change its mind and remove a 
product from the open marketplace would be unfair to 
competitors who shift their business plans in response to the 
Postal Service's competitive product offerings. Changing 
product classifications from noncompetitive to competitive must 
only be a one-way street.
    As we look at the product baskets, and I know I am speaking 
before Mr. Denton, but we will see what he says about the 
nonprofit area, and I will gladly, in a question, if it comes 
up, respond to his position on that, we agree with the rate 
baskets for noncompetitive products in H.R. 22, except that all 
international mail should be competitive. The Postal Service 
faces competition today from both foreign posts and private 
carriers for all international mail. We think that competition 
is only going to increase, so we think that we put 
international mail into the competitive category.
    In pricing, we agree with H.R. 22 that the Commission 
should establish baseline rates under the act without 
provisions for a contingency or prior years' losses.
    As we look at the competitive products, we don't agree with 
the requirement in H.R. 22 that the minimum markup for 
competitive classes of mail must be equal to the average markup 
for all postal products. If H.R. 22 were implemented today, it 
is our understanding that current rates for competitive classes 
of mail would have to increase by as much as 10 percent. Thus, 
H.R. 22 implies that the Postal Rate Commission erred in its 
most recent decision, and we disagree with that.
    We believe that the minimum contribution for competitive 
classes should be established by the Commission for base rates 
after applying all of the factors of the act. This would 
maintain the level playing field for postal competitors that 
the Commission established.
    Finally, we believe that after 5 years this minimum 
contribution requirement should sunset. We think that 5 years 
provides ample time for the Postal Service and its competitors 
to adjust to the marketplace, and the Postal Service would have 
to not do business at a loss and charge a fair-market price.
    Looking at the noncompetitive products, we wholeheartedly 
agree with the index in H.R. 22 used to establish 
noncompetitive rates. There must be a productivity factor 
specifically applied to the Consumer Price Index as part of 
that index. This is needed as an incentive to the Postal 
Service to hold down costs. We strongly object to the Postal 
Service's amendment to remove the productivity factor ``because 
the CPI already contains productivity improvements.''
    The Postal Service should be required to do more than 
merely match productivity gains in the general economy. To fail 
to do so will imperil the Postal Service and the mail industry 
that depends on universal mail delivery.
    We also believe, however, that the pricing provisions in 
H.R. 22 are too rigid. Its application of the rate bands around 
the index severely reduces the pricing flexibility that we 
think the Postal Service needs. We have varying opinions about 
the specific method that best achieves the appropriate level of 
flexibility, but we believe that the provisions of the bill 
must be changed to provide some greater flexibility than H.R. 
22 currently offers.
    We disagree with the Postal Service amendments that would 
allow the Postal Service to bank for up to 5 years any 
percentage increase allowed under the index, which was unused 
in a specific year by the Postal Service. If there is going to 
be any banking, we think 1 year would be a maximum.
    Special financial circumstances. There are three areas 
where we think that H.R. 22 may require some changes for 
special circumstances. The first is, if the Postal Service 
doesn't have enough money to run under the provisions of H.R. 
22. We think in that case, the Postal Service should have to 
come to the Regulatory Commission and set up a brand new base 
case to establishing rates.
    A second area is when something occurs by Congress or 
executive or judicial branch that results in additional costs 
unforeseen on the Postal Service. We think, then, the Postal 
Service should be able to go to the Regulatory Commission and 
ask for a one-time adjustment in the index to take care of it. 
Don't let that adjustment stay in effect for 3, 4, 5 years 
because that will be overpaying the Postal Service for that 
adjustment.
    The third area when there could be some circumstances to go 
beyond the index, would be when a specific rate is too low, the 
Postal Service is not covering its costs in a class of mail. We 
think the Postal Service should have to go to the Regulatory 
Commission and adjust, one time, the index, make an adjustment 
in the index, to increase the rates for that class on a one-
time basis and then go on, under the current provisions, with 
the index previously set by the Regulatory Commission for the 
remainder of the 5 years.
    Market tests. It is important that the Postal Service have 
the ability to test new products, and I want to use the example 
with DHL as an example of potentially a market test. We agree 
that the Postal Service should have the ability to try and test 
products and products that may turn out to be a bust, products 
that may turn out to not cover their costs, but have the 
ability to test them. Otherwise the Postal Service is going to 
be hampered in its ability to meet market needs.
    We do support very much the provisions of H.R. 22 in this 
area, but do agree with the Postal Service on one amendment; 
increase the test side to $100 million.
    Negotiated Service Agreements. We wholeheartedly endorse 
NSA's. We, however, agree with the Postal Service that these 
agreements should be implemented immediately after the Postal 
Service provides public notice of the agreement and all its 
terms. We would then set up complaint procedures. After the 
notice, any party that believes it can meet the terms of the 
agreement would be eligible for the NSA, and if that party is 
denied a similar agreement, they may complain to the Regulatory 
Commission.
    In the same light, any party that feels that the noticed 
agreement violates the provisions of H.R. 22, such as there is 
no way they could be covering costs, for example, they should 
be able to complain to the Postal Regulatory Commission. We 
then think that the Commission should have 90 days to render a 
decision, a final decision, which would be subject to judicial 
review.
    Complaint procedures. Similar to what we say for NSAs, we 
agree that users of the mail and competitors of the Postal 
Service must have an avenue of redress for any grievances 
concerning alleged abuse by the Postal Service of its 
regulatory discretion. Again, the Commission should have 90 
days to issue a decision in the complaint and such decision 
should be final subject to judicial review.
    We really appreciate this opportunity to be here today, and 
I am ready to stand for any questions.
    [The prepared statement of Mr. Cerasale follows:]
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    Mr. McHugh. Thank you very much, Jerry. We appreciate that.
    Next on the list is Neal Denton, the executive director of 
the Alliance of Nonprofit Mailers. Neal, good to see you. Thank 
you for being here, and we look forward to your comments.
    Mr. Denton. Thank you, Mr. Chairman, Mr. Davis and to the 
good staff sitting next to you and behind you. We appreciate 
this entire process that we have been through over the last 
several years.
    In preparing for today, I enjoyed reading some of the 
testimony that we have delivered and my colleagues here have 
delivered over the many years, as we have all gotten to know a 
little bit more about how the Postal Service runs and what 
types of possibilities are out there for meaningful reform.
    As you know, and we have been very clear with this every 
time we have talked with you, we have had very grave 
reservations over the many years about certain concepts in 
postal reform that would give the Postal Service greater 
freedom and flexibility to set postal rates. We believe that 
the most recent increases of January 10 offer some glaring 
examples of the types of abuse we have feared in an unfettered 
rate-setting environment.
    I appreciate your comments in the beginning of the hearings 
today about nonprofit mailers having concerns here. Chairman 
Burton, in the last hearing, was right on the mark when, in 
recognizing the Postal Service surpluses over the last 4 years, 
questioned the Postmaster General as to whether we should have 
had any rate increases at all on January 10.
    As each of you know, the Alliance of Nonprofit Mailers is 
currently in litigation before the court of appeals over this 
case because we do believe that the increases of January 10 
were unfair, that the increases of January 10 were unnecessary, 
and that they were unlawful.
    Unfair because, while the price of a first class stamp may 
have only gone up 1 cent, the price for a nonprofit basic 
standard A mail piece went up 3 cents.
    Unfair because, as each of you know, the rate increases 
imposed on nonprofit periodical publications in some instances 
cause a nonprofit educational magazine with no advertising to 
pay a higher postal rate than an identical commercial 
periodical publication thick with advertising. That is a rate 
anomaly that represents unfair rates that nonprofits are 
experiencing since January 10.
    We believe they were unlawful. Because, as Mr. Burton 
pointed out, the Postal Service didn't lose $1.1 billion in 
fiscal year 1998, as they forecasted. The Postal Service made 
$550 million. They enjoyed a $550 million surplus, and because 
of that we believe that the case was unlawful. The Postal 
Service is supposed to, by law, break even. They are not 
supposed to be enjoying these kind of surpluses. We can't turn 
a monopoly governmental authority loose to be making profits on 
the back of captive monopoly mailers.
    Now, all of this said, and it is important that I say it 
again because we have said it every time here, we do come to 
the table understanding the potential problems that face the 
national mail delivery network and recognizing that there must 
be some realities of political reform that all of us can talk 
about here that can help to move our national mail delivery 
network into the coming century.
    We have looked at H.R. 22, and we have worked with you and 
your staff, and there are some provisions in H.R. 22 that we 
find very admirable and that we support; the caps and 2-percent 
bands provisions that protect all mailers from being singled 
out for especially damaging rate increases--the kind of rate 
increases nonprofits have faced as a result of the January 10 
hikes.
    The bill also protects any mailers from the over-the-cap 
increases that could happen in consecutive periods; that is, 
the Postal Service can't pile on 2 percent above CPI increases 
in consecutive years. Nonprofit mailers were terribly concerned 
about that.
    There are three provisions that are specific to nonprofits 
that we have been very supportive of--one that would change the 
language mandating the overhead assignment for nonprofit 
mailers. It is very technical, but currently the law says that 
nonprofit overhead shall be 50 percent of the closely 
corresponding commercial overhead, and the bill would actually 
say no greater than 50 percent, which would allow some 
flexibility underneath that. That would be very welcome by 
nonprofit mailers.
    It also provides an important safeguard to prevent the 
Postal Service from attributing more cost to nonprofit mail 
than to an identical size, shape, weight commercial mail piece. 
That is very important. We are far away from that right now. 
But the way that the rate structure has been moving over the 
last several years, I like the idea of having that ceiling put 
in there firmly, so that the Postal Service can't creep above 
that in a coming rate case.
    The bill also authorizes nonprofit requester publications, 
an amendment that is something that we have thanked you for 
before and looked forward to seeing in the final bill.
    We also reviewed the Postal Service's proposed amendments. 
We spent quite some time looking at those. I think, after 
reviewing all of them, we probably have criticism with just 
about every one of them, except perhaps one. The Postal Service 
amendment that suggests that the ``x'' factor for productivity 
is superfluous and that the CPI already accounts for 
productivity, I believe is nonsensical. I agree with my 
colleague, Mr. Cerasale, over here. We ask you to continue to 
rely upon the H.R. 22 provisions that would allow the Postal 
Regulatory Commission to set a productivity offset to the 
index.
