[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
  IMPLEMENTATION OF THE POSTAL ACCOUNTABILITY ENHANCEMENT ACT OF 2006

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


                                HEARING

                               before the

                   SUBCOMMITTEE ON FEDERAL WORKFORCE,
                    POSTAL SERVICE, AND THE DISTRICT
                              OF COLUMBIA

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 28, 2008

                               __________

                           Serial No. 110-135

                               __________

Printed for the use of the Committee on Oversight and Government Reform


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                               index.html
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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 HENRY A. WAXMAN, California, Chairman
EDOLPHUS TOWNS, New York             TOM DAVIS, Virginia
PAUL E. KANJORSKI, Pennsylvania      DAN BURTON, Indiana
CAROLYN B. MALONEY, New York         CHRISTOPHER SHAYS, Connecticut
ELIJAH E. CUMMINGS, Maryland         JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio             JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois             MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts       TODD RUSSELL PLATTS, Pennsylvania
WM. LACY CLAY, Missouri              CHRIS CANNON, Utah
DIANE E. WATSON, California          JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts      MICHAEL R. TURNER, Ohio
BRIAN HIGGINS, New York              DARRELL E. ISSA, California
JOHN A. YARMUTH, Kentucky            KENNY MARCHANT, Texas
BRUCE L. BRALEY, Iowa                LYNN A. WESTMORELAND, Georgia
ELEANOR HOLMES NORTON, District of   PATRICK T. McHENRY, North Carolina
    Columbia                         VIRGINIA FOXX, North Carolina
BETTY McCOLLUM, Minnesota            BRIAN P. BILBRAY, California
JIM COOPER, Tennessee                BILL SALI, Idaho
CHRIS VAN HOLLEN, Maryland           JIM JORDAN, Ohio
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
------ ------

                     Phil Schiliro, Chief of Staff
                      Phil Barnett, Staff Director
                       Earley Green, Chief Clerk
               Lawrence Halloran, Minority Staff Director

Subcommittee on Federal Workforce, Postal Service, and the District of 
                                Columbia

                        DANNY K. DAVIS, Illinois
ELEANOR HOLMES NORTON, District of   KENNY MARCHANT, Texas
    Columbia                         JOHN M. McHUGH, New York
JOHN P. SARBANES, Maryland           JOHN L. MICA, Florida
ELIJAH E. CUMMINGS, Maryland         DARRELL E. ISSA, California
DENNIS J. KUCINICH, Ohio, Chairman   JIM JORDAN, Ohio
WM. LACY CLAY, Missouri
STEPHEN F. LYNCH, Massachusetts
                      Tania Shand, Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on February 28, 2008................................     1
Statement of:
    Potter, John E., Postmaster General/CEO, U.S. Postal Service; 
      James H. Bilbray, member, Board of Governors, U.S. Postal 
      Service; and Dan G. Blair, chairman, Postal Regulatory 
      Commission.................................................    58
        Bilbray, James H.........................................    74
        Blair, Dan G.............................................    81
        Potter, John E...........................................    58
    Siggerud, Katherine, Director, Physical Infrastructure 
      Issues, U.S. Government ACcountability Office..............    23
    Wolak, Frank, professor, Department of Economics, Stanford 
      University.................................................     2
Letters, statements, etc., submitted for the record by:
    Bilbray, James H., member, Board of Governors, U.S. Postal 
      Service, prepared statement of.............................    76
    Blair, Dan G., chairman, Postal Regulatory Commission, 
      prepared statement of......................................    83
    Potter, John E., Postmaster General/CEO, U.S. Postal Service, 
      prepared statement of......................................    61
    Siggerud, Katherine, Director, Physical Infrastructure 
      Issues, U.S. Government ACcountability Office, prepared 
      statement of...............................................    26
    Wolak, Frank, professor, Department of Economics, Stanford 
      University, prepared statement of..........................     5

