[Senate Hearing 107-206]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 107-206
 
                  THE ANNUAL REPORT OF THE POSTMASTER
                  GENERAL AND THE IMPACT OF TERRORIST
                      ATTACKS ON POSTAL OPERATIONS
=======================================================================




                                HEARING

                               before the

INTERNATIONAL SECURITY, PROLIFERATION AND FEDERAL SERVICES SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 20, 2001
                               __________

      Printed for the use of the Committee on Governmental Affairs





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                   COMMITTEE ON GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 FRED THOMPSON, Tennessee
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
RICHARD J. DURBIN, Illinois          SUSAN M. COLLINS, Maine
ROBERT G. TORRICELLI, New Jersey     GEORGE V. VOINOVICH, Ohio
MAX CLELAND, Georgia                 PETE V. DOMENICI, New Mexico
THOMAS R. CARPER, Delaware           THAD COCHRAN, Mississippi
JEAN CARNAHAN, Missouri              ROBERT F. BENNETT, Utah
MARK DAYTON, Minnesota               JIM BUNNING, Kentucky
           Joyce A. Rechtschaffen, Staff Director and Counsel
         Hannah S. Sistare, Minority Staff Director and Counsel
                     Darla D. Cassell, Chief Clerk

                                 ------                                

INTERNATIONAL SECURITY, PROLIFERATION AND FEDERAL SERVICES SUBCOMMITTEE

                   DANIEL K. AKAKA, Hawaii, Chairman
CARL LEVIN, Michigan                 THAD COCHRAN, Mississippi
ROBERT G. TORRICELLI, New Jersey     TED STEVENS, Alaska
MAX CLELAND, Georgia                 SUSAN M. COLLINS, Maine
THOMAS R. CARPER, Delaware           GEORGE V. VOINOVICH, Ohio
JEAN CARNAHAN, Missouri              PETE V. DOMENICI, New Mexico
MARK DAYTON, Minnesota               ROBERT F. BENNETT, Utah
                Nanci E. Langley, Deputy Staff Director
               Mitchel B. Kugler, Minority Staff Director
                      Brian D. Rubens, Chief Clerk










                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Akaka................................................     1
    Senator Stevens..............................................     8
    Senator Cochran..............................................    10
Prepared statements:
    Senator Cleland..............................................    23
    Senator Bunning..............................................    24

                               WITNESSES
                      Thursday, September 20, 2001

John E. Potter, Postmaster General and Chief Executive Officer, 
  U.S. Postal Service............................................     2
Kenneth C. Weaver, Chief Postal Inspector, U.S. Postal Service...     3

                     Alphabetical List of Witnesses

Potter, John E.:
    Testimony....................................................     2
    Prepared statement...........................................    25
Weaver, Kenneth C.:
    Testimony....................................................     3
    Prepared statement...........................................    44

                                Appendix

Karla W. Corcoran, Inspector General, U.S. Postal Service, 
  prepared statement.............................................    49
U.S. Postal Inspection Service, prepared statement...............    63
News Release from the U.S. Postal Inspection Service entitled 
  ``Chief Postal Inspector Warns of Charity Scams,'' dated 
  September 20, 2001.............................................    76
Questions and responses for Mr. Potter from:
    Senator Levin................................................    79
    Senator Collins..............................................    81
    Senator Cochran..............................................    82
    Senator Cleland..............................................    95
    Senator Carper...............................................    96
    Senator Bunning..............................................    98
    Senator Bennett..............................................    99
Questions and responses for Mr. Weaver with attachments from:
    Senator Collins..............................................   100











THE ANNUAL REPORT OF THE POSTMASTER GENERAL AND THE IMPACT OF TERRORIST 
                      ATTACKS ON POSTAL OPERATIONS

                              ----------                              


                      THURSDAY, SEPTEMBER 20, 2001

                                     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 10:02 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Daniel K. 
Akaka, Chairman of the Subcommittee, presiding.
    Present: Senators Akaka, Stevens, and Cochran.

               OPENING STATEMENT OF SENATOR AKAKA

    Senator Akaka. The Subcommittee will please come to order. 
Good morning. Today, we have the Postmaster General, who will 
report to Congress on the state of the U.S. Postal Service. He 
is accompanied by the Postal Service's Chief Postal Inspector, 
Kenneth Weaver. We are also pleased to have a written statement 
by the Inspector General of the Postal Service, which updates 
her testimony from our May hearing, and I ask at this time that 
the statement be inserted in the record.\1\
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Corcoran appears in the Appendix 
on page 49.
---------------------------------------------------------------------------
    The great tragedy of September 11 has forever altered 
America and everything we take for granted. In the midst of 
unimaginable horrors, our Federal employees pulled together to 
deliver essential government services. Despite the terrible 
losses, the Federal Government was back to work the next day. 
It is in that spirit that we have asked the Postmaster General 
and the Chief Postal Inspector to address how the Postal 
Service was impacted by last week's events, where it is today, 
and what Americans may expect in the future.
    The operation of the U.S. Postal Service and the delivery 
of the mail are critical to our Nation's economy. One of the 
keys to America's recovery will be a strong and viable Postal 
Service. Delivery of the U.S. mail is a basic and fundamental 
public service that must be protected from disruption. However, 
there will be new costs associated with continuing this 
reliable and efficient service, which must also be reviewed.
    The delivery and security of the mail and the safety of 
postal employees are not the only challenges facing the Postal 
Service. There are many in our audience who are concerned with 
the Board of Governors' announcement that it will file a new 
rate case this month.
    As so many have said, the continued use of rate increases 
to raise revenue may end up having the opposite effect, 
depressing demand which will drive down revenues. It is 
essential that an organization the size of the Postal Service 
be governed by short- and long-term financial goals that 
support its core mission of providing universal mail service to 
all Americans at affordable prices. Because the Postal Service 
appropriately sounded the alarm over declining volume and 
decreasing revenues, Senators Cochran, Lieberman, Thompson and 
I called on the Postal Service in May to develop a 
transformation plan. This plan will be completed at the end of 
this year.
    Two months earlier, again at our request, the GAO began 
conducting an in-depth investigation of the Postal Service, and 
expects to finish its report by early next year. I will review 
all options recommended by the GAO, the Postal Service, and 
postal stakeholders. Moreover, despite the horrible burden 
placed on our President, it is critical to the Postal Service 
and the Nation that nominees for the vacancies at the Postal 
Rate Commission and the Board of Governors be sent to the 
Senate as soon as possible.
    Again, I welcome the Postmaster General and the Chief 
Postal Inspector to the Subcommittee. I would yield my time to 
Senator Cochran if he were here. However, I was informed that 
he is delayed by traffic, but will be here soon. Before 
Postmaster General Potter begins, I would like to note that Mr. 
Weaver must leave directly after his statement. Although we 
will not have an opportunity to ask questions of him now, he 
will respond to any written questions in an expeditious manner.
    Mr. Postmaster General, we look forward to hearing from 
you.

 TESTIMONY OF JOHN E. POTTER,\1\ POSTMASTER GENERAL AND CHIEF 
             EXECUTIVE OFFICER, U.S. POSTAL SERVICE

    Mr. Potter. Thank you. Good morning, Mr. Chairman. I 
appreciate the opportunity to talk with you today about the 
U.S. Postal Service. I have submitted detailed testimony in 
advance. However, recognizing the pressing business of the 
Senate, I will abbreviate my comments. Last week's attack had a 
personal impact on us. The Governors of the Postal Service were 
in public session when the terrorists attacked the Pentagon. 
With our offices overlooking the Potomac, within seconds we saw 
the absolute horror of the moment. None of us will forget the 
black plume of smoke coming from the building.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Potter appears in the Appendix on 
page 25.
---------------------------------------------------------------------------
    In New York, our Church Street Station was in the shadows 
of the World Trade Center. Our employees were getting the daily 
mail ready for thousands of businesses in the area. Their 
station was showered with glass and debris in the opening 
attack. They were in the process of evacuating when the first 
tower fell. Incredibly, none of our employees were hurt even as 
they ran to assist the wounded. I visited New York City last 
Friday and met with employees and managers who ran to help. I 
could still see the shock and disbelief on their faces several 
days later. As a native of New York City, the sight of the 
skyline without the towers remains inconceivable.
    Almost from the instant of the attack, we began to discuss 
ways to keep the mail moving. Over the years, we have learned 
that in times of natural disasters, the appearance of letter 
carriers making their rounds is an important signal to 
neighborhoods and the Nation that the fabric of everyday life, 
although damaged, remains intact. In times of disaster, our 
Postal Inspection Service, Mr. Chairman, plays a constructive 
role in helping management. Chief Postal Inspector Ken Weaver 
is with me today and I would like him to speak for a few 
moments about the role of his inspectors and the postal police 
officers, and what they did last week.
    Chief Weaver.