    Frankly, in my mind, it is highly disturbing that any 
senior postal official would stand before you or before a large 
group of their customers and be so flippant as to suggest that 
potential productivity gains in future operations would be so 
insignificant as to not even include it in any legislative 
formula for setting rates. That is very disturbing, and perhaps 
we must overcome that type of thinking before any of these 
provisions in here are going to be successful.
    The mailers that have supported H.R. 22 aren't here because 
we like the idea of getting increased rates every year. We are 
here because we like the idea of the Postal Service, given 
productivity gains, being able to hold the cost of postage 
down.
    If the Postal Service is going to spend their time and 
energy promoting a legislative proposal that doesn't measure 
these productivity gains, I find that again very, very 
disturbing.
    We appreciate that many in the mailing community, and most 
especially, I am sure the colleagues joining me at this table 
today, are attracted by negotiated service agreements. As you 
know, over the years we have had an awful lot of concerns with 
the concept of NSA's, but we believe that the concerns that we 
have voiced to you over these years have been addressed very 
adequately in H.R. 22. For instance, the recovery of 
attributable cost and a fair portion of institutional costs, 
having the whole thing done in the open air before the 
Commission so that other organizations have an equal 
opportunity to participate in these programs, so that they will 
have an opportunity to also apply for these same types of NSA's 
in these open proceedings. We find that very agreeable, and we 
would support those safeguards and protective criteria and 
would reject the Postal Service's amendments to that.
    As I mentioned, though, one of the Postal Service's 
proposals does merit some consideration. Mr. Cerasale brushed 
upon it briefly, and that is, we are fascinated with the idea 
of creating a separate basket for preferred rate mailers. We 
have always been concerned that by averaging a basket of 
similar commercial and nonprofit mail, preferred rate mailers 
might fare poorly. The notion that all preferred rate mail be 
averaged separately is very interesting. However, the Postal 
Service's proposal would lump nonprofit standard A and 
nonprofit periodicals in the same basket. That would be apples 
and oranges in the same basket, and there is no other basket 
that is included in H.R. 22 that would contain two distinctly 
different types of mail than the one the Postal Service would 
propose here.
    I think we would take the metaphor a little bit further, 
and I would get poked in the ribs by my colleagues who would. 
We have a basket at home. My wife and I have a picnic basket at 
home that has a divider down the middle, and I believe that if 
somehow we could create a nonprofit basket that would allow 
one-half of the basket to average out for those standard A 
products and one-half of the basket to average out to the CPI 
minus X for the periodical publications, and then the whole 
basket average out to meet that index, that would be very 
agreeable and might be an improvement upon what it is that we 
see with H.R. 22.
    I have discussed it with my colleagues that also represent 
nonprofit mailers, and I think that is something we might be 
able to work on if we talk a little more about it.
    The subcommittee also recently heard the testimony of the 
Postal Rate Commission and Chairman Gleiman. Included in our 
full remarks that you have incorporated into the record are 
some comments we have about their proposals, and I think they 
are very favorable.
    While I have your attention, I want to bring up one other 
subject, that you and I have talked about that in the past. It 
is a serious problem. We have recently witnessed some very 
unseemly bullying and harassing of nonprofit mailers over 
questionable revenue deficiencies, all under the name of the 
Postal Service's Revenue Protection Program.
    Postal inspectors and others should be commended for 
identifying fraud and illegal activity that robs resources from 
the Postal Service. Inspectors and others should also have the 
sense to know the difference between a criminal who is 
attempting to defraud the Postal Service and a nonprofit 
librarian who is advertising educational trips.
    As you know, eligibility restrictions outline what a 
nonprofit mailer can and what a nonprofit mailer cannot 
advertise in a preferred-rate mail piece. Many of the rules are 
shaded in gray generalities, the policies are often unclear not 
only to the mailers, but to postal officials, and the rules are 
very often applied differently across the country by different 
postal officials.
    I am very sorry to report that some of the Postal Service 
agents have aggressively attempted to bankrupt community-based 
nonprofit organizations or drive eligible mailings out of the 
nonprofit mail stream with very questionable Postal Service 
interpretations of the eligibility restrictions. This disturbs 
us greatly.
    We would like to discuss this further with each of you 
because we believe that perhaps the blueprint used in the 
series of hearings last year on the heavy-handed approaches of 
the Internal Revenue Service might well be in order as we 
evaluate some of the methods used by the Postal Service in 
squeezing revenue from some nonprofit postal customers.
    We thank you for your fair and insightful approach to 
protecting the viability of our Postal Service, and I join with 
Mr. Cerasale in looking forward to your questions.
    [The prepared statement of Mr. Denton follows:]
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    Mr. McHugh. Thank you very much, Neal. As we discussed, we 
look forward to working with you on those other kinds of 
issues, as we have in the past. I have written the chairman of 
the Board of Governors with respect to that anomaly on R97-1, 
and certainly the other concerns that you have are legitimate. 
We want to try to be able to be of assistance in probing those 
to an equitable solution in addition.
    Last, on this panel, is, as I said earlier, Kam Kamerschen, 
who is appearing on behalf of the Saturation Mailers Coalition. 
Kam, thank you as well for being here, and we look forward to 
your comments, sir.
    Mr. Kamerschen. Mr. Chairman, and members of the committee, 
staff, I am Robert ``Kam'' Kamerschen, chairman of the board of 
ADVO, Inc. ADVO, as you know, distributes targeted saturation 
advertising mail to 60 million households every week. We 
represent 23,000 clients of all sizes and shapes, and make no 
mistake about it, our destiny is closely tied to the success of 
the Postal Service.
    In many ways, I could dramatize that, but make it this way. 
The term ``partner'' is often used sometimes loosely. But I 
would submit the U.S. Postal Service is, indeed, our partner 
because 50 cents out of every dollar of revenue that we 
generate as a public corporation goes to the U.S. Postal 
Service in the form of postage. I think that sounds like a 
partnership, to me.
    I am here representing today the Saturation Mail Coalition. 
Inasmuch as that might not be familiar to many of you, let me 
tell you what it is all about. We represent 40 different 
companies that are essentially in three or four basic areas: 
weekly community newspapers, shopper publications, envelope 
coupon mailers, and other shared mailers like ourselves.
    To give you a frame of reference, those members run from 
relatively large companies, like Harte-Hanks, Money Mailer, 
people of that vestige, to very small operators who mail 15,000 
to 20,000 households, which is essentially the size of a ZIP 
Code, as you know, and so it is quite a diversity of groups.
    The commonalities we have are that we are basically 
servicing a group of retailers and/or other service operators 
who depend very much on us in order to deliver their mail in a 
dependable, affordable fashion. Moreover, there is a bunch of 
consumers that also share the enthusiasm for that, as evidenced 
by the fact that every week we deliver important information on 
products, services, as well as coupons that represent huge 
savings to the consumer.
    Now, just as a frame of reference, since we are going in 
every household every week with different mailing 
organizations, what it says is that we are becoming available 
to all consumers, and that is a very important aspect from our 
dimension in that we are not discriminating. We are making 
these savings available to all of the public, and as a frame of 
reference or contrast, for example, the FSI's, the freestanding 
inserts, which represent savings to the consumer for coupons, 
are delivered with the purchase of a Sunday newspaper. So we 
believe we are delivering a valuable service, indeed.
    We really feel, as I indicated, that mail is our preferred 
form of distribution, even though some of us do use private 
carrier delivery as well. We believe that way. It is our 
preferred option because of the basic credibility and 
reliability the Postal Service represents, which has made major 
improvements, as you know, from as recently as 5 years ago, and 
we certainly feel that way.
    I believe the crux of this whole conversation about 
fairness, competitiveness, level playing field, resides in a 
very simple fact. The fact is that the Postal Service, by 
definition, by law, is accountable and responsible for 
universal service, and here is the quandary: Each year the 
fundamental cost of the national infrastructure for providing 
that service is growing. It is growing because there are an 
additional number of households every year. Just in my tenure 
with the company, in this industry, which is only 10 years of 
length, I have seen an enormous increase of several million 
households every single year being fueled, obviously, by a high 
divorce rate and other considerations.
    So the infrastructure has got to keep growing. And, in 
turn, the Postal Service has to be able to finance that. The 
only way that I know of that we can finance that is a 
combination, I guess, of greater productivity, cost savings, 
but also growth. Growth is the imperative that we believe 
exists in helping to fuel that particular proposition.
    The subcommittee's goal is obviously modernizing and 
reforming the Postal Service, and we certainly applaud that, 
particularly as it relates to the greater pricing 
predictability and stability for the mailers that we represent. 
Think about this: There is nothing that disturbs a business 
person quite to the degree of unpredictability, certainly in 
their measured cost components, and as I indicated already, 
almost every one of our mailers representing our coalition 
spends at least 25 cents out of every dollar to Postal Service 
commissions.
    Our customers don't want to hear about the issues that 
might be driving the Postal Service's difficulties, as they 
were in the 10 years leading up to this period of time. They 
really want to know that they are having rates that are 
certainly at the rate of inflation, at the maximum and under 
the rate of inflation and, at the same time, reasonably 
predictable because God knows there is enough unpredictability 
in the other aspects or forces of the business that we operate 
in.
    There is a subject that I want to underscore for a moment 
because there is a lot of discussion about competitive versus 
noncompetitive categories. I am not an economist. I don't 
proclaim to be one. But it seems to me that the issue of price 
elasticity is something that you don't have to be an economist 
to understand. It is a very simple concept that says demand is 
fundamentally affected by elasticity, and it is either elastic, 
which means it is highly responsive to price changes, or 
inelastic, which means it is not. I think one of the things 
that we need to consider here, and I refer you specifically to 
the testimony on page 5, which certainly dramatizes, as it 
relates to saturation mail, the extreme elasticity that exists. 
Let me be very specific, knowing that you are a very fact-based 
person and that your staff certainly is.
    From the period of fiscal years 1988-96, an 8-year period 
of time, as you know, postal rates at that time were running 
abound greatly in excess of rates of inflation, excessively so, 
as a matter of fact, and our particular form of mail, which was 
at the time called third-class carrier route presort, now 
called ECR--enhanced carrier route--during that entire 10-year 
period of time actually had a one-tenth of 1 percent decline, 
which simply says that that type of business was being 
adversely affected by these price degrees.