  IMPLEMENTATION OF THE POSTAL ACCOUNTABILITY ENHANCEMENT ACT OF 2006

                              ----------                              


                      THURSDAY, FEBRUARY 28, 2008

                  House of Representatives,
Subcommittee on Federal Workforce, Postal Service, 
                      and the District of Columbia,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 4:21 p.m., in 
room 2154, Rayburn House Office Building, Hon. Danny K. Davis 
(chairman of the subcommittee) presiding.
    Present: Representatives Davis of Illinois and Norton.
    Also present: Representative Waxman.
    Staff present: Lori Hayman, counsel; William Miles, 
professional staff member; LaKeshia Myers, clerk; Ed 
Puccerella, Alex Cooper, and Chris Espinoza, minority 
professional staff members.
    Mr. Davis of Illinois. The subcommittee will come to order. 
Welcome members of the subcommittee, witnesses and all of those 
in attendance.
    Welcome to the Federal Workforce, Postal Service, and the 
District of Columbia Subcommittee hearing on the Implementation 
of the Postal Accountability Enhancement Act of 2006. The 
purpose of this hearing is to examine how the U.S. Postal 
Service, the Postal Board of Governors and the Postal 
Regulatory Commission are implementing the act and its impact 
on the postal community. Hearing no objection, the chairman, 
ranking member and subcommittee members will each have 5 
minutes to make opening statements, and all Members will have 3 
days to submit statements for the record.
    Ranking Member Marchant, members of the subcommittee and 
hearing witnesses, welcome to the subcommittee's hearing on the 
Implementation of the Postal Accountability Enhancement Act of 
2006. Today's hearing will examine the progress of the U.S. 
Postal Service and the Postal Regulatory Commission and the 
implementation of the Postal Accountability Enhancement Act of 
2006.
    The Postal Service performs a valuable national service. In 
2007, it delivered over 212 billion pieces of mail to nearly 
148 million delivery points. Over $80 billion was spent in 
providing these and other Postal Services required as part of 
meeting the Postal Service's universal mandate. To ensure the 
financial soundness of the service and its primary function of 
mail delivery, the Congress passed the Postal Accountability 
and Enhancement Act of 2006. The act, making it the first major 
piece of postal reform legislation since the one that created 
the Postal Service in 1970.
    The act was a direct result of the postal community coming 
together and reaching agreement on work sharing, rate setting, 
price and flexibility, diversity and a number of other 
provisions to ensure that the Postal Service can compete in 
today's marketplace. It is only through an economically vibrant 
Postal Service, one that can respond rapidly and effectively to 
changing markets and conditions, that we can preserve the 
important American ideal of universal service. To ensure 
compliance with the act, the subcommittee has conducted and 
will continue to conduct aggressive postal oversight and in 
particular, monitor the implementation of the Postal 
Accountability and Enhancement Act of 2006.
    Today, I look forward to hearing about the progress the 
Postal Service and the Postal Regulatory Commission have made 
in implementing the changes mandated in the act. We have 
already seen evidence of progress. For example, the Postal 
Regulatory Commission developed and issued final regulations 
for a new ratemaking system on October 29, 2007, nearly 8 
months before the statutory deadline of June 20, 2008, set 
forth by the act. On February 11, 2008, the Postal Regulatory 
Commission filed for its first-ever rate adjustment for market 
dominant products under the new regulations when they announced 
that the price of a first-class stamp will increase by 1 cent 
effective May 12, 2008.
    I thank you and look forward to hearing testimony from 
today's witnesses. We will now hear testimony from the 
witnesses before us.
    Our witness for panel one is Professor Frank A. Wolak, he 
is a professor of economics at Stanford University. His fields 
of research are industrial organization and empirical economic 
analysis. Dr. Wolak specialized in the study of privatization, 
competition and regulation and network industries such as 
electricity, telecommunications, water supply, natural gas and 
postal delivery services. He assisted the Postal Rate 
Commission with numerous rate cases and regulatory issues for 
more than 10 years and has written numerous academic articles 
on postal economics. Thank you very much, Professor Wolak. And 
as customary, witnesses before this committee are sworn in.
    [Witness sworn.]
    Mr. Davis. The record will show that the witness answered 
in the affirmative. Again, let me thank you so much. And we 
will proceed. Your entire statement will be included in the 
record. We would like for you to take 5 minutes and summarize 
that. Of course we have a timer. And when things get yellow, it 
means that you are down to 4 minutes. And then as they turn 
red, we would like for you to kind of wrap up. And thank you so 
much.

