    [Senate Hearing 108-508]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 108-508

      POSTAL REFORM: SUSTAINING THE NINE MILLION JOBS IN THE $900 BILLION
                                MAILING INDUSTRY

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

                                    HEARINGS

                                   before the

                                  COMMITTEE ON
                              GOVERNMENTAL AFFAIRS
                              UNITED STATES SENATE

                          ONE HUNDRED EIGHTH CONGRESS

                                 SECOND SESSION

                                   __________

                              MARCH 9 AND 11, 2004

                                   __________

          Printed for the use of the Committee on Governmental Affairs

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                       COMMITTEE ON GOVERNMENTAL AFFAIRS

                       SUSAN M. COLLINS, Maine, Chairman
    TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
    GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
    NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
    ARLEN SPECTER, Pennsylvania          RICHARD J. DURBIN, Illinois
    ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
    PETER G. FITZGERALD, Illinois        MARK DAYTON, Minnesota
    JOHN E. SUNUNU, New Hampshire        FRANK LAUTENBERG, New Jersey
    RICHARD C. SHELBY, Alabama           MARK PRYOR, Arkansas

               Michael D. Bopp, Staff Director and Chief Counsel
                      Ann C. Fisher, Deputy Staff Director
          Joyce A. Rechtschaffen, Minority Staff Director and Counsel
                       Susan E. Propper, Minority Counsel
                          Amy B. Newhouse, Chief Clerk

                                C O N T E N T S

                                     ------
    Opening statements:
                                                                       Page
        Senator Collins.............................................. 1, 33
        Senator Durbin...............................................     5
        Senator Carper............................................... 6, 39
        Senator Voinovich............................................    36
        Senator Stevens..............................................    47
    Prepared statement:
        Senator Lautenberg...........................................    67

                                   WITNESSES
                             Tuesday, March 9, 2004

    Ann S. Moore, Chairman and Chief Executive Officer, Time Inc.....     3
    Mark Angelson, Chairman, President, and Chief Executive Officer,
      RR Donnelley...................................................     6
    Christopher W. Bradley, President and Chief Executive Officer,
      Cuddledown, Inc................................................    17
    Max Heath, Vice President, Landmark Community Newspapers, Inc.,
      on behalf of the National Newspaper Association................    19
    William J. Ihle, Senior Vice President, Corporate Relations, Bear
      Creek Corporation..............................................    22
    Shelley Dreifuss, Director, Office of the Consumer Advocate,
      Postal Rate Commission.........................................    24

                            Thursday, March 11, 2004

    Michael L. Eskew, Chairman and Chief Executive Officer, United
      Parcel Service.................................................    34
    Frederick W. Smith, Chairman, President, and Chief Executive
      Officer, FedEx Corporation.....................................    37
    Gary M. Mulloy, Chairman and Chief Executive Officer, ADVO, Inc..    48
    Gary B. Pruitt, Chairman, President, and Chief Executive Officer,
      The McClatchy Company, on behalf of the Newspaper Association
      of America.....................................................    51
    H. Robert Wientzen, President and Chief Executive Officer, Direct
      Marketing Association..........................................    54

                         Alphabetical List of Witnesses

    Angelson, Mark:
        Testimony....................................................     6
        Prepared Statement...........................................    75
    Bradley, Christopher W.:
        Testimony....................................................    17
        Prepared Statement...........................................    81
    Dreifuss, Shelley:
        Testimony....................................................    24
        Prepared Statement...........................................   107
    Eskew, Michael L.:
        Testimony....................................................    34
        Prepared Statement...........................................   129
    Heath, Max:
        Testimony....................................................    19
        Prepared Statement with an attachment........................    85
    Ihle, William J.:
        Testimony....................................................    22
        Prepared Statement...........................................    97
    Moore, Ann S.:
        Testimony....................................................     3
        Prepared Statement...........................................    69
    Mulloy, Gary M.:
        Testimony....................................................    48
        Prepared Statement...........................................   161
    Pruitt, Gary B.:
        Testimony....................................................    51
        Prepared Statement...........................................   169
    Smith, Frederick W.:
        Testimony....................................................    37
        Prepared Statement...........................................   138
    Wientzen, H. Robert:
        Testimony....................................................    54
        Prepared Statement...........................................   183

                                    APPENDIX

    James N. Andersen, President and CEO, The Instant Web Companies,
      prepared statement.............................................   192
    American Forest & Paper Association, prepared statement..........   198
    Christopher McCormack, President and CEO, LL Bean, prepared
      statement......................................................   202

                       POSTAL REFORM: SUSTAINING THE NINE
                        MILLION JOBS IN THE $900 BILLION
                                MAILING INDUSTRY

                                  ----------

                             TUESDAY, MARCH 9, 2004

                                           U.S. Senate,
                             Committee on Governmental Affairs,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 10:04 a.m., in
    room SD-342, Dirksen Senate Office Building, Hon. Susan M.
    Collins, Chairman of the Committee, presiding.
        Present: Senators Collins, Durbin, and Carper.

                 OPENING STATEMENT OF CHAIRMAN COLLINS

        Chairman Collins. Good morning. The Committee will please
    come to order.
        Today marks the fifth in a series of hearings that the
    Committee is holding to review the recommendations made by the
    Presidential Commission on the Postal Service. Under the
    effective leadership of Co-Chairmen Harry Pierce and James
    Johnson, the Commission put together a comprehensive report on
    an extremely complex issue, identifying the operational,
    structural, and financial challenges facing the U.S. Postal
    Service. The Commission's recommendations are designed to help
    this 225-year-old Postal Service remain viable over the long
    term.
        So much depends upon the Postal Service's continued
    viability. The Postal Service itself has more than 730,000
    career employees. Less well known is the fact that it is also
    the linchpin of a $900 billion mailing industry that employs
    nine million Americans in fields as diverse as direct mailing,
    printing, catalog production, publishing, and paper
    manufacturing. The health of the Postal Service is essential to
    thousands of companies and the millions that they employ.
        One of the greatest challenges facing the Postal Service is
    the decrease in mail volume as business communications, bills,
    and payments move more and more to the Internet. The Postal
    Service has faced declining volumes of First Class Mail for
    each of the past 4 years. This is highly significant, given the
    fact that First Class Mail accounts for 48 percent of total
    mail volume and the revenue it generates pays for more than
    two-thirds of the Postal Service's institutional costs.
        At our first hearing last September, the Committee heard
    from President's Commission on the U.S. Postal Service Co-Chair
    Jim Johnson. Mr. Johnson made the very important point that the
    Postal Service's short-term fiscal health is illusory and that
    Congress must not ignore the fundamental reality that the
    Postal Service, as an institution, is in serious jeopardy.
        The Presidential Commission presented its assessment of
    this crisis in frank terms, concluding, ``An incremental
    approach to the Postal Service reform will yield too little too
    late, given the enterprise's bleak fiscal outlook, the depth of
    current debt and unfunded obligations, the downward trend of
    First Class Mail volumes, and the limited potential of its
    legacy postal network that was built for a bygone era.'' This
    is a very strong statement and it is one that challenges both
    the Postal Service and the Congress to embrace far-reaching
    reforms.
        At the Committee's second hearing in November, we heard
    from the Postmaster General and the Comptroller General. The
    Postmaster General described transformation efforts already
    underway at the Postal Service, many of which are consistent
    with the Commission's recommendations. He also testified,
    however, that legislation was required in order to accomplish
    many of the other recommendations.
        In his testimony, Comptroller General David Walker of the
    General Accounting Office shared the Commission's concerns
    about the Postal Service's $92 billion in unfunded liabilities
    and other obligations. He pointed to the need for,
    ``fundamental reforms to minimize the risk of a significant
    taxpayer bailout or dramatic postal rate increases.'' In fact,
    since April 2001, the Postal Service has been listed on the
    General Accounting Office's high-risk list.
        More recently, the Committee heard from representatives of
    the four largest postal unions, the Postmaster and Supervisor
    Associations, the former Director of the Federal Mediation and
    Conciliation Service, plus two experts on the issue of postal
    pay comparability. The Commission's workforce-related
    recommendations were discussed at length during those hearings.
        Today, we will focus not only on the workforce and
    financial recommendations, but also on the Postal Service's
    monopoly and mission, the rate setting process, and corporate
    governance issues. Among these recommendations are proposals to
    grant a new Postal Regulatory Board the authority to refine the
    scope of the monopoly and also to issue standards defining the
    scope of the universal service application. I would note that
    it is my judgment that many of those issues are best reserved
    to Congress rather than being vested in a new regulatory board.
    The Postal Regulatory Board would also be granted the authority
    to transfer the existing rate setting process into an
    incentive-based rate ceiling system.
        As a Senator representing a largely rural State whose
    citizens depend heavily on the Postal Service, I very much
    appreciate the Postal Commission's strong endorsement of the
    basic features of universal service--affordable rates, frequent
    delivery, and convenient community access to retail postal
    services. It is important to me that Mainers living near our
    borders in Northern or Western Maine or on islands or in our
    many small rural communities have the same access to the Postal
    Service as the people in our large cities.
        If the Postal Service were no longer to provide universal
    service and deliver mail to every customer, the affordable
    communications link upon which many Americans rely would be
    jeopardized. Many commercial enterprises, indeed, most of them,
    would find it uneconomical if not impossible to deliver mail
    and packages to rural Americans at the rates charged by the
    Postal Service.
        We must save and strengthen this vital institution upon
    which so many Americans rely for communication and for their
    jobs. The Postal Service has reached a critical juncture. It is
    time for action, both by the Postal Service itself and by
    Congress.
        Senator Carper and I have committed to working together
    with many other Members of this Committee to draft a bipartisan
    postal reform bill. Now, given the history of previous attempts
    at legislative reforms, I know that this will be a daunting
    challenge. It is not coincidence that the last reform was done
    more than 30 years ago. But it is essential if we are to
    preserve the Postal Service into the 21st Century that we seize
    the opportunity presented by the Commission's excellent work.
        I welcome our witnesses today who are from the mailing
    community. We will hear a variety of views and insights on the
    recommendations of the Presidential Commission and I am pleased
    to welcome our first panel of witnesses today.
        Ann Moore is the Chairman and the Chief Executive Officer
    of Time Inc. In this position, Ms. Moore oversees all of the
    businesses of Time Inc., which is the world's leading magazine
    company and a leading direct marketer of music and videos. Her
    work at Time, Inc. has earned her numerous awards and honors,
    including her appearance on Fortune magazine's list of the 50
    most powerful women in American business.
        Mark Angelson is the Chief Executive Officer of RR
    Donnelley. I would note that he has held that position for all
    of 9 days, but we are very pleased that he could be with us
    today. Mr. Angelson assumed his new position when RR Donnelley
    and Moore-Wallace Corporation combined, creating the new RR
    Donnelley, which is the largest printer in North America. Prior
    to this position, Mr. Angelson was the Chief Executive Officer
    of Moore-Wallace, Incorporated, the third-largest printing
    company in North America and was the principal architect of the
    merger.
        We are very pleased to welcome both of you here today. We
    know you are both extremely busy individuals and I think it
    demonstrates just how important postal reform is that both of
    you, as CEOs of major corporations, would take the time to be
    here today.
        Ms. Moore, we will start with your testimony.

      TESTIMONY OF ANN S. MOORE,\1\ CHAIRMAN AND CHIEF EXECUTIVE
                           OFFICER, TIME INC.

        Ms. Moore. Thank you very much, Chairman Collins, for this
    opportunity to discuss the crucial issue of reforming the U.S.
    Postal Service. As you said, I am Ann Moore, the Chairman and
    CEO of Time Inc. We are the world's largest magazine publisher
    with 134 magazines, including Time, People, and Sports
    Illustrated.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Ms. Moore appears in the Appendix on
    page 69.
    ---------------------------------------------------------------------------
        I have been involved in postal reform for a long time. I
    actually volunteered to work on this back when I was President
    of People magazine because there is no issue that is more
    crucial to the magazine business and to magazine readers than
    the future viability of the Postal System. The great majority
    of our readers depend upon the postal system to deliver their
    magazines, so we need to work together to ensure that this can
    continue over the long term. It affects everyone, from the mom
    who reads Parenting to the sports fan who reads Sports
    Illustrated.
        The core value of the Post Office has always been reliable,
    affordable delivery of the mail to every American home and
    business. We know that Congress wants to maintain this goal and
    we have this wonderful opportunity to pass a meaningful,
    comprehensive reform bill and we are committed very much to
    getting this done.
        The current Postal Service business model is not
    sustainable, as we all know, in a climate of expanding
    addresses and declining mail volume, and we applaud the efforts
    of Jack Potter to reduce Postal Service costs. But reducing
    costs alone won't solve the problem. Broad and sweeping reform
    is required.
        President Bush and the Treasury deserve thanks for creating
    the Presidential Commission to help address these issues and we
    completely support the report's five core principles.
        We also support the Commission's recommendations on
    revisions to the collective bargaining process. Negotiators on
    both sides must know that today's system of binding arbitration
    does not always provide an optimal solution and we feel that
    mediation arbitration might bring parties closer to an
    equitable resolution while protecting the interests of the
    employees and the Postal Service.
        However, it is also crucial that a rational rate cap system
    be put in place by Congress. The dramatic rate increases we
    have seen are simply not acceptable. As a result of rate
    increases in recent years, postage expenses have become our
    single biggest line item at Time Inc. This often surprises
    people, but this year, we will spend more than $500 million on
    postage. We actually spend more on postage than we do on paper
    or printing. We spend more on postage than any other company in
    America, so we are acutely aware that postage costs have been
    going up at a rate that far exceeds the rate of inflation.
        These statistics are documented in our written testimony.
    In 2001 and 2002, we experienced three rate increases within an
    18-month period. If you go back to 1986, magazine postage costs
    have gone up by 220 percent. This is nearly double the rate of
    inflation.
        From our own experience, we know that these rising postal
    costs drive mail volume out of the system, which compounds the
    problem. That is why Congress needs to institute a rational
    rate cap system.
        Today's rate system fails to provide the Postal Service
    with strong incentives to hold down costs, too. It also fails
    to provide mailers with predictable rates. Give us predictable
    rates and we will give the Postal System more volume, from our
    current magazines to all the new ones I would really like to
    launch.
        We have a lot of creative ideas on the drawing board,
    magazines that consumers tell us they want, but if I cannot
    predict the future costs of mail and the long-term costs of a
    new launch, the risk of building a new magazine is too great. I
    don't need to tell you that ventures like new magazines create
    jobs at Time Inc. and beyond. While I have 15,000 employees at
    Time Inc., you could count all the suppliers that depend upon
    us, from the paper mills in Maine to the printers to the mail
    houses. There are many jobs at stake. So for all of these
    reasons, it is crucial that rates be capped to an inflation
    benchmark.
        Now, of course, rate caps must not be met at the expense of
    good service, so any reform bill must also include service
    measurement systems and delivery standards for all classes of
    mail. In addition, rates need to be based upon cost and include
    the proper incentives for mailer work sharing. This concept
    provides the Postal Service and the mailing community an
    incentive to seek the lowest possible cost and the highest
    quality service.
        Before I conclude, I want to comment on last year's CSRS
    legislation. This bill provided much needed relief for the
    mailing industry. Thank you for getting it passed. That said,
    the bill has two problem items that need to be addressed.
        First, the bill's escrow provision will force mailers to
    pay an additional $4 billion to the Postal Service in 2006.
    This item alone will add another 5.4 percent increase to
    postage rates.
        Second, the CSRS bill also shifted $27 billion in military
    retirement costs from the Treasury to the Postal Service. Since
    approximately 90 percent of these costs date back to before the
    establishment of the Postal Service in 1971, these military
    costs are not really the responsibility of the people who rely
    on the Post Office.
        So in summary, Time Inc. believes that the issues
    challenging the Postal Service are urgent and demand action by
    Congress and the Postal Service. We need three things:
    Predictable rate increases that do not exceed the rate of
    inflation, resolution of the CSRS escrow and retirement issues,
    and service standards for all classes of mail.
        I am personally committed to working with you and all
    interested parties to help implement urgently needed Postal
    reform. Thank you again, Madam Chairman, for this opportunity
    to share the views of Time Inc. with this Committee.
        Chairman Collins. Thank you for your testimony.
        Before hearing from Mr. Angelson, I would like to give my
    two colleagues a chance for any brief opening comments that
    they might want to make. Senator Durbin.

                  OPENING STATEMENT OF SENATOR DURBIN

        Senator Durbin. Thanks a lot, Madam Chairman, and I will
    take your advice to make it brief. I want to welcome both of
    our witnesses, Ms. Moore as well as Mr. Angelson. Of course, he
    is with RR Donnelley, which is a major employer in Chicago, a
    city that I am honored to represent, new to the job a few days,
    and happy to have you here.
        Ms. Moore indicated that Time Inc. is one of the largest
    customers of the Postal Service, and I know that RR Donnelley
    is the company that is the largest private user of the U.S.
    Postal Service. I think that is why this particular hearing is
    so important, so we can understand not only the reform of the
    Postal Service, on which the Chair has been our leader, but
    also its impact on private business and how we can try to
    develop some synergies and try to make it more efficient.
        So I thank both of the witnesses for coming. Particularly,
    Mr. Angelson, thank you for the great work that RR Donnelley
    does in the Chicagoland area, all around the United States, and
    the world.
        Thank you, Madam Chairman.
        Chairman Collins. Thank you. Senator Carper.

                  OPENING STATEMENT OF SENATOR CARPER

        Senator Carper. Just a quick note to say welcome. Thank you
    very much for making time out of your day and week to join us
    and to share your testimony with us.
        We are attempting to undertake here something that hasn't
    been undertaken for over three decades, and that is to try to
    figure out what our Postal Service should look like going
    forward. As we attempt to design and develop and build a
    consensus around the Postal Service in the 21st Century, your
    input is welcome.
        I just want to say to the Chairman, this is not the last
    but one of many in a very helpful series of hearings that
    enable us to learn and hopefully will bring us a step closer to
    consensus. We will find out just how successful we have been in
    that in a month or two, so thanks very much.
        Chairman Collins. Thank you. Mr. Angelson.