    In contrast, during the same period of time, First Class 
Mail went up 15 percent and noncarrier route mail went up 34 
percent. So there is the negative side or the elastic side of 
downward pressure. Now why don't we contrast that with postal 
rate reclassification.
    Since that period of time, and as you recall the specifics 
of that, it represented about a 2.7-percent decline, average 
rate decline, for this particular subclass. Interestingly, in 
the 2 years that have followed that, Mr. Chairman, there has 
actually been a 17-percent increase in volume. I would 
respectfully submit that that is about as dramatic evidence on 
the subject of price elasticity as one can possibly--it is 
almost textbook if you are going to write a book about it and 
express it in that fashion.
    Clearly, the thing that makes this particular endeavor on 
your part so important to us, and as we look at the subject of 
price elasticity, and sensitivity and dynamics of the 
marketplace, deals with the subject of cost coverage. Our 
particular form of subclass, as I presume you know, involves a 
203-percent markup, which means it is 103 percent higher than 
the costs attributed to this particular classification. You can 
contrast that number with the average for all postal products, 
which is 156 percent. So, mathematically, it is pretty clear 
that this particular form of mail is certainly carrying its 
fair share, if not unfair share, of the burden.
    It is because of this sensitivity that the particular 
amendments or the particular aspects that you represent in this 
particular H.R. 22 appeal to us, but we would respectfully 
submit some suggestions in terms of improvements. Knowing you, 
Mr. Chairman, as much as I had a chance to sit in on the first 
day of these hearings, you specifically, and I think 
appropriately, said this is a work in progress. So to the 
degree this is a work in progress, we are going to take this 
opportunity to respectfully submit a couple of ideas that we 
would like you to seriously consider.
    This talk about the freeze that the individual 
noncompetitive categories represent is a subject that we are 
particularly interested in calling to your attention. The best 
way to ensure fairness, and the strength of the saturation mail 
system, in our opinion, is ultimately to lower these high-cost 
coverages, as I mentioned before, borne by our mailers.
    We understand, however, that the sensitivity of burdening 
others in the system with increases necessary to lower our cost 
coverages that is not palatable, and we realize that. 
Therefore, we are here today to advocate a method which our 
industry, or any other mail type for that matter, can earn in 
its own pricing rationalization and a manner that does not come 
at the expense of others.
    As a point, in fact, Mr. Chairman, our proposal is a self-
financing proposal with no cost shifting involved in it. Our 
proposed negotiated service agreement language would give the 
U.S. Postal Service the pricing freedom necessary to act 
decisively in a business environment, where a protracted rate 
process would cripple its ability to manage the postal 
mailstream efficiently.
    The language prevents any contribution to overhead or any 
erosion of that and allows the customers to save by increased 
work share, but also by increased volume, as long as the total 
contribution is not lowered. NSA's are sunshined so that the 
public, mailers, and competitors are privy to the U.S. Postal 
Service's sanctioned discount.
    Legislation clarifying the U.S. Postal Service's ability to 
use NSA's is needed even outside the context of H.R. 22, in our 
opinion. NSA's are an essential tool. As you know, they are an 
integral part of American business. Contract rates, volume 
contracts are very common. However, unlike the contract rates 
offered by private companies, the Postal Service NSA's would be 
subjected to nondiscrimination requirements that is available 
in comparable terms. In other words, any mailer able and 
willing to meet the terms of an existing NSA would be able to 
participate, an important safeguard in our view.
    H.R. 22 in its present form would allow the Postal Service 
to enter into NSA's with mailers in a noncompetitive category 
under strictly limited circumstances as to be of little use to 
either mailers or the Postal Service. The main problem with 
section 3641 requirement, from our point of view, mandating 
that NSA mail make a contribution to overhead cost that is 
``equal, on an average unit basis'' to that of the most similar 
classification of mail. This ``equal unit contribution'' 
requirement and the requirement that mailers would have to 
undertake the additional mailing costs to earn a rate benefit 
would transform NSA's into an inferior form of traditional 
worksharing discounts from our point of view.
    The only rate benefit for a mailer would be the amount of 
additional postal cost savings that the agreement generates. 
Yet unlike worksharing discounts, an NSA discount would impose 
the risk of liquidated damages if the mailer failed to perform 
as contracted. This lessens, in our view, the intended 
attractiveness of NSA's to mailers.
    The bill's NSA provision should be expanded to permit NSA's 
that generate an equal or total dollar contribution to overhead 
costs. The principal concern raised about NSA's is that they 
might lead to rates that reduce the contribution of contracted 
mail to institutional costs, thereby burdening other mail or 
the postal system.
    The bottom-line test should be that each agreement must not 
result in a loss of contribution to overhead cost that then 
must be borne by other forms of mail. Through NSA's, mailers 
can provide the Postal Service with guaranteed contributions to 
institutional costs while we grow profitable volumes that will 
benefit the overall financial health of the system and support 
universal service. Yes, there is no free-lunch proposal here. 
It is earned.
    A second change needed to bring increased flexibility is to 
eliminate the prohibition of transferring products to the 
competitive category. H.R. 22, as currently drafted, would 
freeze the types of mail in the noncompetitive category that 
could be transferred to the competitive category based on the 
current scope of the Postal Service's legal monopoly. 
Therefore, if a product is covered by a monopoly, it would be 
forever barred from transfer to the competitive category, 
regardless of how competitive that category may become. Forever 
is a very long time indeed. This provision would nullify an 
important part of the pricing flexibility that this bill 
intends to bring about for competitive mail.
    Consider the case of bulk First Class Mail. In the future, 
some bulk First Class Mail, such as billing statements, may 
become price sensitive and highly competitive due to changes in 
the communications technology or changes in the marketplace. As 
currently framed, the bill would not permit the U.S. Postal 
Service to respond to these significantly changed 
circumstances. It would risk losing that volume and its 
contribution to overhead costs.
    If the mail were, in fact, competitive in a marketplace 
sense, the U.S. Postal Service should be authorized to transfer 
that mail to a competitive category. With this ability, the 
USPS could retain the volume or mitigate the losses in 
contribution through competitive pricing adjustments.
    It is important that no statutory language prohibits the 
U.S. Postal Service's flexibility to respond to increasing 
dynamic market changes. The only statutory tests for transfer 
to the competitive category should be whether, in fact, it is 
competitive under marketplace standards.
    In short, a greater flexibility is needed in classifying 
and pricing mail that faces intense or greatly intensified 
competition and market conditions in these terribly turbulent 
times.
    As you know, Mr. Chairman, our testimony offers several 
others that I will not go into today. Suffice it to say, that 
the two discussed today are critical to the future of the 
saturation industry as a whole, to my company, to small 
businesses, to consumers nationwide, and to the health of the 
U.S. Postal Service and its vital mission to provide universal 
service.
    With these modifications, your committee can report out a 
bill that we support with enthusiasm. It is laudable, Mr. 
Chairman, that you are working to reform and modernize the 
Postal Service in good times rather than trying to accomplish 
the much more difficult task of reform in times of economic 
stress.
    In this permanent Whitewater economy of ours, it is quite 
wise, indeed, to follow the sage advice of Charles Handy in his 
remarkable book, ``Age of Paradox.'' He said simply, ``If it 
ain't broke, fix it anyway.''
    Yes, continuous improvements, sir, is the compelling mantra 
of this age for all of us. We look forward to supporting your 
efforts through the 106th Congress.
    [The prepared statement of Mr. Kamerschen follows:]
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    Mr. McHugh. Thank you very much. My mechanic must have read 
that book. [Laughter.]
    I think your testimony, taken in total, and everyone I 
assume in this room understands, as I mentioned in the 
beginning, the varied interests that you represent really poses 
a great juxtaposition against the previous panel.
    Lest anyone comes away from this hearing believing that my 
sole interest in entering this process was to level the playing 
field, I felt it was equally important, perhaps, frankly, with 
my rural perspective, somewhat more important to try to do what 
we can to ensure that there is a U.S. Postal Service into 
tomorrow that will continue to deliver mail to Box 863, 
Piermont Manner, NY, 13674, at a price that whoever wanted to 
mail me can afford and can rely upon.
    Over the short term, and maybe my horizons are not far-
reaching enough, I think that can only be the U.S. Postal 
Service. I think you folks would agree with that, even though 
you understand, if not in some of your instances, represent 
some of the true giants of the private sector.
    Let me begin by asking you to respond to what Mr. Kelly 
said on the previous panel about his view that the first 
meaningful step in true reform has to be, in his opinion, the 
total end of the current first class monopoly, letter mail 
monopoly.
    How do you think, if at all, that monopoly cessation might 
affect the services that you utilize through the U.S. Postal 
Service?
    Kam, if you want to go first, you have got the microphone.
    Mr. Kamerschen. I guess I do. In this era of 800-pound 
gorillas, which we just followed, we will respectfully submit 
our point of view on that.
    The thing I like that this committee is doing a lot is that 
you are proactively trying to shape the future of the U.S. 
Postal Service, and in its past, the Postal Service itself has 
not been as absolutely proactive on that score. Although I have 
to tell you that, in the last 5 years, I think those of us 
dealing with the Postal Service have seen a truly remarkable 
change, one that far exceeded what we would have anticipated, a 
far more customer-focused, market-driven enterprise, one that 
views the reality of what it is, which is a quasi-public, 
quasi-private institution.
    On the one hand, it has got the very appropriate burden of 
universal service, and on the other hand it has got the very 
appropriate challenge of financing that universal service. I am 
always amused when the word ``profits'' is used by some of the 
outsiders of this industry because, by definition, as you know, 
they are not supposed to make a profit. They are supposed to 
finance the continuation of the various services they have.
    This premise of competitiveness is quite changing. Whatever 
was viewed for competitiveness when the Founding Fathers--I 
guess it was Ben Franklin who was the first Postmaster 
General--put this together, that was a long time ago. We are 
entering the 21st century. There are fundamental realities that 
have changed. Indeed, the mailstream and sources of revenue by 
the Postal Service are getting attacked from all fronts, 
including electronically, as well as marketplace.
