[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.
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    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.
---------------------------------------------------------------------------
    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.
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    \1\ The prepared statement of Mr. Ihle appears in the Appendix on 
page 97.
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    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.
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    \1\ The prepared statement of Ms. Dreifuss appears in the Appendix 
on page 107.
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    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Pruitt appears in the Appendix on 
page 169.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Wientzen appears in the Appendix 
on page 183.
---------------------------------------------------------------------------
    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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