  TESTIMONY OF KENNETH C. WEAVER,\1\ CHIEF POSTAL INSPECTOR, 
                  UNITED STATES POSTAL SERVICE

    Mr. Weaver. Thank you, Postmaster General Potter, Mr. 
Chairman and Members of the Subcommittee for the opportunity 
today. I have a separate written report of the activities of 
the U.S. Postal Inspection Service and would like to have it 
entered into the record.\2\
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Weaver appears in the Appendix on 
page 44.
    \2\ The report of the U.S. Postal Inspection Service appears in the 
Appendix on page 63.
---------------------------------------------------------------------------
    Senator Akaka. It will be entered into the record.
    Mr. Weaver. Mr. Chairman, today I am wearing an American 
flag on my lapel in place of the Postal Inspector pin that I 
normally wear. I have served in the Army, as you have, under 
this flag. I have also served under this flag for 30 years in 
the United States Postal Service, 27 of those years as a postal 
inspector. As the Chief Inspector, I have always been proud of 
the outstanding work performed by the men and women of our 
Postal Service, but I have never been more proud of how 
Inspection Service employees handled themselves and answered 
the call to duty than I have during this crisis. As the tragic 
terrorist events of last week unfolded, the Inspection Service 
immediately took action in support of the Postal Service and 
all Americans.
    Across the country, inspectors, postal police officers and 
support personnel performed acts of heroism and provided 
security and investigative assistance to protect employees and 
customers, the mail, our post offices and to help others in 
their effort to address our Nation's tragedy. The Inspection 
Service has the responsibility to ensure the safety and 
security of postal employees, facilities and assets, as well as 
the U.S. Mail. We have done just that, and we have done more.
    I visited New York yesterday to express my heartfelt 
appreciation to all our people for the outstanding effort they 
have put forth during this crisis. Although shaken from the 
attacks, there is that steely New York resolve to put things 
back together. I saw it in the eyes of our employees. They will 
not be defeated. On the tragic day of September 11, our New 
York division suffered the most serious effects from the 
attack. The postal facility across the street from the World 
Trade Center, Church Street Station, was the home for numerous 
Inspection Service staff employees. Inspectors at Church Street 
offered immediate assistance to victims on the street; 
civilians, local police officers and firemen injured in the 
attack, and helped to evacuate the area as smoke and debris 
filled the air.
    Since the attack, inspectors in New York and outlying 
offices have been following up on the numerous bomb threats and 
scares which have forced evacuation of postal facilities. We 
are also working with the FBI on investigative leads in the New 
York area. When the attack on the Pentagon occurred, postal 
inspectors from the Washington, DC area responded to assist FBI 
agents with evidence collection at the crash site. In 
Pennsylvania, inspectors from the Pittsburgh area reported to 
the plane crash site at Somerset County to assist in securing 
the site and the mail. Three teams of postal inspectors 
continue on a rotating shift at the FBI command center.
    We are also providing significant investigative assistance 
and support to the FBI, the Federal Aviation Administration and 
emergency management agencies across the Nation, while 
assisting postal operations managers at command centers. As 
Postal Service operation managers have dealt with moving the 
mail during the last week, the Inspection Service has worked to 
ensure mail security nationwide. For example, the Amtrak 
network has been expanded and postal inspectors are present at 
key locations nationwide that serve as transfer points for the 
mail.
    Tragedies so often bring out the best in people. 
Unfortunately, tragedies also bring out those who would prey on 
the misfortune of others, and on that very desire to help 
victims. These are the con artists who will solicit donations 
through the mail for the families of victims, yet not a dime 
will ever make it to those in need. Mr. Chairman, I want to 
assure you that postal inspectors will aggressively pursue 
those con artists. We are offering some advice to the American 
public on how to make sure their donations go where they are 
intended. In conjunction with this hearing, we have issued a 
press release with this useful information, and I would like to 
make it part of the record.\1\
---------------------------------------------------------------------------
    \1\ The press release of the U.S. Postal Inspection Service appears 
in the Appendix on page 76.
---------------------------------------------------------------------------
    Senator Akaka. Without objection, it will be made part of 
the record.
    Mr. Weaver. Thank you, Mr. Chairman.
    Safety and security of Postal Service employees is my top 
priority. Security must be part of all postal employees' 
activities. We have advised management of the security 
precautions they should take to contribute to this overall 
effort. I am also proud that postal employees have provided 
eyes and ears in our Nation's neighborhoods and business 
communities. In recent days, employees have provided 
information which has assisted law-enforcement investigative 
efforts during this crisis.
    Before closing, Mr. Chairman, I want to, again, salute the 
outstanding commitment to duty and resolve of postal 
inspectors, postal police officers and our support staff. And I 
assure you that the U.S. Postal Inspection Service will 
continue to work to keep our employees and customers safe, to 
keep the mail moving, and to preserve America's confidence in 
the postal system. We will also continue to join with other 
Federal law-enforcement agencies in the investigation of last 
week's tragic events.
    Mr. Chairman, I appreciate your interest in the Inspection 
Service and the opportunity to address you. This concludes my 
remarks.
    Senator Akaka. Thank you very much, Mr. Weaver for your 
excellent report. I certainly want to add my pride and 
gratitude of the people in the Postal Service and what they 
have done since Tuesday to make our Nation feel secure that the 
mail will continue to be processed and delivered throughout the 
country. We are proud of the folks in the Postal Service and I 
want to extend our thank you to them for what they have done. 
As you have pointed out, events like this bring out the best 
and the worst among people. We would like to encourage those 
who have come forward to sacrifice themselves, their time, 
their resources, to help our country to continue to be great. 
That is what we are all trying to do, and I want to thank you 
again for your report, which I feel will renew the spirit of 
America.
    Mr. Weaver. Thank you, Mr. Chairman.
    Senator Akaka. Mr. Potter.
    Mr. Potter. Mr. Chairman, like Chief Weaver, I am extremely 
proud of our 800,000 men and women and how they pulled together 
to reroute mail from aircraft to ground transportation. We had 
men and women volunteering to go to New York City and help get 
the mail home. It became clear to me in Washington when I was 
in New York that our team was committed to keeping the Nation's 
fundamental communications network delivering. I cannot say 
enough about the thousands of postal employees in New York City 
and the Washington, DC and the greater Pittsburgh metropolitan 
areas, whose personal lives were disrupted, yet found ways to 
get to work and ask, ``How can I help?''
    I also want to salute the hundreds of contract truck 
drivers who move the mail every day, and my compliments to 
George Warrington, President of Amtrak, who added hundreds of 
cars to their network to move the mail. They reacted with 
flexibility and speed. I also want to thank Fred Smith, the CEO 
of Federal Express, and his team. As you know, it was only 3 
weeks ago that FedEx began moving Express, Priority, and First-
Class Mail under a new contract. Almost from the time of the 
terror attack, our teams worked cooperatively and closely to 
serve America and our customers. I am pleased to report that 
amid the national focus on Tuesday, September 11, mail handlers 
and clerks reported to plants across the Nation that afternoon, 
and worked into the evening to process and distribute the mail 
for customers and businesses.
    On Wednesday, September 12, across America, postmasters and 
station managers opened their offices. By midmorning, while 
clerks manned their retail windows, letter carriers began 
fanning out throughout the neighborhoods, delivering and 
picking up Wednesday's mail. In New York City, we concentrated 