    Consequently, I, a free-trade guy by background and 
conviction, see the challenge that the Postal Service has in 
trying to satisfy all of these independent wants and needs. My 
view is very simple because I think it is the view of certainly 
what I represent and, hopefully, what all of the other folks in 
this room represent. All of us need a Postal Service, and it 
needs to grow in order to finance this infrastructure 
requirement.
    And, therefore, I take the view that we should think 
outside the box in terms of allowing the Postal Service to seek 
revenue sources, be more competitive, all, however, within the 
understandable limitations of antidiscrimination and all of the 
rest of it.
    Mr. McHugh. Thank you.
    Neal.
    Mr. Denton. Thank you, Mr. Chairman.
    I almost feel as though, when it comes to the question of 
whether or not we should support the letter monopoly or not, I 
should agree with the comments of Lewis Sachs from the first 
panel on this subject. [Laughter.]
    I think I find myself disagreeing with Mr. Kelly. His point 
of view on that is different from my constituents who see the 
strength of a national mail delivery network resting on the 
back of the letter mail monopoly.
    I smiled when I heard the one quote, ``Fix it, even if it 
isn't broke.'' I don't think that particular piece of the 1970 
act is something that my constituents would be interested in 
seeing us tinker with at this point. It is not that broke, and 
it is not something I think we ought to be looking at doing, as 
H.R. 22 does not.
    Mr. McHugh. Mr. Cerasale.
    Mr. Cerasale. I don't think that we are ready to see what 
the consequences are for elimination of the letter monopoly. 
And I think Mr. Kelly, especially in his oral presentation 
today, discussed the idea that the Postal Service should limit 
itself and be limited in looking to delivery of letter mail.
    One of the fears that we see is that we have heard numbers 
25 to 50 percent of first class mailstream is made up of 
something to do with remittance, a bill, a dunning letter, the 
check coming back. A good deal of that product is already under 
competition from other sources. So we see a significant peril 
to the underpinnings of the First Class Mail, on which we all 
depend. So I don't think we need to cut it out now. We need to 
try and move forward and allow the Postal Service some 
opportunities to try and shore it up.
    Mr. McHugh. Thank you all. Let me just ask a few questions 
that are based on your testimonies, and some of the 
suggestions, some of the concerns that you did raise. Jerry, 
you mentioned, what I believe I recall correctly, your opinion 
that a baseline case should not contain contingency and prior 
year losses, which obviously we agree with----
    Mr. Cerasale. Yes.
    Mr. McHugh [continuing]. And I agree with. But then you 
say, similarly, you felt that if a rate case were held any time 
within a year of the assumed baseline case that the rate case 
should prevail, true?
    Mr. Cerasale. Yes; I did.
    Mr. McHugh. First of all, first quick question, why do you 
think that is important?
    Mr. Cerasale. I think it is important to start off right 
away with some Rate Commission rate. So I think if a case the 
Commission has gone through has been in effect for--comes 
through and been in effect for about a year, to go through the 
entire process again and the delay of that, we probably would 
be beyond what the contingency and prior year losses are. So 
our view would be let us get started and let us get going right 
away.
    Additionally, there are costs to having a rate case, and we 
could avoid those if it is within that short period of time.
    Mr. McHugh. So the assumption you are making is that, and I 
left this unsaid, and for those who may not be aware, 
obviously, in a rate case, contingency and prior year losses 
are included----
    Mr. Cerasale. Yes.
    Mr. McHugh. As they would not be in the baseline.
    Mr. Cerasale. That is correct.
    Mr. McHugh. You feel the cost, both financially and 
probably emotionally, too, given what some of you folks endure, 
of a rate case, of doing another essential rate case, a 
baseline case, would be too high, and you would be willing to 
accept the inclusion of the contingency and prior year losses.
    Mr. Cerasale. Yes.
    Mr. McHugh. Let me follow up before you answer that. What 
concerns me, and what I am interested to know because I am sure 
you thought of it, is that a big concern, I think if we were to 
put that into the bill, I think the logical outcome is it would 
certainly be very tempting for the Postal Service to say, ``OK. 
Let's file a rate case'' within a year because they know that 
they then would be assured of prior year losses and 
contingency. I am assuming you made that calculation and, 
therefore, you say, ``Well, it may be, but given all other 
factors, we are willing to accept that.'' Am I correct in what 
I read?
    Mr. Cerasale. You are correct. I don't think any of us 
believe that a base case will come out with lower rates 
overall.
    Mr. McHugh. Neal.
    Mr. Denton. If I could comment on that.
    It is so rare when I disagree with Jerry Cerasale on 
anything. [Laughter.]
    Mr. McHugh. I am going to give you a chance in a minute 
more, so go ahead.
    Mr. Denton. I agree with the concept in H.R. 22 of allowing 
for a separate--a ``mother of all rate cases'' is what we would 
ultimately get out of this, I think. I speak not just for my 
organization, but for every attorney sitting behind me here 
that is involved in rate case litigation. I am not an attorney.
    We are concerned that not only would it carry on the prior 
year losses, which are dwindling more and more now all of the 
time, and that would lock that in forever, and the contingency, 
and you bring both of those up, and they are not included in 
H.R. 22. But I think some of our folks are also fascinated with 
the notion that this ``mother of all rate cases'' will be 
conducted with the Postal Rate Commission having these new 
authorities, having new subpoena authority.
    A lot of the problems that have frustrated us in these last 
few cases are problems that were alluded to by the second panel 
of gentlemen; that the Postal Service is good at obfuscating 
and disguising data. It is a curiosity, when you have the U.S. 
Postal Service generating every bit of data used in a postal 
rate case. You have the U.S. Postal Service massaging every bit 
of data used in a postal rate case. You have them parsing it 
out in little, bitty pieces as they see fit in a postal rate 
case.
    I like the notion of going into a full-blown final rate 
case knowing that the Postal Rate Commission will have the kind 
of subpoena authority that is outlined in H.R. 22.
    Mr. McHugh. Thank you. As you just said, Neal, you and 
Jerry so rarely disagree that we don't want to pass up an 
opportunity to--you don't have a disagreement. You have a 
difference of opinion.
    One of you believes, Neal, although I think it is fair to 
say you have still concerns of the unknown, that the concept of 
rate caps with the band in place in H.R. 22 meets most. I am 
not asking you to start whistling, you know, ``Blue Bird on My 
Shoulder'' here----
    Mr. Denton. We won't, don't worry.
    Mr. McHugh. I didn't think so. But meets most of your 
concerns. Whereas, Jerry feels, as you heard him in his verbal 
testimony, and it is in his written testimony as well, 
obviously, that the Postal Service needs more flexibility.
    So I will pose it this way: Neal, why don't you turn to 
your friend, Jerry, and tell him why he shouldn't be so 
troubled by this.
    Mr. Denton. As we began this process many years ago, the 
nonprofit community was as far away from agreeing with the 
notion of giving the Postal Service greater freedom and 
flexibility than the gentleman who sat in this seat before I 
sat down here.
    We have, over the many years, recognized some problems in 
the way that the Postal Service applies the preferred rate 
intent of the law to nonprofit rates. We see it now. We see it 
continually. I mentioned at the end of my testimony here, we 
see some problems with the enforcement of the eligibility 
restrictions.
    Someone used to tell me, ``just because you are paranoid, 
doesn't mean that they are still not out to get you.'' 
Nonprofit mailers are concerned about what could happen in an 
unfettered, free rate-setting environment if the Postal Service 
were able to get their hands on the preferred postal rate 
without the oversight of the Postal Rate Commission.
    What is built into the caps and the bands is the kind of 
protection that I think our folks need in order to be fully 
supportive of that freedom of flexibility. Those are the 
restrictions that, while Jerry would describe them as being too 
constrictive for nonprofit mailers, we would describe them as 
being protective, to prevent the type of situation that, 
frankly, we are living with now as a result of this last rate 
case; these January 10 increases, where the first class rate 
went up 1 cent, and the nonprofit standard A rate went up 3 
cents, where commercial rate mailers are enjoying 3- and 4-
percent rate increases and nonprofit charities and churches are 
looking at 15- to 18-percent or higher increases.
    We believe that the caps and bands type of arrangements, as 
described in H.R. 22, would prevent us from having to recognize 
that in the future.
    Mr. McHugh. Jerry, are you persuaded? Or turn to your 
friend, Neal, and say, ``Neal, here is why you should be more 
concerned.''
    Mr. Cerasale. Right. I will do that.
    I am not persuaded, but this line of questioning hits the 
area where in my testimony I say we have some several opinions 
on how to do things.
    I think as we look at the application of the bands in H.R. 
22, it goes down to the rate category level, we think. But the 
real key is that, in order to have any rate go above the index 
that is established, you must, in a year just prior to it, have 
that rate rise less than the index by a similar amount, thereby 
making the band really coming out to being just what the index 
is. And, therefore, some adjustments, those that Kam would say 
that their cost coverage is a little bit too high and maybe the 
Postal Service should be able to adjust for market purposes, it 
kind of puts a restraint on them.
    There are a couple of ways to look at some changes in how 
you would effect those bands. One is, you could establish the 
basket, which I think get to Neal's fifth basket there, the 
basket, and have the index apply to the basket. And underneath 
the basket every rate cell, basically, would be set within the 
bands, the 2 percent up, 2 percent down, above or below the 
index. That is one way of looking at it. And I think, from 
Neal's perspective on basket five, that is the problem he saw 
with standard A and publication mail being connected together.
    Another way to look at this would be to have the index 
apply to each subclass separately within the basket. I mean, I 
think a basket always has to be there so that it doesn't go 
above whatever the index is, but you can apply the index to 
each subclass, and then underneath it the rate categories can 
go above or below the index, the 2 percent. That would protect 
his subclasses of standard A and publication mail within a 
separate basket which, if the nonprofits agree with that, we 
have no problem establishing, from the Coalition's point of 
view, agreeing with the nonprofits to make a separate basket 
for them.
    I think another factor to, I think, cover one thing that 
H.R. 22 does, to try and not allow someone to constantly get an 
increase way above the index every year, which is why you had 
the saving provision in there, you might, another thought would 
be to put in a requirement that no rate could go above the CPI, 
which is different from the index, so that you can keep an 
inflation kind of cap or index on everyone, but still allow 
some flexibility for the Postal Service, in the noncompetitive 
classes, to make adjustments to the marketplace that aren't 
quite as constrained and rigid as those that appear right in 
H.R. 22.
