[Senate Hearing 106-762]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 106-762

            E-COMMERCE ACTIVITIES OF THE U.S. POSTAL SERVICE

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



                                HEARING

                               before the

               INTERNATIONAL SECURITY, PROLIFERATION, AND
                     FEDERAL SERVICES SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 7, 2000

                               __________

      Printed for the use of the Committee on Governmental Affairs


                    U.S. GOVERNMENT PRINTING OFFICE
67-998 cc                   WASHINGTON : 2001
_______________________________________________________________________
For sale by the Superintendent of Documents, Congressional Sales Office
         U.S. Government Printing Office, Washington, DC 20402




                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   FRED THOMPSON, Tennessee, Chairman
WILLIAM V. ROTH, Jr., Delaware       JOSEPH I. LIEBERMAN, Connecticut
TED STEVENS, Alaska                  CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine              DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio            RICHARD J. DURBIN, Illinois
PETE V. DOMENICI, New Mexico         ROBERT G. TORRICELLI, New Jersey
THAD COCHRAN, Mississippi            MAX CLELAND, Georgia
ARLEN SPECTER, Pennsylvania          JOHN EDWARDS, North Carolina
JUDD GREGG, New Hampshire
             Hannah S. Sistare, Staff Director and Counsel
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
                     Darla D. Cassell, Chief Clerk

                                 ------                                

      INTERNATIONAL SECURITY, PROLIFERATION, AND FEDERAL SERVICES 
                              SUBCOMMITTEE

                  THAD COCHRAN, Mississippi, Chairman
TED STEVENS, Alaska                  DANIEL K. AKAKA, Hawaii
SUSAN M. COLLINS, Maine              CARL LEVIN, Michigan
PETE V. DOMENICI, New Mexico         ROBERT G. TORRICELLI, New Jersey
ARLEN SPECTER, Pennsylvania          MAX CLELAND, Georgia
JUDD GREGG, New Hampshire            JOHN EDWARDS, North Carolina
                   Mitchel B. Kugler, Staff Director
              Richard J. Kessler, Minority Staff Director
                      Julie A. Sander, Chief Clerk




                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Cochran..............................................     1
    Senator Edwards..............................................    25
Prepared Statement:
    Senator Akaka................................................     2

                               WITNESSES
                      Thursday, September 7, 2000

Bernard L. Ungar, Director, Government Business Operations 
  Issues, U.S. General Accounting Office.........................     3
John Nolan, Deputy Postmaster General, U.S. Postal Service.......    10
Edward J. Gleiman, Chairman, Postal Rate Commission..............    12
Robert E. Rider, Vice Chairman, Board of Governors, U.S. Postal 
  Service........................................................    17

                     Alphabetical List of Witnesses

Gleiman, Edward J.:
    Testimony....................................................    12
    Prepared statement...........................................    56
Nolan, John:
    Testimony....................................................    10
    Prepared statement...........................................    49
Rider, Robert F.:
    Testimony....................................................    17
    Prepared statement...........................................    72
Ungar, Bernard L.:
    Testimony....................................................     3
    Prepared statement...........................................    35

                                APPENDIX

Karla W. Corcoran, Inspector General, U.S. Postal Service, 
  prepared statement with attachments............................    76
GAO report entitled ``U.S. Postal Service: Postal Activities and 
  Laws Related to Electronic Commerce,'' dated September 2000....    90
Copy of a study submitted by Mr. Gleiman entitled ``Postal 
  Enterprise: Post Office Innovations with Congressional 
  Constraints, 1789-1970,'' by Richard B. Kielbowicz, Associate 
  Professor, School of Communications, University of Washington, 
  Seattle, WA, dated May 30, 2000................................   168

 
            E-COMMERCE ACTIVITIES OF THE U.S. POSTAL SERVICE

                              ----------                              


                      THURSDAY, SEPTEMBER 7, 2000


                                 U.S. Senate,      
              Subcommittee on International Security,      
                   Proliferation, and Federal Services,    
                      of the Committee on Governmental Affairs,    
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:38 a.m. in 
room SD-342, Senate Dirksen Building, Hon. Thad Cochran, 
Chairman of the Subcommittee, presiding.
    Present: Senators Cochran and Edwards.

              OPENING STATEMENT OF SENATOR COCHRAN

    Senator Cochran. The Subcommittee will please come to 
order.
    I want to welcome everybody to our hearing that we have 
convened today. Our Subcommittee is here to review a report 
that has been compiled by the General Accounting Office on the 
electronic commerce activities of the U.S. Postal Service.
    The Postal Service has been aware that the growing use of 
the Internet and electronic technologies is a new problem for 
it as it tries to deal with challenges that are presented with 
these new alternatives to traditional services that have been 
performed and provided by the Postal Service. At a hearing we 
had earlier this year, the Postmaster General said that 
information showed that these factors will cause a drop in mail 
volume and revenue for the Postal Service.
    For some time now we have been working to help ensure that 
the Postal Service conducted its business so that it wouldn't 
have to rely upon the infusion of Federal tax dollars to 
subsidize its operation. The Postal Service has done a very 
good job in recent years in achieving that result--operating 
without the benefit of direct subsidies from the Federal 
treasury. And so this new development is one that presents both 
problems and challenges for the Postal Service, according to 
information that has come to the attention of our Subcommittee 
in previous hearings.
    So the Postal Service, in searching for ways to continue to 
react to the demands of the American public and businesses, is 
trying to decide how it can reduce costs, increase revenues, 
and develop a range of e-commerce products and services that 
supplement its traditional mail services to the public. One 
question that has arisen from competitors who are also 
embarking upon new business ventures in these areas is whether 
or not this is appropriate competition for the Postal Service 
to embark upon, and whether or not it is consistent with 
existing laws and regulations on the subject.
    To try to answer these questions, our Subcommittee asked 
the General Accounting Office to look into these issues and 
give us a report so that we could better understand the legal 
issues that arise from these activities. So that's why we are 
here today. We have an opportunity today to examine the results 
of the GAO's review and its report, which I hope will serve as 
a foundation for continuing oversight of the Postal Service and 
its activities.
    On our first panel today is a witness who is representing 
the General Accounting Office. He is Bernard Ungar, Director of 
Government Business Operations Issues, who will present the 
GAO's report. Then we will hear from a panel of witnesses that 
includes John Nolan, Deputy Postmaster General of the U.S. 
Postal Service; Ed Gleiman, Chairman of the Postal Rate 
Commission; and Robert Rider, Vice Chairman of the Board of 
Governors of the U.S. Postal Service.
    We welcome all of our witnesses and we appreciate very much 
your providing us with prepared statements which we will 
include in the record in full. And we encourage you to proceed.
    Before proceeding, let me point out our distinguished 
Ranking Member of the Subcommittee is not able to join us 
today. Senator Akaka, from Hawaii, has just recently undergone 
replacement hip surgery. He is doing well but the physicians 
suggested that he not yet embark upon a long flight from 
Honolulu to Washington. So he is not here. We do have a written 
statement from him which will be placed in the record at this 
point.
    [The opening statement of Senator Akaka follows:]
                  PREPARED STATEMENT OF SENATOR AKAKA
    Thank you, Senator Cochran for your leadership and direction in 
holding today's hearing on a topic of great importance to the American 
public: The Postal Service's E-commerce Activities. As the Ranking 
Member of this Subcommittee, I am a strong advocate of the U.S. Postal 
Service and understand why Headquarters is pursuing electronic commerce 
initiatives. We are witnessing dramatic changes in government and 
business because of the profound technological transformation of our 
society and world. The ability of the Postal Service to meet these fast 
paced challenges in a highly complex and competitive environment, while 
sustaining its commitment to providing universal service, highlights 
the dedication and professionalism of the more than 800,000 Postal 
Service employees. I hold them in the highest regard and commend their 
exemplary service to our Nation.
    Today's hearing focuses upon the legality, propriety, and 
advisability of the Postal Service's development, implementation, and 
expansion of e-commerce initiatives. There is no question that the 
Postal Service is a leader in utilizing the latest technology and the 
best logistical and marketing strategies to sustain and improve the 
core services. The innovative range of e-commerce initiatives 
implemented and planned by the Postal Service is impressive. There is 
great debate, however, about whether these enterprises are consistent 
with the laws and regulations under which the Postal Service operates 
and whether the Postal Service's entry into the e-commerce arena best 
serves the public interest.
    As the Postal Service becomes more involved in e-commerce 
activities, I want to know how the Postal Service plans to safeguard 
its customers' personal and financial information. This is a growing 
concern of the American public. In recent polls, nine of ten Americans 
expressed concern about threats to their personal privacy and eight of 
ten believe they have lost control over how companies use their 
personal information. There are a number of privacy related bills 
pending in Congress to address this rising concern. It is my hope that 
the Postal Service is employing the strongest safeguards available. Our 
citizens believe in the Postal Service and entrust the Postal Service 
with a wide range of personal information for safe and secure 
transmittal through the mails. I know the Postal Service wants this 
trust to extend into its e-commerce activities, and I look forward to 
working with postal officials to guarantee the highest level of 
electronic privacy standards.
    I am also interested to find out what steps the Postal Service is 
taking to remedy the inconsistencies turned up by the Government 
Accounting Office's audit of the processes for review and approval of 
postal e-commerce initiatives. There appears to be unreconciled 
accounting of how an e-commerce activity is approved, as well as 
concerns that some e-commerce initiatives fall outside the realm of 
approved postal services.
    The exponential growth of the Internet, e-commerce, and electronic 
communications will impact the Postal Service's ability to maintain 
universal service at reasonable rates. It is interesting to note that 
the two highest volume areas--bill presentment and payments and 
advertising mail, are also the most vulnerable to electronic 
alternatives. Without adapting to change, and quickly adopting 
strategic solutions, the Postal Service risks the possibility of loss 
of market share and erosion of its core business. I believe the key 
question we need to answer is how the Postal Service should implement 
change in the 21st century. I look forward to working with the Postal 
Service and GAO in this endeavor.
    Thank you, Mr. Chairman.

    Senator Cochran. Now, Mr. Ungar, we welcome you 
specifically and encourage you to proceed to present the 
report.