 STATEMENT OF FRANK WOLAK, PROFESSOR, DEPARTMENT OF ECONOMICS, 
                      STANFORD UNIVERSITY

    Mr. Wolak. Thank you, Mr. Chairman, and thank you for the 
opportunity to contribute to this hearing. I will focus my 
results on what I believe to be the crucial aspect of the 
successful implementation of the modern system of regulation, 
which is a goal of the Postal Accountability Enhancement Act 
and that is the data collection analysis and dissemination of 
data by the Postal Regulatory Commission. So a modern system of 
regulation that attempts to balance two competing goals, strong 
incentives for the firm to produce in a least-cost manner and 
to protect consumers from prices for market-dominant products 
that reflect the market power of the monopoly provider.
    And the price cap mechanism is one such approach that is 
attempting to cheat both these goals. And this is certainly a--
one of the things, and it is a part of the process, but I 
believe that a major role that can really make this process 
work even better is if the Postal Regulatory Commission fully 
exploits its information gathering powers under the act to 
attain the best possible data from the Postal Service that is 
appropriate for its needs and uses this data to analyze postal 
operations, compute accurate product level cost estimates, 
construct service quality entities and all of these can 
significantly increase the likelihood that the act will 
actually achieve the goals of maintaining higher service 
quality levels and setting economically efficient pricing.
    Another role for the Commission under the act is to 
quantify the cost of the universal service obligation. And this 
is a conceptually challenging task that requires intimate 
knowledge of Postal Service operations. And once again, the 
ability of the Postal Rate Commission to--Regulatory 
Commission--excuse me--to gather data, to analyze cost is an 
important aspect of determining the universal service 
obligation.
    And to make sure that informed decisions can be made about 
what it should look like and how it should adapt to the 
changing competitive conditions that the Postal Service faces. 
I would now like to discuss just a bit in terms of the role of 
the information provision. What information provision can 
really do in a regulatory process is provide what I would like 
to call smart sunshine regulations. And by this I mean the 
collection of data and analysis in a manner and release to the 
public in a manner that really helps parties on an ongoing 
basis monitor the performance of the Postal Service over time 
as well as across processing locations to improve the 
effectiveness of the postal regulatory process and the 
effectiveness of Postal Service operations.
    Another area where this ability to gather data can be 
particularly important is that in previous rate cases, the 
Postal Rate Commission in its previous inter carnation has 
identified significant errors in data used by the Postal 
Service in a number of their mail processing studies. And if 
the Postal Regulatory Commission is able to request data that 
it needs and ensure that it is suitable for the task, it can 
therefore improve the process of cost studies as well as 
improve the accuracy of pricing and other sorts of things.
    A final but important benefit of the Commission's 
regulatory authority is just simply monitoring--the overall 
monitoring of the health of the Postal Service, similar to a 
doctor taking a patient's temperature, pulse and blood pressure 
and other measures of health status. And in the same way that a 
patient's vital signs are used by a doctor to diagnose an 
illness and recommend a remedy, changes in these performance--a 
consistent set of performance measures collected over time can 
be used by the Postal Regulatory Commission in the same way 
that the doctor uses these vital signs to diagnose problems, to 
be proactive and in recommending any sort of cures for problems 
discovered before they develop into significant problems.
    The final point that I would like to discuss is the 
question of the need for a proactive data collection and 
analysis rather than a retroactive. And in particular, the act 
calls for the Postal Service to notify the Commission of any 
intention to raise rates. And allows for a retrospective review 
of these rates if the Postal Regulatory Commission receives 
comments from the party on these rates. The difficulty is is 
that the timing of this process is such that by the time the 
process actually occurs and the rates are reviewed, it would be 
extremely difficult to actually implement the rates that are 
finally reviewed in time for the next submission by the Postal 
Service for a rate increase in a future period.
    So this really emphasizes the importance of a proactive 
process of collecting data, analyzing data, being ready and 
immediately available to act in response to a Postal Service 
rate proposal with the state-of-the-art cost estimates.
    So in conclusion, I just would like to say that I think the 
Postal Accountability Act can really achieve the goals that is 
intended but an important part of achieving those goals is the 
authority of the Postal Regulatory Commission to obtain the 
best possible information and use this in a proactive manner to 
inform both its process as well as the public debate over the 
future of the Postal Service. So thank you very much for the 
opportunity to speak. And I look forward to your questions.

    [The prepared statement of Mr. Wolak follows:]