      TESTIMONY OF MARK ANGELSON,\1\ CHIEF EXECUTIVE OFFICER, RR
                               DONNELLEY

        Mr. Angelson. Madam Chairman, thank you for inviting RR
    Donnelley to testify this morning and good morning to you.
    Thank you, Senator Durbin from the great State of Illinois,
    where we live and are headquartered. Senator Carper, from the
    great State of Delaware where we are incorporated, thank you
    for having us this morning.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Angelson appears in the Appendix
    on page 75.
    ---------------------------------------------------------------------------
        Chairman Collins. And so what are you doing for Maine?
    [Laughter.]
        Mr. Angelson. We are buying more paper than you can
    possibly imagine.
        Chairman Collins. I thought that might be the answer.
    [Laughter.]
        Senator Carper. I think that covers all the bases here.
    [Laughter.]
        Mr. Angelson. I am Mark Angelson, Chief Executive Officer
    of RR Donnelley. Thank you for the slack that I hope you will
    cut me for the fact that this is day nine on the job. Thank you
    very much. And while I have always known that a healthy,
    viable, and most important, affordable Postal Service is
    essential to our country and to our economy, when I found out 9
    days ago that it costs our customers more to mail a catalog or
    a magazine than it does for us to manufacture it, I knew it was
    important that I be here with you and with our fine customer,
    Ms. Moore, this morning.
        As you may know, RR Donnelley is the largest commercial
    printer in North America and perhaps in the world. As a result,
    that makes us one of the largest, if not the largest, users of
    the U.S. Postal Service.
        In addition to being a printer, we also enter nearly nine
    billion pieces of printed material into the mail each year,
    including magazines, catalogs, direct mail, telephone bills,
    and other highly personalized statements on behalf of
    customers, customers like Ms. Moore, who sits beside me this
    morning.
        Our employees and our customers see, feel, and experience
    every single day the consequences of a Postal Service in bad
    need of reform. RR Donnelley fundamentally supports the
    recommendations of the President's Commission and we urge
    Congress to push ahead now with the necessary changes. If we
    continue to put off reform, we will no longer be in the
    advantageous position of passing thoughtful, comprehensive
    reform, but may, in fact, be in a position where we have to
    respond to a crisis.
        Change is essential to the health of the U.S. mailing
    industry as a whole. I know that you have heard these numbers
    before, but I find them so compelling that I feel impelled to
    say them again. This is a $900 billion industry which accounts
    for 9 percent of the gross domestic product and nine million
    jobs.
        Just a short word, if I may, about jobs. At a time when
    many manufacturing jobs are at high risk of moving abroad, I am
    as sure as I am that it will be dark tonight and light tomorrow
    morning that your local letter carrier's job will never move
    overseas. Reforming the Postal Service, therefore, is also an
    opportunity to strengthen a sector of American jobs that stay
    in America.
        This hearing today, therefore, is about much more than
    reforming the Postal Service. It is about the economy, it is
    about jobs, and it is about the future.
        The postal distribution system as it stands today is
    inefficient. The President's Commission recognized these
    inefficiencies and now recommends changes. I hope that you will
    agree with the Commission and with RR Donnelley and our fine
    customer that there is substantial potential for improvement
    here and that the time to do it is now.
        Any piece of legislation, though, that protects the status
    quo will not be sufficient and will not be acceptable under the
    circumstances. At its heart, the Postal Service must change.
    Respectfully, it must change to allow, to encourage, and better
    yet, to demand ongoing improvement. In doing so, the Postal
    Service can function more like a business to the benefit of
    everyone involved. When I say more like a business, let me
    hasten to add we are not talking about losing jobs for people.
    We are just talking about using common sense.
        With my limited time, I would like to focus on just three
    areas, work sharing, network optimization, and the civil
    service retirement issue.
        In today's world where technology is constantly changing to
    allow for new improvements, no company can do everything. As a
    result, we have all learned to focus on our core competencies
    and to rely on others and their expertise in order to maximize
    our performance. The Postal Service should do this, too.
    Delivering the mail to and from every address in the United
    States 6 days a week, otherwise known as universal service, is
    the USPS' core competency. It is simply what they do best. All
    of the rest, I suggest respectfully, should be left to those
    who can do it better, and this combination is what we call work
    sharing, as you know.
        Work sharing frees up the Postal Service to focus on its
    core competency while having others, such as RR Donnelley,
    focus on the non-core competencies. This highly effective
    combination drives down cost. In fact, according to the General
    Accounting Office, in 1999 alone, work sharing saved the USPS
    an estimated $15 to $17 billion. Yet, and this is a very
    important point, even though there is proof that this works, it
    is as difficult today to enter into a work sharing agreement
    with the Postal Service as ever before. It is simply not a
    widely accepted practice.
        Let me give an example. RR Donnelley and others recently
    reached an agreement with the USPS on co-palletization. The
    deal took 18 months to reach, and in the end, all we were
    granted was a 3-year trial. That same deal, if I were to try to
    make it with a typical private sector partner, would have taken
    4 weeks, 6 weeks, or 8 weeks. We shouldn't have to work this
    hard to persuade our partner at the Postal Service to reach a
    result that benefits customers, that benefits the U.S.
    Treasury, the Postal Service, and, therefore, all users of the
    system.
        The second subject that I would like to address is network
    optimization. It is inconceivable to me that there have not
    been ongoing adjustments in the USPS network, but there haven't
    been. The Postal Service's current distribution network was
    established over 30 years ago and it has remained virtually
    unchanged ever since. That is astonishing when one thinks about
    the changes that have occurred in that same period, changes
    that have had a direct impact on how we use and how we would
    like to use the USPS. From major trends like population shifts
    to the invention of E-mail, the country is different now, but
    the USPS remains the same, and respectfully, I would urge you
    that that has to change.
        The USPS must be allowed and incentivized to keep pace with
    change. Facility locations, size, and transportation routes
    should be changing constantly to keep up with demand, to
    eliminate redundancy and overcapacity, and to achieve
    productivity gains. All successful businesses constantly adjust
    to changes in customer traffic, demographics, and other
    factors, especially service businesses like the USPS.
        Put simply, the USPS must be allowed constantly to realign
    its network to reflect current realities, free of emotion, and
    respectfully, Senators, free of politics. If changes of this
    nature are not an ongoing, unencumbered process, all the
    legislation in the world will not make the Postal Service run
    better, nor more smoothly, nor more efficiently.
        Work sharing coupled with network optimization makes it
    possible to achieve what we call the lowest total cost. This
    concept is at the core of what RR Donnelley and our fine
    customers hope to have from the USPS.
        And a final word on the civil service retirement problem.
    First, I ask respectfully that Congress consider removing the
    CSRS savings escrow requirements that were created last year.
    Doing this will free up approximately $73.3 billion that the
    Postal Service can use to pay down its debt to the U.S.
    Treasury and to hold postage rates steady, among other things.
        Second, there is no good reason for the Postal Service to
    bear the financial burden of the civil service military
    retirement benefits. No other Federal agency is required to do
    this. If the Treasury doesn't assume these costs, the result is
    simply that the costs will immediately be imbedded in the price
    of a stamp. In other words, mailers, not just RR Donnelley and
    Time Inc., but many small businesses and American families
    inappropriately will be paying these retirement costs. Let us
    not make the job of the Postal Service even more difficult by
    keeping this financial burden on its back, please.
        We have a chance right now, a real opportunity, to make the
    necessary changes to assure that the U.S. Postal Service and
    the mailing industry as a whole remain healthy and viable.
    Several more years of business as usual could bring us to a
    point of dangerous disrepair.
        I thank you for the honor and privilege of appearing before
    you this morning. Thank you very much.
        Chairman Collins. Thank you very much, Mr. Angelson.
        I am very pleased that you reiterated the startling
    statistics about the impact of the Postal Service on our
    Nation's economy and on some nine million jobs. One of the
    witnesses on our second panel, a catalog owner from Maine, was
    the one who first told me about that impact and I think most
    people are startled to realize that the Postal Service has such
    an economic impact.
        When I look at both of you, you really represent that
    impact. Time magazine buys paper from a mill in Bucksport,
    Maine. You print on that paper. The interrelationship between
    the paper manufacturers, the printers, the publishers, and the
    ability for you to buy lots of paper from a Maine mill depends
    directly on affordable, reliable, and predictable postal rates,
    and I think in the debate that we can't lose sight of the fact
    that if the Postal Service's rates soar or become completely
    unpredictable, that it is going to have a negative impact on
    both of your operations and on those paper mills back home in
    Maine.
        Could you comment, Ms. Moore, on the economic impact of
    unpredictable and high postal rates on Time magazine?
        Ms. Moore. Whenever we have had an unpredictable postage
    increase, we first scramble to do everything we can within our
    own business formula. That might mean reducing the size of the
    magazine. We have had wonderful paper suppliers who have done a
    miraculous job of lowering the weight of paper. The technology
    improvements out of the paper industry have been really just
    fabulous. But those things we can do internally to our physical
    products only can go so far.
        With three price increases, we really had to scramble to
    cut back on mailings, on volume. It prevents us from launching
    new magazines, and then ultimately, we have to pass that price
    on to our reader, and it has not been a welcome increase over
    the last 3 years.
        Chairman Collins. Mr. Angelson.
        Mr. Angelson. I would add very briefly, Madam Chairman,
    that when Time Inc.--when postage rates go up and Time Inc.,
    and others mail less, we print less and the impact on jobs that
    we are trying to avoid is, in fact, compounded in the other
    direction.
        Chairman Collins. Thank you. Some of the most controversial
    recommendations made by the Commission have to do with the
    Postal Service's workforce. Now, I don't support personally all
    of those recommendations, but I do believe that we cannot
    ignore the workforce issues given that 75 percent of the Postal
    Service's costs are directly related to its workforce.
        You have both stressed in your statement the need to deal
    with the escrow account and the military pension issues, which
    I completely agree with. Senator Carper and my bill last year
    did not have the escrow account in it. That was added on the
    House side and I, for one, am committed to reversing that
    provision.
        But those are only two of the issues that affect the
    workforce. Ms. Moore, if we are going to be serious about
    tackling postal reform, can we ignore those workforce
    recommendations?
        Ms. Moore. It is not possible to have meaningful postal
    reform without addressing the labor issues, and I view labor,
    however, as a key partner in reform. We have to do everything
    in our power to address their concerns, but when you have labor
    representing almost 80 percent of the costs, they have got to
    be willing to do their share to provide for the future of the
    Postal Service.
        That number, by the way, is astounding. I did go back to my
    own company because I believe I am a labor-intensive industry.
    I buy paper from your State and I use his presses, so I have a
    labor-intensive business. I only employ people, talented
    writers and reporters, but labor only represents 35 percent of
    my cost base. So that 75 to 80 percent cannot be ignored, and I
    think I saw a quote from Senator Durbin recently which I think
    says it all, and that was that we all should be willing to give
    a little to pass meaningful reform.
        Chairman Collins. Mr. Angelson.
        Mr. Angelson. Thank you, Madam Chairman. I would add that
    we are talking about predictions for adding 1.7 million
    addresses in the United States every year going out for 10
    years, as far as we can see at this point. During that period
    of time, there will be natural attrition in the workforce of
    the U.S. Postal Service and we think that those are two
    statistics that, when worked together, will allow us to address
    this difficult issue in partnership, if you will, with our
    colleagues on the labor side so that we can get this done
    without inappropriately breaking anyone's rice bowl, if you
    will.
        So we think, yes, it needs to be addressed, the labor
    issue, but we think it can be addressed in a way that suits the
    needs of all the constituencies.
        Chairman Collins. You raise a very important point.
    Addressing the workforce issues does not mean laying off
    thousands of postal workers. In fact, 47 percent of the current
    workforce will be eligible for retirement within the next 10
    years. So there is an opportunity to right-size the force
    without resorting to widespread layoffs.
        But there are obviously many other issues involving
    workers' compensation, the collective bargaining system, where
    I think we can make some reforms that will be beneficial to the
    workforce as well as in holding rates down.
        Senator Durbin.
        Senator Durbin. Thank you, Madam Chairman.
        Illinois is a wonderful State and it is pretty flat. As you
    travel downstate, where my home is, cornfields and soybean
    fields in every direction as far as the eye can see. About 100
    miles south of Chicago on Interstate 55, the old Route 66,
    there appears a mountain range. It startles you. You can't
    imagine, what is this all about? Well, it is because within a
    quarter mile of the interstate is a landfill and the landfill
    is huge, and I look at it every time I go by and it is growing.
    Maybe someday we will have a ski resort there, I don't know. It
    is not likely, but possible.
        But it points to a real serious issue which I would like to
    address for a moment here because I can't think of two more
    important witnesses. Most of that bulk in that landfill is
    paper, and it strikes me as odd that in this conversation about
    looking to the future, which the reform of the Postal Service
    is all about, there is very little conversation about paper
    other than making certain that you do business in Maine, which
    is important to our Chairman. [Laughter.]
        Senator Durbin. A few years ago, I had a notion that
    perhaps we should encourage the use of more recycled fiber and
    perhaps even offer incentives in postal rates for those who
    would have a certain percentage of their product in recycled
    fiber and a concomitant penalty for those that didn't, creating
    an incentive that some of the catalogs and magazines that I
    receive would have at least some recycled fiber content.
        I couldn't have ever anticipated the firestorm of
    opposition to that wildly radical idea. Everybody was against
    it, everybody, the unions, the Postal Service, those who print
    the magazines and those who write them. Everybody thought this
    was a completely irresponsible notion.
        I am going to revisit that for a moment here, because I
    can't think of two better witnesses. Ms. Moore, of all the
    publications out of Time Inc., what would you say is the
    percentage of recycled fiber and paper that you use in your
    publications?
        Ms. Moore. I don't know the percentage. I know that we
    certainly have been very aware of the whole environmental
    issue. We have done wonderful work, actually, with our paper
    suppliers on the subject of chemicals and working hard to get
    recycled. I know that currently, 100 percent of our newsstand
    unsold copies are recycled and we are working right now on a
    recycle pilot project, I think in Boston, the City of Boston.
        So it is something--I get this question at the annual
    meeting every year. It is something that we have been very
    aware of and that we are working hard on. But currently, we
    don't have a high percentage of recycled fiber in our current
    printing plants. I think a lot of the work done in the last
    couple years by the paper industry to lower the weight of our
    paper has done a lot of good in keeping that landfill down.
        Senator Durbin. Is it beyond the realm of possibility that
    some percentage of your publications would be recycled fiber? I
    understand that perhaps the covers and some of the features and
    the color pages and such, maybe recycled fiber isn't always
    appropriate. But is it beyond the realm of possibility to say
    that a certain percentage of your publication would be recycled
    fiber?
        Ms. Moore. To make that mandatory? At the moment, it is not
    economically viable.
        Senator Durbin. It is too expensive? Recycled fiber is too
    expensive?
        Ms. Moore. Yes, sir.
        Senator Durbin. Dramatically? I mean, is it marginal or----
        Ms. Moore. Dramatically.
        Senator Durbin [continuing]. Dramatically more expensive.
    Of course, you don't have to factor in the cost of the landfill
    nor the impact on what that means to a community which becomes
    a social cost which a lot of places around the world have
    decided is an important part of the equation.
        Mr. Angelson, I know you are new to the job and I don't
    want to put you on the spot, but could you comment on that
    issue?
        Mr. Angelson. I can speak personally and I can speak a
    little bit on behalf of RR Donnelley and would ask that we be
    allowed to respond more formally in due course.
        Senator I agree with you that our children and our
    grandchildren and their grandchildren need to live on this
    planet and I applaud the spirit which moves you in the
    direction in which you are moving. We at RR Donnelley have long
    recycled the scrap paper that comes off the cutting, etc., as
    we prepare our products for our customers. To a very
    significant extent, though, our customers do the paper buying,
    if you will, and we do the printing on it. I would be grateful,
    in light of my 8 or 9 days on the job, if you will let me duck
    on this one.
        Senator Durbin. I want to revisit it, and I hope I can find
    some common ground with our Chairman. I know this is a delicate
    issue for her and it is an important industry in her State, but
    I know she is also sensitive to the environment that we live in
    and I thank her for her leadership and I thank you both for
    your testimony. Thanks, Madam Chairman.
        Chairman Collins. Thank you. Senator Carper.
        Senator Carper. It is kind of ironic that my colleague,
    Senator Durbin, raised that issue, because last night when I
    brought my boys home from the Troop 67 Scout meeting, we did
    our recycling. We recycle twice a week. It is picked up at our
    curb in front of our house in Wilmington, Delaware, by a firm
    that we actually pay to pick it up because we don't have
    curbside recycling. I am proud to report I think we now may
    actually recycle more than we put out in our trash can once a
    week, which is no small achievement.
        I certainly share his interest in recycling and that is not
    the reason for our hearing today. One of the things that I
    learned, I learned as a Governor when we were trying to reduce
    the amount of land that we had to set aside for landfills, one
    of the things that I learned is that in order to make recycling
    pay, we have to find folks who are willing to buy the recycled
    products.
        I would just ask Mr. Angelson, you are new in your job. Ms.
    Moore, you are not so new. I would ask that you take to heart
    the comments that Senator Durbin made. Those are ones that I
    share, as well.
        In terms of what in the magazines might lend itself to
    being recycled, maybe not the cover, maybe not the pages
    inside. But you know those little inserts, like those little
    postcards you have to mail? Those really get in the way, and--
    -- [Laughter.]
        Ms. Moore. Senator Carper, all insert cards are 100 percent
    recycled paper, you will be happy to know.
        Senator Carper. I should have guessed. I will feel more
    kindly toward those postcards in the future, armed with that
    knowledge.
        Mr. Angelson, have you testified previously before a
    Congressional Committee?
        Mr. Angelson. I have not, Senator.
        Senator Carper. What was it like?
        Mr. Angelson. It feels just like home. I have three
    intelligent, I hope, and active and interested daughters and it
    feels like the dinner table, so----
        Senator Carper. That is good. I think you did a nice job,
    and Ms. Moore, you certainly did, as well. I knew you would.
        Ms. Moore, would you go back and just share with us those
    three points? You closed your testimony with three points. I
    just want to revisit those for a moment, if we could.
        Ms. Moore. What are the three things that are kind of
    ``must haves'' in the reform bill? We would like you to resolve
    the escrow provision in military retirement. We would really
    like you to implement, Congress to implement, a CPI cap for
    rate increases. And finally, we really would like service
    standards for all mail classes. It is not enough just to have
    the low-cost provider. We need reliable service standards for
    all classes of mail.
        Senator Carper. We have had some discussion here amongst
    ourselves and with the Commission appointed by the President as
    to who might be responsible for establishing those service
    standards and what kind of reward or punishment might be meted
    out for failure of the ability to meet those service standards.
    Would either of you care to give us some advice on those
    points?
        Ms. Moore. Well, I think you want to implement--I think you
    want to follow best practices as you do in the business
    community. You want to first start with cost-based rates.
    Please make us pay for what we use. If I am inefficient in
    giving you a direct mail piece that can't be scanned, you
    should punish me with higher rates for that piece of mail. You
    can incent the users of the Post Office to help drive costs
    out. And I also think you want to do things like pay for
    performance. You should incent the management of the Postal
    System to be rewarded for running a low-cost, affordable
    service.
        Mr. Angelson. I would agree with Ms. Moore, Senator. I
    would add that it is very important that in maintaining
    universal service, that Congress reserve to itself ultimately
    the right to regulate that monopoly for the benefit of all
    American citizens with the idea of having corporate governance
    in place for the Postal Service, which, as you know, if it were
    a Fortune 500 company, based on 2003 statistics, it would be
    number 11 in the Fortune 500. Governing it like a business,
    subject, of course, to reserving the right of Congress to
    maintain its most fundamental oversight, we think would be a
    very good thing.
        Senator Carper. With respect to governance, let us talk
    just a little bit about the makeup of the Board of Governors.
    As you know, there is no requirement in the law that they have
    to have background experience consistent with the work that the
    Postal Service does. I think they serve fairly long terms, I
    want to say maybe 9-year terms. I believe for the most part
    they are selected by the President, nominated by the President,
    confirmed by the Senate.
        The Commission has made some recommendations in this area.
    Several people would be appointed, nominated by the President,
    confirmed by the Senate. The rest would be independent Board
    members. There would be a requirement that these folks would
    have to generally have some experience that is consistent with
    the nature of the work of the Postal Service does. And rather
    than serving maybe 9-year terms, they would serve much shorter
    terms.
        Now, each of you have experience with corporate boards of
    your own and I just ask you to reflect on your own experience.
    Think about what we are contemplating with regards to the
    structuring of the Postal Service Board and tell us how you
    think we ought to proceed.
        Ms. Moore. I was absolutely thrilled with the President's
    Commission and how you could attract two bipartisan chairs as
    experienced as Mr. Johnson and Mr. Pierce, and I wonder why you
    couldn't attract the same kind of experienced talent to the
    Postal Board, because here it has an enormous impact on the
    economy, on jobs, and I see no reason why you shouldn't recruit
    to the Postal Board this same thing we would do in manning a
    Fortune 500 board. I think there are a lot of able people with
    experience who would be willing to serve a limited term to get
    the job done in the future. That has not been done in the past,
    and I see no reason why you couldn't call on a lot of able
    people in the business community to fill some of those seats.
        Mr. Angelson. Senator, I agree completely with Ms. Moore's
    remarks. In manning or womanning a private company board, we
    have had great success in choosing people--and again, these
    aren't the people who are going to actually be on the ground
    executing the decisions. These are people who follow the adage
    that when one has a symphony orchestra, one needs 100 people
    and there is somebody to play the triangle and somebody to play
    the drums and somebody to play the French horn, etc. We find
    that a broad cross-section of views from people with a broad
    and diverse cross-section of backgrounds most help in doing
    this.
        It is a business, Senator, as you know, the Postal Service,
    and we think it ought to be run like a business, again, subject
    to preserving jobs where we can do so.
        Senator Carper. I realize my time has run out. Could I just
    ask one other quick one?
        Chairman Collins. Certainly.
        Senator Carper. It relates to the line of questioning on
    the board. Do you recall what your board members are paid, just
    roughly, or your directors' fees? I presume that is public
    knowledge.
        Ms. Moore. I would say, typically--I think there is a broad
    range--I would say typically a board member of a Fortune 500
    probably makes around $50,000 a year, often paid in stock, not
    in cash. That is a guess, but I think that is what I recall. I
    am on the nominating committee of a Fortune 500 company.
        Mr. Angelson. I think that Ms. Moore's guess is very close
    to right. There is--in governance, and you might not have this
    advantage when you put together a governance body for the
    Postal Service, because paying them in stock is something that
    I am not sure would induce them to necessarily perform to their
    utmost. I would have said, if we were in an all-cash
    compensation system, that something around $50,000 would
    probably be right.
        Ms. Moore. But I would also add to that that I think you
    could probably, because of the importance of this, most sitting
    CEOs don't sit on the boards of companies any more for the
    compensation. It is a lot of hard work and it is vital to the
    health of our businesses. I think it would not be money that
    would attract us to the board, but helping the Postal Service
    stay strong.
        Senator Carper. Amen. Thank you. Thanks, Madam Chairman.
        Chairman Collins. Thank you, Senator.
        Ms. Moore, you indicated that one of your top three
    priorities is the establishment of an inflation-linked rate cap
    for the Postal Service. Under the Commission's recommendation
    for such a cap, the Postal Service would have the ability to
    set rates below that cap.
        That leads me to ask you two questions. One, do you have
    any concern that the Postal Service would immediately jump to
    the cap, and second, should there be some sort of after-the-
    fact review of the rate structure to make sure that the Postal
    Service is not taking undue advantage of that latitude?
        I understand the need to have more flexibility, more
    predictability, and to get away from the current adversarial
    process, which can take as long as 18 months. But there are
    also risks with just allowing the Postal Service to set its own
    rates without review. Could you comment further on that?
        Ms. Moore. Well, it is one of the reasons I would love
    Congress to set the inflationary cap guidelines. I could live
    with the Post Office having such a system and having the
    flexibility to raise rates up to that cap because it gives me
    predictability. I could budget for up to inflation every year
    or what the cap is.
        I think that what you want to counter with is a pay for
    performance. Remember, we want to incent the management of the
    Post Office to run a low-cost efficient business. Not only does
    it take 18 months whenever the current system requires a rate
    hearing, but I have to tell you, I spend almost $1 million in
    providing reports every time there is a rate increase. The
    sheer waste of the current system is just intolerable.
        So I think we would all be very happy to live with a rate
    cap system. I don't fear that the management would
    automatically go to the top cap if we incented them properly to
    run the Post Office as a business.
        Chairman Collins. Thank you. Mr. Angelson, do you have
    anything you would like to add?
        Mr. Angelson. I would support Ms. Moore's comments yet
    again. For us, it is about stability and predictability.
        Chairman Collins. I want to thank you both very much for
    your testimony. We look forward to working with you.
        Senator Carper. Madam Chairman, could I ask just one last
    question?
        Chairman Collins. Certainly.
        Senator Carper. Mr. Angelson, I think it was you who spoke
    about how difficult it is to get the Postal Service to enter
    into a work sharing agreement. Would you just go back and
    briefly revisit that for us and maybe tell us what you think
    causes that difficulty and whether you believe that we ought to
    be doing something legislatively to make it easier to do work
    sharing?
        Mr. Angelson. Senator, it is about bureaucracy and it is
    about, if I may, concern about or fear of change. It is about
    entrenched ways of doing things. And yes, we would welcome any
    contribution that this Committee and ultimately the Congress of
    the United States could make to easing the way toward making
    the U.S. Postal Service a more business-like partner.
        Senator Carper. Thanks very much. My thanks to both of you.
        Mr. Angelson. Thank you.
        Ms. Moore. Thank you.
        Chairman Collins. Thank you. I want to thank both of our
    witnesses. Your testimony was extremely helpful and we look
    forward to working with you as we go forward and as Senator
    Carper and I draft our bill, so we would welcome any future
    advice that you might have for us. Thank you.
        Ms. Moore. Thank you.
        Mr. Angelson. Thank you very much.
        Chairman Collins. I would now like to call forth our second
    panel of witnesses. Chris Bradley is the President and Chief
    Executive Officer of Cuddledown, Inc., a manufacturer and
    catalog retailer of fine home furnishings based in Portland,
    Maine. Mr. Bradley also serves as the Vice President of the New
    England Mail Order Association of America.
        Max Heath is the Vice President of Circulation, Postal and
    Acquisitions for Landmark Community Newspapers, Inc., of
    Shelbyville, Kentucky. Landmark Community Newspapers has 53
    weekly and daily newspapers in 13 States and Mr. Heath is in
    his 18th year as Chair of the Postal Committee of the National
    Newspaper Association.
        William Ihle is the Senior Vice President of Corporate
    Relations for the Bear Creek Corporation of Medford, Oregon.
    Bear Creek owns the well-known catalogers Harry & David and
    Jackson & Perkins. Mr. Ihle supervises all public relations,
    community relations, and government relations for the family of
    companies in this country and overseas.
        And finally we are going to be pleased to hear from Shelley
    Dreifuss, who is the Director of the Postal Rate Commission's
    Office of Consumer Advocate. She was appointed to this position
    in April 2002 and has 25 years of litigation experience
    representing consumer issues in the Office of Consumer
    Advocate. I would note that her primary duties are the
    protection of consumer and small business interests in rate and
    classification cases before the Postal Rate Commission.
        Mr. Bradley, we are going to start with you, not only
    because you are my constituent---- [Laughter.]
        But also because you were the first person to educate me on
    the broader economic impact of the Postal Service. You
    organized a meeting of some 22 businesses in Maine, ranging
    from printers to paper manufacturers to LL Bean and everything
    in between and it really was an eye-opener for me about the
    link between affordable, reliable postal rates and the jobs
    that we have in our State and nationwide. So thank you for that
    education and I am pleased to ask you to proceed with your
    testimony.