TESTIMONY OF BERNARD L. UNGAR,\1\ DIRECTOR, GOVERNMENT BUSINESS 
       OPERATIONS ISSUES, U.S. GENERAL ACCOUNTING OFFICE

    Mr. Ungar. Thank you, Mr. Chairman. We are pleased to be 
here today to help the Subcommittee in its oversight efforts 
with respect to the Postal Service's e-commerce initiatives.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Ungar appears in the Appendix on 
page 35.
---------------------------------------------------------------------------
    With me are the staff who worked on our assignment. They 
assure me they are right behind me--I think they are way behind 
me--Teresa Anderson, Ken John, Casey Brown, Angela Davis, and 
Hazel Bailey, who I would like to thank very much.
    Our report,\2\ which was done at your request and at the 
request of the House Subcommittee on the Postal Service, was 
issued today, as you know. What I would like to do is summarize 
briefly four issues that we discuss in this report. Before I do 
that though, I would like to provide some context for those 
issues to be discussed within.
---------------------------------------------------------------------------
    \2\ The GAO report entitled ``U.S. Postal Service: Postal 
Activities and Laws Related to Electronic Commerce,'' dated September 
2000 appears in the Appendix on page 90.
---------------------------------------------------------------------------
    The Postal Service, like many other organizations today, 
both government and in the private sector, is in the early 
stages of actually formulating and developing its e-commerce 
program. A number of initiatives have been undertaken by the 
Postal Service over a several year period, in fact, going back 
even into the 1980's, on an individual case-by-case basis. But 
it has just been in the last several months that the Postal 
Service has been trying to put together a program of 
initiatives.
    It has been in the process, again in the early stages, of 
sorting through that, trying to identify and define these 
initiatives, trying to organize and get a strategy laid out. 
And it has made progress in a number of respects. It has 
defined in the last several months some very broad goals for 
this program. It has identified some strategies that it wants 
to pursue. It has identified certain expected results it would 
like to see from some of these initiatives. It has set up an 
organizational structure to specifically review and approve e-
commerce initiatives, and it has set up a separate review 
process for them.
    At the same time, it is still in the process of making lots 
of decisions and trying to see which initiatives it wants to 
pursue and not pursue. And it has still not yet developed an 
overall strategic plan for this area, but it is in the process 
of doing that.
    With that backdrop, the first issue that I would like to 
discuss has to do with a number of e-commerce initiatives that 
the Postal Service has underway currently.
    According to the Postal Service, the number is seven, and 
we have outlined those both in our statement and in our report. 
However, the Postal Service identifies these seven within a 
framework of a broader category that it has labelled 
``eBusiness'' which constitutes a whole variety of different 
initiatives or efforts, some of which the Postal Service has 
talked about as infrastructure, meaning enablers, to provide 
the Postal Service with the technological capability, for 
example, to do some of these, and some of these are service 
enhancements.
    The Postal Service has come up with a definition of e-
commerce which is basically the use of the Internet to generate 
revenue, in a simplistic fashion. Unfortunately, what we found 
during the course of our work was that the Postal Service had 
not consistently applied this definition to the seven 
initiatives. For example, it has identified Stamps Online as e-
commerce, but an eBay auction of stamps was not e-commerce. So 
we had a great deal of difficulty trying to determine exactly 
what the number of e-commerce initiatives is, and we were not 
able to do that. I would point out again that it is evolving 
and, hopefully, soon it will be a little clearer as to which 
initiatives are e-commerce and which are not. And that is 
important because it has a lot of implications in terms of 
tracking revenues and expenses and the ratepayers.
    The second issue that I would like to talk about is the 
approval process that the Postal Service has set up. It 
actually has two processes: One, a new products approval 
process that has been in place for some time; and a separate 
process it set up for electronic commerce, which was recently 
implemented in May. Of the five initiatives, these are the five 
initiatives of the seven that were either fully or partially 
implemented during the course of our review or as of our 
review, the Postal Service could not provide documented 
evidence that these five initiatives went through all the 
required steps in its process. For example, the electronic 
postmark, according to the Postal Service, was implemented in 
April 2000, yet the documentation provided showed it had not 
been approved by the special panel it had set up for approving 
these types of initiatives until July after the initiative had 
been implemented.
    The third issue, and what I think is one of the most 
important issues for a number of reasons, is the financial 
issue. This has to do with the revenue/expense data that the 
Postal Service has pulled together for its e-commerce 
initiatives. During the course of our review, it has been a 
real challenge for both us and the Postal Service to get a 
handle on this. The Postal Service did provide us a number of 
sets of data during the course of the review, and, as I 
indicated, of course their initiatives are evolving. But 
nonetheless, for each set of data that we had been given we 
found a number of inconsistencies associated with the data, 
some incomplete information, and a lot of problems, to the 
point where we really did not feel comfortable that we could 
rely on that data.
    Problems existed both in the revenue data and the expense 
data. For example, almost all the revenue that the Postal 
Service identified associated with its e-commerce initiatives 
to date had been generated from its Stamps Online and its 
MoversNet initiatives, which basically get back to the 
traditional hard copy documents as opposed to the more e-
commerce type or electronic initiatives. On the expense side, 
similarly, we also found a number of problems. For example, the 
data that the Postal Service provided to us was somewhat 
different from the data that was provided to the Postal Rate 
Commission for the Mailing Online initiative. It also excluded 
some of the expenses that had been incurred associated with 
some of the discontinued initiatives.
    The Postal Service has been quite receptive and quite open 
to the recommendations that we have made to it with respect to 
these issues I just mentioned. During the course of our review 
we did have a few disagreements with the Postal Service, I 
guess largely in the contextual or perspective area. But I 
think the Postal Service recognized that it has got some 
growing pains associated with the e-commerce initiatives and, 
as I indicated, has been very willing to listen to our 
suggestions, and, in fact, has already begun to implement them, 
actually before we completed our review.
    The last item that I would like to talk about deals with 
legal issues associated with the e-commerce initiatives. And as 
I am sure everybody is aware, the information in the paper 
today about the Federal Express proposed alliance I am sure 
falls into this area of interesting legal issues. With respect 
to e-commerce, however, the Postal Service believes that it has 
broad authority to introduce new e-commerce products and 
services. We have not specifically assessed that due to the 
shortness of time available to us. But a couple of years ago we 
did look at its authority overall to introduce new products and 
found that it did have fairly broad authority both in the 
postal and non-postal area, although there are some 
constraints, of course. One of the key ones is how closely do 
these new initiatives relate to its basic mission as it is set 
out in statute.
    The Postal Service believes that some laws generally do not 
apply, such as consumer protection laws or antitrust laws, and 
some laws do apply to the Postal Service. And it gets to be a 
very complex issue. There is certainly a lot of controversy 
over this and certainly a lot of questions that are being 
raised over whether or to what extent the Postal Service has 
authority to get into some of these areas, and, if so, on what 
sort of specific framework it can undertake some of these 
initiatives. We have not evaluated that. But it is certainly an 
issue that is going to be debated for some time.
    One of the key issues I would just like to mention briefly 
has to do with privacy. A lot of people are concerned about the 
privacy issue associated with e-commerce. The Postal Service 
has told us and told others that it believes that its mandate 
basically under the Privacy Act and under the Postal 
Reorganization Act, as well as some other legislation, enables 
it to provide more protection, and will enable it to provide 
more protection in the privacy area to its customers than some 
of its private sector competitors have. And this was certainly 
a controversial area.
    But one issue that I would like to raise is that we have 
had a long-standing disagreement with the Postal Service with 
respect to the privacy of information that customers provide 
for changing addresses. And it is a little difficult for us to 
reconcile this issue with the Postal Service's broad policy 
statement on protecting the privacy of the information. In a 
nutshell, the disagreement centers around whether or not the 
information that postal customers give the Postal Service for 
address changes can be used by its licensees or their customers 
to create new movers lists, which is a marketing area that 
involves sending solicitations and advertisements to people who 
just moved.
    We feel very strongly, and have felt very strongly, that 
this is not a purpose that would be authorized without the 
individual's permission. The Postal Service seems to have a 
disagreement with that. And the question that we raise is what 
implications does this have for other initiatives that the 
Postal Service is going to venture into with that kind of a 
position. It is something that the Subcommittee may want to 
pursue as it looks into a number of the issues that surround 
electronic commerce.
    With that, I would like to end my summary and be available 
for any questions.
    Senator Cochran. Thank you very much, Mr. Ungar. You 
mentioned at the outset of your statement that there were four 
issues discussed in your report. I was trying to keep up with 
each one. You mentioned e-commerce initiatives that have been 
started by the Postal Service, and then I have the legal issues 
that are involved, the definition of the legal authority of the 
Postal Service to engage in these, and then the privacy issue. 
Have I missed one? What was the other one?
    Mr. Ungar. I sort of categorized them a little differently. 
I had the first issue as how many e-commerce initiatives are 
there--identification. The second was the review and approval 
process that the Postal Service has set up. The third is the 
reliability of the financial information associated with that. 
And the fourth one was the whole umbrella of legal issues, I 
just happened to choose one.
    Senator Cochran. All right. In the case of the seven new 
initiatives that have been undertaken by the Postal Service, 
you said five have been fully or partially implemented. What 
are the other two that are still under consideration?
    Mr. Ungar. There are two. They are in the report. They are 
NetPost.Certified and MoversNet.Com enhancements.
    Senator Cochran. OK. Well, in connection with the process 
that has been established by the Postal Service for approving 
these initiatives, we will hear later from representatives of 
the Postal Service who are knowledgeable about that process, 
but as far as your review that was undertaken, you said you 
discovered that some of these initiatives have not really been 
approved by the process that has been established. To what 
extent is this, in your view, a problem? If the Postal Service 
is trying to identify a procedure to review to see that these 
are consistent with the legal authority and that it is 
something that is appropriate for the Postal Service to do, 
what is the risk to the public or what is the reason for 
highlighting that as a matter of concern?
    Mr. Ungar. Mr. Chairman, I think it is important for a 
number of reasons. One is that the Postal Service argues, and 
probably rightfully so, that while it is not subject in its 
view to a number of statutes that would apply to the operations 
of some of its private sector competitors, there are a number 
of protections built in to the Postal Reorganization Act and 
one of those is review and approval by the Board of Governors 
of the general activities of the Postal Service. So to the 
extent that there has not been an appropriate review of some of 
the initiatives, it certainly would suggest that if there are 
public interest concerns--possible competition or fairness of 
competition issues, or pricing issues, to the extent that some 
of these are real initiatives as opposed to enhancements to 
existing services--the Board should weigh in.
    I might add that there is some question--the Postal Service 
believes that it had approved the initiatives, although, again, 
it could not provide us the documentation for that. Since our 
review has started, though, the Postal Service now has a new 
procedure in place we understand, which we think is good, 
whereby the Board of Governors is going to review on a 
quarterly basis the e-commerce initiatives that are being 
proposed and undertaken, and if things apparently come up in 
between those quarters, I think they are going to ask to have 
information on them. So I think they have recognized that this 
was something that they needed to address and have taken 
action.
    Senator Cochran. We know that there are legal parameters 
for the Postal Service's operations set out in the statute 
creating the Independent Postal Service, Board of Governors, 
Rate Commission, and the rest. What remedies are available, if 
any, under the Postal Reorganization Act to those who feel 
aggrieved or harmed by extending activities beyond the legal 
authorities that the Postal Service has?
    Mr. Ungar. Sir, I believe one remedy would be to file a 
complaint with the Postal Rate Commission if a party believes 
that there is some unreasonable initiative or unfair price. I 
think one of the big issues that seems to exist here has to do 
with recovery of cost and are some of the items or services 
going to be underpriced. In other words, the services will not 
cover their direct/indirect cost and make a contribution to 
overhead. Another question is whether the Postal Service is 
using its position as a monopoly provider to its advantage or 
in an unreasonable way.
    I presume that parties who feel that this might be a 
problem could go to the Rate Commission. I presume they could 
go directly to the Board of Governors if they feel there is a 
problem. They could certainly come to Congress, as I am sure 
they often do, and raise a concern.
    Senator Cochran. One of the questions that occurred to me 
was whether or not there have been any instances where there 
has been litigation or an effort to actually test some of these 
authorities in court. Do you know of any, or did your review 
involve looking at whether or not there were cases that had 
been brought?
    Mr. Ungar. I don't recall looking at any cases. I do not 
think we did. There is a complaint pending with the Rate 
Commission on the PosteCS initiative. But we did not do a 
search to see if there were any cases. My recollection is that 
this is pretty uncharted territory when it comes to testing in 
court. There may have been some cases.
    Senator Cochran. One of the observations you made about the 
data review that you undertook to try to determine what kind of 
revenue was being generated by these new eBusiness activities 
and what some of the expenses were that were being incurred in 
developing these initiatives, you said that these were 
difficult to isolate and verify. Has that been cured in any 
way, or do you think there have been changes in the accounting 
processes to permit you to have a better degree of certainty 
about the expenses and the revenues that have been generated by 
these activities?
    Mr. Ungar. Mr. Chairman, not as of the time we completed 
our work, in August. I think even the most recent set of data 
that we got we found some problems with. I know the Postal 
Service is certainly concerned about this as well. And one of 
the problems it has is that these initiatives are being done in 
different parts of the organization and different parts are not 
necessarily seeing things in the same way. Based on the last 
set of data that we got, we still think there is a lot of work 
to be done by the Postal Service to really get a good handle on 
these revenues and costs and make sure that it is allocating 
these costs and assigning them in an appropriate manner.
    Senator Cochran. Well one of the issues involved in 
connection with that is that under the Postal Reorganization 
Act, the charges that are made for services by the Postal 
Service cannot be subsidized by any other activity.
    Mr. Ungar. Right.
    Senator Cochran. Is that the relevant issue that is 
involved--that they have to be able to allocate these costs to 
a particular kind of service that is being provided?
    Mr. Ungar. Yes, sir. That is one of the major issues. 
Certainly, this gets back to why it is important to define e-
commerce initiatives consistently. Because if it is a true new 
product or service, then it needs to be able to stand on its 
own and be able to recover its costs. I know there are a lot of 
issues surrounding that. But it certainly needs to be able to 
stand on its own over some period in time. I think we would 
recognize that any new business is not necessarily going to 
make a profit when it first introduces a product; so, there is 
going to be some period of time where it probably will not. But 
on the other hand, the Postal Service certainly needs to have 
good accounting of both the revenues and expenses so one can 
determine whether direct and indirect costs are really being 
attributed, are they being recovered, and is some contribution 
being made to overhead. So that is a very important issue.
    The other relevance of that is that, to the extent that 
they are not being properly accounted for, then there are a 
couple of issues that arise. One is, is there cross-
subsidization inappropriately taking place, and second, are 
these initiatives successful or not. No one could ever tell. 
Right now, we would have to say we cannot tell where the Postal 
Service is because of the problems with the accounting that 
exists.
    Senator Cochran. Were there any guidelines that the GAO 
suggested to determine when an activity had to be considered 
profitable or not being successful enough to stand on its own 
two feet and would have to be abandoned by the Postal Service? 
Were any guidelines like this discussed?
    Mr. Ungar. No, Mr. Chairman. We did not get into a specific 
timeframe. We have not really researched in terms of, for 
example, the private sector, what is the common practice. I 
know that the Postal Service has discontinued a number of the 
initiatives that it had begun because they were not bearing 
fruit. So it is certainly not a case where the Postal Service 
has just initiated these and let them go on. But in terms of a 
precise timeframe, we are not in the position to say at this 
point.
    Senator Cochran. Were you able to draw any conclusions 
about the overall question, sort of the big question, are these 
or are these not compatible with the Postal Service's 
authorities under existing law?
    Mr. Ungar. That is the $64,000 question, or maybe million 
dollar question in these times. But, no, Mr. Chairman, we 
really did not look at any particular initiative in the context 
of is it appropriate or not. We identified in the report a lot 
of the factors that would be considered. But it is really going 
to boil down to, I think, a public policy question that perhaps 
in the end the Congress or maybe the court is going to have to 
decide.
    The Postal Service, as I mentioned, believes that it does 
have quite broad authority, and in a lot of cases it does. Now 
where that gets tricky is how close are some of these products 
and services to the mission of the Postal Service. I think as 
an enhancement of an existing service, for example, being able 
to track and trace priority mail, I do not think a lot of 
people would argue that it is not connected with the mail or 
the Postal Service. But some of the other things, eBillPay, for 
example, may be a little further away, and some of the other 
initiatives could be, too. So I guess it is a question of how 
closely do these relate to the basic mission of the Postal 
Service, and how comfortable from a public policy standpoint is 
the Congress with the Postal Service venturing into areas that 
the private sector also is already into.
    Senator Cochran. I think this is very helpful and a good 
starting point for our discussion with the representatives of 
the Postal Service about their practices and about their views 
of what they are doing and what safeguards have been put in 
place to make sure that the things that are being undertaken 
are consistent with their authorities, and that they have 
procedures in place to review these and be sure that they are 
being conducted in a way that is consistent with the law.
    So we appreciate this. We will look at the report in more 
detail now that we have it. And we appreciate very much your 
being here and starting off our hearing today, Mr. Ungar.
    Mr. Ungar. Thank you, Mr. Chairman, appreciate it.
    Senator Cochran. Thank you.
    We will now hear from our next panel. John Nolan, Ed 
Gleiman, and Robert Rider, all of whom are here in their 
capacity as officials, one way or the other, of the Postal 
Service or the Rate Commission or the Board of Governors. We 
have each of these entities represented by high ranking 
officials, and we appreciate their presence and cooperation. We 
have statements from these witnesses which we will put in the 
record, and would encourage them to make any summary comments 
or read excerpts from their statements as they choose.
    Mr. Nolan, let's start with you. Please proceed.