on how to get the mail to residents and businesses in Lower 
Manhattan. With the determination that marks New Yorkers, they 
got it done. Today, we are well along to restoring full service 
in New York.
    While America's airlines sat idle, our operations managers 
kept mail moving over land by trucks and trains. When the 
Federal Aviation Administration gave the go-ahead for 
commercial airlines to fly, we were ready to put the mail back 
aboard. In cooperation with the FAA, our aviation security 
group had redoubled efforts to ensure the safety of mail 
traveling by air. Our people remain in close contact with the 
FAA, cargo carriers, commercial airlines and the Postal 
Inspection Service to ensure the integrity of mail flying on 
airliners. Therefore, in places such as Hawaii, Alaska and 
Puerto Rico, our customers are getting mail and parcels from 
the mainland again.
    In the broader context, the events of last week tell a 
great deal about our role as a basic and fundamental service, 
provided for the people by the Government of the United States. 
But in providing that service, the Postal Service is mandated 
to operate like a business, yet we face the same economic 
factors as every other business. This means that we must 
balance our public service responsibility within the framework 
of businesslike operations, since we do not receive and have 
not received tax dollars for postal operations in almost 20 
years. Like other businesses, rising costs and the soft economy 
of the past year have affected us.
    Revenue and mail volume lag behind projections, and as soon 
as we saw those trends developing early in 2000, we responded 
aggressively to lower costs. Through it all, we have had record 
customer satisfaction levels, reflected by strong performance 
in independent service measurements. Over the past 2 years, we 
have reduced career staffing by more than 21,000 positions. 
This year alone, we used 23 million fewer work hours, the 
equivalent of 11,500 employees. When all the initiatives were 
totaled, we removed more than $1.3 billion in costs from our 
system just this year. These efforts have contributed to nine 
straight quarters of positive productivity, an unprecedented 
increase of 4.5 percent over the last 2 years.
    Next year, we have the most challenging budget we have ever 
had. We are looking to reduce work hours by another 26 million. 
That is the equivalent of 13,000 jobs. We will do that in an 
environment that will see another 1.7 million daily delivery 
stops added to our network, and hopefully, an additional 2 
billion pieces of new mail in our system. Yet, as fast as we 
have reacted to reduce cost, rising energy and health-care 
costs and an uncertain economy have continued to challenge us. 
Even before last week's terror attack, we expected that mail 
volume will not keep pace with the annual growth in new 
households. Fiscal year 2001 will show a deficit in the range 
of $1.65 billion, the second straight year of losses. For 
fiscal year 2002, we project that we are going to have a 
deficit of $1.35 billion.
    Against this backdrop, 2 weeks ago I announced the most 
sweeping changes, organizational changes, to affect the Postal 
Service in 10 years. The changes will improve our focus, will 
improve our accountability. We will prioritize program 
expenditures and drive performance. We have reduced the number 
of officers in the Postal Service by 20 percent, and we will 
eliminate over 800 headquarters and headquarters-related 
positions. We have eliminated two of our ten field area 
management organizations. The eight remaining areas will 
accelerate efforts to achieve a 30 percent staffing reduction 
by the end of this year.
    Our plants and district offices will reduce administrative 
staffing by 10 percent, without affecting the collection, the 
processing and delivery of the Nation's mail. Success with 
automated equipment will also permit us to consolidate a number 
of processing facilities and operations around the country. 
This will be announced in mid-October, with implementation 
scheduled for January. Despite these cutbacks, the Board of 
Governors of the Postal Service voted to file a new rate case 
with the Postal Rate Commission later this month. 
Unfortunately, a 30-year-old statutory rate procedure has us 
initiating the process a year before new rates can be 
implemented. Strong cost management enables us to limit this 
filing to an average of just under 9 percent, lower than the 10 
to 15 percent that many anticipated. While the cost of a First-
Class stamp would increase by 3 cents, if our proposal were 
initiated, it is important to note that the 8-cent stamp of 
1971, when adjusted for inflation, would cost more than the 34-
cent price of today's stamp.
    By the way, Mr. Chairman, we estimate that a typical family 
will pay less than one dollar extra per month for this service. 
Recognizing the difficult position of the Postal Service, 
financially and otherwise, both Congress and the Comptroller 
General of the United States have asked us to develop a 
comprehensive transformation plan to serve as a long-term 
blueprint for this organization's future. In the last week, 
perhaps more than ever, we have seen how the Nation depends on 
the Postal Service to keep people in touch and to help drive 
the economy. This transformation plan will help us to identify 
short- and long-term actions that protect our ability to do 
this.
    We are working with a wide range of postal stakeholders and 
pursuing a three-phased approach to developing the plan. Each 
of these phases is being developed on parallel tracks. In phase 
one, we will continue to identify and implement actions that 
are available to us right now to manage more effectively and 
serve the American people better. In phase two, we will 
identify the moderate legislative changes that provide us with 
better tools to meet the business and consumer needs of our 
customers in today's world. In the third phase, we are working 
to identify options for long-term comprehensive changes that 
will define and support the role of the Postal Service well 
into the 21st Century.
    Development of this transformation plan is one of my 
highest priorities. You will receive our discussion document at 
the end of this month and our plan at the end of this year. 
There is a general agreement that the 31-year-old law that 
created the Postal Service does not provide us with the tools 
necessary to protect affordable, universal service. I look 
forward to the Subcommittee's input in our continuing efforts 
to build a strong and healthy future for America's Postal 
Service. With your help, I believe our post offices can 
continue to play a vital role in keeping America connected.
    I cannot say often enough how proud I am of our employees. 
When I was in New York with those employees most affected last 
week, I thanked clerks, mail handlers, supervisors and letter 
carriers for coming to work. One letter carrier, whom I cannot 
forget, looked at me and said, ``I have to be here because my 
customers need me to be here.'' That, Mr. Chairman, says a 
great deal about our men and women. Thank you for this 
opportunity. I look forward to working with you and the 
Subcommittee in the future. I would be pleased to respond to 
any questions you may have.
    Senator Akaka. Thank you very much, Postmaster General 
Potter for your testimony. Without objection, we will put your 
full statement in the record.
    Mr. Potter. Thank you.
    Senator Akaka. I also want to convey to you our pride and 
our gratitude to the Postal Service for the way in which they 
responded to the disaster that occurred on September 11. As you 
pointed out, they went back to work the next day to deliver 
mail and to continue service to our country. I am also glad to 
hear from your statement about helping the economy. It gives us 
an idea of where we are, and I am glad to hear about where the 
Postal Service is now and what you are planning for the future.
    In speaking about the disaster and our economy, I felt 
terrible to learn that there were 60 nations that were affected 
by the possible deaths of people in the World Trade Center. As 
you pointed out, the tragedy of September 11 has united us in 
our spirit and our resolve, and we certainly want to continue 
that.
    Senator Cochran. Good morning.
    Senator Akaka. I'm pleased to have my good friend, Senator 
Cochran with us now. I just want to ask--I do not know the time 
constraints for my other friend, Senator Stevens, and would 
like to ask Senator Cochran to make the decision as to whether 
Senator Stevens will go before him.
    Senator Stevens. Let me make that. I will be glad to----
    Senator Cochran. No, I am going to make the decision. 
Senator Stevens ought to be recognized.
    Senator Akaka. Thank you very much. Senator Stevens.