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    Mr. Davis of Illinois. Thank you very much, Dr. Wolak. 
Again, let me thank you for coming and for being here.
    As you know, total mail volume is declining. That is both 
first class and standard mail. My question is this: Do you 
think that these trends are going to continue? And if they are, 
is there anything that the Postal Service can do? Or can you 
think of the Postal Service doing anything that might turn 
these trends around?
    Mr. Wolak. Well, I think it's--there are certainly in my 
own research, I've identified trends in the--certainly the 
decline in the household for postal delivery services. And it 
certainly seems that on the business side with people receiving 
their bills online as well as paying online, this is certainly 
going to lead to a business decline. But I think the 
opportunity that the act really allows is the ability of the 
Postal Service to, if you like, use its pricing flexibility to 
maximize the amount of revenue it can receive from a given 
class of mail by the flexibility that it has to alter the 
prices.
    So this would call--say that it gets back to again the 
issue of data collection, of it would be useful for the Postal 
Service to really get a much better idea of what the structure 
of its demand looks like as well as what the structure of the 
cost it looks like because typically firms in the, you know, 
private sector competitive sector, the way that you maximize 
their contribution to fixed cost that you achieve is by knowing 
the variable cost of each product that you sell and 
understanding the structure of demand for your product.
    So I think that there is a role for much greater data 
collection and value of data collection analysis also by the 
Postal Service as a way to if you'll like, make the most for 
the volume that it actually serves. You know, sort of the 
decline in volume is, in some ways, I think, is a function of 
the changing nature of the way that we communicate. And it's 
sort of not something we can do a whole lot about.
    Mr. Davis of Illinois. Well, let me ask you, as an expert 
in regulating the energy and telecommunications industries, 
what lessons have been learned there that might be applicable 
or applied to trying to regulate as effectively as possible the 
postal industry?
    Mr. Wolak. Well, I think that was the major theme of my 
testimony is to really try to bring those lessons and the 
important lesson that I've learned from certainly my experience 
with electricity is you know get the data out there, allow 
people to analyze it, to understand it. You know, many eyes 
looking at information, looking at how things are working can 
provide far better regulatory oversight than a very insular and 
closed process. The other is, I think, getting the information 
out there can help to make some pretty politically difficult 
decisions to move forward, to make the, you know, Postal 
Service financially viable into the future by informing the 
process with good analysis. I guess the way that I would 
characterize it is is having the data and performing analysis 
constrains the amount that people can theorize without any 
basis.
    And therefore, reduces the amount of, if you like, you 
know, idle talk and focuses in on what really is the sort of 
the tradeoffs that must be faced in moving forward because you 
can say, this bit of analysis rules out that as a possible 
explanation. Let's really get down to what is consistent with 
the work that we've done. So I think it's really the 
quantitative--gathering the data, analyzing the data and, you 
know, putting it into the public discussion is, I think, very 
useful.
    Mr. Davis of Illinois. Accurately forecasting or trying to 
know and project what the volume of mail is going to be is 
obviously essential to the Postal Service in order for it to 
plan well. How well do you think the Postal Service is doing in 
both its short-term planning as well as long term?
    Mr. Wolak. I think it's an extremely difficult task. I 
guess the thing that I would emphasize is that it may be worth 
spending some money to engage in what most businesses do, which 
is essentially marketing research in the sense of, who are my 
customers, how much they spend, why do they spend what they 
spend, and analyzing you know that kind of information. I know 
that the Postal Service collects what's called consumer diary 
survey, which is a diary of essentially households. But there's 
not a similar survey for the business sector, which is 
certainly, I think, a very rapidly changing sector in terms of 
the types of postal products that its using.
    So having say an ongoing probability sample of those sorts 
of customers, to understand why they're moving where they're 
moving I think can really help the Postal Service get a much 
better handle on where their volume is going. I think--you 
know, currently, I guess what I'd say is given the data that 
they do collect, I'd say they do a very good job. But I think 
getting a bit more into you know customer level surveys that 
are representative of the class of customers that you face in 
truly trying to understand the trends for specific customers 
and drivers for specific customers I think can really help to 
improve those sorts of forecasts.
    Mr. Davis of Illinois. Almost every month it appears as 
though there's some additional electronic diversion of 
possibility relative to technology just simply burgeoning, and 
it seems unlimited. Do you have any forecast or projections as 
to whether or not we're going to continue to see an increase in 
electronic communication? Or is there going to be any leveling 
off so that we might continue to have the same level of need 
that exists for the mail delivery that we see coming from the 
Postal Service?
    Mr. Wolak. Well, certainly in the work that I've done at 
least for the household sector, which is all I've managed to 
have the data for. I'm hoping the Postal Service will collect 
from the business sector to analyze that. But for the household 
sector, it certainly seems that the good news is is everybody 
has high speed Internet access and essentially there therefore 
is sort of a leveling off in terms of the impact of the growing 
penetration of electronic communication.
    So in that sense I think there is evidence at least for 
that it's leveling off. If you like sort of the major--it seems 
electronic diversion from the household sector occurred 
probably about when the Internet was really ramping up. But now 
almost everyone who is using the Internet is using the 
Internet. And, but the unfortunate thing is that the sort of 
intensive users of the Postal Service and probably the most in-
elastic demanders at the Postal Service at the household level 
are certainly--unfortunately the older people. And they're sort 
of--they're going away. And the less intensive users and more 
flexible users are growing. So you know, that's another factor 
that I think is unfortunately contributing.
    Mr. Davis of Illinois. Thank you very much. Representative 
Norton.
    Ms. Norton. Mr. Chairman, as you may remember, I'm 
fascinated by this model that at least in this country, that I 
see is unique. And I appreciate very much Mr. Wolak's testimony 