  TESTIMONY OF JOHN NOLAN,\1\ DEPUTY POSTMASTER GENERAL, U.S. 
                         POSTAL SERVICE

    Mr. Nolan. Thank you, Mr. Chairman. I had to chuckle a 
little bit when Bernie said this was the $64,000 question and 
then corrected himself. If this was the $64,000 question, we 
would not be here. Hopefully, it is a lot bigger than a $64,000 
question.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Nolan appears in the Appendix on 
page 49.
---------------------------------------------------------------------------
    The world is changing. That is no news flash. It has gone 
global, and it has gone Internet. Change is not new, but the 
rate of change continues to be new. And the acceleration of 
that change is a challenge for everybody.
    Some things have not changed, though--the need for the 
Postal Service and the importance of postal services to the 
American public. Also, the need for the Postal Service, and 
businesses in general, to adapt to changing customer needs and 
technology opportunities.
    The Internet is both a supportive and a disruptive 
technology. It is supportive in the sense that it is going to 
enable us to offer our products and services that we have 
historically offered in a more seamless, easier, fuller, and 
richer manner. It is disruptive in the sense that it is going 
to tear away significant portions of our current volume at some 
point in the future and we have to deal with that. So our facts 
that we understand are that volume has been impacted somewhat 
by the Internet and will be impacted a lot more. The question 
really is not will it impact, it is to what extent and when.
    Affordability is at risk. That is a fact. We know we have 
to shrink our organization as mail volume goes away, regardless 
of whether or not we get into the Internet. As volumes go away, 
we cannot have a featherbedding environment where we continue 
to keep people, guaranteeing full employment for all employees. 
We have to shrink our organization as volume declines. But the 
problem is that if you have a letter carrier going up to the 
front door of a house and yesterday it was with ten pieces of 
mail and today it is with five, I still need that letter 
carrier and each piece of mail is going to have to carry a 
higher cost burden. Likewise, we have post offices throughout 
the country in every nook and cranny and the cost of 
maintaining that has to be borne by a smaller number of pieces 
of mail. And that is the question, can we remain affordable?
    We have been delivering money, messages, and merchandise 
for this country for over two centuries. We have accepted the 
challenge of change over the years and have always been 
effective users of technology. And that use has always been 
questioned. It is funny, if we were sitting here in 1910 or 
1911, the big debate at that point was whether or not the 
Postal Service should be allowed to use air transportation for 
the carriage of mail. And there are some interesting quotes 
from that time, because for three straight years the use of air 
travel was disapproved, with statements such as: ``A useless 
expenditure of money.'' ``The Postal Service and Post Office 
have been up in the air much too long and it is time to get 
back on terra firma.'' ``There is no need or demand for this 
experiment.'' And one of my favorites, ``Along with the 
spineless cactus, the motherless chicken, and the seedless 
raisin, do we really want trackless travel now?''
    So we have always been controversial. We are very big, we 
understand that. But we have always used technology. We have 
been a technology user and the country has benefited from that 
use.
    Our Internet strategy is both simple and comprehensive. We 
want to use the Internet for internal efficiencies, like any 
company would. We need to add value to our core products and 
services through the richer, more effective channels through 
which you can reach us. And finally, we want to introduce e-
commerce initiatives.
    E-commerce initiatives, as Mr. Ungar indicated, are those 
products that require the Internet to do business and that 
generate revenue to the Postal Service through either user 
charges or licensing fees. That is the definition that we have 
set and that is the way we are approaching this. And while to 
many businesses the exact definition would be an arbitrary and 
unnecessary thing to discuss, we know it is important in this 
space because we know that there are issues of cross-
subsidization and other things that have to be dealt with. So 
we are not trying to hide from that. We are trying to very 
carefully define it. The audit that GAO did helped us to 
understand better how to package those things so that we will 
have an ongoing ability for them to review what we are doing 
and to keep an eye on us, so to speak, because we know that is 
important.
    We are in e-commerce for several reasons. Customer demand, 
a number of our customers have come to us and said we need you 
in this space. And part of the reason for that is because 
people trust us. When our partners in this space have gone out 
to the public to ask them who do you trust, like that old TV 
show, the Postal Service comes up at or near the top. And 
finally, because we are everywhere. We have the ability to 
offer services in a more effective manner for several 
offerings, and an opportunity to bridge the digital divide to 
make sure that no one is left out of the opportunities of the 
Internet because all of the competitors are not going 
everywhere. We think we can offer something that will make sure 
no one is left out.
    If you ask me for just a couple of words about how our 
services would be categorized in e-commerce, its security, 
privacy, and customer choice. Nothing that we are doing here is 
going to force anyone to use us to the detriment of any 
competitors. We believe in competition. Our competitors should 
believe in competition too.
    Also in this space what you can expect to see is a lot of 
partnering on our part. While we are heavy technology users, we 
have also proven over the years that we are effective partners 
with technology experts. We are not technology experts in this 
space. But we are partnering with a lot of companies that are 
the best and the brightest. They enable us to move quickly, 
they enable us to use the best technology, and they are putting 
up a lot of their own money to make sure that we do not have to 
put up a lot of money to help begin to fund some of these 
things. We believe all of these initiatives in e-commerce will 
generate a positive contribution to the bottom line or we would 
not be able to offer them.
    We strongly support GAO's recommendations. We have no 
problem not only supporting them but embracing them. This was 
not an easy audit for them or anyone else. This is a whole new 
area. Not many audits I am sure have been done in this country 
on e-commerce initiatives within companies. So they were 
charting new ground and we were struggling along with them to 
try and figure out how to categorize various things and 
allocate costs. So the fact is it is a new and developing area.
    We have control over project approval and project costs at 
this point. The time of the audit was at the early stages of 
our growth and showed some of our growth pains, as Mr. Ungar 
indicated. In the first 30 days after I arrived, we instituted 
this e-Business Opportunity Board to set up a more rigorous 
structure. In my last 11 years of business I've had experience 
with profit and loss statements for individual entities and I 
believe in controlling costs, understanding costs, and being 
able to demonstrate those costs and revenues. Our Board of 
Governors is being briefed on all initiatives. One slight 
modification to what Mr. Ungar had said. When an initiative 
comes up that requires Board review, that does not have to wait 
for a quarterly report. We will go right to the Board to notify 
them of that. What the Board has requested, and we certainly 
support, is on a quarterly basis, for each initiative, however, 
we will be providing status on where exactly each of these 
stands so that there is a clear understanding of that.
    Part of the confusion with the numbers and status dealt 
with how to categorize the projects, in my opinion, and how to 
separate out those costs. But we are very confident that we 
have set in process a new accounting system so that each 
initiative will have its own finance number, own accounting so 
that we will be able to tightly control it.
    We will fully meet the GAO recommendations. And the use of 
the Internet will enable us to be a better and more relevant 
Postal Service in the future, we believe. We also believe we 
will not only be better able to serve our customers through our 
involvement, but also to ensure that the trust in and 
utilization of the Internet will also be a beneficiary of this 
endeavor on our part. Thank you, Mr. Chairman.
    Senator Cochran. Thank you, Mr. Nolan. Let's now turn to 
the Postal Rate Commission and its representative here today, 
Ed Gleiman.