      TESTIMONY OF CHRISTOPHER W. BRADLEY,\1\ PRESIDENT AND CHIEF
                  EXECUTIVE OFFICER, CUDDLEDOWN, INC.

        Mr. Bradley. Thank you, Chairman Collins. Cuddledown is a
    small company located in Portland, Maine. We manufacture down
    comforters and pillows with most of our marketing done through
    a catalog we mail throughout the United States. We currently
    have 86 employees. Over the past 15 years, we have grown our
    sales from less than $1 million to more than $20 million. The
    engine for this growth has been our catalog and the U.S. Postal
    Service has been an essential partner in getting our message to
    our customers. I am here before you representing a small
    business that is dependent on a functional and affordable
    Postal Service.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Bradley appears in the Appendix
    on page 81.
    ---------------------------------------------------------------------------
        Cuddledown prints and mails more than ten million catalogs
    each year. Our annual postage bill is roughly $3 million, but
    the impact of our business extends beyond that. We print our
    catalog in Mississippi and we use about 2,000 tons of paper
    each year, also manufactured in this country. The total value
    last year of our payroll, FICA tax, workers' compensation
    insurance, life insurance, long-term disability insurance,
    short-term disability insurance, health insurance contribution,
    and 401(k) contribution was $3 million. And like so many mail
    order companies, Cuddledown is located in a rural part of the
    country where good jobs are highly valued.
        Mail order and the Internet allows small companies to
    spring up all over the country to grow, create jobs, be
    successful, and to realize the American dream. But the future
    of this dream now depends on the legislation this Committee
    crafts to reform the Postal Service. Without substantial
    reform, it is expected that we will once again see rate
    increases far in excess of inflation.
        The last rate increase in June 2002 raised standard mail an
    average of 8 percent. For Cuddledown, that meant an increase in
    our postage bill of $240,000. That is eight good jobs at
    $30,000 per job that we would need to cut just to stay even.
    Given the weak economy and the job cuts that we have already
    seen, to cope with declining sales, large increases in postal
    rates will result in small business failures in my industry.
        Reform is clearly needed and the President's Commission has
    outlined the reforms that need to be put in place. In reading
    the Commission's report and published comments from other
    involved parties, it seems clear to me that reform would
    include the following: Elimination of the escrow account for
    overpayments into the Federal Civil Service Retirement Fund;
    shifting the obligation to pay for military service retirement
    from the Postal Service to the Treasury Department; giving the
    Postal Service the ability to open and close processing plants
    and post offices to meet their business demands; and enabling
    the Postal Service to use pricing and other services as tools
    to grow their business.
        In my opinion, this last point will be the most important
    in the long run. You must give the Postal Service the
    flexibility it needs to compete in the current world. The
    biggest current threat to the Postal Service is the shift from
    physical to electronic mail delivery. First class and standard
    mail are under attack and mail volumes are projected to decline
    in future years. The Postal Service must grow the volume of
    mail, and the only way to do that is to be competitive in
    today's business world.
        The current structure of the Postal Service represents the
    competitive forces of the era when man first set foot on the
    moon. The structure has been successful for 30 years, but the
    world has changed and the Postal Service must change to
    survive.
        So what does it mean to be flexible and competitive in
    today's world? I can think of one example that dramatically
    illustrates how the Postal Service is stuck in another era and
    how they can change to increase their mail volume. Cuddledown
    buys goods and services from hundreds of suppliers, yet the
    only supplier that does not extend us open credit terms is the
    U.S. Postal Service.
        Trade credit is the lubrication that keeps the business
    world running and growing. The Postal Service needs to compete
    in the modern business world, and yet their terms are cash in
    advance as if their customer had no other choice. This policy
    is straight out of the 1960's, at a time when EZ-PASS was
    science fiction and trying to use your BankAmericard at the
    grocery store would have been met with polite refusals, at
    best.
        Cuddledown mails catalogs 18 times each year. The postage
    is removed electronically from our corporate checking account
    on Friday. The catalogs begin to move on Monday and begin
    arriving in our customers' homes the following Monday. Our
    average catalog is delivered 12 days after payment has been
    made. The only competitive part of this process is the
    electronic debit to our bank account, and that is ironic
    because it saves us the postage cost of mailing our check.
    [Laughter.]
        UPS, FedEx, and Parcel Direct all give us open terms. Our
    printer, color separator, photographers, and models all give us
    trade credit. When we buy down or fabric to make our down
    comforters, we have standard payment terms. When we sell our
    comforters, pillows, and sheets to other retail stores, we
    extend them standard credit terms. I can even think of a guy
    from China who sells us down-filled booties. We meet with him
    in Germany. He has never been to Maine, much less visited us at
    our factory, and yet he is willing to give us trade credit.
    Trade credit is reasonable, it is controllable, and it is
    expected in today's world, yet the Postal Service still
    requires their customers to pay in advance.
        So why should you give the Postal Service the ability to
    extend normal trade credit? Because they could use it to grow
    their volume. Paying in advance and waiting 12 days for your
    first results is a roadblock for any business and especially a
    small business. Cash flow is critical for a business, and many
    decisions, especially the question of how many pieces to mail,
    revolve around the impact on cash flow. If commercial mailers
    could match the timing of their postage payments with the
    delivery of their mail, they could mail more volume and they
    would.
        Would trade credit result in significant bad debt expense
    for the Postal Service? I don't think so. The last supplier
    that a mailer would fail to pay would be the Postal Service
    because they would cut off its source of cash. It would be like
    failing to pay your phone bill. It is just not done by a mail
    order company.
        The Postal Service could easily control their expense and
    the marginal cost of mail delivery is low, so the risk of bad
    debt is low. The risk is low, the reward is great, and the very
    survival of the Postal Service depends on new ideas that will
    reverse its declining mail volume.
        Extending trade credit is just one idea that will help the
    Postal Service compete and thrive in today's world. There are
    probably many others out there, and the important thing is that
    new legislation is passed that will enable the Postal Service
    to take advantage of the opportunities that are available to
    it. The business climate in the United States requires constant
    creativity and innovation just to survive. The legislation that
    formed the Postal Service in 1960 served it well for many
    years, but now that same structure is a threat to its very
    survival. Electronic communication has irreversibly changed the
    postal world and it is up to Congress to create new structure
    that will allow the Postal Service to serve its mission for the
    next 30 years.
        Thank you. I appreciate being invited today and having the
    time to talk.
        Chairman Collins. Thank you. Mr. Heath.

     TESTIMONY OF MAX HEATH,\1\ VICE PRESIDENT, LANDMARK COMMUNITY
         NEWSPAPERS, INC., ON BEHALF OF THE NATIONAL NEWSPAPER
                              ASSOCIATION

        Mr. Heath. Thank you, Madam Chairman and Members of the
    Committee. My name is Max Heath. If I may, I will speak briefly
    today and submit a longer statement for your record.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Heath with an attachment appears
    in the Appendix on page 85.
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        Chairman Collins. Without objection.
        Mr. Heath. I am Chairman of the National Newspaper
    Association's Postal Committee and I am a Vice President of
    Landmark Community Newspapers, Inc., a private company operated
    out of Shelbyville, Kentucky. As the Chairman said, we own 53
    small newspapers, 34 related shoppers, about 25 related
    specialty publications, and 19 printing plants which both print
    on newsprint and mail publications for other people, including
    our own newspapers, and these are all across the country. I
    also serve as one of two NNA representatives on the Mailers
    Technical Advisory Committee formed by the Postmaster General
    about 35 years ago now, I believe, and have been on that since
    1989.
        NNA supports postal reform and has worked for the past
    decade to help craft legislation that will provide the Postal
    Service with new tools to remain viable in this century while
    protecting the interest of small newspapers. NNA has about
    2,500 member newspapers in America. I bring greetings from many
    of the publishers in your State, including, Madam Chairman, the
    publisher of the Ellsworth American, Alan Baker, who you know
    well, who is a member of NNA's Board of Directors and who is a
    firm supporter of NNA's excellent relationship with the Postal
    Service. Also in Senator Carper's State we have Tom Bradley,
    the President of the Chesapeake Newspaper that operates in
    Maryland and Delaware, former NNA President.
        I would also like to insert here a point about the recycled
    content on the record, since that was brought up earlier, if I
    may. Newspapers are about 60 percent users of recycled
    newsprint and all the mills that we operate now include post-
    consumer content in that fiber that we buy. One thing we have
    learned as the States have tried to put in local laws to govern
    the use of this is that you can't recycle forever. You always
    have to have some new fiber coming in because the fiber does
    wear out, so there is not such a thing as 100 percent newsprint
    recycled.
        The typical member of NNA is a family-owned weekly of about
    3,000 to 7,000 circulation. Almost all of these depend upon
    periodical mail for their primary circulation and often use
    standard mail to deliver advertising to non-subscribers To
    illustrate, my company in 2003 spent $3 million in standard
    mail postage, $2 million in periodical postage, and only four-
    tenths of a million in first class postage for our total of
    $5.4 million postage bill.
        The membership of NNA also includes a number of small
    dailies, most of which are under 10,000 circulation and many of
    which are heavy mail users. In fact, we even have small dailies
    that continue to depend upon the Postal Service for the primary
    delivery of each daily issue. I have consulted with some of
    those States, such as Michigan and other places.
        I have provided postal consulting services through my NNA
    hat and in my Landmark position for nearly 20 years now and
    have also visited and seen newspapers in other countries. What
    is remarkable to me is the wide diversity and importance of the
    community press in America, compared to some other countries
    where there are one or two major national newspapers and
    possibly some smaller dailies.
        I think the critical element in this country for the
    hometown newspaper has been the Postal Service. Because of it,
    just about every county seat has its own newspaper and some of
    them have two or more even. Our Nation depends upon those
    papers to deliver information on local government and politics,
    including many of your local newspaper columns, and community
    activities. Even in an Internet age, we think there is no
    viable substitute for these newspapers. Community newspapers
    are continuing to grow in this country in total circulation
    even as metro papers, large State papers are on somewhat of a
    decline in the last 10 or 15 years.
        Congress ensured that we would have a thriving community
    press in the 19th Century when it developed postal rates that
    were designed precisely to give the new frontier its own local
    newspapers. The large New York dailies were mailing heavily
    into the developing South and West and Congress sought to
    provide that a local publisher could successfully compete by
    providing favorable rates.
        Because those favorable rates had to ratchet up to cover
    the full direct and indirect cost of delivery in 1970, our
    publishers have experienced dramatic rate shock. Even with the
    largest of work sharing discounts available now, our within-
    county rates have gone up more than 850 percent since postal
    reorganization, and at the basic level rate, there is a more
    than 2,000 percent increase.
        In 1993, Congress put a ceiling on the contribution of our
    postage to the Postal Service's overhead cost, pegging it to
    the outside county periodicals rate. In the past few years, we
    have exceeded the ceiling. For example, in the 2002 Postal
    Service cost and revenue reports, we contributed 102.2 percent
    of our cost while outside county mail contributed 90.6 percent.
    The report demonstrates that our mail is not inefficient or
    unprofitable to the Postal Service. It does show a small
    profit. But it does require some extra work on our part and on
    the part of you and the Postal Service to ensure that we remain
    viable. Because our costs are so small and our mail is such a
    small part of the domestic mail stream, we sometimes become
    lost in the shuffle.
        So that brings me to my first request of the Committee. As
    your work continues, we hope you will make sure that our
    newspaper mail remains a distinct class within the mail stream
    and is not swallowed up by larger, more costly mail class.
        My second request addresses the Postal Service's need for
    more flexibility in managing its business. We agree with the
    need to provide the Postmaster General more management control.
    This includes more flexibility in dealing with labor and
    capturing automation savings.
        We have a concern with the recent trend toward negotiated
    service agreements, however. While we do not oppose them
    outright, we think they should be based upon work sharing
    partnerships, and if they are, we think niche classifications
    are a far preferred tool, something that can be enjoyed by a
    wider class of mailers and not just one large company.
        We have consistently stated through postal reform
    discussions that NSAs that are crafted primarily upon volume-
    based incentives are unwise and are unfair in particular to
    small mailers. Even though NSAs may be extended to other
    mailers that are similarly situated, a small mailer may find a
    massive NSA competitor in his market and be unable to qualify
    for precisely the same sort of NSA.
        Therefore, we have urged the Postal Service and the Postal
    Rate Commission to require these NSAs to be sufficiently
    specific in their details and sufficiently open ended that a
    small mailer could request to perform the portions of the
    larger NSA that it is able to do and to earn proportionately
    similar discounts. We will make the same request of this
    Committee as it drafts legislation. We believe that if you
    leave this portion out of postal reform, the eventual NSAs may
    force small volume mailers out of the mail stream or even out
    of business, and the Postal Service will be the net loser due
    to the law of unintended consequences.
        There are a number of recommendations of the President's
    Commission with which we heartily agree. We certainly agree
    that continued reform of the Postal Service's Civil Service
    Retirement System contributions is needed. We supported passage
    of P.L. 108-18. We appreciate your work on that. We were
    dismayed by the addition of a burden for military pensions,
    like you have heard from many others. We can find no
    justification for this burden. No other government agency bears
    it and no private corporation, of course, has to contribute to
    military pensions.
        Although the Postal Service is a hybrid of government and
    private, one would certainly assume that its obligations in
    this area would be similar to one of those two, and in this
    case, it is like neither one. We strongly urge that the escrow
    of payments in 2006 be ended and a plan worked out for using
    the savings of lower CSRS payments.
        We are also agreed that the Postal Service should be
    permitted to right-size its network. It may be surprising to
    some to hear me, the champion of small rural newspapers, agree
    that closing some postal facilities may be necessary. Yet I
    think it is time to give the Postmaster General the ability to
    decide how many facilities he needs. There are some situations
    where very small post offices and even processing plants will
    still be needed for universal service. I think he understands
    that and that his strategic changes will be sensitive to the
    many needs of communities.
        No one likes to lose jobs or facilities in their areas, and
    certainly not newspapers. But I think we all recognize that
    some change is going to be needed to keep the Postal Service
    viable, and I am willing to give the Postmaster General a
    chance to make some adjustments. If service standards are
    established and observed, I think he has the right to figure
    out how to achieve them. If he guesses wrong, Congress always
    has the ability to step in, and we will certainly be there
    letting him know at the quarterly meetings.
        In the end, Madam Chairman, I think we all are going to
    have to make some adjustments to keep the Postal Service
    viable. We appreciate the work that you and your Committee are
    doing and we look forward to assisting you as you develop this
    legislation to provide America with a sound Postal Service in
    the 21st Century.
        Chairman Collins. Thank you, Mr. Heath. Mr. Ihle.

        TESTIMONY OF WILLIAM J. IHLE,\1\ SENIOR VICE PRESIDENT,
              CORPORATE RELATIONS, BEAR CREEK CORPORATION

        Mr. Ihle. Thank you, Chairman Collins and Members of the
    Committee for providing the leadership that we so desperately
    need to reform the U.S. Postal Service. I am Bill Ihle and a
    Senior Vice President of Corporate Relations. I am here today
    on behalf of our companies owned by Bear Creek Corporation,
    Harry & David and Jackson & Perkins.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Ihle appears in the Appendix on
    page 97.
    ---------------------------------------------------------------------------
        Bear Creek is an active supporter of the Postal Service.
    Our CEO is an active member of the Direct Marketing Association
    and appreciated the invitation to be here today. However, she
    is planning Christmas already for Harry & David and was unable
    to make it, so I am here in her stead. Our Senior Vice
    President and General Manager of Customer Operations is Vice
    President of the Parcel Shippers Association and we are active
    in other industry associations.
        Harry & David is recognized as America's largest shipper of
    gourmet foods, fruits, fine chocolates, and baked goods.
    Hopefully you have enjoyed our Fruit of the Month Club. Maybe a
    Royal Riviera pear or the always wonderful ``Moose Munch.'' At
    this time of year, it is particularly popular.
        Jackson & Perkins is the Nation's largest garden and rose
    company outside of Bakersfield, California. We grow 9.8 million
    roses, and I might say also, 3 years ago, Harry & David and
    Jackson & Perkins received the U.S. Conference of Mayors awards
    for small companies for their recycling efforts, something we
    are quite proud of.
        We employ more than 2,000 people year-round and 8,000
    additional employees in cities such as Medford, Oregon, and in
    Newark, Ohio. We have call centers there. We have our
    distribution centers there. We have warehouses, and we have our
    executive offices.
        We use all classes of mail to communicate with our
    customers, but our success ultimately depends on accurate, on-
    time, affordable package delivery, and the U.S. Postal Service
    is our primary resource for this task. Frankly, our companies
    would likely perish without affordable U.S. Postal Service that
    offers universal service and stands ready to deliver our
    packages to every city, every village, every hamlet, and yes,
    that includes Caribou, Maine.
        We agree with the President's Commission that the service
    models will not work in the future and we agree with many of
    its recommendations. We are pleased that the bills your
    Committee and the House Committee has considered before, S.
    1285 and H.R. 4970, are consistent with those recommendations
    and we believe that they would largely get the job done. We
    must emphasize how important it is that both bills confirm the
    mission of the Postal Service, the physical delivery of
    letters, printed matter, and packages, and we hope a lot of
    Harry & David packages along the way. We believe that both
    bills will also support the principles the administration says
    should govern reform, best government practices,
    transparencies, flexibility, accountability, and self-
    financing.
        Consistent with those principles, we think that there are
    more specific criteria that reform should guarantee--
    continuance of universal service; greater flexibility in the
    Postal Service's ability to fix prices and services; the
    deregulation of competitive products, such as parcel post,
    Priority Mail, Express Mail, so that the market will govern the
    prices and services; right-sizing the Postal Service
    infrastructure, redefining the regulatory regime to ensure that
    the Postal Service is performing its mission and that it
    ensures transparent operation, financial controls, and the fair
    and equitable rate structure; adequate compensation for postal
    employees at all levels in order to attract top-level employees
    and to give them the proper incentives; and end escrow of the
    CSRS savings and correct the military service credit situation.
        I would like to address two of these principles more
    specifically, the core service and increased competition for
    package delivery.
        We agree with the President's Commission that the Postal
    Service continue as a public service with a universal service
    obligation that package delivery should continue to be the core
    function of the U.S. Postal Service. For more than a century,
    package delivery has been an essential and integral part of
    what the Postal Service does. The fact that private sector
    companies have been successful in the parcel delivery business
    in no way alters the necessity of keeping the Postal Service in
    that business to ensure that there will be competition.
        We could not support any reform that would cut the Postal
    Service from the package delivery business because we believe
    that would end the universal service that our companies have
    come to depend upon. I repeat, of particular importance to us
    is 6-day affordable, universal, reliable package delivery
    service. There is no reason given the existence of competition
    for package delivery service to require the Postal Service to
    seek advance approval from regulators of its rates and
    practices as long as those rates and practices do not amount to
    unfair competition and cross-subsidy. Without the Postal
    Service, there simply would not be competition.
        Moreover, the Postal Service provides a unique service.
    Only the U.S. Postal Service provides truly universal parcel
    delivery service--post office boxes, A.P.O., F.P.O., Alaska,
    and Saturday delivery to just name a few examples. It does not
    impose a surcharge on residential delivery and does not compel
    the ordinary citizen to pay hefty charges or go to a franchisee
    in order to send a single package. In fact, the Postal
    Service's competitors hand packages over to the Postal Service
    for delivery that they find inconvenient, difficult, or too
    costly. The USPS does not do that. It is the carrier of last
    resort. It goes the final mile virtually every time.
        Naturally, we want as many competitors for our delivery
    service as possible. At the same time, we understand the need
    for a level playing field. It is not in our long-term interest
    for any of the vendors who provide our transportation service
    to have an unfair advantage over others because that will soon
    end in a recentralization and monopolization of that service.
    We are pleased that S. 1285 and H.R. 4970 protect against
    cross-subsidization and competitive products and strike the
    right balance.
        The Postal Service is living on borrowed time. Were it not
    for the efficiencies the current Postmaster General and his
    dedicated staff have been able to achieve and the one-time
    savings from the temporary fix of the CSRS, the Postal Service
    would already be in crisis. A few nay-sayers should not be
    allowed to stand in the way of the perseverance of this
    indisputable public service, a universal Postal Service.
        I thank you for your consideration and would welcome
    further questions on how our companies are so dependent upon
    the Postal Service and our further thoughts on how to reform
    the future of the postal companies.
        Chairman Collins. Thank you. Ms. Dreifuss.