              OPENING STATEMENT OF SENATOR STEVENS

    Senator Stevens. Mr. Postmaster General, I welcome you in 
your first appearance here, that I have been able to attend. I 
do think we are very fortunate with your background, in terms 
of the operations that you have been involved in in the Postal 
Service, that you have come up to this level of the postal 
system. So I congratulate you for your appointment, and I also 
want to tell you that we are going to need all of your 
experience in dealing with the times that are ahead of us.
    In Alaska, we have had some really difficult times, I am 
sure you know. In our State, 75 percent of all intercity travel 
is by air, almost 90 percent of the mail is delivered by air 
into the smallest of communities. After September 11, as you 
know, everything was grounded for a day or two. We had a hard 
time reminding some people downtown that the taxis were still 
running in New York, the buses were running, and the trains 
were running there, but guess what? There were none of those in 
90 percent of Alaska. So we do appreciate your understanding 
and help in that situation. I am informed that we are almost 
back to normal, not quite, but almost.
    In an area where hay for horses and diapers for babies are 
delivered by the Postal Service under what we call bypass mail, 
it is a real challenge to keep up with our system. I wanted to 
chat with you just a little bit about the future of that. There 
is currently a limit on the use of the passenger-carrying 
aircraft for rural Alaska. I had to look into that. It was an 
odd and terrible day for Alaska, September 11 and 12 was, 
because that was a time when our school teachers were leaving 
to go from the major hubs out to the rural schools, 270 of them 
and probably 260 of them going by air.
    We had enormous difficulty getting our people around, and 
one of the things we have tried to do with bypass mail is to 
ensure that a sufficient amount of mail went on the passenger-
carrying local airplanes, so that stability of those airlines 
to survive would be assured. Have you been able to look into 
that yet, Mr. Postmaster General, in terms of what we will be 
able to do to sustain the type of local passenger service that 
has been in the past sustained through the use of bypass mail 
and the support of the Postal Service?
    Mr. Potter. Senator Stevens, let me begin by thanking you 
for your help to the Postal Service and working with the FAA. 
It is most appreciated. As you mentioned, there are 
restrictions on our tendering of mail, certain types of mail, 
to larger aircraft within Alaska. We are using cargo planes to 
move the mail. We have recertified our processes for airline 
security, working very closely with the FAA. In fact, just this 
past summer, we had redone our airline security procedures with 
the FAA's approval, and we had retrained many of the people in 
the country who handle the mail.
    With last week's events, we went out and did a 
certification, 100-percent certification of all people, to make 
sure we were in compliance with those new regulations or those 
new procedures that we had. We are going to work closely with 
the FAA to ensure that we are able to move mail within Alaska, 
and we will take whatever security measures are necessary. We 
do want to keep mail--as you said, for the viability of those 
passenger airlines, we would prefer to keep mail flying on 
those planes, but again, we will take all the necessary steps 
in order to assure that the mail that is tendered to those 
airlines is----
    Senator Stevens. Well, I thank you very much for that. Many 
people forget that these little carriers that we are talking 
about that carry 9 to 12 passengers, there is not much of a 
fuel load. They are not really capable of doing much damage as 
far as being used as those two monster airplanes were used in 
New York, as bombs--and the one against the Pentagon. These 
are, again, taxis, and they are literally air taxis, but they 
have an economic viability if they can carry the mail; and if 
they are assured that they will carry the mail, they get out to 
those villages and oftentimes people, when they see the mail 
plane come in, they make up their mind that this is the time to 
go to town. So it is the mail that really generates passenger 
traffic and not the other way around. I do look forward to 
working with you, and again, I really am delighted.
    You have got the background, in terms of logistical 
activities of the Postal Service that we need now, and I am 
sure this Subcommittee is going to be working very hard with 
you. I have got to apologize. My friend from Hawaii, he has a 
similar circumstance, but when the planes do not fly over 
there, they just take boats. We do not have quite the same 
circumstance, except when I first came to the Senate, once a 
year there was a vessel known as the North Star, that took 
supplies to all the villages along the Alaska Coast. It went 
out once a year. All of their supplies had to go to their local 
stores--they had to purchase them a year in advance--and 
logistically that meant, in terms of their economy there, they 
did not get much.
    Things have changed now. The day before Christmas I flew 
over with a friend of mine over to Bethel, which is in the 
center of the West Coast of Alaska. I walked through a mall and 
a native store there, where the things that were available to 
those people for Christmas was just overwhelming, compared to 
what I knew was there 30 years ago. Extending the mail system 
and making it reliable in Alaska has been brought about by the 
modernization of rural Alaska, and has brought them into the 
21st Century with everyone else. I cannot think of another 
entity of government that means more to rural Alaska than the 
Postal Service.
    I want you to know, as I have in the past, Mr. Chairman, I 
have served on this Subcommittee longer than anyone on our side 
of the aisle in history. The old Postal Committee was my first 
Committee when I came to the Senate, and I want to continue as 
long as I am here to work with you, because I think you are the 
lifeline for rural Alaska. I am sorry. I have got to go back to 
the other committee, Mr. Chairman and Senator Cochran, because 
we have--guess who? Secretary Mineta and FAA is over there, and 
I want to make sure they understand what I just told you. Thank 
you very much.
    Mr. Potter. Thank you.
    Senator Akaka. Thank you very much, Senator Stevens for 
your statement. I must also add that we certainly share the 
concerns that noncontiguous States have, especially with the 
mail service. So I want to thank Senator Stevens for his 
comments.
    And now, Senator Cochran.

              OPENING STATEMENT OF SENATOR COCHRAN

    Senator Cochran. Thank you. Mr. Chairman, I want to join 
you in thanking Senator Stevens for being here this morning and 
putting in perspective the importance of the Postal Service, 
not only in his State, but I think it is true throughout rural 
America. So the challenges are quite immense. I noticed that 
one of the biggest challenges for the Postal Service is to try 
to modernize and bring your activities up into the modern 
world, and one of the steps that was taken some time ago was to 
move into the area of e-Commerce, so-called electronic 
activities. I am told that in spite of the fact that it was 
expected to help make up for lost revenues from loss of mail 
moving into that area, the Postal Service has not really been 
able to make any money in e-Commerce.
    My question is can you confirm that, and, if so, what are 
your plans to deal with the challenges of e-Commerce? Are you 
going to abandon that or continue to work on it?
    Mr. Potter. Recently, I made organizational changes at the 
headquarters level. Part of that organizational change was to 
take the vice president of e-Commerce, the vice president of 
Package Services, the vice president of Core Products and the 
senior vice president of Corporate Business Development, and 
move them into one organization called the Vice President of 
Products for the Postal Service. Over the course of time, there 
has been internal competition for resources along the areas--
and, obviously, e-Commerce was one of the areas that was in 
competition for resources. The reason I did that was because I 
wanted the organization to focus on one thing. I wanted to 
focus on core products.
    We have some $68 billion in revenue, and my challenge to 
the organization is not to become the premier provider in the 
e-Commerce world. My challenge to the organization is to see 
what we can do to grow that core business, because it is a 
simple analysis. If you wanted to make $680 million and you 
were the Postal Service, it is a lot easier to grow the core by 
1 percent than it is to take a new product and have it come to 
grow to $680 million in revenue. Now, with that said, I want to 
assure everybody, and our customers in particular, that we want 
to move into the Internet. We want to do business, because 
businesses are moving to the Internet to deal with one another, 
and that is a channel for payments. I am talking about our 
major customers--that is a channel that we use to share 
information. So the Postal Service has to be on the Internet.
    We do have a number of e-Commerce initiatives that have not 
produced revenue, that are not meeting the expectations of 
their business plan. We have also eliminated some of those 
initiatives, but I would be happy to share those for the record 
with you. The initiatives that we have, we have put under a 
microscope. We are tracking, monitoring on an accounting-period 
basis, the revenues that we take in, what our costs are, and 
over the next 6 months, our plan is to take those initiatives 
that have not been meeting their business plan, and to put them 
on a critical watch. If, in 3 months we cannot turn things 
around, we are going to eliminate those initiatives. We are not 
going to perpetuate programs that do not have a bright future 
and will not generate the revenues that were expected when 
those programs were initiated.
    Senator Cochran. I noticed that one of the requests that 
has come from the Postal Service just recently is for a 
supplemental appropriation. Could you tell us what this 
supplemental appropriation is needed for, and the exact amount 
you are requesting?
    Mr. Potter. We have asked for $957 million. That is money 
that is owed to us for services that were provided in the 
1990's, and the Congress made a decision that they would pay 
that amount to us in $29 million over a 42-year period of time. 
What we are asking for is to accelerate those payments. Given 
our financial condition right now, we could certainly, as could 
other businesses around America, use $957 million. But our goal 
is to take that money and begin to invest it in the 
infrastructure. Last year, we stopped the building of post 
offices around America. We put a freeze on our capital budget 
for construction of postal facilities. We have had to make a 
decision that we are going to continue that freeze into 2002. 
We would like those funds so that we could, first of all, help 
our bottom line, as well as to accelerate our ability to move 
ahead and continue to build the infrastructure that we need.
    Senator Cochran. There had been some discussion that, 
rather than ask for a substantial postal rate increase, as we 
now know has been done, there was consideration given to asking 
for a phased-in increase in postal rates. Why was the decision 
made to ask for a larger increase and not phase-in the postal 
rate increases?
    Mr. Potter. We took a very hard look at the phasing-in of 
postal rates. Unfortunately, the fact that we are so close to 
our borrowing cap gave us very little flexibility, in terms of 
being able to ask for a smaller rate increase in 2003--our 
fiscal year 2003--and then smaller increases beyond that. So we 
really were hard pressed in terms of bumping up against our 
borrowing limits. Now, that said, a lot of people have 
suggested why not just expand the borrowing limit? 
Unfortunately, given the fact that the only way we can pay down 
the debts that we have is through net income, expanding the 
borrowing limit really does begin to mortgage our future.
    So we felt that, given the circumstances, we had to ask for 
a rate increase and we could not establish a rate increase 
phasing it in. There are just too many inherent risks to what 
we have to deal with in the next year. Those risks include the 
soft economy and the types of volumes that we had projected for 
this year. Certainly, that is at risk. We have three cases--
three contracts that expired that are currently being 
arbitrated by a third-party arbitrator who will make a decision 
about the amount of money that we pay our employees. We have a 
fourth agreement that is currently being negotiated with our 
National Association of Letter Carriers. In total, there are 
some 700,000 employees whose salaries will be determined in the 
coming months. We do not know what the outcomes, particularly 
on the arbitration, will be. So, there is an inherent risk 
there. So, given the risks in our economic situation as we look 
into the future, we felt it only prudent to file rates, and we 
did not feel that we could file rates in a phased manner.
    Senator Cochran. There was a letter that some of us signed, 
asking for a report on the transformation plan of the Postal 
Service. I understand that you are making good progress in 
compiling this information for the Congress and before the end 
of the year, we can expect to have a complete report that we 
requested. Is that information that I have true, and do you 
have any comments about the transformation plan?
    Mr. Potter. Senator, that is true. We plan to produce and 
publish a discussion document by the end of this month. We are 
well underway to completing that document. I have reviewed 
several drafts. We are working closely with the GAO, and we are 
planning a parallel phased approach. Our first phase--and, 
again, we are going to run these parallel to one another--is to 
do everything that we can as a Postal Service to improve our 
posture. That includes taking costs out, looking at our 
networks. In our second phase, we are working and looking for 
moderate legislation that will help us and give us some tools 
so that we can improve the way we do business and act in a more 
businesslike manner. And the third phase will be a discussion 
of a long-term perspective; a comprehensive discussion about 
where the Postal Service should be, what should universal 
service look like 15 or 20 years from now, so that we can begin 
managing our way to an ultimate picture, an ultimate vision, of 
what the Postal Service is.
    It is very important as we do that that we recognize them 
now more than ever--given the events of last week, that we 
recognize the importance of the Postal Service to our economy. 
Some nine million people throughout America are employed, not 
by the Postal Service, but in the mail business. Some $900 
million is transacted in the mail business. We are a vital part 
of the economy, and we take this opportunity to build a 
transformation plan very seriously. It is a high priority and 
we are going to fulfill the direction that we were given by the 
Senate to build a comprehensive plan with stakeholder input, so 
that we have a good working document that we can then fulfill.
    Senator Cochran. Well, Mr. Chairman, I congratulate the 
Postmaster General on the good start you are off to. I think 
you are making good progress. You have got a sense of where you 
need to be, an obligation to reduce deficits and to get better 
control over the operation of the Postal Service, generally. So 
I wish you well and commend you for the excellent start that 
you have made as Postmaster General.
    [The prepared statement of Senator Cochran follows:]