   TESTIMONY OF EDWARD J. GLEIMAN,\1\ CHAIRMAN, POSTAL RATE 
                           COMMISSION

    Mr. Gleiman. Thank you, Mr. Chairman, for the opportunity 
to provide testimony today. I want to make clear at the outset 
that the views I am expressing today are my own rather than 
those of the Commission as an institution. While the majority 
of my colleagues on the Commission would probably agree with 
many of my comments, they have not participated in developing 
this testimony.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Gleiman appears in the Appendix 
on page 56.
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    As the GAO report demonstrates, there is a lot of 
uncertainty about the direction, financing, oversight, and even 
the extent of these initiatives. The report paints a seemingly 
accurate, albeit somewhat surreal, picture of the state of 
current Postal Service activities in the current e-commerce 
area.
    Mr. Chairman, your letter inviting me to appear as a 
witness asked me to address ``the application of major Federal 
laws and regulations to the e-commerce initiatives of the 
Postal Service'' in my testimony. I will do so, but with some 
trepidation, because of two concerns. First, I understand that 
the applicability of current laws to such services is largely 
uncharted territory, and there are few, if any, settled legal 
doctrines to be found in Federal court decisions or other 
authoritative sources. Second, as the General Accounting Office 
report notes, there is a pending complaint proceeding before 
the Commission that concerns the legal status of PosteCS 
service. Because of the extent of the Commission's jurisdiction 
over this initiative is a major issue to be resolved in this 
case, I must refrain from offering comments that could be 
misconstrued as prejudging the issue. Nevertheless, I will try 
to address the question generally.
    The Postal Service's position is that several provisions in 
the Postal Reorganization Act grant general authority broad 
enough to encompass e-commerce activities, in addition to its 
specific power to provide ``special nonpostal or similar 
services.'' However, the Postal Reorganization Act's statement 
of general duties of the Postal Service found in section 403(a) 
must also be kept in mind. This provision obliges the Postal 
Service to offer efficient, reasonably priced postal services 
for the conveyance of ``written and printed matter, parcels, 
and like materials'' and ``such other services incidental 
thereto.'' Likewise, section 101 declares that the Postal 
Service's basic function is the fulfillment of an obligation to 
provide postal services ``to bind the Nation together through 
the personal, educational, literary, and business 
correspondence of the people.''
    It is really hard to see a telecommunications or Internet 
horizon in this legal guidance. Now I agree that Title 39 does 
not contain language specifically prohibiting the Postal 
Service from offering nonpostal services, but I am not 
convinced that Congress intended the absence of a prohibition 
to be interpreted as broad authority to compete with private 
businesses.
    The regulation of the Postal Service e-commerce initiatives 
is also a question to which there is no clear answer. Chapter 
36 of Title 39 requires the Postal Service to file a request 
with the Postal Rate Commission prior to establishing any new 
mail classification for postal services. The Postal Service 
currently argues that as long as the new service manipulates 
electrons and does not produce hard copy, that service is not 
postal and therefore is none of the business of the Postal Rate 
Commission. The Commission has not yet explicitly accepted or 
rejected that argument. I will note, however, that if the 
Postal Service position is correct, there may be a gap in 
regulatory oversight.
    The Postal Service offers several rationales for its entry 
into e-commerce, and I will attempt to address each of these. 
Before doing so, I would like to pose two basic questions: 
First, is there some compelling need for the Postal Service to 
do that? If some current or potential customer of the Postal 
Service has been clamoring for new non-postal e-commerce 
services, I am not aware of it. The evidence I am aware of 
suggests that demand for electronic initiatives is limited to 
those that would make improvements in or provide additional 
support for core Postal Service business.
    Second, is there some compelling justification for any 
government monopoly to compete with private enterprise in this 
arena? Put another way, if the Postal Service had not taken the 
initiative to develop e-commerce products, would Congress pass 
legislation directing the establishment of a government-owned 
start-up, funded by users of the Postal Service, to compete 
with private Internet business firms?
    Returning to the rationale set forth in the GAO report, the 
Postal Service cites four bases for viewing e-commerce products 
as appropriate for serving its institutional purposes. One 
rationale is that such services, in combination with its other 
functions and activities, should help to ``bind the Nation 
together,'' in keeping with the basic function prescribed in 
Section 101 of Title 39.
    This is a plausible rationale, but only if you overlook the 
fact that the United States is already ``bound together'' 
electronically by the private sector--initially by telegraph 
and telephone but now by an ever-expanding variety of 
telecommunications media, including the Internet.
    A second but related rational is the Postal Service's 
suggestion that, since ``binding the Nation together'' is part 
of its basic function, initiatives such as e-commerce serve an 
appropriate objective in their own right by fostering national 
communications. This justification provokes another question: 
At some point, would pursing the objective of binding the 
Nation together through new media change the Postal Service 
from a delivery company to a communications company? There is 
evidence that this may be what the Postal Service has in mind.
    Looking at the Postal Service's website the other day, I 
came across the Frequently Asked Questions section devoted to 
PosteCS service. Here is a question and answer that I found 
particularly interesting. Question: ``How does PosteCS fulfill 
Postal Service's primary mission?'' The first sentence of the 
answer: ``PosteCS fulfills the Postal Service's mission to 
`bind the Nation together through its communications'.'' I do 
not know what or whom this answer intended to quote, but it 
certainly is not Section 101 of Title 39. In any event, the 
diversification of the Postal Service from what has been a 
nationwide delivery service into a communications company would 
represent a major change in national policy.
    A third rationale offered by the Postal Service identifies 
technological improvements such as the Internet as sources of 
``opportunities for improved interaction between the postal 
system and its customers.'' The Postal Service says the 
particular electronic services it has chosen to introduce 
``serve as logical, supporting, ancillary, incidental 
enhancements of the postal system for the benefit of our 
customers.''
    Evolution of the postal services through the adoption of 
new technologies is well-established in historical precedent. 
As long ago as 1877, the Supreme Court recognized the power of 
the national postal service included employing ``new agencies'' 
or ``instrumentalities of commerce'' to ``keep pace with the 
progress of the country, and adapt themselves to the 
developments of time and circumstance.'' However, one question 
posed for the Postal Service's future is the following: If 
entry into e-commerce and other electronic initiatives is an 
appropriate evolutionary development for the national postal 
system, should current forms of oversight, governance, and 
regulation evolve as well?
    The fourth rationale offered by the Postal Service notes 
that the current services are ``deeply rooted in the traditions 
of this country and embedded in the current economic and social 
fabric,'' and it invokes the authority to take advantage of 
such technologies as e-commerce to meet challenges to ``improve 
and build upon the services, capabilities, role, and customer 
relations that it already maintains.''
    I agree that some electronic initiatives can fairly be 
viewed as extensions and enhancements of Postal Service core 
business. For example, mentioned earlier, Delivery Confirmation 
that makes use of the Internet to enhance priority mail and 
parcel post delivery. But other current initiatives do not 
build on any pre-existing traditional service offered by the 
Postal Service. Illustratively, eBillPay does not improve nor 
build on any service currently offered. Instead, it offers a 
potentially all-electronic substitute for the current bill 
paying transactions.
    My point here is not that the Postal Service should be 
precluded from offering services that are categorically 
different from anything they have done before, although 
historically the Congress did preclude the pre-Reorganization 
Act Post Office Department from extending the scope of its core 
businesses by competing in the new media such as telegraph and 
telephone services. The point to be made here is that the 
Postal Service forays into services with no clear connection to 
its core business raise important policy issues that ought to 
be considered in a forum beyond Postal Service headquarters and 
beyond meetings of the Board of Governors.
    And while I am on the subject of traditional postal 
services, let me say a few words about the privacy 
traditionally and legally accorded to mailers and mail 
recipients. The GAO report noted my comments earlier this year 
about the breadth of disclosure of customer information allowed 
by the Postal Service's Privacy Act statement for the eBillPay 
service. The Postal Service has since revised that Privacy Act 
statement. As a general matter, the Postal Service is quoted as 
saying that it can protect the privacy of the Postal Service e-
commerce customers better than private sector providers because 
of the Federal privacy laws.
    Nevertheless, I remain concerned that personal information 
about the users of e-commerce services might be disclosed 
pursuant to permissible so-called ``routine uses'' under the 
Privacy Act of 1974. As evidenced by the Postal Service's 
initial eBill Privacy Act statement, Federal agencies have 
broad administrative discretion when it comes to sharing 
personal information, more perhaps than many of the proposals 
currently under consideration which would impose restrictions 
on the private sector.
    One practical reason that has been advanced for the Postal 
Service's entry into e-commerce is reaction to the new 
competitive challenges that may lead to a substantial decline 
in first class mail volume and result in an erosion of the 
Postal Service's ability to fulfill its universal service 
obligation. Under this rationale, the Postal Service must 
invest in developing e-commerce activities as a means of 
cultivating new revenue streams.
    The rationale of income replacement raises serious 
questions. First, who would finance the Postal Service's e-
commerce initiatives? The Postal Service has no sources of risk 
capital except its revenue from monopoly ratepayers. And if it 
fails to earn the expected return, there are few adverse 
consequences.
    Because the Postal Service can easily obtain risk capital 
from monopoly ratepayers, it may be tempted to make imprudent 
guarantees to other vendors when it enters the e-commerce 
market. Frequently, partners and contractors require guaranteed 
revenues. This happened in the market test for Mailing Online 
service. In exchange for low printing rates, the Postal Service 
guaranteed its printing contractor a minimum revenue of 
$325,000. At the end of the test, only about $23,000 had been 
spent on printing services. The Postal Service reportedly has 
had to pay more than $250,000 to the contractor with no 
additional services being rendered, and as of February of this 
year there was an outstanding remaining payable balance. The 
potential size of guarantees in the e-commerce arena may be 
much, much larger and should be given some attention.
    And this raises a question. Who is going to manage and 
audit the service, the cost and revenues of these initiatives? 
This is a significant consideration because of the potential 
financial impact on monopoly ratepayers and other users of 
conventional postal services.
    GAO's sense of confusion about the Postal Service's 
division of its e-commerce activities, which I share, 
highlights the importance that the Postal Service not bury 
significant development costs of e-commerce products in product 
lines that fall outside of e-commerce. Moreover, while the 
Postal Service states it intends to recover direct and indirect 
costs of its e-commerce products, I believe that products 
should satisfy the more appropriate standard of covering 
incremental costs.
    Then there is the pragmatic, bottom-line issue of whether 
e-commerce products can reasonably be expected to produce 
significant amounts of revenue to support the Postal Service. 
All things considered, I would have to say that the signs are 
not encouraging. As someone close to the issue, and sitting 
close to me, said recently, ``While the Postal Service may wish 
for a golden spike out there in the realm of e-commerce to 
produce huge revenues, the immediate prospects are much more 
modest.''
    To summarize, from my perspective, the issue of the Postal 
Service's participation in e-commerce is a difficult one 
involving many uncertainties. The sources and extent of the 
Postal Service's authority to mount such initiatives 
unilaterally is not clear in the Postal Reorganization Act. 
Further, the applicability of existing regulations and 
requirements is likewise uncertain.
    On the merits of embarking on e-commerce initiatives, some 
of the rationales the Postal Service offers appear to rest on 
questionable legal or practical assumptions. There is no 
apparent legal mandate, or compelling need, for broadening the 
mission of this government enterprise to include 
telecommunications services generally. In addition to the 
effects on private competition, postal ratepayers would have to 
fund such initiatives, and the net financial returns to the 
Postal Service may not justify the outlays.
    Of course it makes sense for the Postal Service, like any 
good business in the current era, to adopt available new 
technologies into its operations to enhance productivity and to 
add value to its core services. But pursuit of e-commerce for 
its own sake may only serve to distract postal management and 
divert resources from the critical demands of performing its 
public mission in a challenging new century.
    Mr. Chairman, I have a copy of a study that I would like to 
provide to the Subcommittee, by Professor Richard B. 
Kielbowicz, that was prepared for the Commission, entitled: 
``Postal Enterprise: Post Office Innovations with Congressional 
Constraints, 1789-1970.'' \1\ This study will also soon be 
posted on our web page.
---------------------------------------------------------------------------
    \1\ The copy of a study by Professor Kielbowicz appears in the 
Appendix on page 168.
---------------------------------------------------------------------------
    I want to thank you for the opportunity to share my 
thoughts with you on this important matter. And if there are 
questions, I would be pleased to answer them.
    Senator Cochran. Thank you very much. We appreciate your 
statement and the study that you have provided the 
Subcommittee, which we will carefully consider.
    We will now turn to Mr. Rider, who represents the Board of 
Governors. We appreciate your presence. You may proceed.