       TESTIMONY OF SHELLEY DREIFUSS,\1\ DIRECTOR, OFFICE OF THE
               CONSUMER ADVOCATE, POSTAL RATE COMMISSION

        Ms. Dreifuss. Chairman Collins, thank you very much for
    allowing me to testify today on behalf of consumers and small
    businesses. It is an honor and privilege to share my views with
    you today.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Ms. Dreifuss appears in the Appendix
    on page 107.
    ---------------------------------------------------------------------------
        Postal legislation of 1970 explicitly provided for a
    representative to protect the interests of consumers and small
    businesses when postal rates were to be changed and new classes
    and services established. This continues to be a vital need
    today. I ask that you and your Committee explicitly provide for
    a Consumer Advocate in postal reform legislation that is
    presently under consideration.
        Mail to and from consumers and small businesses comprises
    the vast majority of the postal mail stream, approximately 80
    percent of postal volume. Yet the individual usage of mail is
    relatively small on a per household basis. Individual mailers
    spend an average of $7 per month on postage. This amount is too
    small a percentage of a typical household budget to spur
    individual mailers to intervene in postal rate and
    classification proceedings. This holds true for small
    businesses, as well, those that spend a fairly small percentage
    of their budgets on postage.
        Without an independent Consumer Advocate to litigate on
    behalf of small volume mailers, the needs and concerns of small
    volume mailers will rarely come to the attention of a postal
    regulator.
        Large businesses, particularly those that regularly spend a
    sizeable percentage of their budgets on postage, find it in
    their economic interest to intervene on an individual company
    basis or as part of an association. They direct their energies
    and resources toward developing an evidentiary record that
    shows the effect of rate increases on their businesses. Without
    a consumer/small business advocate, the evidentiary record is
    unbalanced and incomplete. Evidence of the impact of rate
    increases on consumers and small businesses must also be
    brought to the attention of the postal regulator through the
    intercession of a Consumer Advocate.
        My office has represented consumer and small business
    interests for 34 years and has achieved a long string of
    victories on their behalf. I would like these protections and
    successes to be carried forward in the new era of postal
    legislative reform.
        The two main objectives of consumers and small business
    mailers are the same today as they were 34 years ago. They need
    high quality, reliable services at low prices. I must caution
    that the mechanisms that are intended to produce downward
    pressure on costs may have a corresponding tendency to produce
    downward pressure on service quality. For that reason, I
    endorse new mechanisms that will establish and maintain high
    levels of service performance at the same time costs are being
    controlled.
        A high level of postal services can be established by
    giving the Postal Regulatory Board the duty and power to
    establish service standards for every postal product and
    service. The consumer representative should be explicitly
    designated by statute to intervene in such proceedings.
        High quality postal services will be maintained by giving
    the Postal Regulatory Board the power to order the collection
    and reporting of detailed information on how well the Postal
    Service is meeting the service standards established by the
    Board. The Consumer Advocate should be given the power to file
    complaints when service falls below minimum standards.
        To protect consumers and small businesses from a
    disproportionate share of increases in postage, I ask this
    distinguished group to explicitly provide for a consumer
    representative in the baseline postage rate increase case that
    is planned to launch the new system of price controls. I also
    ask that the consumer representative be designated to
    participate in future postal rate and classification
    proceedings so that no changes can be made without specific
    consideration of consumer impact.
        Consumers and small businesses will be one of the major
    sources of funding for universal service. I do not think it
    advisable to shrink over time the base of mailers who fund
    universal service. I am concerned about a recommendation that
    would produce this situation by shrinking the postal monopoly.
    As the captive customer base shrinks, there will be fewer and
    fewer mailers contributing to the expenses of universal service
    and the fixed costs of the Postal Service. The prices that they
    pay will necessarily grow larger and larger over time because
    their share of fixed costs will grow larger. It is a
    mathematical law that cannot be escaped. Therefore, I recommend
    against a narrowing of the monopoly in proposed legislation.
        Again, many thanks for the great privilege of allowing me
    to testify this morning and I would be very happy to answer any
    questions you may have.
        Chairman Collins. Thank you for your testimony.
        Mr. Bradley, you mentioned in your testimony that the 8
    percent rate increase that occurred in June 2002 meant for your
    company an increase in your postal bill of $240,000 and you
    equated that to being equal to eight good-paying jobs in Maine.
    Is there a particular problem for catalog companies when postal
    rates go up unexpectedly in view of your inability to adjust
    costs? In other words, I assume a catalog company sets the
    prices in advance. You are printing catalogs way in advance,
    and if you have to endure a postal rate increase in the
    interim, you can't adjust your prices to recover those costs.
    Is that part of the problem?
        Mr. Bradley. That is certainly part of the problem. The
    inability to adjust quickly is always inherent in the catalog
    industry because right now, we are working on the holidays and
    we are actually working on probably 2005 right now. We don't
    set our prices that far in advance, but we are very inflexible
    once we get close to a date. So it is very difficult to adjust.
        Also, we are not charging for the catalog. It is sent out
    free as a form of advertising. So we have to raise the prices
    of our products if we are going to cope with an increase in
    postage, and we are in competition with every other form of
    commerce in the United States. So for us to just increase
    prices because we have an increase of cost doesn't really work.
        I mentioned eight jobs just to give a benchmark of what
    that would mean. You are really looking at cutting costs too,
    all things being equal, so you try to raise a little bit, cut a
    little bit, and try to survive. In an environment like we had,
    when we had three postage increases in less than 2 years, I
    think more like 18 months, that was a very difficult time
    because your costs are going up and there is just really no way
    to pass that on effectively and efficiently and competitively
    to your customers.
        Chairman Collins. So if anything, the current system forces
    you to look at reducing jobs because if you are coping with
    three price increases from the Postal Service in an 18-month
    period, you cannot recoup those costs through adjustments in
    your product prices, both because catalogs may already be
    printed, but also because you are in a competitive market, is
    that correct?
        Mr. Bradley. Right. You can't raise the price of your
    products just because one of your costs has gone up unless that
    applies to everybody out in the retail world. Catalog and
    Internet, home shopping all combined, they are probably only
    about 15 percent of sales for our product categories in the
    United States. So you have got 85 percent of the sales
    occurring in retail stores and that is where your competition
    is. You have to pay attention to the competitive environment
    for pricing your product.
        Chairman Collins. Mr. Heath, many mailers have criticized
    the current 18-month rate setting process as being too
    adversarial, too expensive, too time consuming. We heard Ms.
    Moore from Time magazine say that she spends $1 million in
    intervening in the average rate proceeding.
        Consequently, the Commission and many other experts have
    recommended streamlining that whole process. Are you concerned
    that that would limit your ability as a stakeholder, as someone
    who is very affected by the outcome of the rate proceedings, if
    we move to the kind of system recommended by the Commission? Is
    there a trade-off for you that is worth it?
        Mr. Heath. I don't think we object to that because we don't
    have $1 million to spend, so we don't spend it, but $100,000 or
    so for our association to defend the situation. It is so drawn
    out and there are so many economic discovery issues that have
    to come up that if there could be ways to implement a shorter
    process and look at rate bands that are held below the cost of
    inflation, I think we supported some of those concepts and
    still will. So I think an abbreviated process is certainly in
    the interest of everybody in the mailing community and we don't
    have any objection to that.
        Chairman Collins. Mr. Ihle, do you agree with that?
        Mr. Ihle. Yes. When we went through the postal increase, it
    cost us $8 million last year, not last year but the year before
    last when it went through. That had to come from somewhere. The
    catalogs are already preprinted. Our big expense is, it is not
    so much shipping out the catalogs, it is the parcels. If you
    already have your rate structure set in the catalog and the
    pricing, then all of a sudden in the middle of the year you get
    $8 million, that can be the difference between a good year and
    not a good year.
        It is a horrible shock to come in the middle of the year.
    You think you are on track. You think the year is going to be
    good. Consumers are responding. And then all of a sudden you
    get a bill for $8 million. That is a tough run.
        Chairman Collins. Ms. Dreifuss, the current rate setting
    process is adversarial in nature. It is very expensive and it
    takes too long. But you raised an interesting point this
    morning and that is that your office is able to intervene in
    the process to make sure that voices that might not otherwise
    be heard--small businesses, individual consumers--are
    represented. If we give the Postal Service the authority to set
    its own rates within a cap, how would we ensure that the
    important voices of consumers and small companies are heard in
    the process?
        Ms. Dreifuss. One very important measure you could take
    would be to make sure that there is consumer representation in
    that baseline case that starts the price cap system. In that
    way, we would make sure in the baseline case that all first
    class rates, Priority Mail, Express Mail, special services,
    that they are set in the proper relation to everyone else's
    rates.
        Now, in the future, I think it is possible--no one would
    like to see this happen, but it may be possible even under a
    system of price caps that the Postal Service will sometimes
    even be unable to live within the price cap. I don't know if
    legislation will provide for still further increases, but
    certainly if there were to be such increases, I would very much
    like to have a consumer representative there to make sure that
    a disproportionate share isn't shifted onto the backs of the
    captive customer.
        Chairman Collins. So you see that baseline case that is
    going to be used to establish the cap as a way to ensure the
    involvement of your office on behalf of small businesses and
    individual consumers?
        Ms. Dreifuss. Indeed, and I would hope to the extent that
    there will be future rate, classification, and service
    proceedings, even under our new regime of postal activity, that
    there would also be a consumer representative in those
    proceedings, as well.
        Chairman Collins. Mr. Bradley, the General Accounting
    Office has criticized the Postal Service in many reports for
    not having transparency and accountability in its financial
    statements, that it is very difficult to figure out exactly
    what is going on, whether cross-subsidization is occurring,
    whether or not the Postal Service costs are fully accounted
    for. If we are going to give the Postal Service more authority
    to set its own rates, does that need to be accompanied by new
    requirements to ensure that there is transparency in the
    financial reporting of the Postal Service?
        Mr. Bradley. I am not a student of the Postal Service and
    certainly the accounting of the Postal Service, but it would
    seem that it would be essential that you would have
    transparency in looking at the financial performance and being
    able to segregate different classes of mail and evaluating the
    specific costs of those classes of mail and being able to
    attach rates based on that. I think it seems essential.
        Chairman Collins. Mr. Heath, do you have any comment on
    that?
        Mr. Heath. Well, we, too, like other associations and
    mailers, at times have had difficulty getting what we consider
    to be accurate information or sometimes information at all
    regarding the particular issues that we are trying to work with
    in a rate case. We cite in our testimony a problem that
    happened in the 1994 rate case where they came out with a 35
    percent increase in in-county rates and when they got through
    refiguring their numbers, it was actually a negative 1.5
    percent, so quite a big difference there.
        So especially with measurement of in-county volume and in-
    county costs, being the small class it is, we have a lot of
    concern about some of those issues and certainly we support any
    efforts that could be made to have better data and have that
    better data more shared and more shared on a regular basis
    between rate cases, not just in discovery and having to beg and
    borrow and subpoena. But if subpoena power needs to be there,
    we support that.
        Chairman Collins. Mr. Ihle.
        Mr. Ihle. Transparency is essential, Senator.
        Chairman Collins. Ms. Dreifuss.
        Ms. Dreifuss. Chairman Collins, I think in order to make a
    greatly reduced rate case, a streamlined rate case work, it is
    absolutely essential that the Postal Regulatory Board have the
    power to require the Postal Service to collect and report the
    data that would be necessary to move forward quickly in the
    case. In that way, the public will be well informed about the
    Postal Service's costs, revenues, and volumes before the case
    ever begins.
        Chairman Collins. Thank you. Senator Carper.
        Senator Carper. Thanks very much.
        Ms. Dreifuss, I had to be in and out during your testimony.
    Could you just take maybe one minute and just summarize very
    briefly the heart of the thoughts that you would want me to
    take out of here that you have conveyed?
        Ms. Dreifuss. I am delighted, Senator, to do that. What I
    said was that consumers and small businesses spend a very small
    percentage of their budgets, of their household or business
    budgets, on postage. Very large businesses and in particular
    those large businesses whose budgets have a very sizeable
    percentage of postage as being one of their expense items--Time
    Inc., for example--I want to make a contrast here that large
    businesses or businesses that have a sizeable percentage of
    their budgets on postage do intervene in proceedings. It is in
    their economic interest to do so. However, by contrast,
    consumers and small businesses, with their small involvement in
    postage, don't.
        And that is why I think we need to have a Consumer
    Advocate. We have had one since 1970 and I would like to
    continue to see a Consumer Advocate in the future.
        Some of the other points were actually made in response to
    Chairman Collins' question just now, and that, I think, covers
    it pretty well.
        Senator Carper. Good. Thanks very much.
        Mr. Bradley, I think early in your comments you mentioned
    that the U.S. Postal Service was barred from extending trade
    credit to its customers. Did I hear you correctly? They are
    barred?
        Mr. Bradley. I am not aware of that policy being extended.
    The point that I was making is that out of all the vendors,
    hundreds of vendors that we deal with, and we are a fairly
    small company, they are the only one that has no ability or
    inclination to extend us simple payment terms, such as UPS,
    FedEx, Parcel Direct would do. They do the service and we pay
    really in conjunction with it being completed.
        Senator Carper. I would ask any of the other panelists or
    witnesses, are you aware of a legislative constraint that keeps
    the Postal Service from negotiating trade credit? No? Let the
    record show that a shaking of heads no, indicated no.
        Mr. Heath, where are you from?
        Mr. Heath. Kentucky.
        Senator Carper. Whereabouts?
        Mr. Heath. Shelbyville, just due east of Louisville. I am
    formerly from Campbellsville down south.
        Senator Carper. Do you know my mother? [Laughter.]
        Mr. Heath. Well, I could. Where is she from?
        Senator Carper. Actually, she lives right across the line
    from Huntington in a little town called Ashland. My sister is
    in a place just to the east of Lexington, a place called
    Winchester.
        Mr. Heath. Winchester, right, a beautiful little town.
        Senator Carper. Keep an eye on them for me, if you would.
        Mr. Heath. We will. [Laughter.]
        Senator Carper. I want to go back to something that you
    talked about, Mr. Heath. A couple of our witnesses have come
    before us and talked about negotiating service agreements. I
    believe you cautioned us about large volume customers being
    able to negotiate those kinds of agreements, but smaller volume
    customers not being able to.
        In the legislation that I introduced last year, I think it
    allows small mailers--relatively small mailers--whose business
    is largely local to apply for negotiated service agreements. We
    tried to make sure in that legislation that a small newspaper,
    whether it is in Dover or Ashland or some other place, could
    get a negotiated service agreement with the U.S. Postal Service
    if a large mailer that they were competing with in Dover or
    Ashland were able to get one. Would that be something we ought
    to try to include in our final bill?
        Mr. Heath. We are very sold on the concept of work sharing
    and our association was involved in some of the very early work
    sharing rates that went on in the early 1980's so that if you
    presort your mail to certain levels and if you walk sequence it
    to certain levels, you get better rates, if you enter it at the
    office of delivery, like many of our publications do, both for
    newspapers and advertising mail.
        So we don't quite understand why there can't be more niche
    classifications that broaden the concept of work sharing to
    more mailers. That is what we basically advocate and we sort of
    stick with that. I suppose that if there is a way that this
    similarly situated language that has been kicked around could
    actually work--we haven't seen it work just yet. We sort of
    believe in the concept, but we are not sure exactly how that is
    going to end up working in the final analysis.
        We just believe that if we do the same amount of work to
    get a piece of mail to an additional location than some
    competitor, or the same location as some competitor in some
    places, that we should have basically the same rates for it. We
    send out a lot of ad mail just like, for instance, Adville
    Systems does that serves our preprint customers going right
    down to the carrier route and we don't necessarily think, or,
    in fact, we don't think that just because they happen to enter
    so many billion pieces a year and we may enter a few hundred
    thousand, if we are doing the exact same level of work entered
    at that delivery office that we should have any less rate than
    they do. So that is why we feel the parity issue is very
    important.
        Senator Carper. All right. Good. Thanks.
        I would like just to talk a little bit or ask you to talk a
    little bit about universal service, and I ask you to keep your
    responses brief so everybody can have a shot at this. What do
    you believe universal service to be? Do you think it is fully
    defined in current law or adequately defined in current law?
    How do you envision universal service changing in coming years?
        So it is a three-part question. What do you believe
    universal service to be? Is it adequately defined in current
    law? How do you see it changing in coming years? I don't care
    who goes first. We could do it in alphabetical order, though.
    [Laughter.]
        Mr. Ihle. I will take it first. We believe that universal
    service has to include package delivery. It has to be able to
    go to not only big towns but small communities. It has to
    include Saturday delivery. As we saw this year, I believe
    Christmas Eve was on a Saturday this year. Being a cataloger,
    and I suspect you feel the same way, that cutoff period where
    you have to cut off the phone orders and the Internet orders,
    for us it was, I think, December 19. That window in between the
    19th and the 25th, the 24th for Christmas Eve, is a huge delta
    for us. If we can have that Saturday delivery and it happens to
    fall in that period of time, that is a huge incentive for us.
    It has to include packages and it must include Saturday.
        Senator Carper. Thank you. Others, please?
        Mr. Heath. We, too, in the newspaper business still feel
    that 6-day delivery is important. Many of our members use
    Saturday for delivery of newspaper issues and shopping
    advertisement material.
        To us, universal delivery sort of increasingly seems to
    mean access to the full range of products and services that the
    Postal Service has. We are concerned, for instance, that the
    Postal Service had difficulty dealing with automation of our
    newspapers and we wanted to play, and we worked with a lot of
    work groups to play in that arena and make sure we are
    participating, and yet the machines too often are built maybe
    not to include the widest possible range of materials that need
    to go through them. So we can be part of this cost savings that
    needs to go on in automation.
        So to us, universal service means to not leave outside the
    best and most efficient part of the mail stream products that
    are very essential to local subscribers and to people all
    across the country, snowbirds and so forth. Many of our
    products go South for the winter and we have a lot of
    difficulty with that.
        So we are trying to view it a little bit as how accessible
    the whole system is and how much we want to be a part of the
    best, most efficient part of that mail stream. That is kind of
    an important issue for us.
        Senator Carper. Thank you, sir. Ms. Dreifuss.
        Ms. Dreifuss. I would be happy to go next. I think
    universal service means giving the public access to a Postal
    Service, a Governmental Postal Service, that will accept
    letters, packages, periodicals, and make delivery of those
    items to every home and business in the United States. I think
    it includes 6-day delivery.
        One point I want to stress that is often overlooked,
    everyone seems to accept that--and businesses in particular
    would like to have delivery made to every home and business in
    the United States. But I don't want anyone to forget that in
    States like Maine, and I am sure many parts of Delaware, it is
    necessary for consumers and small business people to have ready
    retail access to these services. So I do think that should be
    part of the definition.
        Senator Carper. OK. Thank you.
        Mr. Bradley, the last word.
        Mr. Bradley. Universal service, I think to me is similar to
    what Ms. Dreifuss said, access throughout the whole country. I
    see the Postal Service as being responsible for what is termed
    as the last mile, being able to go to every home and business
    in the country.
        I personally am not sold on 6-day delivery. I may buck the
    trend. I don't know what the Postal Service would----
        Senator Carper. Do you want seven? [Laughter.]
        Mr. Bradley. No, I was thinking five, but I am not sure
    what they would do with the mail on that other day.
    Logistically, I don't see how you could avoid Saturday
    delivery. I think the mail would logistically have to move on
    that day.
        But I think that the Postal Service is in that unique
    position and has that unique responsibility of going that last
    mile and is responsible for that and work sharing with others,
    such as FedEx going and being dropped off to the Postal Service
    to be delivered that last mile, those are all very appropriate.
        Senator Carper. Good. Those are helpful responses and we
    appreciate each of them and we appreciate your being here.
    Thank you for contributing to our deliberations and we look
    forward to taking your thoughts into consideration when we try
    to mark this bill up. Thanks so much. Thank you, Madam
    Chairman.
        Chairman Collins. Thank you, Senator Carper.
        I want to end this morning by emphasizing a point that Mr.
    Ihle made, and that is that it is only the Postal Service that
    provides 6-day-a-week delivery of mail to every address at a
    uniform rate, what Mr. Bradley referred to as delivery to that
    last mile. I think as we craft a postal reform bill, we need to
    remember that.
        At our next hearing on Thursday, we will hear from two of
    the Postal Service's competitors, Federal Express and UPS, and
    I look forward to hearing their views on this issue, as well.
        I very much appreciate the testimony of all of our
    witnesses today. Your insights have been very valuable to us.
    You represent a real range of entities affected by the Postal
    Service. We are going to continue to work on this issue and we
    would welcome your advice and input as Senator Carper and I sit
    down at the end of these hearings to draft a bill.
        The hearing record will remain open for 15 days for the
    submission of any additional materials that our witnesses or
    others may have.
        This hearing is now adjourned.
        [Whereupon, at 11:54 a.m., the Committee was adjourned.]

       POSTAL REFORM: SUSTAINING THE 9 MILLION JOBS IN THE $900 BILLION
                                MAILING INDUSTRY

                                  ----------

                            THURSDAY, MARCH 11, 2004

                                           U.S. Senate,
                             Committee on Governmental Affairs,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 9:30 a.m., in
    room SD-342, Dirksen Senate Office Building, Hon. Susan M.
    Collins, Chairman of the Committee, presiding.
        Present: Senators Collins, Stevens, Voinovich, Carper, and
    Pryor.

                 OPENING STATEMENT OF CHAIRMAN COLLINS

        Chairman Collins. The Committee will come to order.
        Good morning. Today marks the sixth in a series of hearings
    the Governmental Affairs Committee is holding to review the
    reforms recommended by the Presidential Commission on the
    Postal Service. On Tuesday, the Committee heard from
    representatives of the printing and magazine industries, small
    catalogue retailers, weekly and daily newspapers, and the
    Postal Rate Commission's Consumer Advocate. We discussed not
    only the Commission's workforce and financial recommendations,
    but also the Postal Service's mission and monopoly, the rate-
    setting process, and corporate governance issues. Today we will
    continue our focus on the mailing industry.
        As our witnesses well know, the Postal Service is the
    linchpin of a $900 billion mailing industry that employs 9
    million Americans in fields as diverse as direct mailing,
    printing, publishing, catalogue production, and paper
    manufacturing. The health of the Postal Service, therefore, is
    essential to thousands of companies and the millions that they
    employ. It is vital that we in Congress, the Postal Service,
    and the mailing industry work together to save and strengthen
    this institution upon which so many Americans rely for
    communication and for their jobs.
        I welcome our witnesses today and look forward to hearing
    their views and insights on the recommendations of the
    Presidential Commission.
        I would now like to welcome our first panel of witnesses.
    Mike Eskew serves as the Chairman and Chief Executive Officer
    of UPS, the world's largest package delivery company. Under Mr.
    Eskew's direction, UPS is expanding its capabilities into new
    lines of business that complement the company's global package
    delivery operations. Prior to serving as Chairman and CEO, Mr.
    Eskew served as both Executive Vice President and Vice
    Chairman. He has served as a member of the UPS Board of
    Directors since 1998.
        Our second witness this morning is Fred Smith, who is the
    Chairman, President, and Chief Executive Officer of FedEx
    Corporation, a $23 billion global transportation and logistics
    company. Mr. Smith provides strategic direction for all FedEx
    Corporation operating companies, including FedEx Express, FedEx
    Ground, FedEx Freight, etc. He founded FedEx in 1971. Today the
    company serves over 214 countries and handles more than 5
    million shipments each day.
        We are very pleased to welcome you to the Committee. We
    appreciate your both taking time to come in person, and, Mr.
    Eskew, we will ask that you begin.