and particularly when it began by looking at how private sector 
firms would operate, and then moving on to what tools might 
help the Postal Service. I'm really--particularly after sitting 
through hearings and being struck by conundrum after conundrum 
in what is being required of the Postal Service. I begin to 
wonder about this model itself.
    I notice you talked about vital signs. Well, you know, 
vital signs assumed the organs that are in this body belong in 
this body and are supposed to work together. So you know, you 
get sick and you put some medicine in it and they begin to work 
like they're supposed to work. But what you've got here is a 
model with caps on it and that's appropriate because the Postal 
Service still performs a public function, it has to deliver and 
deal with mail in the far corners where you wouldn't expect the 
private sector to earn a profit. On the other hand, we have 
said, but you're supposed to act like a private sector company, 
you know, make some money, take care of yourself.
    And you indicate that they're certainly going to have a 
hard time doing that if they don't have something close to 
perfect data and that they'd have to get that data in a fairly 
refined way, using technology and almost a quick response or 
proactive way.
    Well, my question is given the coexistence of a private 
sector and a public sector model in the same body, suppose you 
did have perfect data and you were dealing only with where--I 
think you call them noncap issues. Noncap issues, you know, 
like express mail. I guess priority mail. There are not a lot 
of those. And there's heavy competition from the private 
sector, which consists often wholly of that kind of mail.
    And I am very pleased that the post office has been able to 
break into it at all. But of course, part of it is by the same 
way anybody would operate in the private sector, underpricing 
them, trying to improve on it. You know, even for commercial 
magazines, they are capped in terms of what you can charge. I 
mean, the magazines themselves earn a lot of money, leave aside 
nonprofits. I'm talking about the Time Magazines and whoever it 
is that uses the mail. But of course, you have to do that 
because otherwise they'll move someplace else in order to send 
their magazines out.
    I just have to ask you, and you know, let's assume that we 
get some perfect data. How close will that come to solving this 
conundrum so that perfect data--I mean, that's my model, I'm 
assuming it. I recognize how difficult it is--will somehow make 
it easier for them to set--to do pricing according to their 
market; of course, pricing according to the market brings other 
problems with it, like competing in the market. And whether you 
know of any model in the world where the public and private 
components are combined that we might look more closely at.
    Finally, just let me give the model--push private sector 
pricing into models that any fool would know they won't work. 
For example, and the post office has done better than Amtrak. 
The private sector turns over Amtrak to the Federal Government 
in 1970 and said, we surely can't deal with this. This doesn't 
fit our pricing model. We go out of business. Here, government, 
you take it. And this administration has trying to treat Amtrak 
as if, once again, like any private railroad, except if you 
look at the world at large, there is no such thing as a 
railroad which is not subsidized heavily by its government. And 
so you have all kinds of extraordinary rail travel throughout 
Europe and Asia. And we're sitting here with Amtrak not having 
enough money even to take care of its security problems.
    So my question goes you know, do we have any model to work 
from if we have perfect data? How much or do you think this 
would solve the problem given the noncap, small, maybe 10 
percent of the business is noncap that has to compete with 
highly competitive, highly efficient international corporations 
that do that business all over the world. I would just like to 
hear you just opine on this issue or whether we're about to 
drive the post office into the ground the way we have Amtrak.
    Mr. Wolak. Well, I think what you're really referring to, 
at least I'll recast it as is that it's really the USO--
universal service obligation, I would classify that as sort of 
the government aspect and in the private. And I think that is 
really a major issue going forward for the Postal Service and 
the Postal Regulatory Commission. And even in a world with 
perfect data, there are, as I note in my testimony, some really 
difficult and conceptual issues in terms of thinking about is, 
you know, I think your point exactly.
    Many of the rail lines that exist in Europe exist purely I 
think for USO reasons, in the sense that there is a desire of 
the government to say, we should provide transportation even if 
its uneconomic to these areas because we think, you know, there 
is a public benefit aspect to it. And that's the essential 
feature of the universal service obligation. We define an 
obligation that really doesn't make economic sense but it 
makes, you know, greater sense in the greater good sense. And 
that really is the issue. And that exists, I think, to a lesser 
extent in other network industries. And at least to my mind 
makes them very interesting.
    In the telecom sector, we have the universal service 
obligation that we want to provide everyone with access to 
telephone service. But the trouble is telephone service has 
become so cheap that it's not nearly as hard to do that, and 
similarly with electricity. But we have a, you know, to provide 
universal access to people. The Postal Service presents a more 
challenging, you know, universal service obligation just 
because of how it's been defined. As I put a stamp on that 
letter and that stamp delivers it to anywhere in the United 
States. And you know, regardless if its across the street or in 
the Grand Canyon, and you know, that's a very challenging 
process that makes the determination of that. But if you like, 
you give me the ideal data, I will give you the ideal outcome. 
The ideal outcome is we take the ideal data and we figure out 
what that cost is and we recover that cost to make sure that 
the universal service obligation is met and then we say OK, 
Postal Service subject just to the fact that you have to make 
some contribution to fixed cost from the competitive products, 
we give you complete flexibility in, you know, how you price 
those to compete against the vigorous competition that you 
face.
    But it is a--I definitely think a very major challenge to 
figure out first just what is that universal service obligation 
and the second is, what is the cost of it? And I think that's a 
very important discussion that needs to take place, given that, 
you know, the discussion I had with the chairman of the 
changing role of interpersonal communications that results from 
the fact that we have the Internet and these sorts of things so 
we may want to revisit what the USO obligation really is. But 
that's something for----
    Ms. Norton. I just don't think there's any chance we're 
going to revisit that obligation. The one thing that happens in 
this place when you talk about revisiting that obligation is 