    Mr. McHugh. Well, good. We have got a deal.
    Mr. Kamerschen. Do I get to cast the deciding vote? 
[Laughter.]
    Mr. McHugh. Sure.
    Mr. Kamerschen. Not really.
    Look, the subject it is hard not to agree with some of the 
points on both sides. If we got, like Mr. Smith, if we got our 
druthers, obviously--our particular Coalition--we would like to 
examine what Jerry just described as this modest increase in 
cost coverage difference of 203 percent versus 156. His idea of 
mathematics are different than mine, but so be it.
    We, as you know, support the price cap concept. We would 
have submitted a version, but, frankly, the Postal Service beat 
us to it in terms of a proposed amendment. We have the very 
simple point of view that the price caps and the bands allow 
certainly directionally the stability and the predictability 
that we talked about earlier, but at the same time, a kind of 
disregard to the economic realities of the marketplace that 
say, gee, at any given point in time, isn't there some plus or 
minus modification of those bands to allow the Postal Service 
the flexibility to protect volumes, build volumes or what have 
you.
    So, we would support the plus or minus variations of the 
bands and, second, we would support the notion of treating that 
on a basket basis as opposed to a subclass basis. This, in our 
view, is a modicum of flexibility for the Postal Service which 
is really a modicum of flexibility for the mailers that I 
represent.
    [Additional questions for the record follow:]
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    Mr. McHugh. Thank you, gentlemen.
    We have a fourth panel coming up, and they have been very 
patient for quite some time. So I don't want to impose upon 
them any longer.
    I want to thank you all for not just your appearance here 
today, but your active participation in this process, as I know 
you have experienced in the past. We are going to look at all 
of the things that you have stated, both for the record here 
today, and suggestions that we have talked about and that you 
wrote about in your statements, and try to do the best we can 
in continuing what I am now beginning to wonder is maybe a work 
in process, not progress, but we are moving along the calendar. 
So thank you, gentlemen. I appreciate it.
    Mr. Cerasale. Thank you for your 4 years of working on 
this.
    Mr. McHugh. It beats prison. [Laughter.]
    Mr. Kamerschen. Barely.
    Mr. McHugh. Barely, but it beats it. [Laughter.]
    Our final panel and, again, I appreciate their patience, is 
comprised of a very diverse group. First, the executive 
director of the Main Street Coalition for Postal Fairness, John 
T.--also known as Jack--Estes, who is accompanied by John F. 
Sturm, who is representing the Newspaper Association of 
America, and Lee Cassidy, National Federation of Nonprofits, 
and Joe Roos, the Associated Church Press--I hope we have 
enough chairs for all of these good people--and David Stover, 
Esq., from the Greeting Card Association, and Guy Wendler from 
the American Business Press, and Kenneth B. Allen of the 
National Newspaper Association and, finally, Charmaine Fennie, 
who is chairperson of the Coalition Against Unfair USPS 
Competition.
    Folks, I tell you what, please, before you all get settled, 
there are so many. Why don't you please stand, and if you will 
raise your right hands.
    [Witnesses sworn.]
    Mr. McHugh. The record will show half the room responded in 
the affirmative. [Laughter.]
    Which included all of the witnesses.
    Jack needs to be seated because he will be one of two of 
all of you who are actually presenting oral testimony. I 
believe I am correct all of the rest of you submitted written 
testimony. I recall reading a lot of testimony, and I think the 
number matches the people at the table, and I appreciate the 
work that went into that.
    Also, Ms. Fennie will be presenting as well. I believe I am 
correct on that. Is that true? Robert tells me I am correct.
    So, Jack, thank you for being here. And, again, it bears 
repeating. Thank you for your patience. It has been a long day, 
and you are very gracious in still remaining with us. We are 
looking forward to your comments. So, sir, you may proceed.

 STATEMENTS OF JOHN T. ESTES, EXECUTIVE DIRECTOR, MAIN STREET 
 COALITION FOR POSTAL FAIRNESS, ACCOMPANIED BY JOHN F. STURM, 
    NEWSPAPER ASSOCIATION OF AMERICA; LEE CASSIDY, NATIONAL 
 FOUNDATION; DAVID STOVER, THE GREETING CARD ASSOCIATION; GUY 
 WENDLER, AMERICAN BUSINESS PRESS; KENNETH B. ALLEN, NATIONAL 
   NEWSPAPER ASSOCIATION; AND CHARMAINE FENNIE, CHAIRPERSON, 
           COALITION AGAINST UNFAIR USPS COMPETITION

    Mr. Estes. Thank you, Mr. Chairman. I am relatively 
hesitant to start out this way, but I must beg your indulgence. 
I was just informed before the hearing started that Joe Roos, 
from the Church Press, took ill and will not be here.
    I am under oath, and I can assure you he is not with Mr. 
Sachs. In fact, he is not even near the Treasury Department. 
[Laughter.]
    Mr. McHugh. That latter bit of news is good. We appreciate 
that. The former, of course, is not, and we hope that it is 
nothing serious and that he recovers quickly.
    Mr. Estes. I don't believe it is. He got word to me that he 
just couldn't be here, and he was sick. If it is OK, he would 
like to submit a short statement for the record, and I told him 
I would ask.
    Mr. McHugh. Absolutely. It will be submitted into the 
record, and we will review that, of course, and wish him our 
best for recovery.
    Mr. Estes. Thank you.
    Mr. Chairman, in spite of your tireless efforts to improve 
postal reform and the Postal Service, both now and in the 
future, and in spite of our appreciation for advancing concepts 
which have forced all of us to look very carefully at what we 
believe to be the most precious aspect of the Postal Service; 
namely, the preservation of universal service, and in that 
regard, to put aside, in many cases, narrow self-interests and 
look at the broader national interests, and in spite of our 
appreciation for working with a truly professional, courteous, 
accessible staff, and I mean that in every sense of the word, 
in spite of all of those things, Mr. Chairman, we are unable to 
support H.R. 22 in the form in which it is introduced.
    We have come to that conclusion, as I am sure you know, not 
lightly. We have worked hard and long, not probably as hard and 
long as you have--probably few have in that regard. But we have 
asked ourselves a few key questions about why we have come to 
this conclusion.
    Really, the first one was whether or not, in our judgment, 
the Postal Service is destined to become obsolete in the near 
future. And our answer to that is, of course, no, but it will 
undergo some structural changes.
    We have asked ourselves whether the Postal Service will be 
unable to achieve its primary goal of providing universal 
service, and will it continue to provide such service. And our 
answer to that is, yes, again, even if there are some 
structural changes.
    And, finally, Mr. Chairman, we have asked if there is 
clearly currently no clear and present danger now threatening 
the Postal Service from fulfilling its mission, even though 
there may be some clouds on the horizon, should we nevertheless 
start to implement plans to anticipate a bumpy road? And our 
answer to that, sir, is, yes, we should.
    As I am sure you have noted in our statement to you, Mr. 
Chairman, we divided our position into really three categories. 
We listed, first of all, those areas where we thought we could 
move ahead now promptly with some of the reforms you have 
suggested. And without going into detail, those included the 
Postal Regulatory Commission reforms, the evaluation of the 
labor and management relations situation, relaxing some of the 
Treasury Department finance proposals--many of those, really, 
we looked at in the Cochran bill in the other body--and nailing 
down some of the Board of Directors' qualifications.
    But more importantly, and probably the meat of what we are 
presenting to you is that, for reasons discussed in our 
statement, it may be that there are other areas that need to be 
recast and that there needs to be some evidence that it should 
be present--the evidence should be present before we pursue 
them, and we listed those. Again, those were the ratemaking 
price caps, the baseline rate case, rate flexibility for 
noncompetitive products and market tests.
    Now, I said evidence, and obviously you are probably 
thinking, well, what more evidence could you possibly want or 
need or think would be desirable? The evidence that we are 
really looking for, Mr. Chairman, is evidence of true, harmful, 
immediate or potential competition. What type of competition? 
Is it e-mail? Is it electronic diversion? How serious is it? 
What classes does it affect? Is there truly out there today a 
serious concern that there is evidence of that type of 
competition that could seriously harm and perhaps, in some 
cases, disable the Postal Service? We think more work needs to 
be done in that area, and that is why we have taken the 
position that some of these areas need to be looked at 
carefully, and in some cases, maybe, as we have suggested, the 
provisions of the bill need to be recast.
    And then, last, Mr. Chairman, we have suggested that some 
of the reforms which you have proposed should be set aside, 
certainly for now, and that included testimony you have 
received earlier today on the USPS Corp. We do not believe 
negotiated service agreements are in the public interest, and 
we would hope that that would be set aside. And, of course, we 
are concerned about the bifurcation of the first class basket.
    So having said all of that, Mr. Chairman, our basic line 
really, our bottom line, is that there may be reasons to go 
ahead in some areas, but we do not believe that the bill has 
addressed some of the urgent needs that need to be justified 
before some of the provisions that should be enacted. It may 
not be an emergency, but there certainly should be an urgency.
    We think H.R. 22, Mr. Chairman, is cast in more of a 
predicting-the-future mode, and it really should be in cast in 
a planning-for-the-future mode. We are very aware that it is 
highly desirable to gather and evaluate the evidence and that 
we have urged you to do. We are also very aware that you are 
probably unquestionably, as stated, today, have no interest 
apparently in moving ahead with additional hearings.
    There are concepts in this bill, Mr. Chairman, which we 
find confusing, complex, difficult, based on, as I have said, 
evidence that we are not convinced is a matter of record. So we 
would hope that we could look--and one of the problems we are 
really struggling with, Mr. Chairman, is the implementation of 
some of these concepts. It is one thing to put it in a statute, 
as you well know. It is another thing to struggle with the 
implementation, and therein lies some real problems.
    I appreciate very much your agreement to have us assemble 
our ``dream team'' and come before you with an ability, 
hopefully, to respond to your questions. And at the appropriate 
time, I trust that ``the team'' would be able to react to 
whatever you have to say.
    [The prepared statement of Mr. Estes follows:]
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    Mr. McHugh. Thank you very much. Some dream. [Laughter.]