    TESTIMONY OF MICHAEL L. ESKEW,\1\ CHAIRMAN AND CHIEF EXECUTIVE
                     OFFICER, UNITED PARCEL SERVICE

        Mr. Eskew. Chairman Collins, good morning. I am Mike Eskew,
    Chairman and Chief Executive Officer of UPS, and I am pleased
    to be here today to testify on behalf of the men and women of
    UPS on this important issue of postal reform. I have a written
    statement that, with your permission, I would like to submit
    for the record.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Eskew appears in the Appendix on
    page 129.
    ---------------------------------------------------------------------------
        Chairman Collins. It will be entered.
        Mr. Eskew. And I will summarize that statement with just
    some brief comments this morning.
        Madam Chairman and Members of the Committee, I appreciate
    your efforts on this important issue. The Postal Service is an
    impressive organization and has some great things going for it:
    Inspired leadership from Jack Potter and his team, incredible
    dedication of the people in the field, and an infrastructure
    designed to deliver core mail services that are second to none.
        In the past, UPS and the Postal Service have been at odds
    with respect to postal reform. However, more recently both
    organizations have made great strides in trying to find common
    ground on a number of issues. Many of our team from several
    functions across UPS have gotten to know the Postal Service,
    and Postmaster General Potter and his team have gotten to know
    us. And these efforts have led to relationships that we hope
    will continue to grow.
        We think it is a credit to both organizations that we have
    been able to meet with some level of success by working
    together where it has been mutually beneficial. UPS is in an
    interesting position with respect to the Postal Service. On the
    one hand, we are large customer of theirs. We use the Postal
    Service as our primary means of communication with our
    employees, our shareholders, our customers, our vendors, and
    others. UPS is responsible for over $230 million annually in
    revenue to the Postal Service, and as I have said before, we
    are now working together with them on a number of fronts. And,
    on the other hand, we are perhaps one of the few companies in
    the Fortune 500 that has the Federal Government competing in
    our core market, the package delivery business. I believe there
    is a path to postal reform that will enable the Postal Service
    to continue to provide high-quality core mail services to
    everyone in America. This path should include provisions that
    ensure that the monopoly is not leveraged into the competitive
    marketplace. Indeed, the Bush Administration highlighted this
    concern when it issued its statement that any reform measure
    must ensure that the Postal Service ``operates appropriately in
    the competitive marketplace.''
        The path to postal reform should focus on the following key
    areas: A clear focus on core mail services; a strong, effective
    regulator; cost control, cost management, proper cost
    allocation, along with financial transparency; and, to the
    extent that the Postal Service competes with the private
    sector, it should be on a level playing field. I will elaborate
    on those four.
        First, reform should focus on core mail services provided
    by the Postal Service: First-Class mail, standard mail, and
    periodicals. These services provide the Postal Service with 99
    percent of its annual volume, 86 percent of its annual revenue,
    and covers 92 percent of the overhead cost of the organization.
    Competitive products do not represent the way out of financial
    troubles for the Postal Service. Electronic alternatives to
    hard-copy mail pose a far greater threat to the Postal Service
    than does competition from private delivery companies like
    ours.
        Second, because the Postal Service retains its statutory
    monopoly, the public is best served by a strong, effective
    regulator. Strong, up-front regulation is simply the price for
    going to market with a statutory monopoly. I want to point out,
    however, that I agree that the current rate-setting process is
    in need of improvement. I do not believe, however, that
    effective regulation and improvements to this process are
    mutually exclusive.
        Third, the Postal Service and the Postal Rate Commission
    should have the tools needed to establish and maintain the
    clear, transparent financial picture of the Postal Service.
    Additionally, the Postal Service should continue to enhance its
    focus on cost control and set up its efforts to proper cost
    allocation to its various products.
        Fourth, and finally, to the extent that the Postal Service
    competes with the private sector, it should be on a level
    playing field, and that the Postal Service should not leverage
    its monopoly network into the competitive free enterprise
    marketplace. Because core mail services cover nearly all of the
    overhead costs of the Postal Service, competitive products
    essentially get a free ride on the postal network. Neither UPS
    nor any other private company has the benefit of a statutory
    monopoly to cover the lion's share of its overhead cost. This
    clearly represents an advantage to the Postal Service.
        Additionally, the Postal Service enters the competitive
    marketplace with other benefits associated with its government
    status. It is exempt from many taxes and exempt from a number
    of laws that apply to the private sector. Just last month, the
    U.S. Supreme Court found in the case of U.S. Postal Service v.
    Flamingo Industries that the Postal Service is indeed part of
    the Federal Government and, therefore, it cannot be subject to
    antitrust laws. In its decision, the Court stated that the
    Postal Service has many powers more characteristic of
    government than of private enterprise, including its state-
    conferred monopoly on mail delivery.
        To be fair, the Postal Service also has its burdens placed
    on it as a result of its public mission that do not fall on
    private sector companies. This fact is recognized by the
    Supreme Court in the Flamingo case as well. These advantages
    and the burdens should be recognized and reconciled.
        I believe there is a path to reform that will accommodate
    the Postal Service, its employees, its customers, and its
    competitors. I look forward to working with you and your staff,
    Madam Chairman and Members of the Committee, to ensure the
    Postal Service remains strong and viable into the future.
        Thanks so much, and I will be happy to take your questions
    at the appropriate time.
        Chairman Collins. Thank you very much for your testimony.
        Before turning to Mr. Smith for his statement, I would like
    to call on my colleague, Senator Voinovich, to see if he has
    any opening statements he would like to make.

                 OPENING STATEMENT OF SENATOR VOINOVICH

        Senator Voinovich. Thank you, Madam Chairman. It is a short
    statement.
        I want to thank you for continuing your thoughtful probe
    into the recommendations made by the Presidential Commission. I
    applaud your efforts to address this issue and for your
    commitment to finding solutions in a bipartisan manner.
        There is a bipartisan agreement that we need a strong,
    viable Postal Service. Whether it is delivering needed supplies
    to a business or a birthday card to someone's grandmother, the
    Postal Service exists to serve the needs of every American.
        Ohio is the home to significant urban areas, major U.S.
    cities, including Cleveland, Columbus, Cincinnati, Toledo, and
    Dayton. However, much of Ohio is rural, and for people who live
    in rural areas, the Postal Service provides a vital
    communication and economic link to the rest of Ohio, the
    Nation, and, for that matter, the world. I know that rural
    Ohioans were concerned that universal service, guaranteeing
    affordable rates and frequent delivery, could be scaled back. I
    am pleased that the Commission strongly endorsed continuing
    this long-standing mission.
        Ohio's business community has shared with me their support
    for postal reform including RR Donnelley, which maintains a
    large presence in Ohio, testified before this Committee on
    Tuesday, and the American Greetings, which is headquartered in
    Cleveland. But it is clear that the U.S. Postal Service faces
    serious challenges. While it is impressive that the Postal
    Service has reduced its level of indebtedness to the U.S.
    Treasury from $11 billion in 2002 to $7 billion today, this is
    still a significant amount. In addition, the Postal Service
    carries approximately $48 billion in unfunded retiree health
    benefits and about $6.5 billion for unfunded workers'
    compensation benefits.
        Furthermore, the Postal Service faces increased competition
    not just from commercial firms like the gentlemen who are here
    today and their companies, but also from rapidly expanding
    technologies such as e-commerce and online bill paying.
        In addition, we cannot ignore a new challenge facing the
    Postal Service, and that is the challenge of securing our
    Nation's mail. My colleagues and the entire congressional
    community know this reality all too well after the horrific
    anthrax attack in October 2001. We are still getting our mail 2
    and 3 weeks late. I have to tell people to mail items to our
    regional offices because of the process that mail must go
    through here.
        This tragedy was even more personal to the postal
    community. I visited with postal employees in Toledo and
    Cleveland after the anthrax attack to talk with them about
    their fears and assure them that we would do what was necessary
    to protect them. That is another burden the Postal Service
    carries today, and I know we are working to try and make sure
    that they are working in a secure environment.
        Madam Chairman, I thank you for calling this hearing. I
    thank the witnesses for their testimony before the Committee
    today, and I look forward to continuing to hear the views from
    our witnesses today. Thank you.
        Chairman Collins. Thank you. Mr. Smith, would you proceed
    with your statement?

     TESTIMONY OF FREDERICK W. SMITH,\1\ CHAIRMAN, PRESIDENT, AND
               CHIEF EXECUTIVE OFFICER, FEDEX CORPORATION

        Mr. Smith. Thank you, Senator. I, too, have a written
    statement which we have submitted to you, and I am going to
    summarize it if that would be acceptable.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Smith appears in the Appendix on
    page 138.
    ---------------------------------------------------------------------------
        Chairman Collins. Without objection, all written statements
    will be submitted in full.
        Mr. Smith. Senator, on behalf of 245,000 members of the
    FedEx team, we appreciate very much the opportunity to give you
    our thoughts on this important issue.
        FedEx supports the modernization and the transformation of
    the U.S. Postal Service. We support S. 1285, which has been
    proposed by Senator Carper, with some recommended amendments.
        We urge further study in regard to developing a fundamental
    transformation plan for the Postal Service for the future to
    look at the pros and cons and the methods of turning the Postal
    Service into a corporation owned by the government or by
    private interests, and to determine the best method to unwind
    the monopoly that the Postal Service enjoys by the end of 2008,
    which is consistent with the European Union timetable, and in a
    manner most suitable for the Postal Service.
        Now, we are very familiar with the requirement to transform
    a business. FedEx itself has been dramatically transformed over
    the last few years from a largely domestic express
    transportation company to a major diversified transportation
    logistics and business service corporation.
        The Postal Service is likewise at the proverbial fork in
    the road. Its main income comes from letters, most of which
    will eventually disappear. And as Peter Drucker has noted, we
    are sort of like the 1820's, the same status in terms of the
    Information Revolution as the Industrial Revolution was at that
    time, so there is more change ahead.
        So the basic choice for the government is relatively clear.
    On the one hand, you can liquidate in an orderly manner or
    close down the USPS as technology encroaches upon its primary
    business. Or you can structure an entity that can compete.
        Now, FedEx favors allowing the USPS to compete because at
    the end of the day it is politically not feasible to simply
    ignore three-quarters of a million U.S. citizens employed by
    the Postal Service. And the management of such a decline and
    liquidation would be extremely difficult. One only has to look
    at the experience of Amtrak to see how difficult that truly is.
    But none of that detracts from the issue that the Postal
    Service needs fundamental transformation. I think it was best
    summed up by David Walker, the Comptroller General of the
    United States, when he stated that the ``incremental steps
    toward postal transformation cannot resolve the fundamental and
    systemic issues associated with the Service's current business
    model.''
        The Presidential Commission recommended making USPS into a
    world-class business, but it should be obvious that the USPS
    must first become a business before it can hope to become
    world-class. A regulated government monopoly cannot become a
    world-class business. We at FedEx certainly could not have
    transformed ourselves into the entity that we are today had we
    had a board of political appointees, regulated prices and
    operations, and a monopoly. So serious study is needed of the
    pros, cons, and options for transforming the USPS into a
    corporation.
        Likewise, the USPS cannot learn to compete unless it is
    required to compete. A monopoly is dispiriting and enervating.
    A serious quantitative plan to phase out by the end of 2008
    should now be developed, in our opinion. Postponing repeal
    beyond 2008 could delay EU reform to the detriment of U.S.
    express and direct marketing companies. And I would just point
    out in that regard, one of the serious concerns I know on the
    part of FedEx, and I suspect on the part of the United Parcel
    Service as well, are the European monopoly postal services who
    have been allowed to come into private industry and use those
    funds to help them compete against our operations.
        FedEx would recommend an increase in USPS management
    flexibility, much more flexibility in pricing of their
    competitive products, an end of salary caps for executives to
    ensure the best possible talent. We would like to see a ceiling
    on the scope of the postal monopoly, say 12.5 ounces or 6 times
    the stamp price, and divesting the USPS of the administration
    of that monopoly because it is fundamentally unfair.
        We favor firewalls, which is the term that Congressman
    McHugh used over on the House side, to prevent unfair
    competition, a separation of USPS accounts into non-competitive
    and competitive, a required allocation of a reasonable level of
    overhead cost to competitive products, an end of key legal
    privileges for competitive products, such as the antitrust
    exemption, an assumed Federal income tax on USPS competitive
    product revenues.
        We recommend strengthening the Postal Rate Commission,
    giving it subpoena power, extension of jurisdiction to
    international mail, annual oversight of rates, and increased
    enforcement powers.
        We recommend allowing the Treasury and USPS to create a
    government corporation to handle the back office,
    transportation, and sorting in a truly businesslike manner.
    Such operations should be nonpolitical and performance based,
    and a government-owned corporation working only for the USPS
    would not pose competitive issues.
        The monopoly reforms need to be refined in minor respects,
    authorizing the Postal Rate Commission to adopt regulations
    clarifying the scope of the postal monopoly, and exempting
    outbound bulk international mail from the monopoly.
        You should consider authorizing, in our opinion, the Postal
    Rate Commission to phase in access to mailboxes in a controlled
    manner that does not hurt the USPS or households.
        And we think that you should adopt basic common-sense
    guidelines for international postal policy. You should not
    allow the USPS to charge less to deliver foreign mail than
    American mail, except perhaps for correspondence from the very
    poorest companies. And we recommend that you not allow the
    UPU's Committee of Postal Officials to legislate international
    regulations binding on the U.S. Government or courts.
        And, finally, we recommend you exempt bulk business letters
    from the requirement of a uniform rate for all letters, which
    is about half of all letters. Universal service should be
    preserved, but allowed to evolve with changing times. No
    political or economic reason whatsoever, in our opinion,
    remains to require uniform rate for bulk business mail, and we
    recommend that you give the USPS maximum operational freedom
    consistent with maintaining universal service.
        That concludes my comments, Senator, and obviously I would
    be happy to answer any questions that you might have.
        Chairman Collins. Thank you very much.
        Before turning to questions, I would like to call on my
    colleague, Senator Carper, for any opening remarks that he may
    have. As many observers are well aware, Senator Carper and I
    have committed to joining together to draft a bipartisan postal
    reform bill. We hope that bill will be enthusiastically
    embraced by all of our colleagues.
        Senator Carper. At least by George Voinovich. [Laughter.]
        Chairman Collins. Senator Carper.

                  OPENING STATEMENT OF SENATOR CARPER

        Senator Carper. Thanks very much.
        Mr. Smith, I understand that when I was just about to walk
    into the room, you said some supportive things about the
    legislation that I introduced this past year, and maybe, Madam
    Chairman, if Mr. Eskew comes in and supports it as well, we
    could just go right to the markup on that bill.
        Chairman Collins. I don't think so. [Laughter.]
        Senator Carper. I didn't think I would get you on that.
        Chairman Collins. Nice try.
        Senator Carper. I have a statement for the record that I
    would like to submit, and we are just delighted that you are
    here. We have had, really, a series of excellent hearings, and
    I think given the lineup that we have here today, we are going
    to get a lot out of it, and I look forward to marking up the
    Collins-Carper-Voinovich bill some time in the next couple of
    weeks. Thank you.
        Chairman Collins. That is right.
        [The prepared statement of Senator Carper follows:]

                      PREPARED STATEMENT OF SENATOR CARPER

        By all accounts, the Postal Service has been a success since its
    creation. It receives virtually no taxpayer support and the service its
    hundreds of thousands of employees provide to every American nearly
    every day is second to none. More than thirty years after its birth,
    the Postal Service is a key part of the nation's economy, delivering to
    more than 200 million addresses and supporting a massive mailing
    industry.
        Even a casual observer, however, could see that the past few years
    have not been easy for the Postal Service. As we learned earlier this
    week, they have also been difficult for the private firms, large and
    small, and the millions of mailing industry employees who depend on
    stable postal rates.
        I am pleased, then, that we have a once-in-a-generation opportunity
    now to work in a bipartisan way to modernize the Postal Service and
    update its business model for the 21st Century. Congress has been at
    work on postal reform for nearly a decade now, mostly in the House
    under the leadership of Congressman John McHugh from New York. This
    year, however, I sense that we have some momentum that hasn't been
    there in the past.
        At the end of last year, President Bush issued a set of postal
    reform principles focused on those recommendations from his postal
    commission aimed at improving transparency and accountability at the
    Postal Service and giving management the increased flexibility they
    need to streamline operations and seek out new mail volume. His
    principles touch on the main themes addresses in S. 1285, the
    comprehensive postal reform legislation I introduced last June. S. 1285
    itself was based in large part on the most recent postal reform bill
    put forward by Congressman McHugh.
        I think it's safe to say, then, as I've said before, that we
    probably have agreement on 90 percent of what should be in a new postal
    reform bill. Now that this committee's schedule of postal hearings is
    nearly complete, I look forward to sitting down with you, Madam
    Chairman, and all of our colleagues to begin putting that bill
    together.