you get--there's one issue that gets you a universal vote with 
no dissents. So that's the conundrum of which I speak. And I 
just think we have to reinvent the model. I must say this whole 
notion of flexibility price, there is no such thing as price 
flexibility. Private sector has no flexibility. You know, it is 
more discipline. You might not call it a cap. But if it wants 
to stay in business, it's got to compete with other people who 
want to do the business more efficiently and at less cost. They 
have very little flexibility.
    And so they do it--in all manner of ways. So we gave them 
the quote same flexibility. You know, here's your flexibility. 
Go and compete with, you know, express mail or go and compete 
with the people who invented this whole new way of doing what 
you do.
    On management, the Postal Service itself, of course, is 
unionized. We approve of that. Management in the Postal Service 
is--I'm not sure what the nature of the regulation there is. 
But these are people who operate as managers. There might be 
some problems with pay-for performance, although I do 
understand they do some of that. But in terms of efficiency or 
good managers, is there any reason to believe that the Postal 
Service couldn't attract the same kind of managers that Federal 
Express or some of those people attract? We keep them from 
getting those managers where there may be more flexibility than 
in a unionized work force.
    Mr. Wolak. Well, there certainly is far greater flexibility 
to pay-for performance in the private sector than in the Postal 
Service. And that certainly I think has, you know, both 
positive and negatives.
    Ms. Norton. Yeah, well we've seen the negatives. And that's 
not what this committee--but again, is that what--is the kind 
of management we have in the Postal Service that much different 
from the management of similar noncapped services provided in 
the private sector?
    Mr. Wolak. Well, I certainly think your point of the--
certainly one way that a number of the other firms perhaps are 
less encumbered is the degree of the unionization. And I don't 
want to, you know, I don't want to comment to anything on that, 
so that can make it more difficult for the managers to----
    Ms. Norton. I don't really think that's our problem. What 
happened was Federal Express invented a whole new way of 
rapidly dealing with the mail. Yes, they're not unionized. But 
in order to remain competitive with the Postal Service, for 
that matter, they've got to pay very well. The way in which 
you--the challenge for the Postal Service is a challenge not 
unlike the challenge that American Express had. OK, invent a 
model, a new model that fits this universe. The universe they 
found was a universe in which there was not express mail and 
which you couldn't do things overnight, in which you couldn't 
shift things that were perishable quickly, so they invented a 
model that fit them. What I'm suggesting, this model is a 
jerry-built model that----
    Mr. Wolak. Oh, no, no, no.
    Ms. Norton [continuing]. Seemed to satisfy neither side but 
the moment we want to change the universal model, people scream 
and obviously doesn't satisfy the competitive side because 
they're competing with people for who they must underprice or 
become vastly more efficient than in order to even stay in the 
game. So I don't even see those two coexisting in the same 
universe.
    Mr. Wolak. I guess I would say that as someone who has 
visited a number of postal sorting facilities, I mean, they're 
very modernization operations, they have state-of-the-art 
equipment, I think the are using modern management practices as 
much as possible. But I guess the--you know, what I would say 
is that there's--you know, the simple way to describe it I 
think would be is there's looking at things in terms of how 
much labor do I put in and how many pieces do I get sorted? But 
when you are operating in a market context, it's more of how 
many dollars of labor--or how many dollars do I spend on this? 
How much, therefore, sales do I get at the other end? And how 
much contribution am I getting to pay for my fixed costs? And 
it's sort of a--in the market environment, that's really what 
you are interested in.
    So even if suppose it's very costly for you to do 
something, if what you are able to sell it for is something 
very high, that's something that in a market environment you 
are going to do, and I think that's the transition that is 
taking place under the act and is hopefully being, you know, 
taking place, is a recognition of you are competing in the 
marketplace, that it really is how are you getting contribution 
to fixed cost rather than just simply improving the efficiency 
of postal operations in the sense of, you know, amount of labor 
hours, amount of pieces sorted. And if the pieces you are 
sorting aren't the ones and doing a good job of sorting aren't 
the ones that are really high value to you and you are probably 
not as good as sorting the ones that are extremely high 
valuable to you, then you would probably want to get more of 
those. And that's, I think, the new model. And I think that's 
where you know understanding how you're making your money is 
really the change in the world. And that's just not something 
in a monopoly environment that you really need to be concerned 
with because the monopoly environment guarantees you 
essentially cost recovery whereas the competitive environment 
doesn't.
    And so you really have to be much more cognizant of that 
and the price gap mechanism in some sense is trying to say, 
look, you really have no ability to move your prices. They will 
simply increase at this CPI. So, you know, try your best to 
figure out the best place to try to sell your products to you 
know scale down your operations to do that.
    Ms. Norton. Thank you, Mr. Chairman. I thank you, Mr. 
Wolak. Mr. Chairman, I believe that this perfect data might 
well tell the Postal Service to raise prices in the noncap 
areas. If you want to deal with their revenue problems which 
are immense, and look what that would mean in competing with 
Federal Express and the rest of them. That's why I think this 
is a--we need a whole new model. And I accept the private 
sector model and I accept the universal service model and I 
don't know what to do about it. Thank you very much.
    Mr. Wolak. Thank you.
    Mr. Davis of Illinois. Thank you very much, Representative 
Norton. Thank you, Mr. Wolak. We appreciate you coming.
    Mr. Wolak. Thanks.
    Mr. Davis of Illinois. We will now move to panel 2. Ms. 
Katherine Siggerud is a Director in the Physical Infrastructure 
Issues team at the Government Accountability Office [GAO]. She 
has directed GAO's work on postal issues for several years, 
including recent reports on delivery standards and performance, 
process and network realignment, contract and policies, 
semipostal stamps and biological threats. Thank you very much, 
Ms. Siggerud. It is our custom to swear in all the witnesses.
    [Witness sworn.]
    Mr. Davis of Illinois. The record will indicate that the 
witness answered in the affirmative. We thank you very much for 
coming and for being here. Your full statement is in the 
record. If you would take 5 minutes and summarize for us, we'd 
appreciate that. Thank you very much.