             OPENING PREPARED STATEMENT OF SENATOR COCHRAN
    I welcome you, Postmaster General Potter and Chief Postal Inspector 
Weaver, in your first appearances before the Senate. I would also like 
to thank you both for the significant efforts the Postal Service and 
the Postal Inspection Service have made during the past several days to 
keep the mail moving in as safe and expeditious a manner as possible.
    Postmaster General Potter, you stepped into your new role at a very 
interesting, and also very difficult, time for the Postal Service. In 
fact, you were appointed Postmaster General just 2 weeks after this 
Subcommittee held a hearing in May to discuss the seemingly rapidly 
deteriorating financial situation of the Postal Service. Fortunately, 
the numbers relating to the Postal Service's expected deficit for this 
fiscal year have improved slightly since then. However, significant 
challenges remain in the effort to return to a ``break-even'' state--as 
made evident by the Postal Board of Governors' plan to file for another 
rate increase, an ongoing facilities funding freeze, and new plans for 
substantial workforce cuts. Hopefully, today's hearing will provide us 
the opportunity to discuss further cost cutting and revenue generating 
plans you may be considering.
    I appreciate the efforts the Postal Service has made thus far in 
preparing a comprehensive transformation plan, as requested by Senators 
Akaka, Thompson, Lieberman, and me. I understand that we can expect to 
receive this at the end of the year, along with a detailed plan for 
deficit reduction. These plans should prove highly useful in helping 
the Senate understand the long-term operational, financial and human 
capital needs of the Postal Service.
    Despite the Postal Service's current difficulties, the agency's 
tremendous workforce of over 800,000 employees has maintained record 
service performance and high levels of customer satisfaction--with over 
one million new addresses being added each year. The agency's 
reputation as a highly dependable deliverer of mail to American 
citizens throughout the country is well deserved.
    I am pleased to have this opportunity to review with the Postmaster 
General the activities and problems of the Postal Service and any 
issues that, in his judgment, should be brought to the attention of 
this Subcommittee.
    I do hope the Postal Service will continue to pursue its 
fundamental responsibilities, providing universal mail service at 
affordable rates.
    I thank you, Chairman Akaka, for holding this hearing. I look 
forward to hearing the Postmaster General's and Chief Inspector 
Weaver's reports.