        Chairman Collins. Thank you, Senator.
        Thank you both for your testimony. As competitors of the
    Postal Service, your views and experience are very important to
    our deliberations as we review the Commission's recommendations
    and sit down to draft a bill.
        Mr. Eskew, during your presentation to the President's
    Commission, you testified that the package delivery sector is
    well served by private companies, and some observers felt that
    you implied that the Postal Service should not compete in this
    area. Some observers have felt that both UPS and FedEx's goal
    is to get the Postal Service out of the package delivery
    service.
        Earlier this week, we heard from both small and large
    retailers, for example, a small company in Maine called
    Cuddledown, a larger company that owns Harry & David, who
    testified before us that their companies could not exist
    without the Postal Service, even if they are customers of yours
    as well.
        Would you please comment on the issue of whether UPS
    believes the Postal Service should get out of the package
    delivery business altogether?
        Mr. Eskew. Yes, Madam Chairman. My comments to the
    Commission was that philosophically we believe that the package
    business in the United States is well served by the private
    sector, and we think that this country was founded on the free
    enterprise system that really has made it the envy of the world
    in terms of the things that we do and the things that we bring
    to market. And to the extent that we do service very well,
    completely, the package business, we think philosophically that
    the government does not need to be in there, that we serve the
    needs of the public very well. Practically, they are in this
    business. Mr. Smith talked about the 750,000 people. So we
    think to the extent that they do compete in this business, it
    needs to be on a level playing field, and that is what we have
    practically been talking about. So that is the first part of
    your question, I hope.
        The second part, just to think about--I am not sure about
    the small company in Maine or Harry & David's comments about
    the Postal Service. But quite frankly, I would agree that the
    Postal Service is absolutely necessary to be able to ship out
    catalogues and bills and the things that we rely on them to do.
    Also, we could not exist without a strong Postal Service. So to
    that extent, I think that is real.
        To the extent that they are talking about parcels, on the
    other hand, though, we service all the State of Maine, from
    Calais to Corea to Presque Isle to Greenville, and every
    village, every town, every hamlet, every street in the United
    States, and we do not stop at the mailbox. We go to the door.
    We go to the porch. And there is an awful lot of these
    customers that tell us, ``You're the only one to come to the
    ranch,'' or ``You're the only one to come to the farm,'' in
    parts of Ohio and Maine and in Delaware and all over the United
    States. So we do service the whole country in terms of parcels.
        Harry & David's parcels are heavy. They are pears, they are
    apples, they are rosebushes. They do not fit in the mailbox.
    And in those places where they do not fit in the mailbox, they
    go back to the post office. A postcard may be left in the
    mailbox, and the person would come to get them. We deliver them
    all the way to the door. And if for some reason there is a
    pricing differential, I think that is the whole competitive
    landscape that I like to talk about in terms of level playing
    field, because those heavy parcels are not part of the in-
    trace, in-sequence part of what the letter carrier finds on his
    tray with the next stop that fits nicely into the mailbox--and
    should not carry any overhead burden. Those things require
    overhead burden.
        Chairman Collins. Doesn't UPS rely on the Postal Service
    for the delivery of packages in certain areas?
        Mr. Eskew. Madam Chairman, we have two million daily pickup
    accounts in the United States, some infrequent, some every day.
    We have two accounts, two of the two million, one per million,
    that we have an experimental pilot program where we are using
    the Postal Service to deliver about less than 20 percent of the
    volume we pick up from those two accounts. Those two accounts'
    packages fit in the mailbox, a place that we, as Mr. Smith
    mentioned, do not have access to. If we could have access to
    those mailboxes, that 20 percent would be much less.
        But those two customers that we use the post office to
    deliver less than 20 percent, a very small piece, are satisfied
    with the slower services and less than--the visibility that we
    provide with the total services that we offer, and so we do use
    the Postal Service for those two accounts.
        Chairman Collins. Thank you.
        Mr. Smith, in some ways, your testimony seems to go even
    beyond Mr. Eskew's when you refer to the difficulty of winding
    down an organization that employs some 750,000 individuals. I
    want to clarify what your position is since I do not think you
    really are endorsing the dismantling of the Postal Service, if
    it were practical, but perhaps you are. But what is your
    position on whether the Postal Service should be in the parcel
    delivery business?
        Mr. Smith. Well, Senator, let me clarify the first point
    there. What I was trying to say, perhaps not as clearly as I
    meant to, is that the Congress of the United States has two
    choices. Technological trends are such that you can either
    decide to liquidate the Postal Service because that is what is
    going to happen if you don't do anything. Technology is going
    to basically fundamentally change it. Or, secondarily, you can
    modernize it. We support the latter completely. And in that
    regard, some of the things that we have recommended, not
    dissimilar to what Mike Eskew said, are that the Postal Service
    divide its competitive and monopoly products into two buckets.
    And those competitive products have to bear an appropriate
    level of the overhead and the cost structure of the Postal
    Service.
        If you really look at the practicalities of the situation
    where the Postal Service shines compared to the private
    delivery companies like UPS and FedEx, both of whom serve every
    address in the United States the same way the Postal Service
    does, it is in those very small, particularly lightweight
    packages that can be commingled with letter mail. When the
    Postal Service has to have a completely separate delivery
    structure or an off-route delivery by letter carrier, that is
    not a marginally costed activity. And if you divided the Postal
    Service along the lines that we mention in here, into
    competitive and non-competitive products, and had the
    competitive products bear an appropriate level of the cost, my
    guess is the marketplace would solve all this on its own. And
    that is why we support the bill that Senator Carper authored
    and a companion bill over on the House side which is headed in
    that direction.
        So we do very much support the modernization of the Postal
    Service.
        Chairman Collins. Thank you. Senator Carper.
        Senator Carper. Thanks very much.
        Just look forward, if you will for us, 10 or 15 years--and
    think about when Ted Stevens was a freshman Senator, he held
    hearings--I do not know that they were so much in rooms like
    this, but he actually shared with me once that he held
    breakfast meetings, I guess at his house here in the Washington
    area, back in 1970, 1971, had people over for breakfast and
    they talked about what kind of changes were needed in the
    Postal Service. And out of those breakfasts--maybe we should
    start serving breakfast at these. I don't know. But out of that
    series of breakfasts came sort of the foundation for the
    changes in the Postal Service that have endured for over three
    decades.
        I don't know that anything we will come up with will have
    that kind of life span, but just look forward for us, and I am
    sure in 1970 they did not know we would have an Internet, the
    kind of changes that we see in the delivery of information. My
    guess is that no one was even thinking about it then.
        But look forward ahead for us 10 or maybe 15 years and tell
    us what kind of postal system, delivery system, including your
    operations, what are we going to have? I am asking you to be
    futurists and look ahead. What do you think it will look like
    10 years from now? Let's go in alphabetical order.
        Mr. Eskew. When we think about the future in our business--
    and then perhaps I will come back to the Postal Service--we
    really think that it is goods and it is information and it is
    funds. It is all wrapped together. It is commerce all over the
    world in a much more global perspective than perhaps we think
    about it now. So it is going to allow companies like ours to be
    certainly one to one, each package as if it is the only one we
    have, each customer as if it is the only one, and it will be
    much more tailored and much more one to one with our--and that
    information about the goods moving through our networks allow
    us to do those kinds of things. So that is where I think that
    we are headed.
        Now, when you think about letters and documentation, Mr.
    Smith said it the right way, I think, that certainly the
    Internet and electronic transmissions, e-billpay, those kinds
    of things are going to go much further and much easier and much
    more--as younger generations age, it is going to be much more
    well received than it is today. And it is going to be much more
    practical to use it because it is going to be part of the
    process of ordering, payment. It is all going to be the virtual
    process of one touch, the bill gets cut, the bill gets paid, it
    is all electronic, it never gets reduced to paper and never
    finds its way into the Postal Service.
        Senator Carper. All right. Mr. Smith.
        Mr. Smith. Well, we have gone under a very simple premise
    for a long time, and that is that whatever can be moved
    electronically eventually will be moved electronically.
        Now, that threatens, if you will, a great part of the
    existing First-Class mail monopoly that the Postal Service has.
    I think virtually all of the invoicing that currently moves
    through the postal system will go to an electronic format
    simply because the cost/benefit ratio is enormously favorable.
    I mean, you can go online and find an invoice that you owe and
    pay it for a few cents, where the overall transaction cost of
    producing an invoice, mailing it, mailing back in a check is
    well over a couple of dollars. So just the efficiency of that
    will lead most institutions to go to an electronic invoicing
    system. Most of the personal communications that are written
    today have gone, of course, to E-mail.
        Now, I think on the other side of the coin, however, the
    Postal Service actually has a huge business opportunity in the
    future because what the Internet and cable TV are actually
    doing are balkanizing the broad communication systems in this
    country. You know that from the political campaign business.
        So the Postal Service has a tremendous advantage in that it
    is a product-push organization rather than a customer-pull type
    situation that the Internet is. If you are interested in
    looking at something on the Internet or buying something on the
    Internet, you have got to go on it and search it and find it.
    The Postal Service can reach out to specific slices of society
    like no other institution in terms of advertising, promotions,
    publications, catalogues, and then that in turn will create a
    tremendous amount of traffic going into homes and businesses,
    some of which the Postal Service, if it is reformed along the
    lines we suggested, can compete for and hopefully there is a
    significant amount of business there for FedEx and UPS and
    other private competitors.
        So I am quite optimistic that there is quite a good
    business for the Postal Service, but only if it is reformed and
    can encourage and incent that business, and then on the other
    side of the coin is required to cost account for competitive
    products in a way that you do not get this muddled situation
    that they have today about what is really costing what and what
    this should cost versus that. So that is our view.
        Senator Carper. Thank you. Talk to us a little bit about
    corporate board structure. Look at your own corporate board
    structure. Look at that that exists in the Postal Service with
    the Board of Governors. I think in the President's Commission
    they had recommended that we have a board of 12 members. I
    think the Postmaster General would serve along with three
    people, nominated by the President, confirmed by the Senate,
    and then they would go out and select from others in the
    country, eight or nine others to serve on the Board of
    Governors. They would serve 3-year terms, not 9-year terms.
    There would be age restrictions; I think no one could serve
    over the age of 70. I think there would be a requirement that,
    for people to serve on the board, they would have to have had
    some experience in the enterprises that relate more or less to
    what the Postal Service does.
        Those are recommendations in the President's Commission,
    and looking at your own operation, the way your own board
    operates the way you select your members and what we are going
    to be trying to figure out with the Postal Service, what advice
    would you have for us?
        Mr. Eskew. Again, with any board in our governance,
    transparency is the rule of the game, and we need to make sure
    that anything that the board of our companies is fully
    transparent, fully reported, fully able to be audited and
    applied to all the proper commissions. And that is a big part
    of any part of governance for the Postal Service in the future.
        In terms of the board makeup, independence may be a little
    bit difficult because there are so many people that have so
    many contacts with the Postal Service. That may be a bit
    problematic.
        Senator Carper. Everybody is a customer.
        Mr. Eskew. That is right. That may be a little bit
    difficult to do, but certainly independence and proper
    oversight and transparency, the same type things that we do
    with our boards.
        Senator Carper. Mr. Smith.
        Mr. Smith. Well, based on my experience both at FedEx and
    serving on five other New York Stock Exchange companies over
    the years, I would say that the fundamental requirement for a
    good director of the USPS or any other large commercially
    oriented enterprise is business understanding and business
    knowledge. A person might not understand the particular details
    of the business, but if they understand how a commercial
    enterprise operates in general, they can generally provide good
    input to that organization.
        The second thing that they have to have is independence. In
    our particular case, there is only one insider on our board.
    All the others are independent directors and always have been.
    I think at one time we had two insiders on the board, so it is
    one out of 13. And I think that the second criteria is to have
    strong, independent directors. And the third, just as Mike
    Eskew said, is that you have to have a board that is willing to
    and insists upon a great degree of transparency to the various
    publics that oversee and depend upon the Postal Service.
        Senator Carper. I might say, Madam Chairman, this issue of
    transparency that they both come to, when we talk about the
    issue of whether or not the Postal Service would have the
    ability in the future to use the profits from their monopoly
    operation to cover some of the overhead that relates to their
    competitive products, to the extent we could have good
    transparency, it would help ensure that that kind of thing does
    not happen.
        Chairman Collins. Thank you, Senator Carper. Senator
    Voinovich.
        Senator Voinovich. First of all, I would like to say that I
    do not have the benefit of the time that the Chairman of this
    Committee has had in studying the report of the Presidential
    Commission. I apologize if some of this may sound redundant.
    First, would you clarify if you are suggesting today that the
    Postal Service get out of those areas where they have high cost
    drivers and where the private sector is getting the job done.
        One of the concerns I have--and I am sure the public has--
    is that if the Postal Service withdrew from some of these
    competitive businesses, it would impact pricing. For example,
    if I am American Greetings or I am a big mail house like
    Donnelley or a mail order business like Harry & David, there is
    a concern that they are going to end up with one railroad and
    not have competition. As a result of that see their costs go up
    because there isn't any competition. What are your comments on
    this?
        Mr. Eskew. Senator, I will start. When we think about price
    and we think--the Postal Service has a number of different
    products, but I will simplify them into two. They go to market
    with a monopoly set of products and products that compete with
    the private sector. And when they go to market with that
    monopoly set of products, then the burden is to make sure that
    the cost is allocated and priced properly and it is managed
    properly and transparency is all there.
        The Postal Service has been able to allocate to each
    product about 60 percent of the cost. About 60 percent of the
    total cost is attributed to the product, and the other 40
    percent is left over in overhead.
        Think about what happens with the 40 percent that is left
    over in overhead. To be able to partition those, they mark up
    each of those sets of products. In the monopoly part, if they
    mark those up by 69 percent, an extra 69 percent applied over
    and above the attributed cost a monopoly might----
        Senator Voinovich. In other words, you are saying that the
    Postal Service uses one part of its business to subsidize other
    parts.
        Mr. Eskew. Well, they do mark up the monopoly products by
    69 percent, only 28 percent in the competitive side. Two and a
    half times as much is marked up in the monopoly side that is
    protected. So that is something that when you do go to market
    and when you do have those kinds of markups that are two and a
    half to one, that gives us some concern. It is the price of
    going to market with the monopoly and competitive products, is
    proper oversight, proper regulation, proper reporting, proper
    transparency, and proper regulation up front.
        Also, if you think about who suffers because of that and
    you talk about prices, it is the captive First-Class user who,
    we believe, pays the price for the overall system. And so cost
    burden is shifted, and depending upon how that cost is cut up.
        Senator Voinovich. So you are saying that the First-Class
    customers are subsidizing the inefficient operations of other
    business lines? Are you saying the Postal Service should get
    out of those inefficient operations? Don't you think that if
    they did, the costs of UPS and FedEx would go up substantially?
        Mr. Eskew. We have a lot of great competition that we have
    to watch. We have to earn our business every day. And I did not
    say get out. I do think it just needs to be on a level playing
    field, and that attribution measurement certainly needs to be
    evaluated much more carefully, and more than 60 percent of it
    needs to be attributed to each product, and the way it is
    marked up beyond that needs to be studied.
        Senator Voinovich. Well, I want to say to both of you that
    I am a customer, and both outfits do a very good job, and I
    congratulate you on that.
        The other issue I would like to ask about is the issue of
    management. We have had the most revolutionary change in the
    last 25 years in the Title 5 dealing with the Federal
    workforce. And both of you have had an opportunity to observe
    the postal management and how it is organized.
        In terms of just fundamental business practices, empowering
    people, training, giving employees the tools they need to get
    the job done, what are your candid thoughts about the
    management?
        Mr. Smith. First, Senator, let me just clarify what you
    said to the question that Mike Eskew answered. We have not
    recommended that the Postal Service get out of anything. What
    we have said is break it into two parts, the monopoly and the
    competitive, and the competitive should be required to allocate
    appropriately the cost when it is competing with private
    industry, because, otherwise, you end up with someone
    subsidizing someone else. It is just that simple. And there is
    a great social experiment that has been going on for the last
    10 years that shows what happens when you get oblivious to
    those types of fundamental business principles, and it is what
    has happened in Europe. It is incredible that these postal
    monopolies have been able to take these enormous protected
    monopoly cash flows and been able to diversify into competitive
    businesses, which earn a fraction of the returns of the
    noncompetitive businesses.
        Now, whose interests have been served? Only one, and that
    is the management of those regulated businesses over there.
        So we do not propose anything other than what I just
    mentioned, dividing it into two parts.
        Regarding the management, it is first-class, and the
    management of the Postal Service, particularly in the last two
    administrations of Postmaster General Henderson and now
    Postmaster General Potter, are as fine business executives in
    transportation and distribution as I have seen anyplace. And I
    think the common denominator there is that both of those
    Postmaster Generals, as opposed to the political appointees
    before, really understood the operations and the issues of the
    Postal Service as an operating entity. And the political
    appointees, while they were fine folks and some of them
    personal friends, simply did not have that level of knowledge.
        So the Postal Service is extremely well managed, in my
    opinion, and it is because of that fundamental change that took
    place with Postmaster General Henderson's appointment.
        Chairman Collins. Thank you, Senator Voinovich.
        We have been joined by Senator Stevens, who probably knows
    more about the Postal Service than any Member of the Senate,
    and we are very pleased he could find the time to join us this
    morning.

                  OPENING STATEMENT OF SENATOR STEVENS

        Senator Stevens. Thank you very much, Madam Chairman. I am
    delighted to be here, and I am delighted that you are holding
    these hearings. With the Postal Service and the two gentlemen
    at the table, I think you are talking about three of the
    largest employers in my State, as a matter of fact. So the
    scope of this hearing is really, I think, most interesting to
    us.
        Unfortunately, I cannot stay because I have got an
    appropriations hearing, but I did want to come by and pay my
    respects to Mr. Smith and Mr. Eskew and the people that work
    for them, as well as the Postal Service. I think the recent
    changes in our economy show that we really have to find some
    way to bring about a better balance in this, and I congratulate
    you and the Committee for holding these hearings.
        There is no question that the scope of the mailing industry
    is changing, and its tasks are becoming just overwhelmingly
    difficult really to balance all the interests involved.
        I look forward to working with you and Senator Carper and
    the Members of the Committee, Senator Voinovich, in trying to
    find some answers to some of the questions that are being
    raised here. But I do not have any questions for them. I,
    instead, have thanks because I do not think we could get along
    very well in Alaska without the Postal Service or the services
    that FedEx and UPS provide to our citizens. I am happy to have
    a chance to just drop by and say hello.
        Thank you very much. As a matter of fact, I think FedEx is
    the largest employer in my home town, so I am glad to see you
    here, Fred. Thank you very much. [Laughter.]
        Chairman Collins. Thank you, Senator Stevens.
        I want to thank both of you for taking the time to come
    testify personally. You both represent outstanding companies,
    and I think we can learn a lot from your experience. So we hope
    you will continue to work with the Committee as we proceed down
    the road of postal reform.
        Thank you very much for your testimony.
        I would now like to introduce our second panel of
    witnesses.
        Gary Mulloy is the Chairman and Chief Executive Officer of
    ADVO, Incorporated, the Nation's largest targeted direct mail
    marketing company based in Windsor, Connecticut.
        Gary Pruitt is the Chairman, President and Chief Executive
    Officer of the McClatchy Company, which owns the Sacramento
    Bee, the Minneapolis Star-Tribune, the Raleigh News and
    Observer, and he appears today on behalf of the Newspaper
    Association of America, which represents 2,000 large newspapers
    plus a number of weekly newspapers. Mr. Pruitt serves as
    Chairman of the NAA's Postal Committee.
        Robert Wientzen is the President and Chief Executive
    Officer of the Direct Marketing Association which represents
    4,700 member companies, both commercial and nonprofit,
    including numerous catalogue companies and direct mailers. Mr.
    Wientzen has over 30 years of experience in the marketing
    industry. In his position as President and CEO, he is
    responsible to the DMA Board of Directors and oversees all
    facets of the organization's work.
        Mr. Mulloy, we will start with you. You may proceed.

     TESTIMONY OF GARY M. MULLOY,\1\ CHAIRMAN AND CHIEF EXECUTIVE
                          OFFICER, ADVO, INC.

        Mr. Mulloy. Thank you, Madam Chairman. I am pleased today
    to represent the 3,700 associates of ADVO who serve 20,000
    small and large clients across the United States. We are the
    largest user of standard mail, and we spend about half a
    billion dollars a year in postage. We are proud to be the
    constituent of the Ranking Member of the Committee in
    Connecticut, and we also have facilities in the States of most
    of the other Members of the Committee as well.
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        \1\ The prepared statement of Mr. Mulloy appears in the Appendix on
    page 161.
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        I would particularly like to thank Chairman Collins and
    Senator Lieberman and the entire Committee for your work on
    Public Law 108-18 which attempted to address the Postal
    Service's CSRS funding issue. One of the key events of that
    effort was a request by Senator Lieberman for a report from the
    GAO. I thank the Senator for his initiative on that effort and
    for the commitment of every Member of this Committee to see
    that CSRS funding is corrected.
        As a result of that law, the Postal Service has promised to
    hold rates steady until at least 2006. Following three rate
    increases in an 18-month period, this respite came at a
    critical juncture for the Postal Service, our industry, and the
    economy as a whole as it prevented another rate increase and
    therefore created a window of opportunity for this Committee
    and Congress to thoughtfully consider postal reform.
        In the letter I received from the Chairman and Ranking
    Member, I was asked to address a wide array of reform issues
    being considered by the Committee. In response, I have
    submitted written testimony. I will summarize certain parts of
    my written submissions today.
        I am going to focus today on a topic that is not always
    considered exciting, and that is accounting. This Committee and
    the Congress should address this issue in a comprehensive
    manner. The issues I am talking about here are related to the
    retirement and health care benefits which have actually been
    mentioned this morning already.
        If we would put the Postal Service on a truly transparent
    and more clearly understood financial footing by addressing
    these issues, we would then empower all other reforms to, in
    fact, succeed. In addition, proper accounting of these benefits
    would allow the Postal Service to keep its commitment to its
    employees and retirees; that all pension and retirement
    benefits and health benefits are paid, now and in the future;
    and the Postal Service will be able to offer its customers an
    extended period of rate stability that would allow it to take
    advantage of our now recovering economy to grow volume and
    revenue for the Postal Service and improve the financial health
    not only of the USPS but our industry and the overall economy.
        As one of the Postal Service's largest customers, I can
    confirm the GAO's comments that predict spiraling, increasing
    rates will continue to drive business, volume and revenue away.
    Non-competitive pricing that creates higher than necessary
    postal rates has led existing and potential customers
    elsewhere. It has also led to the creation of competitive
    alternatives that have drained revenue and profits from the
    Postal Service. Some, like us, have even begun our own private
    delivery services as alternatives and as a necessary hedge for
    fear of continuing rising postal rates. If postal rates were
    established, maintained, and managed in a more market-oriented,
    efficiently run system, private industry would use the USPS
    more, and both the Postal Service and industry would experience
    growth.
        Our current strategy calls for us to double our business in
    the next few years. This will be done by expanding the
    geographic coverage and increasing the frequency of what we do.
    This expansion could bring significant additional business to
    the Postal Service. However, we have already begun shifting a
    significant portion of our business to alternate delivery. In
    just the three markets where we currently conduct our own
    private delivery system, we are delivering mail pieces that
    have more advertising, are heavier in weight, with equal
    readership and response to what we deliver through the mail,
    and are achieving savings of over $6 million per year compared
    to the cost of using the Postal Service. Unless changes are
    made, much of our future growth will continue to be shifted
    away from the Postal Service and into the alternate deliveries.
        Now let me give you a glimpse of a different scenario.
    Extending the current period of rate stability beyond 2006
    would allow us to be even more aggressive in our expansion
    because we would have the confidence that our largest single
    cost would be contained. We have the latent ability to create 3
    billion additional packages. Importantly, we would be able to
    plan our growth in a rate-stable environment.
        Continued rate stability would benefit the mailing
    industry, the Postal Service, and the economy as a whole. This
    is no overstatement. The volume generated by this hiatus in
    rate increases, coupled with the impact of the important
    reforms this Committee is considering, would set the Postal
    Service on a positive course for the next generation. On the
    other hand, frequent excessive rate increases, such as the
    three that were implemented from the beginning of 2001 until
    mid-2002, will decrease business and lead to the fulfillment of
    GAO's prediction of spiraling declines in business.
        Stable rates coupled with comprehensive reform are not a
    pipe dream. This Committee can help lead the Congress to make
    them a reality. Since 1971, the Postal Service has been
    required to break even by charging mailers its cost of
    operation. The USPS has not been chronically losing money or
    breaking even in its operation, despite what many people have
    said. In fact, since it was created, the Postal Service has
    generated an operating profit, and a handsome one at that.
        Since 1971, postal revenues have been billions of dollars
    more than the cost of handling postal operations. Even if
    Congress were to force the Postal Service to book 100 percent
    of its health care liabilities today, the Postal Service still
    would have generated billions more in excess revenue through
    rates charged mailers and consumers in the past and still in
    place today.
        That money has gone to the Federal Treasury. The USPS is
    not only not subsidized by the taxpayer, instead, surprisingly,
    it has been subsidizing the taxpayer.
        Last year, this Committee took the first steps to correct
    the retirement overpayments made by the USPS to the Treasury.
    This important first step was only a partial, temporary
    solution and included some provisions whose effects were not
    known by this Committee and Congress and that were not in the
    best long-term interests of the Postal Service.
        In implementing last year's action to correct the CSRS
    overfunding, the Office of Personnel Management made a very
    material accounting change to the existing 33-year methodology
    that substantially reallocated to the Postal Service some of
    the government's responsibility for its share of the pensions
    earned as a result of work performed by postal workers prior to
    1971. The 1970 Postal Reorganization Act made the Treasury
    responsible for employee benefits earned while working for the
    old Post Office Department and it made the Postal Service
    responsible for benefits earned after they took over. For
    years, the benefit obligation for retirees with employment both
    before and after 1971 was allocated between the Postal Service
    and the Treasury based on the number of years of service
    employed at each agency, allocating the same dollar amount for
    each year of employee service. Using that methodology, the
    Postal Service has, as of today, even with last year's changes,
    actually overfunded the CSRS liability by $81 billion. However,
    that fact was masked when OPM, after discovering this
    overfunding thanks to Senator Lieberman's GAO request,
    responded by quietly adopting a new allocation method that
    shifted much of the pre-1971 obligation to the Postal Service,
    to the detriment of postal customers. Instead of an $81 billion
    overfunding, the USPS was told the obligation was still
    underfunded by $4.8 billion.
        Interestingly, congressional language in Public Law 108-18
    established a method by which the USPS could appeal the change
    of the pre-1971 allocation to the CSRS Board of Actuaries. The
    USPS has filed that appeal. They make the case in that appeal
    that the original allocation method used for 32 years was fair
    and recently determined to be consistent with sound, common
    practice in both the public and private sectors by the Hay
    Group, a well-respected actuarial firm commissioned by the
    Postal Service.
        The USPS has a sound and well-substantiated case. However,
    the three-member, OPM-appointed board has not heard an appeal
    in its 84 years of existence. It is unclear what timeline or
    method will be applied to the USPS appeal. You have the
    opportunity to take control of that process and codify the
    former methodology in legislation, acknowledging postal
    customers have been grossly overcharged over the years, and
    make the operating and financial performance of the Postal
    Service clear and transparent as a productive base from which
    to implement other areas of reform.
        In addition, part of last year's legislative fix of CSRS
    was a new requirement that the Postal Service pay military,
    Peace Corps, and other government retiree benefits. This
    transferred an additional $28 billion in charges. We would
    suggest, along with the Presidential Commission, that that
    requirement be removed.
        We believe that this Committee can put the Postal Service
    on the road to financial health if you fix the problem of the
    allocation of retirement benefits carried before 1971, transfer
    the military benefits back to the Treasury, and release a
    portion of the identified overpayments from the escrow created
    last year. These actions will make prefunding health care
    possible and eliminate the Postal Service's debt to the
    Treasury. In addition, the Postal Service would have funds for
    needed capital expenditure, and it can provide additional years
    of rate stability going forward, that will, in fact, encourage
    revenue and business success for the Postal Service.
        We believe this resolution is fair to postal workers. We
    believe it is fair to the Postal Service. We believe it is fair
    to the consumer, and we believe it is fair to our industry
    that, in fact, relies on the Postal Service for its livelihood.
        Thank you for your time.
        Chairman Collins. Thank you. Mr. Pruitt.