   TESTIMONY OF ROBERT F. RIDER,\2\ VICE CHAIRMAN, BOARD OF 
                 GOVERNORS, U.S. POSTAL SERVICE

    Mr. Rider. Thank you, Mr. Chairman. I welcome this 
opportunity to discuss with you the electronic commerce 
activities of the Postal Service. I appreciate your interest in 
the Postal Service and your insights as we grapple with the 
unprecedented complexities of the 21st century communications 
marketplace. I would also like to recognize the hard work of 
the General Accounting Office and thank them for their 
recommendations, which incidentally dovetail with our own 
thinking.
---------------------------------------------------------------------------
    \2\ The prepared statement of Mr. Rider appears in the Appendix on 
page 72.
---------------------------------------------------------------------------
    The Governors of the Postal Service have broad oversight 
over the expenditures, practices, and policies of the Postal 
Service. It is our responsibility to ensure that the strategic 
direction of the organization is sound and to judge the overall 
implementation and performance of programs put in place to 
carry out that strategy. As a practical matter, the Governors 
are not involved in day-to-day operations or the thousands of 
daily decisions that are required to manage such an extensive 
operation. That responsibility rests with a highly dedicated 
team of professional managers, represented here today by Deputy 
Postmaster John Nolan. Therefore, I will address the broader 
questions of our e-commerce strategy and my view of 
management's implementation and overall performance.
    Our overall Internet and e-commerce strategy is based on 
the fundamental principle that our actions must be consistent 
with our historic traditions of public trust and fairness, and 
with our mandate to operate according to the highest standards 
of business and of public service. Consequently, our e-commerce 
initiatives should be supportive of our universal service 
mission and the need to bring electronic commerce to those who 
cannot afford it. They should foster economic growth by 
enabling greater public confidence and trust in Internet 
communications and commerce. The new e-commerce services should 
respond to customer needs and be managed with appropriate 
business discipline so as to become self-supporting within a 
reasonable period of time.
    The Governors are supportive of management's efforts to 
embrace the Internet. For the most part, these efforts 
represent an ongoing evolution to improve the management of the 
mail system through the use of modern information technology. 
To the average household customer, the Postal Service is 
represented by the individual clerk who sells them stamps or 
the neighborhood letter carrier that stops by their mailbox 
each day.
    In reality, the Postal Service is a complex, interdependent 
network that each day coordinates the movement of nearly 700 
million pieces of mail, on more than 15,000 commercial air 
segments, between 38,000 post offices and 800,000 employees, 
who serve more than 134 million delivery points. Our success in 
managing this network is directly related to infrastructure 
improvements that allow us to rapidly transmit critical 
information to employees, to customers, and to suppliers in 
many platforms.
    Today, the postal retail customers enjoy the convenience of 
credit and debit card purchases. Major retailers schedule their 
shipments and make payments electronically. Letter carriers 
track packages and important documents with computerized hand 
scanners that uplink into a national data network. And 
sophisticated logistical systems keep the mail flowing 
economically by ground, rail, and air between our plants and 
our post offices.
    Over the past few years, as citizens and business have 
embraced the Internet, the Postal Service has migrated some of 
these information systems onto the Internet. We expect this 
trend to continue. Today, millions of household customers visit 
our web sites every day. Large mailers use the Internet to 
coordinate their operations with ours. And the postal intranet 
has become a primary tool to manage operations and share ideas 
among functional units dispersed all across the country. The 
result has been a more efficient and productive organization 
that provides better service and value to our customers. Postal 
management has done a commendable job in managing these 
extensive information programs, which have involved substantial 
expenditures and resulted in better productivity, service, and 
value for our customers.
    So, in many ways, the Internet has been a blessing. It has 
enabled the Postal Service to perform its historic mission with 
modern precision and efficiency. However, the Internet has also 
demonstrated an ability to alter entire industries and offer 
new business models. We have seen examples of this in the 
retail and software sectors. We are aware that similar 
potential exists for the mailing industry. E-mail, Internet 
banking and bill payment, and electronic catalogs and 
merchandising are directly competitive with the mail. The GAO 
has warned that the Postal Service may be nearing the end of an 
era due to these and other competitive pressures. The truth is 
we do not know how fast or how much the Internet will change 
the Postal Service's business model. What is clear is that the 
stakes are high and we cannot wait to be certain before we act.
    This year marks a turning point for the Postal Service's e-
commerce program. In the latter half of the 1990's the Postal 
Service began to explore the potential of e-commerce. The last 
couple of years, however, were also occupied with updating our 
computer system for the year 2000, Y2K. This year, we are 
bringing new focus to our development efforts and formalizing 
our processes based on what we have learned. We have also 
launched several new products and are testing them in the 
marketplace.
    The Board of Governors has encouraged and enthusiastically 
supported these developments. The Governors have discussed or 
reviewed some aspect of e-commerce at virtually every board 
meeting this year. On June 5, the Board established a quarterly 
review procedure by which management will provide regular 
reports on the current status of existing e-commerce 
initiatives. The board also has established the means by which 
significant new types of e-commerce initiatives will be 
presented to the Board before being launched. These measures 
reinforce the framework created by management for developing 
and managing e-commerce initiatives, which are Mr. Nolan's 
responsibility and which he has discussed in some detail with 
you.
    It is difficult to assess the effectiveness of the Postal 
Service's e-commerce initiatives thus far. As the GAO has 
noted, the program is in its very early stages. It is also hard 
to establish meaningful benchmarks in an industry that is in 
its infancy. Nevertheless, management has proven its ability in 
other challenging modernization efforts, and the Board expects 
no less in this difficult area.
    Thank you, Mr. Chairman, that concludes my remarks.
    Senator Cochran. Thank you, Mr. Rider. Thank you all for 
your interesting statements and your cooperation with our 
Subcommittee's effort to review this issue.
    In connection with the GAO's findings, there were several 
points made in the testimony and in the submitted statement by 
GAO about the process that is in place for reviewing and 
approving initiatives in this area by the Postal Service.
    Mr. Nolan, is it your view that this procedure and process 
that has been established now is one that will provide a clear 
impression of what e-businesses are being undertaken by the 
Postal Service and a certainty that these activities have been 
approved by the Board of Governors?
    Mr. Nolan. Yes, sir, I do. I think the early initiatives 
and structure that the Postal Service used in fact was to try 
and set up competing groups within the Postal Service to see 
who could develop some of these areas, and also to make use of 
existing talent. For example, our treasurer was a natural to 
take a look at e-payments. The time has come though, and in my 
discussions with Bill Henderson as I was coming on board, to 
try and put those into a more logical structure and a more 
streamlined structure.
    That is exactly what we have done. The creation of an e-
Business Opportunity Board gives the Postal Service the 
opportunity to bring people together from different 
organizational functional areas, everything from our consumer 
advocate, to finance, to operations, to take a look at new 
initiatives at their very inception to determine whether or not 
it is worth pursuing those things and then to regularly review 
them. Because on the Internet there are a lot of good ideas or 
things that seem good on day-1 that by day-31 do not seem quite 
as good. And yet, in a lot of organizations those things would 
continue on because they got started and inertia is going to 
keep it moving. Well, we cannot afford to let that happen.
    So the review process that we have is a very rigorous one. 
And at critical points it involves our communications with the 
Governors, reviewed by the Governors, so that we are sure we 
are on solid ground. But as we move ahead, and this is where 
the GAO study comes in, we can improve something, move forward 
on it, we have got to have goals, we have got to articulate 
those goals, we have got to track performance against those 
goals, and, as they say, fish or cut bait down the line 
someplace if we are not achieving those goals, to either fix it 
and achieve the goals or to stop it. And I am confident that 
the process we have set in place will do that.
    Senator Cochran. There was also a question raised about the 
transparency of the revenue and expense data for those who were 
reviewing these activities. Are you confident at this point 
that you have a system in place that permits a review by an 
investigative body like GAO or the Congress that will be able 
to determine what the revenue and expense data really are for 
these new e-business activities?
    Mr. Nolan. I think we are, Mr. Chairman. I am hesitating 
because we have just recently instituted some of these things. 
As I mentioned before, we have a certain accounting process 
that we have set up, very early on, to track each individual 
cost. To be able to go back in time through some earlier 
initiatives that changed directions several years ago is 
obviously difficult. But I am confident that costs that we have 
going forward are going to be tightly controlled.
    To me, it is not just a matter of getting it right, getting 
the numbers accurate so that they are auditable, but the ease 
of the audit is also what I am concerned about. I do not want 
it to be a torture going forward, because we know we are going 
to have reviews like this. Part of the way we should be 
measured is not only are the data accurate, but how easy it was 
to get to. Because if we are not reviewing that data regularly, 
then we are missing what we should be doing. And so, if we are 
reviewing it regularly, it ought to be very easy for a GAO 
audit or any other audit to find that. That is the standard 
that we are trying to hold ourselves up to.
    Mr. Rider. Mr. Chairman, I just wanted to add that the 
Governors endorse having a profit center for each one of these 
initiatives, and we will have. Each one will stand on its own.
    Senator Cochran. I see. There have been several references 
to specific activities that are now being initiated or have 
been initiated by the Postal Service in this area. One was 
buying stamps over the Internet.
    Mr. Nolan. Stamps Online, yes.
    Senator Cochran. Stamps Online, you call it. Another one 
talked about is being challenged now before the Postal Rate 
Commission. I think that was referred to as the PosteCS case.
    Mr. Nolan. Electronic courier service, yes, sir.
    Senator Cochran. Now what is that?
    Mr. Nolan. It is a service which enables people to send 
highly confidential documents in a very secure manner over the 
Internet, again, electronic to electronic, no hard copy 
involved. I should add it is not only designed for domestic 
use, but also to enable us to transmit those documents across 
borders. The interesting thing of course is that if we did not 
get into this business, you could have the Costa Rican Post 
coming in and offering the same thing within this country, 
because it is a service that is very important we believe.
    Senator Cochran. By across borders, you are talking about 
national borders?
    Mr. Nolan. Yes, to Europe, to the Far East.