    I appreciate your comments, and we are going to hold to the 
practice of going to Ms. Fennie and allow her to make her 
statement and then--the reason we swore all of you in is that, 
clearly, in the Q&A we are not just allowing, we are interested 
in the comments that any or all of you may have.
    So, with that, Charmaine Fennie, as I mentioned before, is 
the chairperson of the Coalition Against Unfair USPS 
Competition.
    Welcome. Thank you for being here, and our attention is 
yours.
    Ms. Fennie. Thank you, Mr. Chairman, and members of the 
subcommittee. Thank you for the opportunity to be here today.
    I am Charmaine Fennie, chairman of the Coalition Against 
Unfair USPS Competition, and the Coalition strongly supports 
passage of H.R. 22 with certain changes. The Coalition 
represents the interests of more than 12,000 privately owned 
small businesses in all 435 congressional districts, including 
10,000 mail and parcel centers and 2,000 independently owned 
office supply stores. These businesses exemplify small business 
at its best.
    We feel that H.R. 22 represents the best effort at 
comprehensive postal reform. However, there are important 
changes that we feel need to be made. We feel that we must see 
elimination of the Private Law Corp. for prohibition against 
competition with small businesses. The need for a Private Law 
Corp. has not been proven. No compelling case for authorizing 
the Postal Service to begin complete and unfettered competition 
with the private sector has been made.
    The powers of the PLC are extraordinary. It can go into any 
business it wants, invest in any private company, and enter 
into joint ventures with any private corporation and could 
become a Fortune 500 company. The PLC can purchase any of our 
members or any of their stores. The Coalition opposes Congress 
authorizing a Government-owned corporation that can compete 
with our industry or purchase our stores.
    The Postal Service instituted its smallest rate case in a 
generation last January, 1 cent for First Class Mail. That rate 
hike is expected to generate an additional $1 billion in 
revenue annually. What would the PLC have to do to match this 
$1 billion in revenue? It would have to turn itself into a 
business, such as Merrill Lynch. The largest publicly traded 
brokerage house had a 1997 profit of $1.8 billion on gross 
revenues of $31.73 billion and was No. 24 on the Fortune 500 
list; or Sears, 1997 earnings of $41.36 billion, a profit of 
$1.18 billion, and it was No. 16 on the Fortune 500; or 
Motorola, No. 29, on the Fortune 500, with 1997 profits of 
$1.18 billion on earnings of $29.79 billion.
    Mr. Chairman, the record of the USPS in private business 
ventures is terrible. In 1997, the GAO reported an $84.7 
million loss on these new ventures. Even if the USPS were to 
turn its poor record completely around and make an $84.7 
million profit, it would have to increase that profit by 1,200 
percent to reach $1 billion. H.R. 22 should firmly direct the 
Postal Service to not compete with private business in new, 
nontraditional ventures.
    The Coalition respectfully requests that H.R. 198, the 
Postal Service Core Business Act be included in H.R. 22. H.R. 
198 firmly states that the Postal Service is to return to its 
core mission of delivering postal services and not be 
distracted by the new, nonpostal ventures. Another version of 
this legislation has been proposed by the Mail Advertising 
Service Association.
    Packing is one of the principal product lines for the mail 
and packaging members of the Coalition, and the Coalition does 
not believe that the Postal Service should be in the packaging 
business. The Postal Service estimates it will generate only 
$13 million annually on packaging. This profit will only be 
realized by charging no advertising revenue to the Service.
    Considering that the Postal Service's multi-million-dollar 
advertising budget, this seems very unlikely. This $13 million 
is barely 1 percent of the $1 billion generated by the 1-cent 
rate hike. The Postal Service would become the largest single 
packaging service provider with over 7,000 locations. It would 
offer packaging in most congressional districts represented by 
subcommittee members, including Philadelphia, Cleveland, 
Indianapolis, Brooklyn and Chicago.
    The Postal Service stated during the PRC proceeding that it 
would only offer packaging where it felt it could make a 
profit. This means only urban and suburban areas, where the 
private sector is already providing the service. The Coalition 
is unalterably opposed to the Postal Service providing 
packaging in competition with its members and requests the 
subcommittee to adopt language which would prevent the Postal 
Service from offering this service in direct competition with 
Coalition members.
    I would like to thank you, again, for the opportunity to 
testify. We feel H.R. 22 is very important to our members, and 
we urge action on the bill and these amendments as quickly as 
possible. It is our hope that this bill can be passed this 
year, so the implementation of postal reform can begin quickly.
    Thank you.
    [The prepared statement of Ms. Fennie follows:]
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    Mr. McHugh. Thank you very much.
    As I said, I have gone through all of your testimonies and 
found them all very compelling. The one interesting thing, out 
of many, that I come away with from this process is I have 
never been involved in anything where there were more greater 
number of opinions voicing so much disparity in views that were 
all correct. [Laughter.]
    And I take issue with none of you. I truly don't. The 
process we have been engaged in has been one of trying to go 
forward where we can and build the broadest base of support 
where possible. We have tried to do it in the most open and the 
most receptive process that was possible for us and 
particularly the folks over here, Robert, and Heea, and Tom, 
and so many others who have done such a great job.
    I think it is fair to say that we have dedicated to you, as 
individuals and the organizations you represent, dozens and 
dozens of hours trying to represent your versions. We are going 
to continue to do what we can and where we can. But where we 
don't it is not necessarily a lack of understanding of your 
views nor a lack of concern.
    I would ask you, Jack Estes, and if others of you speak for 
the record, please identify yourselves because you are such a 
large number, in fairness to the stenographer.
    You say there is not a pressing concern, and I understand 
that view. It is not falling apart. We are not in crisis. I 
think, frankly, that is one of our major challenges. You heard 
Kamerschen suggest that is the perfect time to go forward, but 
I don't think we can ignore certain realities. The Postal 
Service tells us that by the year 2000 they are going to lose 
what they estimate to be $38 billion transactions to electronic 
transfers and mostly in remittance mail. It is going to cost 
them $6 billion. That is a heck of a chunk.
    You heard, and many of you represent the interests, and Ms. 
Fennie certainly does, the great pain and pressure that private 
companies are under from what they have understandably come to 
know as a Postal Service monopoly that competes against them in 
ways that they find impossible to effectively respond to, and 
all of this is coalition building. I just don't know how we go 
forward without taking up the issue of a Private Law Corp. 
because I truly don't think that the environment in this 
Congress is such that you are going to pass through both Houses 
and have signed a bill that is going to restrict the Postal 
Service.
    So what you have is the choice of continuing where we are, 
which means that they can use their revenues to go into area, 
and Ms. Fennie's spoken and written testimonies attest to that 
very eloquently about their less-than-successful record, but no 
way to stop them.
    So the question is if we have the choice of doing H.R. 22, 
as construed, and understanding that we will try to do more 
things with it, or doing nothing, which is better in your 
environment?
    Mr. Estes. Let me say, first of all, Mr. Chairman, that 
many of the suggestions that we have advanced, particularly to 
Robert, many of them have found their way into the bill, and we 
are grateful for that. And your process has been open and fair. 
I just can't say enough about that.
    The question of whether or not there is an urgency to do 
something is one that really gnaws at us, and it is the 
corroboration of whether or not there is a real problem there. 
We hear from the Postal Service a conjecture that they will be 
faced with a revenue and volume loss because of certain 
competitive thrusts in years to come.
    But they are, in a sense, an interested party, and it may 
not be an unbiased party, but it clearly is an interested party 
that is making that conjecture. And one of the things we're 
struggling with is how can we bring to you, as the chairman, 
something that you can rely on and be comfortable with that is 
more than conjecture? Because the bill really does, as you 
know, and if you are right in that we will be faced with a 
serious problem, it turns our system on its ear in many ways. 
Now, that is not necessarily bad, but we have to be, I think, 
satisfied, and I think that is also important with respect to 
the acceptance level of the mailing community. That has to be 
raised.
    In our group, for example, in all honesty, that acceptance 
level for some of these reforms aren't there not because they 
may not be good reforms at the right time under the right 
circumstances.
    I think Ken wanted to say something.
    Mr. McHugh. As I said, for the record, identify both 
yourself and your organization.
    Mr. Allen. I am Kenneth Allen with the National Newspaper 
Association, and I am pleased to be here on behalf of America's 
community newspapers which inform and educate about 160 million 
people every week.
    I should also note that I am relatively new to the postal 
arena, and I have had quite an education in the last year.
    Mr. McHugh. It only gets better. [Laughter.]
    Mr. Allen. It is an exciting area, I can tell.
    Community newspapers have one major partner, and that is 
the Postal Service. Most of our members rely on the Postal 
Service because there is no alternative. And the fact is that 
without the Postal Service and without one that provides 
quality of service at adequate rates, there wouldn't be a lot 
of the community newspapers.
    We are not here today to defend the status quo. We are here 
today to find a solution to a viable Postal Service in the 
future. And I think our concern, as part of the Main Street 
Coalition, is that we need to find creative and innovative 
solutions, and H.R. 22 certainly has a lot of those in there. 
We are concerned, however, with the risks of implementing all 
of those at this time. We think you have accomplished a lot in 
the past 4 years, and we think there are pieces of it that 
should go forward.
    But there are also some risks to us. And from the point of 
view of community newspapers, let me just tell you what we look 
at, briefly, and what our concerns are. We have three concerns: 
One, that rates need to stay fair and equitable and that the 
quality of service needs to remain adequate. And we have some 
concerns about price caps, whether worksharing will provide 
incentives for the cost reductions that we see now.
    Second, we are concerned that our competitors don't get 
better rates than we do. That is why we are concerned about 
negotiated service agreements.
    Third, we are concerned about not competing with the very 
organization that delivers our newspaper, and that is the 
Postal Service.
    So when you look at all of those, we are concerned that the 
risks of going forward with such a comprehensive change may 
lead to the demise of many newspapers. And it is easy to say 
that if it is wrong, in 2 or 3 years we will change it, but 2 
or 3 years is a lifetime for many of the smaller newspapers in 
the country. And waiting that long to fix something I am 
concerned may not be adequate. So we want to work with you 
toward a solution.