      STATEMENT OF KATHERINE SIGGERUD, DIRECTOR, PHYSICAL 
  INFRASTRUCTURE ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Ms. Siggerud. Chairman Davis, Ms. Norton, members of the 
subcommittee, thank you for your invitation to testify at 
today's hearing concerning the implementation of the Postal 
Accountability and Enhancement Act. When I testified about a 
year ago before this subcommittee, I said that the Congress's 
efforts to pass comprehensive wholesome reform provided 
opportunities to address many of the Postal Service's 
challenges. We are now at the point where we can begin to 
assess the act's implementation. Today I will focus on first, 
actions to date resulting from the act including how they 
affected the service's 2007 financial condition, and second, 
continuing challenges in areas for oversight. My full statement 
also covers how studies required under the law can contribute 
to future postal reform decisions. My statement today is often 
a positive one, as we are encouraged by the early steps that 
the service, the PRC, mailers and the stakeholders have taken. 
They have found new ways to engage in constructive dialog and 
in several cases reach consensus on how best to proceed. These 
actions, which contrast sharply with the former adversarial 
ratemaking process hold promise for a future progress across a 
broad range of postal reform issues. Such collaboration and 
progress will remain necessary as the service and the mailing 
industry transform themselves in response to the rapidly 
changing marketplace and continue to implement these reforms.
    Turning now to implementation of the act. The service, the 
PRC and other postal stakeholders have worked cooperatively to 
date to meet their responsibilities in fulfilling its 
requirements. Key actions include establishing first, early 
regulations for a new rate-setting system which influence the 
service's decision to pursue its proposed rate increase under 
the new system. Second, a mechanism that requires prefunding of 
retiree health insurance premiums, thus distributing this 
burden between current and future rate payers. And third, 
modern service standards for the service's products covered by 
the postal monopoly.
    These were the result of a collaborative effort and were 
the most sweeping update in years. In addition, several reports 
required under the act have been issued and the PRC has 
solicited comments and held meetings to simulate dialog on the 
complex issues related to the new regulatory framework. In 
terms of impact, the service reported a $5.1 billion net loss 
for 2007. Other aspects of the act, such as retiree health 
obligations directly affected these results. Costs such as 
wages, fuel and adding 1.8 million new delivery points. This 
left the service with a total debt of $4.2 billion. With regard 
to challenges and areas for oversight, we have in the past 
called attention to basic challenges facing the services, such 
as changing mail volumes and increasing delivery points. And 
these remain relevant today. They are exacerbated by our 
current economic environment. A slowing economy, recent rate 
increases and other factors negatively affected the postal 
service's financial performance in the first quarter of 2008. 
Its mail volumes and revenues, particularly the key products of 
first class and standard mail, were lower than planned.
    The service was able to respond by cutting costs. Although 
the service anticipates additional revenues from its proposed 
rate increase, additional cost reductions beyond those that had 
been planned will be needed to meet its financial projections 
for 2008. We have also followed the service's challenges and 
improving its efficiency. This includes realigning its 
processing and other infrastructure.
    The act requires the service to develop a plan by June for 
rationalizing its spent work and removing excess processing 
capacity. This provides the service the opportunity to make its 
case for continued action and address concerns and 
recommendations raised by the PRC, the postal IG and GAO. The 
service also plans several new technology investments that have 
the potential to increase efficiency such as a system to sort 
flat shaped mail in the transition to the intelligent mail bar 
code. There is also the significant challenge of measuring the 
reporting on the quality of service for most postal products. 
The Postal Service must, in consultation with the PRC, submit a 
plan to Congress by June for how it will meet its newly 
established standards including performance goals and must then 
begin to report on performance. The service and its 
stakeholders have made good progress to date and our work 
suggests that. With regard to reporting, key principles of 
completeness, availability and usefulness should guide future 
actions and that this should continue to be a collaborative 
effort.
    In conclusion, Mr. Chairman, given these challenges, key 
areas for continued oversight include how mailers and mail 
volume have and will respond to rate changes, the effects of 
changes in mail volume and revenue on the service's financial 
condition, efforts to control cost by modernizing and 
optimizing the Postal Service's infrastructure and work force, 
the transition to new automation and mail tracking systems and 
the level of transparency and measuring and reporting on 