    Senator Cochran. International.
    Mr. Nolan. Yes.
    Senator Cochran. What are some of the other business 
activities that you are now undertaking that you think are 
going to be long-term and are classified by you as e-business?
    Mr. Nolan. E-commerce I think is----
    Senator Cochran. E-commerce, yes.
    Mr. Nolan. E-commerce is a part of e-business. E-business 
includes things that we would do within our organization to 
streamline it as well as to add value to our existing core 
products and services, like a return merchandise service on the 
Internet that enables you to bring packages back. That would be 
building on our core products and services.
    E-commerce would include, in addition to the Stamps Online 
and the PosteCS that you have mentioned, our Mailing Online 
initiative, which is really a hybrid service. It starts off as 
an Internet service and that people will send us files, and we 
will transmit those files to a destination print site where it 
gets printed and inserted and mailed. So it is both hard copy 
and Internet. The reason why we have included it as an Internet 
is because we get user fees for the Internet portion of that, 
and that is why we have included it. The other area that we 
have got that is moving from hard copy to the Internet is our 
Movers Guide and the MoversNet.com where people will be able to 
update their changes of address not only in hard copy but via 
the Internet. Our Electronic Postmark enables people to 
indicate when they have mailed something and then we can 
certify when they have transmitted it via the Internet, and we 
can also ensure that there was no tampering of that document 
going forward to destination.
    Senator Cochran. Is this like a return receipt requested 
that you used to use?
    Mr. Nolan. In a sense it is in that it will indicate who 
shipped it, when it was shipped, and when it was received. In 
addition, it will indicate whether or not it was tampered with 
in process, both to the shipper and the receiver.
    Finally, the other area, that we have not made a formal 
announcement about, but that we are working very closely on 
with HCFA and Social Security, is our NetPost.Certified. This 
is an interesting area where, for example with HCFA, you have 
got a lot of doctors that have to communicate tons of paperwork 
to HCFA in order to get reimbursements. That agency, along with 
Social Security and others, is trying desperately to streamline 
their operations to reduce the cost of doing business, make 
more efficient what they are doing. And they have asked us, and 
we have readily agreed, to get into the space, whereby we could 
authenticate the shipper of that information and provide secure 
transmission of that, to, again, take the cost out of that 
transaction and to speed it along so that everyone benefits in 
the space. Again, the fact that we are located everywhere 
certainly helps that authentication and makes sure that 
everyone can avail themselves of that.
    Those seven are--I don't know if we should call them the 
Magnificent Seven right now--but there are seven initiatives 
that at the present time are the ones that we are pursing 
aggressively and we believe represent areas of opportunity to 
serve the public better.
    Senator Cochran. There was a reference made earlier today 
about a new initiative--it was in the paper and I have a copy, 
I guess it is the Washington Post edition this morning--that 
the Postal Service and Federal Express Corporation are 
negotiating a strategic alliance and could complete a deal by 
next month under which the Postal Service would deliver many 
FedEx packages to homes across the Nation while using FedEx's 
air transportation network to move priority and express mail 
around the world. Is this another example of e-commerce or e-
business?
    Mr. Nolan. No, sir. This does not involve Internet. 
Obviously, in the exchange of information on package status, 
etc., we, like Federal Express, like UPS, certainly use the 
Internet to be able to track packages and provide information. 
But we are doing that separately. This represents an effort on 
our part to--we are one of the largest users of contract 
transportation in the world and Federal Express is one of the 
most efficient airlines in the world. Certainly, the 
opportunity to make use of their airline capacity to augment 
what has been increasingly non-available private carrier 
capacity that we have been using should enable us to enhance 
service and keep our costs down.
    In the process of doing that examination for our air 
transportation, we obviously began to look at other areas where 
we could use our ubiquity, our resources that are out there to 
the best possible use. And so, we are looking at contact points 
and where we have some synergy where we can enhance the 
functions of both companies to better provide services to the 
American public.
    Senator Cochran. There is some question about the fact that 
if you do not get into some areas such as you have described 
here you are going to have to raise rates for the delivery of 
mail and the other services that you have traditionally 
provided. To what extent has that provided an incentive for the 
Postal Service to look for new revenue sources, and are these 
going to provide the revenue sources you need in order to keep 
from having to raise rates in the future?
    Mr. Nolan. Yes, and I hope so. Certainly, this disruptive 
technology that is having an impact on our volume--our volume 
is not declining yet, Mr. Chairman. But in a period of 
significant economic boom, to only have the kind of growth 
rates that we are having is unprecedented for us. Normally, you 
would see far greater increases in volume during a period of 
economic strength that this country is seeing. So we know that 
the Internet is going to have dramatic impact, as has other 
technology had an impact, on our revenues.
    There has been a lot of discussion about the ratepayers 
here. If we are not careful, we may significantly impact the 
ratepayers with higher rates and the inability to provide 
universal service if we do not find alternate sources of 
revenue to enable us to keep this infrastructure which has 
served the public so well for so many years. Our concern is 
that in a declining revenue period, while we certainly have to 
cut costs, we are going to be faced with an infrastructure that 
the country and our ratepayers cannot afford. And just as when 
Mary Smith or John Doe place a phone call, if you ask them the 
question, would you like the phone company to be investing in 
new technologies? They might say, no, let's keep our rates low. 
But the fact is that without that investment, the opportunity 
to take advantage of new technologies, to offer new products 
and services to enhance the lifestyles, the businesses in this 
country would be very limited.
    Senator Cochran. Mr. Gleiman, during your comments I was 
interested in your assessment of these e-commerce activities as 
possibly outside the realm of authorized activity by the Postal 
Service. What will a prohibition against e-commerce, if 
Congress decides to legislate a prohibition against e-commerce 
activity by the Postal Service, what impact will that have, in 
your opinion, on postal rates?
    Mr. Gleiman. Senator, postal rates are likely to go up 
whether Congress enacts legislation prohibiting the Postal 
Service from being involved in e-commerce or not. And postal 
rates are likely to go up whether the Postal Service is 
involved in e-commerce or not.
    You have heard a bunch of interesting words today. 
Augmentation is one that I especially like--we want to augment 
our revenue. If you do not realize net profit from a new 
activity, then the augmentation is not worth very much. If I 
could give you a simple mathematical example. It involves the 
Postal Service's eBillPay, at least as far as I understand it.
    A first-class stamp that you and I put on a bill when we 
pay it is 33 cents. Roughly 18 cents of that 33 cents goes 
toward covering the cost of actually handling that piece of 
mail, and the other 15 cents goes towards contributing to 
institutional overhead of the Postal Service. Now, if I do not 
send that envelope with a 33 cent stamp on it and decide to use 
eBillPay instead--and I can be corrected, and would be 
delighted if I am wrong here to be corrected--the Postal 
Service is going to get 10 cents from its eBillPay partner 
CheckFree for each electronic bill payment. Now remember the 
numbers I gave you. We started with a 33 cent stamp, there were 
18 cents in costs, and 15 cents in institutional contribution. 
The 10 cents that the Postal Service is going to get from 
CheckFree is not going to cover the institutional cost. They 
are still short 5 cents on the institutional cost. And unless 
the Postal Service can figure out how to shed the 18 cents of 
cost that it currently incurs for handling the piece of hard 
copy mail, they have got to cover that, too.
    So when you talk about eBillPay or e-commerce being a 
savior for the Postal Service, you really have to look hard at 
the numbers. The bottom line is going to be the bottom line. 
And I am really pleased to hear Mr. Nolan say that his attitude 
is you have got to fish or cut bait. My concern is when you cut 
bait, who pays for the bait you just lost? It is going to be 
the monopoly ratepayer and the other captive users of the 
service. So I am not sure that it is going to make all that 
much difference in the final analysis if the Postal Service 
gets involved or not.
    Mr. Nolan mentioned downsizing, cutting costs, and there 
has been a lot of talk about the universal service obligation 
of the Postal Service. I am going to commit an act of heresy 
here that is likely to get me in a little bit of hot water, but 
it will not be the first time. Perhaps in addition to 
considering cost-cutting and downsizing, the Postal Service and 
the Congress ought to be looking at the current universal 
service obligation. Maybe, if a lot of the hard copy mail is 
going to find its way into electronic media, there will not be 
the need to deliver to every place 6 days a week. If the mail 
is not there, maybe we ought to have a different type of 
service than we now have. And there are other aspects of 
universal service that ought to be examined that also would 
come into play or should come into play.
    I want to make clear though there is a distinction: 
Activities that are above and beyond what the Postal Service 
now does that are more in the communications area, as they make 
them out to be, as opposed to those that enhance their core 
products. And I think they ought to charge out into the sunset 
and take care of enhancing those core products. They are doing 
a good job in that area and they ought to continue it.
    Senator Cochran. I am going to ask you one other question, 
and then I am going to yield to my friend from North Carolina 
who has joined us at the hearing. You mentioned this PosteCS 
case, the fact that it is pending before the Postal Rate 
Commission, and that you would not be able to comment on it. 
Nor should you, on the merits at all. But tell us what is the 
issue that has been raised by that case exactly.
    Mr. Gleiman. Well, the Postal Service's position is that 
since what is involved here is a point-to-point electronic 
transmission, it is not postal in nature, it is nonpostal in 
nature. Another aspect of the Postal Service's initial defense 
against the complaint was that this was an international 
service. I was interested to find out just a moment ago that in 
fact it was designed for domestic use as well. But the key 
issue here is whether the Postal Rate Commission has 
jurisdiction over something that is a point-to-point electronic 
transmission.
    Senator Cochran. OK. Who brought the complaint?
    Mr. Gleiman. The United Parcel Service filed the complaint.
    Senator Cochran. OK. I am going to yield to my friend from 
North Carolina.
    Mr. Gleiman. If I could just add, because I think it is 
relevant to a comment that was made by Mr. Nolan in response to 
a question a moment ago.
    Senator Cochran. Yes. Go ahead.
    Mr. Gleiman. If the Postal Service did not offer PosteCS or 
eBillPay or Electronic Postmark, does anyone really believe 
that there is no one else out there that would offer these 
services, or perhaps people are not already offering these 
services? I see news clips and read trades and it seems to me 
that every day there is a new entity out there that is offering 
something akin to what the Postal Service says if they do not 
put it out there it is just not going to be available.
    Senator Cochran. The Senator from North Carolina, Senator 
Edwards.