    Mr. Potter. Thank you, Senator.
    Senator Akaka. Thank you very much, Senator Cochran.
    Postmaster General, you and Mr. Weaver have described some 
of the extraordinary steps the Postal Service has taken during 
the past 10 days to ensure that the mail is delivered in a 
timely manner, despite the devastating circumstances that we 
all faced. I, too, want to join Senator Cochran in applauding 
your leadership during this time, and also your leadership in 
what is ahead for the Postal Service.
    I again commend the hundreds of thousands of dedicated 
postal workers who work so hard every day to deliver the mail. 
Many times during disasters, the Postal Service is the first 
sign of the Federal Government on the scene. As you noted, mail 
was delivered to many homes and businesses last Tuesday. My 
question is what types of disaster plans does the Postal 
Service have, and would you further explain the steps the 
Service took last week to secure the U.S. mail, ensure 
delivery, protect its employees and communicate information to 
the field? You partly answered this, but perhaps you can expand 
on that.
    Mr. Potter. Let me just tell a little story. You mentioned 
that mail was delivered on Tuesday. We had people who work in 
our headquarters building, and, as you know, the city was 
evacuated. We shuttered postal headquarters and people were 
asked to go home, and there was a horrendous traffic jam as 
people moved to their homes, and I had two employees come to me 
and say, ``You know, I got home at two o'clock and right behind 
me was the letter carrier, delivering that mail.'' So even here 
in Washington, people were delivering the mail.
    As soon as we saw--as we were up on the 11th floor of our 
building and we saw what happened at the Pentagon, we began an 
evacuation of our building, and we immediately went into our 
continuation-of-operation plan. We had people that were 
dispatched to a location outside the Beltway to activate that 
center, while we kept half the folks downtown to communicate to 
the areas and to issue instructions on what to do. Immediately, 
we moved and developed a plan to move mail on the ground.
    About 20 percent of our mail flies, so we wanted to make 
sure that the economy kept going and that we kept the payments 
that were in the mail--we kept them moving. So, immediately we 
went to ground transportation. As I said, Amtrak offered to 
give us additional cars on trains, build trains for us, and 
within a couple of hours we had that conversation. Federal 
Express called us and said, ``We will move the mail by truck.'' 
We went to our trucking folks and we asked them to run extras 
and make sure that the mail kept moving. Throughout that 
process, we stayed in communication with the field. As you 
know, domestic air carriers were told to ground their planes. 
Some of those planes landed in places where we do not have air 
mail centers. So we dispatched our folks out to the airports, 
and as quickly as we were allowed to get access, we took the 
mail that was flying off the plane, put it on ground 
transportation and got it moving.
    We expanded our current surface networks. We have a network 
to carry our advertising mail and our parcel post throughout 
the country. We immediately used that network to move First-
Class Mail, Priority Mail, and although it would be a little 
late, Express Mail, on trucks. We worked closely and contacted 
in very short order the FAA to determine what their plans were. 
We made contact with our cargo air carriers, FedEx. We made 
contact with other cargo air carriers who had worked for us in 
the past or worked to handle our Christmas mail, and we 
prepared them so that once we had the go-ahead to fly, we could 
move mail on cargo planes and begin to tender mail to domestic 
carriers.
    And, as I said earlier, we reacted in terms of any 
restrictions that might be placed on us in terms of flying mail 
on domestic carriers. I am happy to say that the mail moved. It 
is moving. We have contacted a lot of our larger customers, 
particularly remittance centers around the country, to garner 
from them what their perception was, and they understood that 
mail would be delayed a day or two. But they were satisfied 
that we kept the mail moving, they are receiving their 
payments, and we made our contribution in that way to the 
economy.
    Our goal was to get back to normal as quickly as possible. 
In New York, as we speak, there are only the two stations in 
New York that we have not moved our carriers back into. That is 
the Church Street Station that was right under the Trade 
Center, and I do not think that we are going to get access to 
that anytime soon. We have made provisions for the people who 
are serviced by Church Street Station to receive their mail at 
our General Post Office in New York, and, as they come to pick 
up the mail, we are offering them forwarding service, and we 
are suggesting to them that they not make the trip to 33rd 
Street and Eighth Avenue in Manhattan, but that they put 
together--if they have a residence or if they have moved their 
business, that we began to forward the mail for them. We do not 
want to inconvenience those customers.
    The other station in Manhattan that has not opened is Wall 
Street Station. Our carriers are preparing mail. We have sent 
trucks down there to find out what buildings we could get 
access to. Whatever buildings we can get access to, we have our 
carriers going into that area to deliver the mail. We just got 
power back in the building late last night, so today we are 
doing a cleanup. Tomorrow, we will have access to that building 
and we will be delivering the mail out of our Wall Street 
Station. Once we move the mail, there are customers who are in 
buildings that they cannot access--who will be able to pick up 
their mail at the Wall Street Station. So we are doing 
everything we can possible to make sure the mail is moving
    Our office in the Pentagon is open again. We are delivering 
mail to the Pentagon. So, for the most part, I can say the mail 
is moving. I think people have to be somewhat patient with us. 
We are trying to stay within the standards, the expectations 
that people have for mail moving across the country, and where 
possible, we are doing that and we are moving mail on all 
available transportation, cargo, and airlines. In fact, in your 
State, Senator, the State of Hawaii, we have had to put some 
cargo carriers in place because right now the mail to Hawaii 
has increased dramatically, people requesting goods and 
packages.
    There has been a tremendous increase, and so we are flying 
charter planes with packages into Hawaii. We are using charters 
to move mail to Guam and American Samoa, and we are moving 
letter mail on all commercial carriers, and where we cannot, we 
are using cargo planes. The one problem we have in your State 
continues to be the Compact Islands, although we believe we 
have a flight leaving Saturday to get the packages down there. 
The smaller products have moved.
    So, again, I cannot say enough about the people who work in 
the Postal Service. This is not what I did. This is what the 
people in New York, the people throughout the country, are 
doing to move the mail. Our logistics people, our Vice 
President of Network Operations, Paul Vogel, has done an 
outstanding job in coordinating the efforts of the country. 
This truly has brought out the best in postal managers. There 
is a level of cooperation like we see every time that we are 
challenged, and there is something where the Nation needs us to 
help them, and so I could not be more proud of what we have 
done. We are going to continue to work hard. We are going to 
make sure that the mail is secure, that our employees are 
secure.
    We have issued instructions to create a greater awareness 
on the part of our employees of the need for safety. This is 
not just mail that flies. This is all of our vehicles, all of 
our post offices. So we are getting the word out to make sure--
and I personally am going to do that--to make sure that when 
they leave their vehicles that they are locked; to make sure 
that if there is a stranger who shows up at a postal building, 
that they are immediately challenged and that we take the 
proper precautions to make sure our doors are locked, 
precautions that are just common sense. But we need to 
reinforce that common sense which is more important today than 
ever, because we cannot have the American public lose 
confidence in the mail.
    Senator Akaka. I want to thank you very much for responding 
to the needs of the Pacific, to Hawaii, Guam, and American 
Samoa. As we all know, the mail stopped because it could not be 
delivered by commercial airlines to those places. But I am glad 
to know that the Postal Service has responded and moved it as 
quickly as you could to those areas. I want to know what steps 
the Postal Service took in helping to protect the employees and 
also communicating with them in the field?
    Mr. Potter. We put out ``Direct Line,'' which is a 
communication that goes to all post offices. We have done it 
that way. We have a Postal Service television network where we 
have kept people abreast of all the events that have gone on, 
let them know changes that were being made, and basically made 
them aware of the need to secure the mail, secure themselves, 
stay safe, and, again, deliver mail to America on a daily 
basis. Now, more than ever, I think people are looking at the 
Postal Service. They understand how vital it is to not only the 
economies in Hawaii and in Alaska, but to the economy of the 
United States. Over $1 trillion transits the mail over the 
course of the year.
    So we understand what is in the mail. We understand the 
need for people to receive payments to get their bills so that 
they can pay them, so we can keep the engine, the economy, 
moving and we, again, want to do our part. Our first concern is 
the safety of our employees, and I was very happy, as I said in 
my earlier statement, that no postal employee got hurt. Our 
managers did the best they could to get those folks out of 
harm's way, and we took the necessary precautions to ensure 
that our employees were safe and at the same time make sure 
that the mail got through.
    Senator Akaka. Again, I want to thank you for thinking of 
the Pacific and working with the Honolulu District to resolve 
the backup of mail in Los Angeles bound for Hawaii, and for 
establishing a regular delivery schedule. Can you tell me when 
the backlog for Hawaii will be clear?
    Mr. Potter. Senator, it is my understanding that we are now 
flying a full 747 daily. We had anticipated that, based on the 
volume that we normally have, we would be flying the 747 every 
other day; however, we are now flying that plane daily. 
Domestic carriers are again accepting letter mail and 
lightweight flat mail. So we are moving all the mail that we 
possibly can, and it is a matter of getting it to Honolulu and 
then moving it out on inter-island transportation, and we are 
able to do that. So we believe that it is not perfect yet, but 
the flow is just about back to normal. Again, the thing that 
was most surprising was the fact that, once this disaster hit, 
apparently the amount of orders for goods and the amount of 
communication going between the mainland and Hawaii jumped 
tremendously. We appreciate the revenue, but we have had to 
make adjustments to react to it.
    Senator Akaka. I want to tell you that the people out in 
the Pacific are grateful. I know because I was receiving calls 
about prescription drugs and other necessities that come 
through the mail. As soon as there is a disruption, you hear 
from these folks, and I am glad you took care of that.
    I will ask one more question before I end this round. With 
the special challenges facing the Postal Service, there will be 
additional costs incurred in getting the mail delivered. My 
question is how long do you expect these additional costs to 
continue and will the supplemental funding request submitted to 
the White House just last week be used for these costs?
    Mr. Potter. We submitted a supplemental funding request to 
the White House. They actually asked us to identify additional 
costs that we had incurred and we submitted a number in the 
range of $50 million. Let me explain what that number is. 
Approximately half of the $50 million is for the renovation of 
the facility that was damaged at Church Street. In addition to 
that, as Chief Weaver mentioned earlier, we have provided 
assistance to the FBI in the form of equipment so that they 
could handle evidence at some of the sites.
    We have also spent funds aiding the rescue efforts and the 
recovery efforts. We have provided trucks. Amtrak donated a 
service where they filled up seven carloads with medical 
supplies to assist in the Manhattan rescue effort. Those 