    TESTIMONY OF GARY B. PRUITT,\1\ CHAIRMAN, PRESIDENT, AND CHIEF
      EXECUTIVE OFFICER, THE MCCLATCHY COMPANY, ON BEHALF OF THE
                    NEWSPAPER ASSOCIATION OF AMERICA

        Mr. Pruitt. Thank you, Chairman Collins, Senator Carper,
    and Senator Voinovich. Thank you for the opportunity to share
    the views of the newspaper industry on the important issue of
    reforming the U.S. Postal Service. As mailers since the birth
    of the Republic, newspapers want and need a healthy and vibrant
    postal system for generations to come.
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        \1\ The prepared statement of Mr. Pruitt appears in the Appendix on
    page 169.
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        The Newspaper Association of America encourages this
    Committee to take a comprehensive and fresh approach to postal
    reform, including addressing the difficult yet critical issue
    of cost control. NAA supports most of the recommendations
    outlined by the bipartisan Presidential Commission, and my
    written statement provides a summary of the industry's position
    on all of the major issues addressed in the Commission's
    report. The main focus of my testimony is pricing flexibility,
    an issue of particular concern to newspapers.
        First, I would like to take a moment to describe how
    newspapers use the Nation's postal system. Throughout our
    history, newspapers have served as partners with the Postal
    Service in its mission to bind the Nation together. Congress
    has consistently recognized the important role newspapers and
    other periodicals play in our Nation's postal system.
        Newspapers today are among the leading local users of
    postal services and, collectively, we spend well over $700
    million on all classes of mail, particularly in periodicals and
    standard mail. And because we collect the majority of our
    revenue from subscriptions and advertising revenue through the
    mail, we also have a special interest in first-class.
        Newspapers, whether large or small, daily or weekly, serve
    as vehicles for news and advertising. Generally speaking, there
    are two kinds of newspaper advertising. One is commonly called
    ``Run of Press'' or ROP, and it appears on the page of the
    newspaper. The other is called ``pre-prints,'' and they are
    free-standing inserts that we either put inside the folded
    newspaper or mail to non-subscribers.
        Newspapers compete with other Postal Service customers,
    particularly saturation advertising mailers, for both types of
    advertising. Unfortunately, over the years this competition
    with other mailers has served as a source of considerable
    friction between newspapers and the Postal Service. Newspapers
    do not believe that the Postal Service, an agency of the
    Federal Government, should take sides in the marketplace
    competition between one mail customer and another. Regrettably,
    our experience has been that the Postal Service has, in fact,
    chosen to favor our advertising competitors through pricing
    strategies and new initiatives targeting the advertising
    revenues upon which we rely to support news and editorial
    content in our products.
        In its 1998 marketing plan, the Postal Service clearly
    presented its goal of harming newspapers in favor of
    advertising mailers. It said the service would ``create the
    platform for moving substantial revenues from pre-printed
    newspaper inserts into the mail.''
        Since this declaration, Postal Service actions have spoken
    louder than words. It launched an ill-fated $10 million market
    test called ``Auto Day'' that set out to divert automobile
    advertising from the Milwaukee Journal and into mail. Last
    year, in Iowa, the Postal Service employees made sales
    presentations to newspaper advertisers encouraging them to move
    their business out of newspapers and into direct mail. Finally,
    the Postal Service continues to advance the misperception that
    it is in the direct mail business. An example is its
    description in its 2002 Transformation Plan in which the Postal
    Service describes saturation advertising mail as ``low hanging
    fruit'' it seeks to increase, needless to say, at the expense
    of newspapers.
        While our concerns about the Postal Service choosing sides
    in the competition for advertising among mailers dates back
    more than two decades, we have been encouraged by the recent
    actions of Postmaster General Potter and his management team as
    they refocus the Postal Service on its core mission of mail
    delivery. We applaud their efforts, and we want to work with
    them as customers.
        Congress has heard from large mailers and the Postal
    Service that they want pricing flexibility and that that is key
    to the Postal Service's financial future. We encourage you to
    examine these pleas carefully. There is a big difference
    between improvements that benefit all mailers, making the
    process of changing rates simpler, more efficient, and more
    predictable, and certain changes that would allow large
    influential mailers to get special deals for themselves. High
    on the wish list for pricing flexibility is the ability to
    enter into so-called negotiated service agreements, or NSA's,
    with individual mailers.
        Although newspapers are often the largest mailer in a local
    market, we strongly oppose NSAs because we believe they
    unfairly favor the largest mailers with deals made by a
    government entity. Government services, here postal services,
    should not be based on negotiating or lobbying skills. I urge
    the Committee to support that principle.
        Newspapers believe strongly that NSAs for the benefit of
    individual mailers should be abandoned in favor of work-sharing
    arrangements that are available to all mailers, both large and
    small, who meet predetermined criteria for those rates, and
    that such discounts should be based on cost savings. By working
    with all mailers, the Postal Service would earn a far better
    return on its investment of time and effort than if it spends
    its energy and resources to negotiate special deals with
    individual mailers.
        While we oppose NSA's for individual mailers, we agree that
    the current ratemaking process is too lengthy, too litigious,
    and too expensive. NAA supports the creation of an expedited
    rate-setting process that would also protect mailers from
    unjustified or flawed rate proposals before they are
    implemented.
        The Presidential Commission has recommended that the Postal
    Service should be allowed to set rates within certain limits
    established by an enhanced Postal Regulatory Board, and under
    this approach, rate ceilings could rise no more than inflation,
    and within a rate index, the Postal Service would have
    flexibility to make annual rate adjustments without going
    through the current lengthy Postal Rate Commission process. At
    the same time, mailers would be protected from large and
    frequent rate increases. NAA supports this type of pricing
    flexibility.
        Newspapers believe, though, that even with this revised
    system, mailers should be given at least an opportunity to
    challenge postal rates before they are implemented upon a
    complaint that a particular rate is flawed or discriminatory.
    Such a system would not cause delay in a proper rate change as
    the Postal Service must give mailers time to modify their
    mailing software to implement new rates. But it would provide
    an appropriate safeguard.
        Newspapers also agree with the Presidential Commission that
    with pricing flexibility must come enhanced oversight to ensure
    that the Postal Service operates properly as a public service.
    In particular, NAA supports the Presidential Commission's
    recommendation to give an enhanced regulatory body the
    authority and tools to ensure that the Postal Service is
    appropriately allocating its costs across its competitive and
    non-competitive products and services. The regulator in a
    separate proceeding should establish the methodology used for
    calculating and allocating costs and should be given necessary
    tools to compel the Postal Service to produce cost data. A more
    accurate and fair system for measuring and allocating costs
    should be a prerequisite of any reform measure.
        NAA appreciates the opportunity to provide the Committee
    with our views on postal reform and specifically on the issue
    of pricing flexibility. Congress established the U.S. Postal
    Service as a fundamental public service with a mission of
    providing universal mail service at affordable and non-
    discriminatory rates. We look forward to working with this
    Committee on comprehensive postal reform to improve this
    essential public service.
        Thank you.
        Chairman Collins. Thank you, Mr. Pruitt. Mr. Wientzen.