              OPENING STATEMENT OF SENATOR EDWARDS

    Senator Edwards. Thank you very much, Mr. Chairman. Good 
morning.
    Mr. Nolan, I want to ask you a few questions about a 
subject that is of interest and concern to me, which is 
privacy, specifically, the approach the Postal Service takes 
with respect to its privacy policy with respect to the eBillPay 
program. Let me ask you first just generally, would you agree 
that the Postal Service's approach to privacy is to try to 
incorporate the fair information practices of notice, choice, 
access, and security, is that something that you all try to 
meet and comply with?
    Mr. Nolan. Yes, sir.
    Senator Edwards. OK. We've got a copy, and I think you have 
a copy in front of you and there is a copy up on the easel over 
here, of the Privacy Act statement of the Postal Service. 
First, with respect to the notice consideration and giving 
people notice of what your privacy policy is and what you do to 
protect people's privacy, let me just ask you a couple of 
questions about this Privacy Act statement, if I can. It uses 
language, and I am referring now under the Privacy Act 
statement to the second sentence, that says ``The information 
may be disclosed,'' and then there are a number of enumerated 
categories. Let me ask you, do you disclose information that 
are not in one of those categories?
    Mr. Nolan. I am sorry, I am not sure I----
    Senator Edwards. If you look under the Privacy Act 
statement, second sentence. It says ``The information may be 
disclosed'' and then you have got a list of several categories. 
I guess what I am asking you is, are those the exclusive 
categories, circumstances under which information can be 
disclosed, or are those just examples of categories where it 
can be disclosed?
    Mr. Nolan. It was designed to be all-encompassing.
    Senator Edwards. OK. So what you intend to tell folks there 
is that the only way in which their information will be 
disclosed is if it falls within one of these categories. Is 
that correct?
    Mr. Nolan. Yes.
    Senator Edwards. OK. Well, I am not sure that is clear when 
you say ``may be disclosed.'' It might be a good idea to tell 
people that these are the only ways it can be disclosed.
    Mr. Nolan. I think that is a very good comment. I think the 
statement was designed to show that one or more of these may 
apply in a given situation. But we should say that they are the 
only situations under which circumstances may require us to 
issue information.
    Senator Edwards. OK. I think that is a good policy and I 
think it is important for people to know that is what it means.
    Mr. Nolan. I agree.
    Senator Edwards. Let me ask you a couple of follow-up 
questions about the specific categories that you have here. You 
say, under subsection (a), ``to an appropriate government law 
enforcement agency pursuant to a Federal warrant.'' Do you have 
any policy or provision that allows the people whose 
information is being provided to contest the warrant if it is 
something they think should not be complied with?
    Mr. Nolan. To tell you the truth, I do not know the answer. 
I will be glad to look it up and get back to you on that. I am 
not sure. I think from the law enforcement standpoint, that 
notifying someone that their information is being examined and 
having them contest it may wind up being a problem. But I do 
not know the answer and I will get back to you on that.
    [The information to be provided follows:]
                          INFORMATION PROVIDED
          This is the manner in which the Postal Service intends to 
        treat customer information acquired in its eBillPay service 
        offering.
          Privacy Act Statement: The information you provide will be 
        used to provide you with electronic billing and payment 
        services. The information may be disclosed (a) to an 
        appropriate government law enforcement agency pursuant to a 
        Federal warrant; (b) in a legal proceeding to which the Postal 
        Service is a party or has an interest when such information is 
        relevant to the subject matter of the proceeding; (c) to a 
        congressional office at your request; (d) to an independent 
        certified public accountant during an official audit of Postal 
        Service finances; (e) to the service provider under contract 
        with the Postal Service to provide eBillPay service; (f) to a 
        payee or financial institution for purposes of resolving 
        payment-posting questions or discrepancies regarding status of 
        electronic bill payment; (g) to a credit bureau for the 
        purposes of verifying identity and determining risk limits; and 
        (h) pursuant to a Federal court order. The provision of 
        information for eBillPay service is voluntary. However, if the 
        information is not provided, we will be unable to provide you 
        with our eBillPay service. The collection of information 
        required for this service is authorized by 39 U.S.C. 
        Sec. Sec. 401 and 404.

    Senator Edwards. Is that something that you think folks 
ought to have a right to do? If you get a warrant from a law 
enforcement agency saying they want this information, I assume 
you notify the people who are involved that you are about to 
provide this information. Is that right?
    Mr. Nolan. That is what I am not sure about. I need to find 
out that information. I am not sure of the implications, again 
from a law enforcement standpoint, at what point people should 
be notified, be given the opportunity. So I would need to 
provide that information to you. I am just not aware of that.
    Senator Edwards. OK. Would you find that out for me and let 
me know that, please.
    Mr. Nolan. Absolutely.
    [The information supplied follows:]
                  INFORMATION SUPPLIED FOR THE RECORD
    1. Can the eBillPay's Privacy Act statement be amended to clearly 
state that information will be disclosed exclusively for the 
specifically listed purposes?

         So long as our Privacy Act statement is consistent with the 
current system of records for eBP, the statement may be amended at any 
time. It would be consistent with the soon to be published revised 
eBillPay system of records to state that ``[a]s a routine use, the 
information may only be disclosed outside the Postal Service (a) . . . 
.''
         In publishing the Privacy Act statement, the Postal Service is 
meeting its obligation under the Privacy Act. Disclosures of the 
information within the agency for the purpose of providing and 
monitoring the service should reasonably be within the expectations of 
a customer of this service. Furthermore, the sentence preceding the 
introduction of the routine uses states that ``information you provide 
will be used to provide you with electronic billing and payment 
services.'' As the Postal Service seeks to set a standard for 
electronic commerce notification and protection, we will consider 
whether this sentence might also be amended to clarify internal 
releases as well.

    2. Is there a mechanism that would allow an affected person to 
challenge the issuance of a warrant before the Postal Service discloses 
information in response to receiving a warrant?

         No. The Privacy Act provides that the general prohibition 
against disclosure of Privacy Act records does not apply to 
disclosures:

        Lto another agency or to an instrumentality of any governmental 
jurisdiction within or under the control of the United States for a 
civil or criminal law enforcement activity if the activity is 
authorized by law, and if the head of the agency or instrumentality has 
made a written request to the agency which maintains the record 
specifying the particular portion desired and the law enforcement 
activity for which the record is sought;

      L5 U.S.C. Sec. 552a(b)(7). A Federal search warrant would 
certainly fall within the definition of a criminal law enforcement 
activity authorized by law.

         The Privacy Act does provide that an agency maintaining such 
records shall ``make reasonable efforts to serve notice on an 
individual when any record on such individual is made available to any 
person under compulsory process when such process becomes a matter of 
public record.'' 5 U.S.C. Sec. 522a(e)(8). This provision does not 
require advance notice, but rather only reasonable efforts to notify 
once a disclosure is made.

         There has been little litigation concerning this ``reasonable 
notice'' provision. Taking the language at face value, it would not be 
``reasonable'' to tip the subject of a criminal investigation that he 
or she is such a target. The purpose of search warrants, and the reason 
they are subject to specific judicial scrutiny prior to execution, is 
that they are used to seize records and evidence of criminal activity 
before the subject of the investigation has the opportunity to 
``cleanse'' those records. Where the element of surprise is not 
important, Section 522a(e)(8) makes provision for notification after 
release of the records.

         Title 18, U.S.C. Sec. 41 establishes the procedures for the 
issuance and execution of a search and seizure warrant. Rule 41 
requires that notice of the execution of a warrant be left with the 
custodian of the items seized. Postal Service regulations interpreting 
this requirement provide that, when live mail is seized, the Postmaster 
receives a copy of the warrant, not the addressee or sender of the 
piece seized, unless the sender has requested a return receipt, in 
which case notice and a copy is sent to the sender after execution of 
the warrant. Administrative Support Manual (ASM) 274.62 and 274.63.

         In the context of the seizure of personal information stored 
in electronic communications (it appears that eBillPay customer 
transactions would fall within this definition) there are specific 
requirements, and exemptions, for prior notification in the Electronic 
Communications Privacy Act, 18 U.S.C. Sec. Sec. 2701-2711. The ECPA 
requires that law enforcement entities obtain a warrant for certain 
stored electronic communications, and specifies notification 
requirements to the subject of the request. However, 18 U.S.C. 2705 
makes clear that a court shall grant a request for the delay of 
notification to the subject of the warrant. Similarly, when records 
that are subject to the Right to Financial Privacy Act, 12 U.S.C. 
Sec. 3401, et seq. are seized pursuant to warrant, the RFPA specifies 
notice requirements within 90 days of execution of the warrant. Again, 
however, the RFPA provides that, upon request, the notice requirement 
may be postponed where such notice could interfere with an ongoing 
investigation. 13 U.S.C. Sec. 3406.

         There does not appear to be any mechanism that allows the 
subject of a search and seizure warrant to challenge the release of 
information prior to the execution of that warrant. Certainly, however, 
any attempt to use the evidence seized as a result of a warrant is 
subject to potential challenge on a host of procedural and 
constitutional grounds.