supplies were brought into our facility. We off-loaded those 
supplies into trailers and moved them to the site, and we are 
incurring some costs for some of the cargo transportation that 
we are talking about. So we anticipate that number could 
potentially grow, but I guess if you think about it, this kind 
of points back to the rate process that we have and the fact 
that, to prepare a rate case, to get an outcome and to 
implement, you are talking on the order of 16 months. 
Preparation--4 months, 10 months at the Rate Commission, 2 
months to allow for people to get ready for a new rate.
    We are not really ready to handle that type of thing from a 
rate standpoint. When we saw fuel costs rise in the past year, 
our competitors, FedEx, UPS--they put a surcharge on fuel in 
terms of what their customers would pay. We did not have that 
ability or the flexibility to make that change. We submitted 
the supplemental because the White House asked us to identify 
our additional costs. We think they are going to grow and those 
are the types of things we have identified as costs.
    Senator Akaka. Thank you. Let me ask my partner, Senator 
Cochran, for any additional questions.
    Senator Cochran. Mr. Chairman, one other question, if I 
might. Despite recent gains in productivity overall, over time, 
there has barely been an increase in productivity, and this is 
in the face of substantial investments that had been made in 
information technology, modernization and automation and the 
like; why has the Postal Service had such difficulty improving 
productivity over the long-term?
    Mr. Potter. As you have heard already, we have made a lot 
of progress in the last 2 years. We are focused on our costs 
and taking costs out. We have had since the beginning of the 
Postal Service, about a 13.3 percent increase in productivity, 
4.5 percent of that has occurred in the last 2 years. We are, 
again, focused on making sure that every penny we spend is 
necessary, because we know it is going to have to come from the 
ratepayer.
    In terms of why you haven't seen a greater productivity 
improvement over time--I believe it is because of the fact that 
delivery, in and of itself, is a very labor-intensive activity. 
We have over 300,000 people who deliver the mail, and we are 
working to evaluate the processes used in delivery to try to 
improve productivity in that area. I mentioned earlier today 
that we have eliminated some 21,000 career positions. The bulk 
of those positions are clerk positions, where the automation 
investment that you have referenced is focused, and we have 
gone back to make sure that as we have improved machines' 
ability to read addresses, so that we reduced the work hours of 
clerical employees.
    We have to take that same resolve, in terms of reducing our 
cost in areas of material handling, that is the movement of 
mail into buildings and out of buildings and onto machines and 
off machines. We want to work with our customers, so that it is 
kind of transparent, the movement of mail from a printer right 
to delivery. We have some processes that were created before 
the advent of automation, and we have to change the packaging 
to reduce those costs. We also have to invest in material 
handling systems. In the area of delivery, again, we are 
focused on those processes to see whether or not there is an 
opportunity to reduce costs.
    But, in a nutshell, moving mail is a labor-intensive 
business. We move over 208 billion pieces of mail a year with 
some 800,000 employees. I would not call ourselves 
unproductive. I would say, though, we have opportunities to 
improve.
    Senator Cochran. Thank you. Mr. Chairman, this concludes my 
questioning.
    Senator Akaka. Thank you very much.
    Mr. Postmaster General, let me ask you the question that is 
on everyone's mind. We know that the Postal Board of Governors 
will request that the Postal Rate Commission give expedited 
consideration to its rate case. In fact, you repeated the need 
for expedited review today. If the rate case is completed in 
less than 10 months, does that mean that rate increases will be 
implemented as soon as the case is decided?
    Mr. Potter. Well, as a matter of fact, Mr. Chairman, one of 
the reasons that we would like to have an expedited rate case 
is so that we would understand what the recommendation of the 
Rate Commission is. Many people have talked to me, to other 
governors, about delaying the implementation of the case. The 
only way you can make a decision about that is to understand 
what revenues we might get from that additional rate. So, what 
we are doing is we are going to look at all of the different 
variables that go into a decision about when we might implement 
the rates. Those variables, as I described earlier, are what 
happens to the economy and what happens to our volume and 
revenues between now and next summer, what happens in front of 
the three arbitrators who are going to decide the wages and 
working conditions for three of our major unions, what happens 
with the negotiations for the National Association of Letter 
Carriers, and what happens in front of the Rate Commission and 
what recommendations they will come back with.
    So the idea of asking for an expeditious decision was not 
with a mindset of ``we are going to accelerate these rates as 
quickly as we can,'' it is ``let's get all the information that 
we possibly can garner to make a sound judgment about an 
implementation date.''
    Senator Akaka. Obviously, the various classes of mail will 
be impacted differently under the new rate case. I know that 
postage rates for periodicals have increased 12.5 percent under 
this year's two increases, and are expected to increase another 
10 percent under the new proposal. Priority mail is targeted 
for a rate increase of 13.5 percent, even though its rates have 
already increased by more than 16 percent this year. My 
question is how does the Postal Service calculate the point at 
which raising rates will have a negative impact on the 
different types of mail service, and do you believe the Postal 
Service will eventually price itself out of some classes of 
mail?
    Mr. Potter. Postal Service rates are determined by Postal 
Service costs. We operate under a 30-year-old law that 
basically has us charging mailers or our customers prices based 
on what our costs are. We have worked with periodical mailers. 
We are attempting to work with those mailers to try and drive 
costs out of our processes. As I said earlier, we are trying to 
figure how to mail from printers to our letter carriers with as 
few handlings as possible along the way. So we are looking at 
the entire chain, from printing to delivery, and we have an 
ongoing dialogue with that group of mailers. In the area of 
Priority Mail, yes, our costs have risen, and that is the 
driver behind the increases that people see. We believe with 
the FedEx contract that we are going to increase the 
reliability of the mail, Priority Mail and Express Mail, and 
that we are going to have competitive products in both of those 
arenas.
    As far as the long-term, I think your question about long-
term, will we price ourselves out of one or two product areas? 
I would prefer not to. I am going to work very hard to make 
sure that does not happen. The key in my mind is building a 
solid transformation plan, putting in the efficiencies that 
need to be put in in order to make sure that those costs do not 
rise, because they trigger rates. It is also an opportunity to 
discuss the 31-year-old law that we have governing us and the 
potential to have some pricing flexibility, so that if we know 
we are going to put efficiencies into different classes of 
mail--that we take advantage of that and have prices that would 
be more moderate and would allow for an evolution to a more 
efficient operation.
    If you step back and think about the Postal Service, the 
bulk of our mail is letter mail. So it was very wise that, 15 
or 20 years ago, our number one priority for investments was 
letter mail. Now, by doing that, other classes of mail were not 
concentrated on. There were not similar efforts to improve 
efficiency. Now is the time to do that because we know how 
important magazines are to the American public, we know how 
important packages are to certain communities around America, 
because we are, in some communities, the main provider of 
packages to customers.
    We need to keep all Americans linked. We understand our 
obligation to keep our costs down so those products are 
competitive. We cannot just service a few markets around the 
country. In order for us to have reasonable rates, we have to 
have products that are competitive in all 50 States, and there 
is sufficient volume there to allow us to be efficient. We are 
very much concerned about that and we are going to do 
everything we can do to ensure that. We do not have to walk 
away from--or our customers don't have to walk away from a 
product offering because we have priced ourselves out of the 
market.
    Senator Akaka. I am glad to hear that from you, and of your 
concern. As you know, these periodicals, as you pointed out, 
depend so much on the Postal Service. Without the Postal 
Service, they cannot do business. So you are important and, I 
am glad you are giving them that kind of attention. Some 
observers believe that prior to seeking postal reform 
legislation, the Postal Service should demonstrate that it has 
explored the boundaries of the existing rate-making structure. 
In fact, the vice chair of the PRC urged the Postal Service to, 
and I quote, ``to take advantage of the wide latitude permitted 
by current law,'' during our May hearing. However, you and the 
Board of Governors say that your options are very limited. Why 
do you believe that there are these two opposing views, and 
does the Postal Service have any plans to go beyond existing 
rate-making structures?
    Mr. Potter. I believe that we have opposing views--I know 
the Postal Service's view is built around experience at the 
Rate Commission. When someone is preparing you to testify at 
the Rate Commission, basically they tell you to provide an 
answer that says anything is possible, when given a 
hypothetical. Well, we could hypothesize all day, and anything 
is possible, and we do have to test that and we are testing 
that. An example of a test under current law is that we are 
going to propose, and the Board of Governors voted to propose, 
a waiving of delivery confirmation fees in the beginning of 
December, to see whether or not we can shift the deposit of 
packages with us from later in the month, when they are costly, 
to earlier in the month of December.
    So we are beginning an effort to try to explore and test 
the boundaries of what can be done at the Rate Commission. I 
would have preferred to have done that with this current rate 
case; however, as I have described earlier, there were 
compelling factors that just did not enable us to--given the 
fact that we are about to bump up against our borrowing limit, 
that is a compelling reason not to go with a smaller rate case. 
If you are in a hole, you have to dig yourself out. I know we 
want to continue to look at those options in the future, and we 
are going to work closely with the Rate Commission.
    I recently had lunch with George Omas to discuss what the 
alternatives are. So there is an open line of communication, 
and we want to keep that there. As I said, the first phase of 
our transformation plan is to explore all the options that we 
have under current legislation, and certainly one of those 
options is to look at alternatives to a traditional rate case 
at the Rate Commission.
    Senator Akaka. Thank you very much for your responses. It 
appears that coordination and cooperation certainly are the 
keys here at this time.
    Senator Cochran, do you have any additional questions?
    Senator Cochran. I have no other questions, Mr. Chairman.
    Senator Akaka. Senator Cochran, I thank you very much for 
sitting here with me. I have other questions, but I will submit 
them in writing.
    Mr. Potter. Thank you.
    Senator Akaka. Mr. Postmaster General, I want to thank you 
so much for your responses and for being with us today. You 
have done an excellent job in your first appearance before 
Congress, and I sincerely appreciate your leadership during 
these trying times. I wish to commend you on your efforts in 
developing that transformation plan. The Subcommittee and I 
look forward to working with you further and for keeping the 
mail delivered to our country. Again, I wish to extend my 
gratitude and my feeling of pride to you and the employees of 
the Postal Service.
    Mr. Potter. Thank you, Mr. Chairman. Thank you, Senator 
Cochran.
    Senator Akaka. Thank you very much. The Subcommittee stands 
adjourned.
    [Whereupon, at 11:23 a.m., the Subcommittee was adjourned.]
                            A P P E N D I X