        TESTIMONY OF H. ROBERT WIENTZEN,\1\ PRESIDENT AND CHIEF
            EXECUTIVE OFFICER, DIRECT MARKETING ASSOCIATION

        Mr. Wientzen. Chairman Collins, I am Bob Wientzen, and I am
    President and CEO of the Direct Marketing Association. On
    behalf of the 4,700 members who are direct and interactive
    marketers--and, by the way, that includes about 350 nonprofit
    companies or entities that use mail to raise charitable funds--
    I want to thank you for having us involved in these hearings.
    We consider this to be a vital issue for our industry, and, in
    fact, for its 9 million employees. This is the key to our
    continuing to be able to grow and be part of this economy.
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        \1\ The prepared statement of Mr. Wientzen appears in the Appendix
    on page 183.
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        Now, I also believe that direct marketing is, in fact, a
    vital interest to the future of the Postal Service as well as
    the economic and social interest of the country. Our business
    has about a $635 billion impact on the economy, and our
    nonprofits, in fact, raise about $50 billion a year through the
    mail. That is an important part of the social services part of
    the Postal Service's contribution to the fabric of this
    country's economy and its social work network.
        So we are talking about a major element of the economy and,
    in fact, over 50 percent of the Postal Service's revenue from
    both mail and parcels, a very important distinction.
        From the outset, I want to tell you essentially what I told
    the Presidential Commission, and that is, I do not believe that
    you can find a solution to this problem without someone's ox
    being gored. It is that simple. I do not think you are going to
    be able to find a way out without achieving less than that
    desired by some of the interested parties.
        My biggest fear at the moment is that the Washington drive
    to compromise will, in fact, produce a bill that ends up either
    not being effective or not being effective over the long term.
    And that view is shared by some of our larger members, who are
    worried that, in fact, we will not have a long-term solution
    coming out of this process. So that we want to acknowledge up
    front, that this is a tough one for you all to be dealing with.
        I want to cover a few of the key points that are covered in
    detail in our written testimony.
        Flexibility to set rates--clearly we think that the
    keystone of this legislation needs to be the ability to set
    increases on the part of the post office that are no more
    frequently than yearly and that are at or below the rate of
    inflation or the actual cost, whichever is less. To us that is
    sort of a bottom-line basis.
        We think that the post office and certainly us, the mailing
    community, need to be set free, as Mr. Pruitt and others have
    indicated, from this cumbersome and unbelievably costly
    ratemaking process that we now have before us. We also believe
    that the post office needs to have clear flexibility to achieve
    negotiated service agreements.
        On work sharing and workforce flexibility, another key
    point, I believe that any solution needs to build on the 25
    years of work-sharing experience that we have. We agree with
    the GAO. We are saving $15 to $17 billion with the work-sharing
    agreements we have now. That is more than the discounts that
    are being provided. The post office needs the flexibility to
    continue that program. It also needs the flexibility to right-
    size its labor force and its infrastructure. There is no
    question about that. It has to be able to match the marketplace
    demand for its services, which is--as you heard earlier and we
    certainly agree--going to continue to change.
        Now, that may mean a smaller internal workforce over the
    long term. I suspect it does. We think that can be handled by
    the significant retirements that we are going to see over the
    next 6 years.
        Also, modest adjustments in the current collective
    bargaining process may be in order. Specifically, we think we
    should be seeing required mediation and, very importantly,
    restricting arbitration awards to be prospective rather than
    retroactive. We do not see any sense in that system.
        Arbitrators, further, should be required to consider the
    current marketplace conditions in their findings. This is a
    changing communication world, and we think arbitration simply
    has to take that into consideration.
        Regarding workers' comp--I agree with the Presidential
    Commission. An injured worker should receive the pension level
    that he or she would have ended up with had they not been
    injured. It is not comprehendible to me that somebody would end
    up with a bigger retirement having been injured versus somebody
    who served an entire career. And, Senator Collins, I know your
    staff is working with the employee groups on some of these
    issues to find ways to improve the collective bargaining
    process. We applaud you publicly for that. We know that is not
    simple. We would encourage you and we want to commit to being
    helpful in any way that we can in that regard.
        Let me make one additional point in that regard, and that
    is, we think there should be a continued effort to find ways to
    work with the employee units to increase volume. There is not
    enough talk of that, and some of them are working with us to
    try to find new ways to increase volume versus simply talking
    about cutting costs.
        Regarding universal service--we certainly support its
    continuation, and we think it ought to be reviewed periodically
    as the world changes. One important point, however, is we do
    see a continued need for a parcel delivery service component on
    the part of the Postal Service. It is vital to our members.
    Many of them depend on it, and it does provide a competitive
    base, and I think most of you realize that we believe that it
    is part and parcel of the work of keeping the system
    competitive.
        Now, two final big points regarding civil service
    retirement issues--we strongly agree with the Commission on
    this issue, and effectively we would say to you let's make it
    right, let's do it clearly, and let's do it as soon as
    possible. There is no logical reason to continue the current
    funding of military retirement benefits by the post office, no
    logical idea that we have heard advanced, and we should not
    force mailers to fund an escrow account or in any way continue
    the mistakes of the past in that regard. Again, do the right
    thing for the post office's future. And, Senator Collins, I
    know your initial bill did not include that escrow provision.
        To conclude, direct marketing is about arithmetic. It truly
    is. It is that simple. While we are a big industry, it is about
    the numbers. We use mail rather than use E-mail when mail
    works. We use mail rather than space ads when mail works. And,
    increasingly, there are competitions. We know that. Raising
    postal rates, to my knowledge--and I have been in the business
    a long time now, raising postal rates has never raised response
    rates. And, in fact, that has made the Postal Service less
    competitive with these other media. If we continue to raise
    them, we will make it even less competitive in the future. It
    is that simple.
        When the math says it no longer works, people now switch to
    other things, and they are increasingly doing so--a week does
    not go by that I do not have a meeting about issues of E-mail
    or wireless communication and so forth. And, in fact, if the
    mail continues to go up, we are going to see much more effort
    to use less of it.
        So I think this bill is going to have to end the death
    spiral that we have of increasing rates and diminishing volume.
    And I commit the Direct Marketing Association certainly to
    continue to work with all of you and ask that you really think
    of the fact that this bill, if it even comes close to the
    effort Senator Stevens and others made that was referred to
    earlier, is going to have to last us for a long time. We really
    need it to be effective.
        Thank you very much.
        Chairman Collins. Thank you, Mr. Wientzen.
        Let me start by responding to some comments that you made
    in which you expressed some skepticism about whether Congress
    will produce a comprehensive and effective bill. We would not
    be holding this, our sixth hearing on postal reform issues, if
    this were not a serious endeavor to produce a bill that does
    not just nibble around the edges but, rather, will be a
    comprehensive effort. I see the Commission's report as
    presenting an opportunity that will pass by if we do not act.
    And a great number of the Members of this Committee have been
    very active in this effort. So our goal is the kind of
    comprehensive and effective bill that you seek as well.
        In that regard, aside from the issues of fixing the escrow
    account, which you correctly noted was not in the original bill
    that we authored here in the Senate, and the military
    retirement issue, what provisions do you believe are absolutely
    essential to make sure this is an effective, comprehensive
    bill?
        Mr. Wientzen. Well, certainly as others have indicated, the
    ratemaking process is really the keystone to, we think, the
    future. If we limit rate increases to the rate of inflation--I
    personally favor the rate of inflation minus some productivity
    factor. That aside, if we limit those increases, then, in fact,
    we will have a systemic reason for the Postal Service to be
    more responsive to the marketplace demands. And I think that
    will be very important. So that, I would say, is a key issue.
        The issue of being able to right-size both the workforce
    and the facilities, I think, is the second issue that we simply
    have to find a way to depoliticize that. We have to find a way
    to allow the post office adequate flexibility. The post office
    is doing a great job. We think that we have a marvelous post
    office. We really do. But, in fact, the fear is that they are
    going to be hamstrung from continuing to be able to deliver a
    competitive product if they do not have the ability to right-
    size both the workforce and the facilities.
        Those are the two big points I would advance to you.
        Chairman Collins. Thank you.
        Mr. Pruitt, in your testimony, you said, ``Newspapers agree
    that the current ratemaking process can be too lengthy, too
    litigious, and too expensive.'' You also say that, for good
    reason, Congress has never granted the Postal Service both a
    legal monopoly and pricing freedoms, and you go on to say that
    Congress should take pleas for pricing flexibility with a
    healthy grain of salt.
        I would like to explore this issue further with you because
    it is an absolutely key issue, and many of our witnesses have
    said exactly the opposite. They said without the ability to
    adjust rates, without a short-cut to the 18-month rate-setting
    process, the Postal Service just is never going to become agile
    enough and responsive enough.
        If Congress were to give the Postal Service more pricing
    flexibility, should the Postal Service be able to set whatever
    rates it wants? Should it have a cap? Should it have a review
    process before the fact or only one that is triggered after the
    fact upon complaint? Could you explain what you think should be
    done in that area now that we know your concerns.
        Mr. Pruitt. Sure. I will do my best, and to the extent that
    I am not complete in my answer, let me know.
        We do think the current process is not effective--too
    expensive, too lengthy, too litigious. So we do, in general,
    support the Presidential Commission's recommendation on price
    flexibility and the indexing mechanism.
        Our concern there is that--and the way we would like to see
    that work is it would be indexed, say, to inflation or cost,
    whichever is lower, however it works, the rate announced, and
    would be put into effect unless there is a complaint, at which
    time the Postal Regulatory Board would quickly review and make
    sure it is fair, and the rate would be imposed. That is not
    unlike what the FCC used to do when they were administering
    rates and fees on telecommunications. There would be a rate
    announced, and without objection--and there usually was not--it
    would go forward. If the rate is within the indexed amount, I
    do not think there would be many objections.
        But as the Presidential Commission pointed out, there are
    different postal functions that are used in each class of mail,
    so it does not necessarily follow that each will go up with
    inflation or each will go up at the same level or at the same
    time. Our biggest concern here is we do not want First-Class
    mail subsidizing standard mail. We do not want a cross-
    subsidization going on, and if there is an after-the-fact
    review, we fear that there will be damage in the marketplace
    with advertising and business switching in a fiercely
    competitive marketplace that an after-the-fact review and
    refund system will not adequately address.
        And so we are concerned with an after-the-fact review, but
    we do think the Presidential Commission is on to something with
    an appropriate amount of pricing flexibility within an indexing
    mechanism.
        With regard to NSAs, our concern with NSAs is that we do
    not think an essential public service should negotiate with
    individual customers for a price break. We do not think that
    that is the best or fairest or even most cost-effective way for
    the Postal Service to address this issue. We think what they
    should do is get the mailers together and establish work-
    sharing criteria for all of the mailers and have input from a
    wide array of mailers, it will be a better return to the Postal
    Service. It will be fairer.
        If you have an individual negotiation, that individual
    mailer will seek to have terms that may be particularized or
    individualized to its company, and that will be unfair to the
    other mailers who are not a part of this negotiation. I think
    it will be subject then to litigation and claims and not have
    an adequate return on the effort that the Postal Service is
    engaged in to create the NSA.
        Senator Carper has incorporated some safeguards into his
    proposal with regard to NSAs which I think are quite
    encouraging and wise. But we still have concerns that hopefully
    can be addressed.
        I do not want to go on too long, but I hope that addressed
    most of those questions. I would be happy to follow up if you
    would like.
        Chairman Collins. Thank you. Senator Voinovich.
        Senator Voinovich. Mr. Mulloy, you made reference to the
    accrued liabilities of the Postal Service. You think those need
    to be tackled, $48 billion in unfunded retiree health benefits
    and $6.5 billion for unfunded workers' compensation costs? In
    other words, this is a ticking time bomb, and you are concerned
    if we do not face that forthrightly that down the road you are
    going to see these things just skyrocket.
        Also, this is news to me. Did you say that the Postal
    Service subsidizes the Treasury of the United States. Is that
    correct?
        Mr. Mulloy. Yes, Senator. Essentially what has happened is
    that overcharges have been assessed to the Postal Service over
    the years. The Postal Service has charged excessive rates and
    those monies have been turned back to the Postal Service and
    then back to the Treasury in a way of assessed retirement
    benefits payments that were, in fact, not necessary. In effect,
    therefore, the Treasury has been subsidized by the Postal
    Service by incorrect assessment of retirement benefits payment
    obligations.
        Senator Voinovich. So what you would say is that that
    should be looked at very closely and start to direct those
    dollars, instead of going into the general fund, toward dealing
    in a responsible fashion with these accrued liabilities. That
    would be interesting.
        Mr. Mulloy. Yes, sir, it would.
        Senator Voinovich. Because our accrued liabilities for
    retirement and health care in the Federal service, as you know
    are enormous. We do not have the funds in many of these
    accounts, and then when these retire, we have to take money out
    of the income that comes in. It is a pay-in, pay-out type of a
    system. And you are suggesting that, like any business, you
    must put the money aside and deal with funding retirement
    benefits in a responsible fashion.
        Mr. Mulloy. Exactly, Senator. I would add that
    unfortunately, in most commercial entities, the accrual for
    retiree benefits is not necessarily 100 percent secure, as we
    all know, even in the commercial world; and that, in fact, with
    what the Postal Service has paid, for the last 30 years or so,
    is in an enviable position, to actually deal with all these
    issues at one time if we, in fact, look at that as a totality.
        Senator Voinovich. Well, the problem is that, like so many
    of the other trust funds, there is nothing. We have spent the
    money.
        Mr. Mulloy. Right.
        Senator Voinovich. We say it is there, but it is not. So
    that is something that really would need to be done over a
    period of years in order to make it right.
        Mr. Wientzen, you were saying something about competition.
    I asked a question earlier of the other two witnesses about if
    the Postal Service got out of parcel delivery, you would not
    want that to happen.
        Mr. Wientzen. No, Senator. We think that would be a serious
    problem on a couple of fronts.
        First, a large number of our members really do depend on
    the parcel delivery service of the Postal Service. We are large
    customers, and many of our members are entirely dependent on
    the Postal Service for their parcel delivery.
        Of course, we have a number of members who are delivering--
    --
        Senator Voinovich. Will you tell me, which members?
        Mr. Wientzen. Well, I was just going to say, we have a
    number of members who are delivering smaller parcels--books,
    CDs, software, and so forth. Oftentimes, they are finding that
    the Postal Service is absolutely cost-competitive and they
    provide an adequate service.
        Beyond that, there are many of our catalogue members--and
    you heard, I think, an earlier firm, a couple of them--who find
    that the Postal Service's products are cost-competitive, that
    they are adequate for their needs and the Postal Service does a
    good job.
        I think finally we have a very serious concern that if the
    Postal Service were to either be pushed out of the business or
    to have encumbrances that make it less competitive, that, in
    fact, you would see prices being driven up by UPS and FedEx,
    good business practices that they would be, would simply move
    prices considerably higher and that would be bad for our
    members and bad for the customers that they serve.
        I do not know why so many people think that, for example,
    our industry, let's take just the catalogue part of our
    industry, has switched over to the private delivery services.
    They have not. There are many who use both, and we have a
    fairly good number who use principally the Postal Service. And
    I will tell you, many of them are not unhappy, again, with that
    value proposition, the cost and the quality of delivery.
        Senator Voinovich. The question is are you happy with that
    service being subsidized by other customers of the Postal
    Service?
        Mr. Wientzen. Well, it is a fair question, and I would
    argue, we do not think it is. We think that there is adequate
    protection in place at this point. But, beyond that, I would
    ask you to think about this: Does United Parcel charge all of
    its customers the same rate? No. We know they do not. In fact,
    I can tell you, having been on the other side, that you can sit
    down and negotiate with United Parcel or with FedEx, and
    depending on your volume and what you want and where you are
    and how much business they have and a lot of other factors, not
    just your size, you can come out with a different price.
        Now, I would argue, if I come out with a better price than
    you, are you, in fact, subsidizing me? I think you all have to
    make a big decision here. Are we going to move this thing more
    in a direction of the marketplace or not? And, yes, if you do
    move it in a direction of the marketplace, are there going to
    be a few inequities here or there? Yes, maybe so. But as long
    as they are not significant and serious, I think you have to
    decide to move it in a direction of a freer marketplace
    situation. If the post office can do a good job at a reasonable
    price and agree that they do not use the monopoly as the
    principal way of subsidizing it, I think we have to open that
    up, frankly.
        And I would also say to you that we think opening it up to
    other private delivery services, be they domestic or foreign,
    is not inappropriate competition. We are not afraid of that.
        Senator Voinovich. So you would say that you think they
    ought to have the flexibility to look out at the marketplace
    and look at what their costs are and what others are, and
    understand that in totality to compete.
        Mr. Wientzen. Well, I do. And I would say if you look
    carefully under the hood, you would discover that there is one
    form or another of ``unlevel playing field'' all over the
    place. Do the private delivery services use other businesses to
    subsidize delivery? They have leasing businesses that, in fact,
    are less profitable than the delivery service. I suspect that
    in today's world, we are going to see a lot of that. I grant
    you that government services are different, but the big
    decision you all have to tussle with is: Do you move this
    Postal Service further away from being a government agency and
    more into the private marketplace, competition world?
        Senator Voinovich. My time is up.
        Chairman Collins. Would you like to----
        Senator Voinovich. I would just like to mention one other
    thing.
        Chairman Collins. Sure.
        Senator Voinovich. We got into the issue of the workforce
    in terms of needing flexibility, and as I mentioned earlier, we
    have tried, working with the Chairman of this Committee, to
    make some real changes in Title 5, for our civil service. The
    concept is to work harder and smarter and do more with less; to
    pay for performance and give agencies flexibility to bring in
    people, for example, and paying them more than what the Federal
    Government says you can pay because they need the experts, but
    just giving them a lot more flexibility.
        It has not been easy because there is some real concern in
    terms of the employee unions, and I would like you to further
    comment on that issue. I know the Chairman has been working
    with the unions. We are trying to come up with something that
    they feel is going to be fair. But from your perspective, are
    we too inflexible in terms of our operations, in terms of human
    resources?
        Mr. Wientzen. Well, certainly you are less flexible or the
    post office is a lot less flexible than the private sector
    would be, and the fact is that that is where the competitive
    pressures are coming from. So the answer is certainly yes,
    there is a lot less flexibility.
        I do think that you have made some progress. I think we
    should acknowledge that. There is some great thinking going on,
    and we are feeling generally positive. I will also tell you
    that we are working with some of the unions in a much more
    cooperative and proactive way. And we are seeing some different
    focus by a number of those folks who do recognize now that
    there is going to be a significant drop in the volume of mail
    at the post office. And if we do not have more flexibility and
    they do not join in on that, we are not going to have jobs one
    way or the other.
        But there are lots of things that you can do yet. For
    example, I think preserving seniority if the trades move
    between one kind--because that is going to have to happen, I
    suspect. To have those inflexible silos like we have now is
    going to be really a problem down the road in the next couple
    years. You are going to have to have more flexibility there. I
    think the grievance process and some of those kinds of things
    need to be less bureaucracy oriented and faster. They need to
    move along, less incentive for spreading out things. We think
    the mediation thing I mentioned needs to be--we need to have
    incentive to move all of these processes more quickly, to make
    the post office more nimble and able to be competitive. It is
    not now able to really be as competitive as they want to be or
    they would be if we took some of the bureaucracy away from the
    structure that they are having to deal with.
        Senator Voinovich. Chairman, are the demographics the same
    in the post office as they are in most of the other Federal
    agencies in terms of this large group of people that are going
    to be retiring that could make it more easy to do some of the
    things that Mr. Wientzen suggests?
        Chairman Collins. Absolutely. Forty-seven percent of the
    postal workforce will be eligible for retirement within the
    next 10 years. So the workforce reforms, in my judgment, do not
    translate into the need for large-scale layoffs. I think a lot
    of the right-sizing can be done in a compassionate way that
    takes advantage of the aging workforce in the sense that they
    are eligible, going to become eligible for retirement. So I
    think a lot of the reforms that need to be instituted can be
    done in a way that creates a positive working environment, and
    I know that has been the Senator's concern as well.
        Mr. Wientzen. And if you look at the detail of the numbers,
    even within 6 years of--while we say a decade, if you really
    look at the numbers, within the next 6 years you have got a
    tremendous opportunity within that time frame to make a very
    significant difference. We just have to take sort of the
    boundaries of some of the things that the post office would do
    in terms of shifting people around and so forth.
        Chairman Collins. Thank you, Senator.
        Mr. Mulloy, I want to talk to you because you have a very
    interesting perspective. You are both a very large customer of
    the Postal Service, but you are also a competitor. You
    described in your statement that in three markets you have gone
    to an alternative delivery system.
        One of the issues that the Committee is debating is whether
    or not the Postal Service should be allowed to compete in areas
    where there are private sector providers. As you are well
    aware, the Postal Service has had some bad experiences in
    trying to sell products that really were not part of the Postal
    Service's core commission, and they ended up being money-losing
    enterprises.
        So, first, I would like to get your view on the issue of
    the Postal Service competing with the private sector. And
    second, and a related issue, is whether there are additional
    constraints that are needed, either statutory or regulatory, to
    ensure fair competition and to ensure that there is not a
    cross-subsidy between the monopoly products and the competitive
    products.
        Mr. Mulloy. I think to reply to the first part of the
    question, I really do believe that we would support and I would
    support that the Postal Service should be a stronger and more
    competitive commercial entity. I think with that I am implying
    that it should, in fact, compete with commercial entities that
    are conducting the same kinds of businesses.
        There should be a charter around the Postal Service in
    terms of where it should properly focus its attention. Some of
    the things that were attempted to be done with separating its
    business into three separate buckets that begin to look at
    First-Class separately from standard mail and some of the other
    pieces of the business that it is in, we would support that.
    But I do believe that the Postal Service should be encouraged
    to be a competitive entity where it is doing its business.
        Our company makes decisions to use our own private carrier
    delivery system when we think it is economically attractive. I
    wish that that were not something we needed to do to protect
    the outlook for rates and the uncertainty of that rate process
    going forward. If we felt that the Postal Service managed its
    rates as most commercial entities do, which is setting the caps
    around inflation, and understanding the way that you are
    incentivized to manage your business then its customers would
    have the reliance upon the fact that they are not going to have
    an inflationary cost, especially when that cost is a major part
    of the business that they do.
        The second thing is that I think there is only a certain
    amount of regulatory environment you can put around an entity.
    You cannot legislate out every single thing that might, in
    fact, be simply a slightly different way of interpreting
    things. The idea that we need to fairly burden the cost of all
    parts of the mail system with the cost of doing that part of
    the mail is something that we would endorse.
        That being said, in my 35 years of business, I know that
    cost accounting is not a science. It is an art. And it, in
    fact, does subsidize new ventures for a business. When a
    company goes into a new business. In the very first company I
    worked for, in the new product department of a personal care
    company, they allocated what they called ``before fixed
    overhead profitability.'' For the first 3 years of the
    product's life they did not even allocate fixed overhead to
    that product because it was being invested in as the future
    growth of the business.
        I am not implying that that is done broadly and deeply and
    arbitrarily, but, in fact, it is a way that businesses look to
    the future. And if we want the Postal Service to begin to look
    to the future, it has to be looking at where its business is
    going to come from and where it wants it to go. And I really
    believe, as I think even Mr. Smith said earlier, that there is
    a bright outlook for the Postal Service. I think there is a lot
    of business to be had, as long as it is encouraged to
    commercially market itself against the growing product streams
    that are out there.
        Chairman Collins. Mr. Pruitt, I would like to ask you a
    similar question because in your testimony, you gave an example
    of the Postal Service competing with the newspaper business.
    And I remember it very well because my newspapers in Maine were
    very concerned about that experiment as well to pull the
    newspaper ads out as separate mailers. What are your thoughts
    on the appropriate role for the Postal Service when there is a
    private sector provider of the same service?
        Mr. Pruitt. I think it is critical, and the Presidential
    Commission got it right, it is an essential public service,
    universal service, and in the First-Class and standard mail
    area, it is a monopoly. And as a monopoly, it has worked well
    to provide that universal service, and we do not object to that
    at all.
        Our only concern is cross-subsidization, and what we want
    to ensure is that there is a postal regulator, a Postal
    Regulatory Board, that has the power to ensure that measures
    and allocation of costs are fair and appropriate and that the
    Postal Service's delivery costs are covered within that class
    of mail. And we do not feel it is appropriate for a government
    service, a public service, with a monopoly to enter into
    private agreements with the mailers and give them a price
    break. That is our concern.
        In the competitive areas, I think it is a principle where
    cross-subsidies are also a problem, but, frankly, our biggest
    concern is the cross-subsidy in the monopoly areas between
    First Class Mail and standard mail.
        Our experience has been that alternative delivery has not
    been as effective in our products as mail delivery, and so we
    have delivery of the newspaper and then we use the mail, and we
    hope to use the mail, use it efficiently, but with fair
    pricing.
        Chairman Collins. Thank you.
        Mr. Wientzen, what is your opinion on this issue, which is
    going to be one of the major issues we tackle?
        Mr. Wientzen. Well, first, initially, I would probably be
    one of the few people saying I would let the Postal Service
    sell Buicks if I thought they could make money on it as a kind
    of a joke, but I do not believe we can, in fact, unbridle the
    Postal Service and say go do whatever it is that touches your
    fancy.
        But the problem that you are going to have with this is it
    is very easy to have a view of the right thing to do today. I
    think the difficulty is to figure out what is the right thing
    to do 5 or 10 years from now because the world is changing so
    rapidly. And if we put the post office in a box and say you can
    deliver letters and printed material, essentially what you are
    doing now, and that is it, I think you are going to--somebody,
    hopefully you, or someone else, is going to be sitting here 5
    years from now scratching your head saying we really still have
    a problem because there has been this significant shift or
    there has been some new technology.
        So I think you have to provide a lot more flexibility, and
    to me, those who fear the post office just because of
    competition, I do not think we can listen to them. I think
    those who fear the post office because they do recognize that
    the monopoly benefit that they get could be used to create very
    unfair competition. But that is usually much more narrow than
    is being described. And I will say we have many companies, some
    of whom are my members, who would limit the Postal Service even
    within the business of doing the mail that they do now because
    it would benefit their particular business model.
        I think in your wisdom, you are going to have to give the
    post office more flexibility than they have, but you are going
    to have to find some way to provide the private sector for
    being protected from outlandish subsidization, I think as Gary
    has pointed out. But if you keep this definition very narrow, I
    am going to bet that in a few years we are going to have more
    problems because the Postal Service will not have enough
    business to continue doing the essential services they are
    doing.
        Chairman Collins. Thank you. Senator Voinovich, do you have
    any further questions?
        Senator Voinovich. Yes, just following up on your
    questions.
        Chairman Collins. Sure.
        Senator Voinovich. The competition aspect is important to
    me. I will recall that I ran a utility company when I was mayor
    of Cleveland, and it was in pretty bad shape when I started. We
    improved it substantially. Because we existed, we competed with
    an investor-owned company. The fact of the matter is that the
    businesses in our community benefited from that because we
    would offer a price and the competition would offer a price,
    and it kept rates down. You know, it was very good. Of course,
    the investor-owned utility did not like it.
        So I am real concerned about if we are going to be in a
    dynamic area, that they should have the flexibility. The
    question I have is: Do you have in your organization people who
    are going to have a choice between either mailing something or
    putting it in a newspaper?
        Mr. Wientzen. Oh, absolutely, Senator. In fact, the vast
    majority of my members, I would say 98 percent----
        Senator Voinovich. So the fact of the matter is you have
    got a choice of either sitting down with the advertising folks
    at a newspaper and discussing how much is it going to cost you
    to put that advertisement in the newspaper. The alternative you
    have is to mail it and is it more cost effective to do that.
    And in some instances--I do not know if it happens in your
    State, but I get a lot of stuff now that is just delivered at
    the door, advertising mailers, that type of thing, but usually
    from local people.
        Mr. Wientzen. Local people.
        Senator Voinovich. Tell me a little bit about how that
    works.
        Mr. Wientzen. Well, as I say, our business is arithmetic.
    You sit down and you say it is going to cost this much to
    deliver this message, and my tests tell me--and we deal in
    data. My tests tell me that if I do it this way, if I deliver
    it in a newspaper or I deliver it in mail, here are the
    response rates I get and here is the cost. I divide it and I
    say that is within my margin of profit or not. And if it is
    not, I do not do it. If it is, I do as much as I can of it.
        What we are facing is there are new competitions, the
    electronic ones, which, while the response rates are low, the
    costs are low. And they are going to continue to be low. Even
    if they go up, they are going to continue to be much lower. And
    those are being used more and more as the costs for mail go up.
    But, in reality, almost every one of our members look at
    newspapers, magazines, mail, electronic, door-to-door, handing
    out things in malls, they use all of those techniques when they
    are economically viable.
        Now, the other thing I think you need to keep in mind on
    the competition point is that the Postal Service has a lot of
    other burdens to deal with. They have universal service, which,
    I mean, I think some of the households they deliver are not
    exactly profitable ones. We know that. And so they have a
    burden, a competitive burden that they are assuming as a part
    of this monopoly package that they have taken on. Just as your
    utility company, I am sure, did some things that a private
    company would not have done had they not been a public entity.
    And I think we need to think about that, that that does provide
    some balance, and maybe there is a little advantage to the
    public entity that is balanced off by the additional
    obligations that they have.
        Senator Voinovich. Well, Mr. Pruitt indicated that he did
    not like the idea of the Postal Service going out and competing
    for people that put advertising in the newspapers. I think that
    is what you said. But if the Postal Service could do that
    without subsidizing--in other words, that it is an even-steven
    thing--why should they be prevented from going forward and
    doing it?
        Mr. Pruitt. They should not be prevented from offering the
    monopoly direct mail service that our competitors can take
    advantage of and that we take advantage of. We have no
    objection to that. It is an essential public service. But there
    are companies like ADVO, other the direct marketing companies
    and newspaper companies that are in the advertising mail
    business and take advantage of that service.
        What we object to is the Postal Service taking a small
    portion of its institutional or overhead costs and allocating
    it to standard mail, and thereby taking first-class
    institutional costs higher and artificially reducing standard
    mail costs so that direct mail advertising is being cross-
    subsidized by First-Class mail. And as a result, it hurts our
    business because it is not a level playing field. If it were a
    level playing field with no cross-subsidy, we would be fine. We
    feel no problem with open competition. But our business is
    about numbers as well. It is also news and advertising. And if
    we lose advertising, we lose the ability to produce quality
    news.
        Senator Voinovich. Well, would that be the excuse to
    discourage them from doing that? Is the reason why you do not
    want them to do it because if they lose their advertisers, the
    newspapers are going to be hurt in terms of their editorial
    content and so forth?
        Mr. Pruitt. We just want fair pricing, and we feel
    perfectly comfortable going toe to toe with fair allocation of
    costs.
        Senator Voinovich. Your argument is that the First-Class
    mail people are probably subsidizing their ability to compete
    and get these folks to come in and be their customers. Is that
    right?
        Mr. Pruitt. That is right. The Postal Rate Commission
    estimated that 66 percent of institutional costs, that is,
    overhead, is allocated to First-Class mail and 22 percent is
    allocated to standard mail, advertising mail. Yet they are
    virtually identical in volume. It just does not seem fair.
        Senator Voinovich. The thing is, though, in 2006 rates are
    going to go up. From what I am understanding, when rates go up
    it means that you are going to be more likely to look at some
    other alternative sources than the post office.
        What I am trying to say to you, if I am running a business
    and I keep my costs at what they are today, and there is a
    little cross-subsidization but I can go out and pick up some
    more business, why shouldn't I be able to do it?
        Mr. Pruitt. Because it is a monopoly, and if it has pricing
    flexibility to disadvantage other customers as an essential
    public service and disrupt a competitive advertising market,
    that seems an inappropriate role for a monopoly government
    service. If it were in the parcel business, it might be
    different. I do not really have an opinion there. There is
    competition with FedEx and UPS and others. But in a monopoly--
    but in First-Class and standard mail, that is the only game in
    town, as it should be. But then that means making sure that
    their pricing is fair and evenly distributed to all customers.
    Giving a monopoly that pricing power is something we do not
    allow in the private sector, and certainly I do not think we
    want to allow it for a government entity.
        Senator Voinovich. Mr. Wientzen, what is your perspective?
        Mr. Wientzen. The fact is that we do not think newspapers
    are bearing the total overhead of the post office that indeed
    they should or would if you did a direct cost comparison. We do
    not begrudge them that. We do not suggest that it should be
    changed because we do acknowledge that there is some special
    informational value, etc. But we do think there ought to be a
    balance here. There is already an advantage, in effect, in
    their acknowledgment of the special case for newspapers. And my
    suspicion is that we will only handcuff the post office if we
    continue to put barriers in the competitive front.
        I think you are going to have to make a decision and give
    them more competitive strength than they have now.
        Senator Voinovich. Madam Chairman, Mr. Wientzen said
    somebody's ox is going to be gored. [Laughter.]
        Senator Voinovich. We try not to do that.
        Chairman Collins. We are just hoping it will not be ours.
    [Laughter.]
        Mr. Wientzen. I do, too, Senator.
        Chairman Collins. I want to thank Senator Voinovich. He
    always makes such a contribution to the Committee's work, and I
    appreciate his taking the time to be here today.
        I am sure all of us have additional questions. We are,
    however, in the midst of the budget debate, as you know, and so
    I am going to submit any additional questions for the record.
    This hearing record will remain open for 15 days.
        [Prepared statement submitted by Senator Lautenberg for the
    record follows.]

                    PREPARED STATEMENT OF SENATOR LAUTENBERG
        Madam Chairman: Postal reform is an important national issue, but
    most Americans spend little time thinking about it because they take
    postal service and the employees who provide it for granted.
        The importance of the U.S. Postal Service (USPS) to our national
    economy cannot be overstated. I'll give you an example: A 2-year delay
    in postal rate increases has the potential to save publication
    companies like Time Warner approximately $200 million in mailing costs.
        Last year alone, the USPS delivered more than 200 billion pieces of
    mail. So the important role the Postal Service plays in our economy and
    the contribution of its 843,000 dedicated employees should not be
    overlooked or taken for granted.
        Having said that, this is indeed a time of great change for the
    Postal Service. As the President's Commission has observed,
    ``traditional mail streams will likely continue to migrate to cheaper
    Internet-based alternatives,'' even as the Postal Service's delivery
    network expands at a rate of 1.7 million new addresses per year.
        Given the existing regulatory structure, the Postal Service's debt
    is likely to increase every year, making it tougher for the Postal
    Service to achieve its fundamental mission of universal service.
        Accordingly, it is clear that the Postal Service needs to become
    more efficient and more effective in fulfilling its universal service
    goal.
        I support the Commission's recommendation to make the rate-setting
    process less cumbersome and more efficient. Today, the process can take
    upwards of 10 months; the Commission's recommendations would reduce the
    rate-making process to 60 days.
        I am also intrigued by the notion of increasing work-sharing and
    private sector partnerships. I would hope, however, that such
    partnerships are not at the expense of the hardworking men and women of
    the Postal Service. Improving the Postal Service should not mean
    gutting its workforce.
        Today, I look forward to hearing from some of the U.S. companies
    that rely on the delivery system of the Postal Service to operate their
    business. I am also interested to hear from the Postal Service's
    business partners and competitors about the recommendations of the
    President's Commission and other postal reform ideas.
        Thank you, Madam Chairman.

        Senator Collins. We very much appreciate this panel's
    testimony this morning as well as the previous panel. Our next
    hearing is going to be on March 23, and it is going to be a
    joint hearing with the House Government Reform Committee, at
    which the Postmaster General will be testifying. We are going
    to continue our work and hope to introduce a bill in April that
    will incorporate all that we have learned at these hearings.
        So thank you for your testimony this morning, and this
    hearing is now adjourned.
        [Whereupon, at 11:30 a.m., the Committee was adjourned.]

                                A P P E N D I X

                                  ----------

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