    Senator Edwards. And if you look under subcategory (d), it 
says ``to an independent certified public accountant during an 
official audit of Postal Service finances.'' Do you have any 
provision or contractual obligation with the CPAs that may 
conduct an audit that provides that they cannot provide the 
information to somebody else? In other words, at that point 
does the customer who is involved, do they lose control over 
their private information?
    Mr. Nolan. Well, I should add two things. One is, there is 
a lot of information that is collected about transactions, 
these kinds of things that would have nothing to do with a 
person's personal information. The need for an auditor to look 
at personal information--your Social Security number, or your 
address or what have you--would be extremely remote, and I 
cannot even think of an instance at this point. It was designed 
more to indicate that looking at reams of data that would be 
available about transactions, volumes, revenues might be 
required. But it probably would not touch on an individual's 
personal information. However, should for some reason that come 
in contact with that auditor, they would absolutely be 
controlled by us from providing that information to anyone 
else.
    I should add one thing. Again, given our concern about 
privacy, and yet being in an area where privacy has been a 
concern, not because of the Postal Service but everyone in this 
space, what we are doing is convening a panel of privacy 
experts, people interested in the whole privacy field later 
this month to begin the process to have them understand what it 
is that we are trying to accomplish, how we are trying to 
accomplish it, to offer us the best possible information on 
ways to ensure that we are the best organization in the world 
in protecting people's privacy. That is an important part of 
our brand. It is not something we are playing games with. And 
we want to make sure we get the best information from experts 
in the field, not one time but on a continuing basis, to make 
sure that we are enhancing that space.
    Senator Edwards. And when is this panel convening?
    Mr. Nolan. It is later this month. I am not sure of the 
exact date, September 21 strikes me. I will let you know about 
that.
    Senator Edwards. Good. I am glad to hear that. And I am 
glad to hear your description of your attitude toward 
protecting people's privacy.
    One of the concerns I had is, not that brevity is 
necessarily a bad thing, but your privacy statement is 
relatively short and simple. And when I compare it to privacy 
policies of organizations like Bank of America, which I have in 
my hand here, which goes on for several pages and are very 
specific about the things that they are protecting, there 
obviously is a difference between the two. So I think it is a 
good idea for you all to be examining----
    Mr. Nolan. There are other web pages as well that describe 
in a lot more detail some aspects of our privacy and uses, etc. 
So there is a lot more than just this. We are trying to make it 
understandable. And we probably need to do that better and will 
continue the process to do that.
    Mr. Gleiman. Senator, if I may.
    Senator Edwards. Sure.
    Mr. Gleiman. Since I cut my teeth working on the Federal 
privacy law way back in the 1970's when I was an aide to 
Congressman Richardson Pryor----
    Senator Edwards. From Greensboro, North Carolina.
    Mr. Gleiman. Yes, sir. I thought I might add some insights. 
First, an earlier statement that the Postal Service published 
was far more onerous, and I think they are to be complemented 
for narrowing the routine uses that they will make of this 
data.
    Senator Edwards. You mean it was broader in terms of who 
they could disclose to?
    Mr. Gleiman. Yes, sir. And I think they have done a nice 
job in narrowing down and addressing this concern.
    Second, with respect to your question about pre-
notification. In the Federal Privacy Act, in order to avoid the 
onerous requirement that people be notified, and in some cases 
the counter-productive notification, pre-notification before 
the release of information, as might be the case when there was 
a criminal investigation, the law has a provision that permits 
agencies to establish ``routine uses,'' which are what you were 
seeing up there. The law does not require that individuals be 
notified before disclosure pursuant to published routine uses, 
only that an accounting of the disclosures be kept.
    I might add that while this statement is an improvement, 
there is nothing that precludes the Postal Service, or any 
other Federal agency, from coming up with additional routine 
uses that would broaden out the availability of data. But I 
take Mr. Nolan and others at the Postal Service at their word 
in that they are concerned and that this is an issue that they 
use as a selling point.
    Senator Edwards. Also, I am not sure we want to be bound by 
existing law, since it is to a large extent not existent. One 
of the things I think Mr. Nolan was saying is you want to go 
far beyond the existing law in protecting people's privacy, is 
that right, Mr. Nolan?
    Mr. Nolan. Yes, sir.
    Senator Edwards. Let me ask you just a couple of follow-up 
questions. You use a company called CheckFree to handle your 
electronic bill payments. They have a privacy statement, 
CheckFree, that says ``We do not share your personal 
information with other companies, the government, or any third 
party. Your personal information is kept strictly 
confidential.'' In other words, they have no subset categories 
of circumstances under which they disclose the information. 
Which privacy policy controls, CheckFree's privacy policy or 
the Postal Service's privacy policy, to the extent there is a 
conflict between them? Because theirs seems very absolute, ``We 
do not share your personal information with other companies, 
the government, or any third party.''
    Mr. Nolan. Well, I have not seen theirs. But, obviously, if 
a warrant was issued for information there, they would be 
required by law to give it up. So I am not sure that--there is 
no absolute there. But one of the reasons why we chose 
CheckFree, frankly, was their attitude about data and the 
sanctity of the data very much was in line with ours. And this 
is a company that has been in business for a long time and 
knows that if they are going to stay in business they have got 
to respect privacy. So I would say that we are looking to make 
our privacy policies and actions as rigid as we possibly can 
for the benefit of the consumer. Because that benefits our 
brand, our activity in the space, and, frankly, benefits the 
Internet in general. So we think it is just a sound business 
practice. So to the extent that we can, we want to make it as 
rigid as possible, recognizing that we, as private companies, 
have obligations under law to release information if we are 
given a warrant or whatever.
    Senator Edwards. One thing, when you convene your panel 
later, you may want to look at making sure that your privacy 
policy is consistent with organizations, like CheckFree, that 
you do business with. I think that would be important.
    I am very pleased to hear your description and your 
attitude about privacy and the fact that you are convening this 
panel. I think those all say very good things. And I agree with 
you that the Postal Service in fact should be the model of the 
kind of privacy protection that people in this country should 
expect.
    Mr. Nolan. The way that people have come to us, a lot of 
customers have come to us is saying to us that people trust 
you. As Mr. Gleiman indicated, there are other people who can 
offer these services. This is not a monopoly. Why do people 
want to come to us? Why do they want us in this space? Because 
they trust us. Frankly, our hard copy business is our bread and 
butter, will continue to be our bread and butter. To do 
anything that would damage that bread and butter in an area 
that is a new initiative would be ridiculous for us to do. So 
we take that very seriously.
    Senator Edwards. Good. Thank you very much, Mr. Nolan.
    Mr. Chairman, thank you.
    Senator Cochran. Thank you, Senator.
    Mr. Rider, there was some conversation with our GAO 
representative, Mr. Ungar, about the documents that were needed 
by GAO to verify that the Board of Governors had actually 
approved some of these e-commerce initiatives. According to the 
GAO report, the Board of Governors did not have documentation 
showing that it had approved but one of the seven e-commerce 
initiatives before they were launched.
    What is your response to that? Is that a problem? Has that 
been corrected? Do you intend to ensure that there will be 
documentation of the actions of the Board in the future on 
these issues?
    Mr. Rider. Senator, there were seven endeavors there. The 
first one we will discuss is ePayments. This was approved in 
the April Board of Governors meeting.
    NetPost Mailing Online was approved in our August meeting. 
The Board of Governors approved the PRC decision authorizing 
the pilot of this. That was done in August.
    With respect to Internet change of address and move-related 
products and Movers Guide, a proposal was presented to the 
members of eBob, which is our Business Opportunity Board, on 
April 13, 2000. The Governors were sent a letter on May 31 
informing them of all the proposed enhancements to this 
program.
    The next one is NetPost.Certified. The eBob approved it in 
August and the Board of Governors were briefed on this at our 
September board meeting.
    PosteCS--The Board of Governors were briefed on the launch 
of PosteCS in April, and in August the eBob approved the 
business plan.
    Stamps Online--The Board of Governors' approval was not 
necessary because of the minimal development expenditures and 
because it is an enhancement of our stamp selling process.
    Electronic Postmark--The Board of Governors was notified of 
that program in April 2000, and eBob approved the business plan 
in August 2000.
    Senator Cochran. Do you think it would be helpful in the 
future for the Board of Governors to have some documentation 
about the basis for its decisions on e-commerce initiatives on 
the record so that people who are interested, stakeholders 
particularly, can understand why they are deemed appropriate 
and in the public interest?
    Mr. Rider. Yes, sir, I certainly do. And the eBob committee 
was just formed, I think, in April and they will be reporting 
to the Board every quarter on their progress, and in every 
board meeting we expect to review any new initiatives.
    As far as the public notification, Senator, the Board of 
Governors' public notification complies with the provisions of 
the Sunshine Act and all of the presentations to the Board of 
Governors are documented. The minutes of our meetings are open 
to the public for their review. What I have told you on each 
one of these initiatives and the dates I have told you are 
gleaned from our records.
    Senator Cochran. Mr. Gleiman, there was a case recently 
entitled Mailing Online. Could you tell us how the Postal Rate 
Commission handled that and the issue, particularly of fair 
competition.
    Mr. Gleiman. Yes, sir. First off, it is important for you 
to know that the Commission is covered by the Administrative 
Procedures Act when it has a case before it, and, in keeping 
with that Act, we have hearings on the record where parties, 
both the Postal Service and others, can come in and make their 
case before the Commission and rebut one another's cases before 
the Commission. So we had an evidentiary record that we looked 
at.
    In examining the information that the Postal Service 
provided, we concluded that some of their costs were not 
calculated correctly. We made adjustments in the costs and also 
in the mark-up over cost of that product. The result was, for 
example, that a two-page black and white document, as proposed 
by the Postal Service would have cost 38 cents, and under the 
recommendation of the Rate Commission, which was accepted by 
the Governors, it would cost 41 cents. But that was one aspect 
of trying to protect competition, by not allowing a rate that 
was unreasonably low that would put the Postal Service at an 
unfair competitive advantage.
    Another aspect of that case involved an agreement that was 
reached, ostensibly through negotiations between the Postal 
Service and the parties who had intervened in the case, to 
ensure that all parties who offered similar services, and there 
is some language in the decision to describe the nature of 
similar services, would have available to them the reduced rate 
for the hard copy portion of mailing online that the Postal 
Service had requested from us and that we had approved. So that 
also kept the field level and did not give the Postal Service 
an advantage in the hard copy end.
    Senator Cochran. Mr. Nolan, the Postal Service has said it 
has identified an electronic mailbox, which is a concept in the 
development stage that could link electronic and physical 
addresses. Can you explain how an electronic mailbox would 
work. Would every American, for example, get one?
    Mr. Nolan. Again, Senator, as you indicated, we are in the 
conceptual development phase of the electronic mailbox. But 
every American could get one if they wanted, if we wind up 
offering the service. It is not something that we have secretly 
got a number for everybody and it is there and you have to use 
it.
    One of the things that becomes very obvious in the Internet 
is the value of information that has existed forever but was 
not able to be captured. So, for example, if you ordered 
something from a catalog or an e-tailer and were to receive 
delivery, would it be of value to you to know when that package 
was going to be delivered by the Postal Service so that you 
could be sure to be home, or ask the Postal Service not to 
deliver it that day, or to deliver it at a certain time? If we 
had the ability to take that physical address as we are 
scanning it through our normal process and be able to know what 
your E-mail address is to trigger an information notice to you 
that a package was coming, where would you like it, when would 
you like it, we think that would have value.
    We think there are other products and services in similar 
fashion that could also have value for consumers and they may 
very well appreciate receiving the information that way. We may 
find that people involved in our bill payment service would 
like to receive their bills in a special place, as opposed to 
their normal mailbox, that is less open to the public, more 
restricted in who they provide that information to. They might 
find a value in that particular space. So we are examining all 
those possibilities. We have not made any decisions yet. But it 
seems to us to be an area of opportunity that we are in fact 
investigating.
    Senator Cochran. One concern that has been brought to my 
attention is that this could possibly be used to send out 
unsolicited advertising. Is that expected or foreseen by you?
    Mr. Nolan. Absolutely not. To the contrary, it is because 
of concerns about spamming that this kind of thing would 
actually be of benefit. In this model, the sender pays. And so, 
as is true in the spamming environment when people are spamming 
individuals, they do not pay an intermediate body like the 
Postal Service for delivery of that spam message. In this 
particular kind of situation, if we offered the opportunity for 
customers to receive mail in their mailbox, the payment through 
us to that mailbox would be by the sender. That would tend to 
dissuade people from spamming.
    In our current mailbox we act as an agent, in the hard copy 
mailbox, the box at the curb or your front door, we act as an 
agent of the sender and the receiver. If you want to send mail, 
we are duty-bound to deliver it to that box. So what goes into 
that box is not your choice as the owner of the box, it is the 
choice of the sender. In the space on the Internet, we view the 
electronic mailbox as something that is controlled by the 
receiver. So only that which the customer wants to get in that 
box gets there.
    That is the model that we are using conceptually as we are 
developing that. It is designed specifically to ensure that the 
Postal Service is not a party to any kind of spamming situation 
or loss of privacy for the individual. So we are really turning 
that whole thing on its head in our conceptual phase as we are 
developing it right now.
    Senator Cochran. Some have suggested that the Postal 
Service, since it has law enforcement responsibilities for e-
commerce products and services, is positioned to compete 
unfairly just as a matter of fact with other competitors. How 
do you respond to that concern?
    Mr. Nolan. We pay for our Inspection Service. It is borne 
by our ratepayers. If individuals play games on the Internet, 
break the law on the Internet, the FBI, the Justice Department, 
there are a lot of law enforcement agencies which in fact can 
be brought to bear to find and convict those people committing 
those crimes. We have received a Memorandum of Understanding 
that enables our Inspection Service to delegate that authority 
to get involved in those kinds of activities where there is a 
postal nexus. But the fact is that we are interested, as is the 
Inspection Service, in enhancing the security on the Internet 
and so we work very closely with other law enforcement 
agencies. But we pay for that postal service.
    I appreciate the fact that people view it as a premier law 
enforcement agency. We are proud of that fact. It did not come 
as a result of statute; it came as a result of the way we do 
business. And to the extent that the way we do business gives 
people confidence in our abilities to maintain privacy and 
security, we are pleased with that. But our ads, everything we 
do does not tout the Inspection Service as much as it touts the 
fact that you are doing business with the Postal Service and 
the benefits from doing that.
    Senator Cochran. Another concern that has been brought to 
my attention is that because of the legal and regulatory 
framework that is used to create the Postal Service, that you 
are positioned to compete unfairly with others in these e-
commerce areas. What is your response to that? Is it unfair?
    Mr. Nolan. I would love to have the playing field that our 
competitors have. I think that the restrictions placed on the 
Postal Service far outweigh any benefits that exist for us to 
be able to compete. I think that what we are faced with here is 
an organization that is meeting a need within this country, and 
we think we have done it fairly well, hoping to do it better 
all the time. But to the extent that by doing the job we do 
everyday it enables us to offer products and services that 
satisfy the needs of customers, I think that is good news. But 
I think that in terms of restrictions that we have, again, if I 
were a competitor choosing whether to take my restrictions or 
their restrictions, I do not think anybody in their right mind 
would choose mine.
    Senator Cochran. I appreciate very much this panel's 
participation in the hearing. We have votes occurring on the 
floor and I have to go back over there and cast my vote. But I 
think we have had an excellent overview of the situation here 
with the e-commerce strategy and initiatives of the Postal 
Service being reviewed by the General Accounting Office and its 
report being presented to the Subcommittee today.
    We are going to undertake a careful review of all the 
information that has been provided to us today and are hopeful 
that the work of our Subcommittee will contribute to the 
overall understanding of the legal situation. And if there are 
indications that changes should be considered, we will be glad 
to hear from other Senators and those who are interested in 
this issue as well.
    The hearing is adjourned.
    [Whereupon, at 12:30 p.m., the Subcommittee was adjourned, 
to reconvene at the call of the Chair.]




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