    Mr. McHugh. I appreciate that, and I would never tell you 
don't be worried, 2 or 3 years we will fix it. I think too much 
of you, and all of this oath-taking may rub off on me, and I 
don't want to get caught in a perjurious statement.
    Just for my own interests, when you say it may help your 
competitor, whom are you considering your competitors?
    Mr. Estes. Our competitors are direct mail advertisers, the 
Internet, all sorts of media that generate advertising revenue. 
We have seen activities by the Postal Service in the past to 
promote direct mail advertising, for example, at the expense of 
newspapers, and we are concerned about that. We don't think 
that the Postal Service should be in the business of promoting 
one form of advertising or one form of mail over another.
    And with the Private Corp., we are concerned the Postal 
Service may get into advertising in other areas, in and of 
itself, and become a competitor.
    Mr. McHugh. I understand that. I mean, you have got 
situations that John Sturm can speak to about Auto Day and 
other things that, frankly, they are now legally empowered to 
enter into. I don't want to sound self-important here, the 
process that we are involved in, but I think one of the reasons 
that they agreed to withdraw was because we were involved in 
this process.
    The concern I would have, if I were in some of your shoes 
and seats, is what happens if we don't do something, what comes 
after? My view is that you are going to see, by necessity in 
their view, a far more aggressive Postal Service in the kinds 
of areas that you are concerned about. And, again, if your 
belief is that the Duncan-Hunter bill that you referenced on 
the Core Business Act, will be passed by both Houses and signed 
into law, then I guess your gamble is go with nothing. But I 
think that is a big gamble. No one asked me, but I am not sure 
that is what is going to happen.
    But I don't want to keep the rest of you from commenting.
    Mr. Stover. Mr. Chairman, if I may add something to Jack's 
answer. David Stover, the Greeting Card Association.
    Mr. McHugh. Yes, sir.
    Mr. Stover. The question of whether it is time to reform 
the system, in light of how far off or how near the competitive 
threats from electronic media are, I think also has to be 
looked at in terms of whether reforming the ratemaking system 
is the way to meet that particular threat.
    A First Class letter today costs between 23.8 and 33 cents 
to send, depending on what rate category it is in. If the same 
information can be transmitted over the Internet to the 
satisfaction of the sender and recipient, it is difficult to 
see how any foreseeable rate reduction can compete on pure 
price with that electronic transaction, which perhaps costs a 
penny or two to execute.
    As a rate lawyer of many years standing, I am afraid, like 
a lot of people, I tend to assume that price is everything and 
that what is really important is how you make the price. But I 
think maybe we need to step back and see what the problem is 
that we are trying to cure before deciding that ratemaking 
reform is the only solution we need to consider.
    Mr. McHugh. Sir?
    Mr. Cassidy. Mr. Chairman, first, I think it is important 
to note----
    Mr. McHugh. Pardon me. Please identify yourself and your 
organization. Thank you.
    Mr. Cassidy. Yes, sir. I am Lee Cassidy. I am executive 
director of the National Federation of Nonprofits.
    Mr. McHugh. Thank you.
    Mr. Cassidy. I think it is important to note that you have 
already made an indelible mark on the Postal Service by 
establishing a piece of the original legislation. I guess it 
was H.R. 3717, that piece being the inspector general, and that 
was a critically important step. Now, we have talked here some 
about implementation. In the case of the implementation of 
deregulation of other utilities, and the Postal Service must be 
considered basically a utility, we have had supervision of that 
implementation by an existing Regulatory Commission, usually 
within the States, in some cases nationally.
    I would like to suggest, sir, that the next critical step 
is the strengthening of the Postal Rate Commission to create 
the Postal Regulatory Commission, as you have proposed in H.R. 
22, to give that Commission significantly greater power in 
order to supervise the implementation of many of the--and maybe 
most, and perhaps all--of the reforms that are included in the 
rest of the bill.
    Had the Commission had those additional powers, the 
problems that we talked about in our testimony of the Postal 
Service not accurately estimating its costs, not accurately 
proposing rates; those problems, we believe, would have been 
largely corrected by a stronger Postal Rate Commission. And so 
from our standpoint, we see that as the next critical step and 
one that would permit a much smoother implementation of all of 
the other reforms.
    Mr. McHugh. Well, obviously, I agree that is an important 
step or it wouldn't be in the bill. I don't want to leave 
anybody with the impression that, in our interest of making 
progress, being creative, and building a coalition, that we 
have done anything that would be unacceptable in and of itself.
    The problem with your suggestion, I would suggest, or the 
difficulty of it, is that many people who find other parts of 
the bill less attractive find that one very attractive, and if 
you portioned that out, then they all of a sudden become far 
less interested in the other parts, and you start to pull the 
puzzle apart.
    The fact of the matter is we were very fortunate, with a 
lot of help from Senator Ted Stevens, and a number of others on 
the IG, to do something that was--correct a situation that was 
totally unique in the Federal Government; that is, an 
organization the size of USPS did not have its own inspector 
general. I think it was a once in a one of those lifetime 
moments.
    And the Postal Service, and its workers and other segments 
honestly believe, and strongly believe, on the opposite side of 
where you are, that the PRC is far too powerful now, that they 
have never obfuscated data, and that the only thing at risk 
here is proprietary information that would be used to further 
diminish their standing by those who wish them to do not so 
well, et cetera. The problem being I don't think we could pass 
it by itself.
    So that is the challenge in virtually all of these, that 
this is a stew or it is a bad plate of green meat in the 
corner. I mean, together we can make a nice stew, the parts 
separately, you know, your mother wouldn't serve it to you. So 
that is the frustrating part from here.
    And when I say, again, I don't disagree with anything any 
of you are saying, that is the challenge.
    Mr. Wendler. Mr. Chairman, my name is Guy Wendler. I am 
president of Stamats Communications in Cedar Rapids, IA. We 
publish four business magazines and are a member of the 
American Business Press. The American Business Press has about 
100 member companies, and we publish a 1,000 magazines. Typical 
circulation would be 50,000/60,000. An example of that would be 
our Buildings Magazine that might be read by somebody who is 
responsible for managing this building right here. Some of the 
editorial that we have in Buildings would be on indoor air 
quality, security, safety, things like that.
    We very much appreciate the initiative that you are taking 
in trying to keep the Postal Service competitive and viable in 
the future because we depend 100 percent on it. I have no other 
choices to mail my magazines and none of the other members have 
any choices to mail the magazines as well. So we applaud your 
efforts in that regard, and we see some good things in the 
bill, such as strengthening the Postal Rate Commission.
    In the spirit of perhaps providing you some of our insights 
on why we are concerned with the current bill, the last two 
ratemaking proceedings that went on in the periodicals class, 
basically, involved an issue between the small circulation 
magazines and the large circulation magazines. We looked to the 
Postal Rate Commission to protect our interests there and I 
think protect public policy interests of unzoned, flat 
editorial rates.
    We are concerned that if we move to the indexed sort of 
system, we will lose some of that protection, and the Post 
Office will be able to accomplish some of the things that they 
haven't been able to in the last two rate cases, which really 
aren't being driven necessarily by competition.
    We are also concerned in that it is unclear as to how the 
indexing will occur, whether it will be by basket, by class, by 
subclass, and that could have a major impact on the smaller 
circulation publications, and I wanted to share that with you. 
I thank you for all your efforts that you are making with this, 
and we hope you do make progress on it.
    Mr. McHugh. I appreciate that, and I appreciate both your 
comments and the supportive nature of them and the process that 
you have been a part of and your organization has been a part 
of.
    If I, honestly, could see how to more effectively guard 
against the thing you just stated you were concerned about, I 
would do it. I think you heard the prior panel where, if 
anything, a large class of mailers, who are highly dependent on 
the Postal Service as well, feel that the index, coupled with 
very tight banding that was suggested by some of you, by the 
way--we didn't dream it up--is too inflexible.
    If you make the assumption that your baseline rate case is 
fair and the PRC at that time presumably would have the 
increased powers that you support, so it would have a far 
better opportunity to produce a fair outcome in the baseline 
case than it presently does, then from that point forward, you 
are much more insulated against any--I mean, it becomes a 
matter of mathematics, not a matter of the whims of the Postal 
Service.
    So my point would be, if there are ways in which you want 
to talk about becoming even more strict with the index and the 
band, we will be happy to talk about that. But you have heard 
the problems that raises with other people who are very 
dependent upon the Postal Service, as well. You heard who they 
represented. So my point being, I don't discount the concerns 
you have. I truly don't. What I am searching for is a way in 
which we can meet those concerns, so they are not totally 
disruptive to the other effort. But let me move on to another 
point, if I may.
    I think there may be an exception or two, but most, if not 
all of you, expressed concerns about discriminatory pricing on 
negotiated service agreements. Here, too, is an area that I am 
very concerned about. It is a troubling aspect for you, so, 
therefore, it is for me as well.
    You heard Mr. Kamerschen, who came here today to try to 
propose a way by which he felt it was a win-win situation to 
take a different tack on NSA's because he felt the language 
that we have in here is so tight that it is going to preclude 
any real benefit. I would ask if any of you have suggestions as 
to the approach we have taken on NSA's, as to what more we can 
do to prevent discriminatory pricing because, frankly, with the 
components of the current NSA that we have in there, I think we 
have pretty well covered that, but I want to learn.
    Mr. Allen. I am not going to say that there aren't some 
changes that could be made to tighten them up. Our concern 
comes back to the issue that, as we see the negotiated service 
agreements, they will primarily benefit the large-volume users.
    Mr. McHugh. But let me interrupt you because the 
requirement of the bill suggests that all similarly situated 
mailers have to be eligible for the same NSA, and beyond that, 
all discounts that derive from that singular NSA must be driven 
to those who don't get the discounts, as well. So it is a 
requirement that any benefit from the NSA be equitably 
distributed across the entire universe.
    Mr. Allen. But it is my understanding that you have to, 
once the NSA is negotiated, that you have to file for the 
similar discount; is that not correct?
    Mr. McHugh. On the NSA itself?
    Mr. Allen. Yeah.
    Mr. McHugh. If I understand your question correctly, it has 
to go with PRC prior approval.
    Mr. Allen. And then the individual users will get the 
benefits without any further proceeding?
    Mr. McHugh. If it is approved by the PRC.