                              ----------                              


                 PREPARED STATEMENT OF SENATOR CLELAND
    Thank you Mr. Chairman for giving me the opportunity to speak at 
today's hearing and address the Postmaster General, Mr. John Potter and 
the Chief Postal Inspector Mr. Kenneth Weaver. First, let me thank the 
employees of the United States Postal Service (USPS) for their efforts 
in keeping the mail moving during the last week and the Postal 
Inspectors for their cooperation with other law enforcement authorities 
to bring to justice those responsible for the terrible attacks of 
September 11, 2001.
    The USPS was established by the Postal Reorganization Act of 1970. 
This act chartered the USPS to perform as a business enterprise, with 
the freedom to provide ``non-postal services,'' ensuring that USPS 
could provide universal service reliably, efficiently and as 
inexpensively as possible for years to come. Furthermore, the USPS was 
mandated to operate on a self-supporting, break-even basis, with 
particular emphasis on restraining postal rate increases and providing 
``honest, efficient, and economical management.''
    The Postal Service is an amazing organization. Its Universal 
Service program binds the country together by providing inexpensive and 
reliable First Class mail delivery for every American and every 
business. The USPS stops at approximately 134 million addresses 6 days 
a week and delivers approximately 670 million pieces of mail every day. 
The Postal Service generates approximately $64 billion in revenue, 
ranking it eighth in the United States in the Fortune 500 Global 
listing. In addition, the Postal Service employs approximately 800,000 
individuals giving it the Nation's second largest payroll, and USPS 
operates approximately 38,000 postal facilities. Managing any 
organization this size can be a very difficult challenge, but it was 
done profitably for much of the latter half of the 1990's.
    In 1997 the Postal Service turned a $1.2 billion profit, and had 
been profitable for the years 1995-1999. But in 2000, the Service 
showed a net loss of $199 million. The Service originally predicted a 
deficit for 2001 of approximately $500 million. Early in 2001 that 
projected loss was revised to between $2 and $3 billion. With a new 
rise in rates effective July 1, 2001, and cost cutting measures the FY 
2001 loss is now expected to be approximately $1.6 billion. The Service 
has gone from profitability to billion dollar losses in less than 2 
years. In order to cut costs and pay its bills the Postal Service has 
frozen all existing capital construction projects, the Board of 
Governors voted to modify the most recent rate decision by raising 
certain rates, and the Service expects to save $3 to $4 billion by 2005 
through its ``breakthrough productivity'' plan. I applaud several of 
the efforts of the Postal Service in attempting to meet this challenge, 
however, I am concerned about how freezing capital construction 
projects will affect future service and if delaying these improvements 
will result in greater costs down the road.
    I have heard from many communities across Georgia that they are 
experiencing service problems at their existing Post Offices. The lines 
are too long, there is not enough parking or the Post Office is not big 
enough to handle the volume of mail going through its facility. Georgia 
has experienced one of the largest growth rates in the country and many 
existing facilities are being squeezed in their effort to provide 
prompt, efficient and reliable service. I have been informed by USPS 
that projects in Buena Vista, Butler, Columbus-Beallwood, Cotton, 
Darien, Gray, Guyton, Hawkinsville, Kathleen, Lyons, Macon-Downtown, 
Madison, Marble Hill, Marshallville, McCaysville, Monroe, Monticello, 
Pine Mountain, Pooler, Pulaski, Roberta, Rupert, Sharpsburg and 
Townsend will be affected by the freeze. I am very concerned about what 
the freeze in capital construction projects will mean to these growing 
communities in Georgia and how long it will last. I would like 
assurances from the Postal Service that efforts will be made to ensure 
that communities across the Nation affected by this freeze will not see 
a decrease in the service that they and all of us have come to expect 
from the Postal Service.
    In addition, I am concerned about the long term viability of the 
Service. The Service has increased postage twice in the last year and 
is in the process of filing an expedited rate case for another increase 
in postage rates expected to become effective in late 2002 or early 
2003. With the advent of electronic alternatives First Class mail 
volume is expected to decline and postage increases may accelerate this 
change. USPS's new product lines and attempts to delve into the e-
Commerce arena have not yet yielded the expected results. Furthermore, 
costs for the Service increase every day as new addresses are 
continually added. I applaud the efforts of the Postmaster General and 
others to cut cots by reducing management staff levels. However, I am 
concerned about the effect these reductions may have on the current 
backlog of equal employment opportunity and grievance cases. I feel 
that we need to work together to find a long term solution to the 
potential future problems of the Service, and I will look forward to an 
opportunity to review the Service's recommendations for reform.
    Finally, I would like to mention efforts that I and a number of my 
constituents have made to award a commemorative stamp to Lt. Henry O. 
Flipper, who was the first African-American graduate of the United 
States Military Academy. He served as a member of the all-black Buffalo 
Soldier 10th Cavalry, but he was court-martialed and dishonorably 
discharged from the Army. Lt. Flipper has since been cleared by the 
Army and was pardoned by President Clinton. I feel that Lt. Flipper 
made significant contributions to the civil rights movement and paved 
the way for future African-American officers in the U.S. military. The 
Stamp Advisory Committee has been considering the request for a 
commemorative stamp for Lt. Flipper for approximately 15 years and I 
would appreciate your consideration of this matter in the very near 
future.
    Once again, I would like to thank the Chairman and the participants 
in this hearing for allowing me to speak to you about my concerns. I 
will review the report for this hearing when it is released and I look 
forward to working with you in the future on these and other important 
issues.

                               __________
                 PREPARED STATEMENT OF SENATOR BUNNING
    I certainly realize that the United States Postal Service is facing 
some tough financial choices in the coming months, including possibly 
closing and consolidating mail processing centers.
    I have heard reports that the USPS is considering changes to the 
Ashland, Kentucky, facility, and I would like to take the opportunity 
to register my concerns, especially regarding possibly moving the mail 
processing center to Huntington, West Virginia.
    The Ashland processing center has a strong record of providing good 
service to its customers. In fact, it is my understanding that the 
Ashland mail processing center was recently ranked 12th nationally in 
terms of efficiency. I am concerned that this move could mean a 
decrease in the quality of service my constituents receive, along with 
a loss of jobs in Ashland.
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