    Mr. Stover. May I----
    Mr. McHugh. What I am saying is, if there is, and we assume 
the PRC will approve NSA's that are of benefit, if there is a 
savings and a benefit of the discount to the individual NSA, 
that discount benefit has to be driven back to all mailers.
    I don't know how else we would do that. It is not like 
there will be a single beneficiary. The entire mail universe 
will benefit.
    Mr. Stover. David Stover, again, GCA.
    You, Mr. Chairman, mentioned the proposal made by Mr. 
Kamerschen in his testimony earlier. I did have a reaction to 
that. As I understand it, it would loosen the language in H.R. 
22 so that the NSA mail would not have to pay the same 
contribution per piece as all other mail of that category. But 
the contract volume would have to pay the same total dollar 
amount into the institutional cost pool. This means that as the 
contract volume grew, which Mr. Kamerschen expected that it 
would, the per piece contribution, of course, would go down.
    There was a long discussion, as I recall, in the 
reclassification case at the PRC about 4 years ago, in which 
the question, what is a fair standard for contribution, was 
discussed; and there the conclusion was that you could look at 
that per piece contribution, and if that was equal, you had 
fair rates.
    So I don't think that you need to slacken your own language 
in order to achieve fairness in that regard.
    Mr. McHugh. In fairness to Mr. Kamerschen, I don't want to 
sit here and critique his bill in a negative sense without 
going back and giving it the fair consideration it deserves, 
but I don't know that I disagree with what you have just said. 
But that is not in the bill. I am concerned, and I don't 
believe you were addressing that when you all submitted your 
testimony on H.R. 22 with respect to NSA's.
    Mr. Cassidy.
    Mr. Cassidy. Mr. Chairman, I concur with Mr. Stover's 
comments about NSA's. But apart from NSA's, if I understood 
your question correctly, it is, ``does the basic pricing system 
contribute to the elimination of or does it eliminate 
discriminatory pricing?'' And there are some special provisions 
in there relating to nonprofit mailers, and I can say that, 
from our standpoint, it is a vast improvement over what we have 
now. And while I am sure if we studied it for another 4 years 
we could come up with some minor refinements, we find that it 
is something that we certainly can live with, and we would be 
reasonably happy with.
    Mr. McHugh. Well, I am glad I asked.
    Mr. Wendler. I do have a comment----
    Mr. McHugh. I said I am glad I asked. I am sorry, Lee. I 
didn't know if you were--go ahead.
    Mr. Wendler. On the NSA's and predatory pricing, one of the 
things to consider is relative bargaining power. My card is not 
in the Rolodex of the postmaster general. So if I wanted to 
call and try and negotiate something, I probably couldn't do 
that. And in terms of being protected by somebody else 
negotiating something like that and it being available to my 
company, it may not because we don't have the mailing density 
to a particular area, so we may not be able to take advantage 
of any of those things.
    Mr. McHugh. I couldn't agree more with the fact that not 
every mailer will be able to directly participate in NSA's. 
Clearly, that isn't going to happen, and there is no way you 
can legis--I mean, I guess we could legislate and the 
Postmaster General shall provide a business card to all 
mailers, but I don't think there's any way we can address that.
    But the point about discriminatory pricing I think is that, 
if you were able, or any two mailers were able to participate, 
on the one hand, you cannot negotiate an NSA with one and 
exclude the other, or if it's 10 or 20 or 100, however many 
wish to. I would suggest that this may, in fact, open up 
avenues for negotiated service agreements that small business 
people--and, believe me, I mean that as a compliment, not an 
insult--but small business people probably don't have the 
opportunity to go out and negotiate, and develop and think 
about, and it could be done for them by others. Then they'd 
look at the menu of approved NSA's and say, gee, I might be 
able to benefit from that.
    But even if you don't, under the unit contribution to 
institutional costs, you still benefit because it goes back as 
a unit-cost contribution that benefits every mailer. That is 
what we are looking at--protections, the bottom line, ladies 
and gentlemen. When you say you are concerned about 
discriminatory pricing, I am as well. We have tried to address 
that in a very direct manner, and Mr. Cassidy's points are well 
taken to the extent that we could sit here and theorize on 
things for the next 4 years, and ultimately we would come up 
with nuances of change.
    But if there are ways by which, other than saying we can't 
do this, I mean, that is legitimate, and if that is your 
choice, I accept that. But, if there are ways in which we can 
change NSA's to your benefit and to the point of concern of 
nondiscriminatory pricing, that is a vitally important issue 
that moves us deeply. That says a couple of things; one, it is 
important and, two, our lives are moved by strange things. But 
we want to be helpful.
    John Sturm.
    Mr. Sturm. I just thought I would offer this comment, Mr. 
Chairman, because you just sort of said it. I am John Sturm 
from the Newspaper Association of America.
    I guess Mr. Kelly said it a couple of panels ago, when he 
was talking about the division that this bill makes between 
competitive and noncompetitive services. One wonders whether if 
you, as Congress would do in this bill, made that choice and, 
indeed, you had price competition in competitive services. Why, 
in fact, do we need to go away from the current system in 
noncompetitive services? In other words, it strikes me that a 
lot of this is great concern about areas in which, for reasons 
that were detailed in the earlier panel by Mr. Kelly and Mr. 
Smith, there is a highly competitive business in parcel 
delivery, and I think they did a very good job of tracing the 
history of that.
    I look, then, at noncompetitive. You made a choice. You 
have put mail in different packages, and why we need to go down 
the route, if you will, of negotiated service agreements in 
noncompetitive mail when, in fact, at least to a lot of us, it 
poses the risk, at least, of being in a situation where either 
we don't qualify or we are going to be asked to pay for the 
discounts that are given to somebody else. And that's, I think, 
the great concern here.
    Mr. McHugh. You had me until the end. Well, you can make 
the argument, and I would be the first to admit the newspapers 
are in a very unique situation competitively in that, when you 
make the statement, we may pay for the discounts, you could 
make the argument, I suppose, that lost revenues because of 
lost advertising mail would be a way you would pay. But I would 
take exception if you meant by that, however, that you would 
pay for the discounts as a mailer because, as I said, we have 
the unit contribution requirement that, in fact, would be 
driven back to benefit you.
    And, John, you and I have had long conversations and, as I 
understand it, we are going to have another one----
    Mr. Sturm. Probably more.
    Mr. McHugh. I understand the unique situation that you have 
with the Postal Service and the question of advertising mail. 
But in what we call the noncompetitive areas, there are many, 
many mailers who, I think, would want to be classified that 
way, historically have been, and probably the rationale should 
be, who have no other real choice, who could, in fact, benefit 
from NSAs and could benefit, I would argue, under the way in 
which we have structured it to the inurement of the entire 
postal system. But we did, we made choices, no question about 
it.
    Mr. Sturm. My only suggestion would be, perhaps you had it 
right the first time when you didn't include NSAs in the bill.
    Mr. McHugh. Perhaps we did. I don't question your right to 
question us.
    Well, if nothing else today, we have proven, as Will Rogers 
said, ``If two people agree all of the time on everything, one 
of them is unnecessary.'' So I guess we are all pretty 
necessary. [Laughter.]
    So, unless one of you would like to make an additional 
comment, we will look at your suggestions.
    I want to repeat, again, particularly on NSAs and the issue 
of discriminatory pricing and other such key issues, we want to 
try to do the best job we can. So we are looking forward to 
working with you.
    Let me just close by saying Jack made some comments about a 
new process, perhaps he didn't say it in so many words, but I 
certainly got the indication he felt we ought to have some more 
hearings. We have talked about this Competitive Products Fund 
since it was first discussed in an opening hearing we held back 
in I believe it was September 1997, and then it was first 
proposed a year ago--Private Law Corp. is what I am supposed to 
be mentioning--a year ago in December, and we have had several 
hearings, including this one.
    And I, in no way, diminish the concerns that you have, but 
I think, when you couple the relative age of the proposal and 
the numbers of hearings we have had, and the repeated 
opportunities that we have provided and, thankfully, you have 
accepted to talk about this issue, that we really have, after 
4-plus years now, reached a time when we have got to start 
making some decisions about that.
    So, as my opening statement said, I still believe, and I am 
always willing to learn, but I still believe we may have come 
to the public hearing end of the road, but we are only at step 
one on the legislative side, and we have not yet drafted a 
final bill. I think it is fair to say that when we first 
introduced H.R. 22 as a new proposal a little more than a year 
ago, a lot of individuals were fairly surprised at the depth of 
changes we made.
    If nothing else, I hope you will admit it shows that we are 
listening to a lot of people, and we are going to continue to 
do that. I am not making any predictions, but I am suggesting 
to you that we are going to try to be as open and as receptive 
as we can.
    Jack, are you just showing me your pen or did you want to 
say something?
    Mr. Estes. I was just showing you my pencil.
    Mr. McHugh. It is a nice pen. [Laughter.]
    Mr. Estes. I would like to say that these have not been 4 
wasted years. I mean, really, we have made progress, and a lot 
has been done, a lot has been accomplished. As I said earlier, 
we, unfortunately, are uncomfortable about some of the major 
thrusts of the bill.
    Mr. McHugh. I understand that, and I hope I never suggested 
that I do disrespect that because I don't. And I don't feel 
they have been wasted. It has been a fascinating opportunity 
for me. I have worked with some terrific people.
    We will go to markup, and there is a time to say it, but 
the times I have looked bad are my own fault. The times I may 
have looked good, it is because of these people here. A 
tremendous staff. I have never been so fortunate in nearly 30 
years in public office and public life to work with more 
caring, more thoughtful and hardworking folks. So I want to 
thank them for a great job, and you know them all. Robert, and 
Tom, and Steve is here. So many who go back ever since Bill 
Clinger made that ill-fated call back in 1993. That will teach 
you to answer the phone, folks. [Laughter.]
    Thank you very much. We will be in touch.
    [Additional questions for the record follow:]
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    Mr. McHugh. The hearing is adjourned.
    [Whereupon, at 4:31 p.m., the subcommittee was adjourned.]
    [The prepared statements of Mr. Sturm, Mr. Cassidy, Mr. 
Stover, Mr. Wendler, Mr. Allen, Mr. Dzvonik, Mr. Disbrow, Ms. 
McFadden, and Mr. Williamson, and additional information 
submitted for the record follow:]
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