delivery performance. This completes my statement. I'm happy to 
answer any questions you may have.
    [The prepared statement of Ms. Siggerud follows:]
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    Mr. Davis of Illinois. Thank you very much, Ms. Siggerud.
    Let me ask you how well would you say or what is your 
impression of how well the Postal Service and the Postal 
Regulatory Commission have been implementing the Postal 
Accountability and Enhancement Act?
    Ms. Siggerud. Mr. Chairman, as I think you can tell from my 
statement, we have a generally good outlook on those issues. 
Just a couple examples, developing these new regulations was 
very complex, particularly with regard to rate setting and the 
efforts that were done to modernize the standards. Both of 
those were carried out in the collaborative and open fashion. 
And in the case of the rate setting framework, the deadline was 
met ahead of time, allowing the Postal Service to have a new 
rate proposal under the new system.
    The key deadlines have been met not only by the Postal 
Service and the PRC but by several other key stakeholders that 
were also required to report to the Congress in the last year. 
I think there are a couple of areas for oversight that I 
mentioned in my statement, including with regard to looking at 
mail volumes and revenues and clearing this economic situation 
that we are in will be a concern over the coming year.
    Mr. Davis of Illinois. We continue to hear rumbles of 
economic slowdown, recession, some places depression, shaky 
outlook for the economic future. How well would you say that 
the Postal Service is positioned to handle a slowdown or a 
downturn in terms of the movement of communication devices.
    Ms. Siggerud. That's an excellent question. I think it is 
worth thinking about that question in a long and a short-term 
point of view. From the short-term point of view, clearly the 
Postal Service is suffering from lower than expected volumes. 
This is a direct result of problems in the financial services 
sector and other sectors as related to housing and credit. It 
is really impossible to know how long this will last.
    Volumes are also affected by two other longer term issues, 
one being the electronic diversion issue. There are also the 
effects of last summer's rate increase in which the Postal 
Service gave incentives to mailers to prepare mail in a way 
that is cost effective for the Postal Service. Mailers are 
responding by changing the nature and the volume of their 
mailings.
    The Postal Service also faces some significant cost issues. 
Fuel prices come to mind based on recent news and the data from 
last year for the Postal Service. There are also a core list of 
employees that must be made under the collective bargaining 
agreements. Short-term the Postal Service will be able to 
reduce its work hours since they are partly driven by volume, 
but that is not going to be a successful long-term strategy in 
terms of responding to volume decreases.
    The good news is that in the first quarter of this year we 
began to see these issues happen. The Postal Service was able 
to cut costs, reduce work hours and also provide record service 
in the portion of the first class mail that it measures and 
reports. So there are both short-term solutions, long-term 
solutions. Short-term solutions involve work hours, looking at 
overtime, looking at transportation costs, as well as the fact 
that there will be new revenue in May.
    Long term what the Postal Service needs to do is use the 
flexibility given to it in the act to develop and refine its 
products and services to attract increased volume and revenue. 
It also needs to improve productivity and efficiency. The flat 
sorting machines that are coming into place have some promise 
in that area. The data that will come out of the implementation 
of the intelligent mail bar code should also help the Postal 
Service to improve its management.
    And finally, it does have the opportunity to try to remove 
some excess capacity from its networks in the long run.
    Mr. Davis of Illinois. And so you think that there is room 
for increased proficiency?
    Ms. Siggerud. Absolutely, I'm sure the Postmaster General 
would agree with me on that issue. And that is part of the 
reason the Postal Service is going with investments in 
automation.
    Mr. Davis of Illinois. Thank you very much.
    Representative Norton.
    Ms. Norton. Thank you very much for your testimony. Could I 
ask you how you think--you say in your testimony that the 
ongoing economic problems of the Postal Service are exacerbated 
by, you say, a projected $600 million net loss for 2008. How do 
you expect the Postal Service to meet the problems caused by 
this loss or to carry this loss?
    Ms. Siggerud. Well, the Postal Service did project a loss. 
It is not a surprise to anyone. The economic situation may make 
the situation worse. The Postal Service does have a variety of 
short-term cost cutting efforts that may help to deal with 
that. The Postal Service is also allowed to borrow money, and 
in fact it will be increasing its debt at the end of the year 
as well. But going back to my response to the chairman, I think 
using the flexibility----
    Ms. Norton. Increase its debt?
    Ms. Siggerud. Yes.
    Ms. Norton. In order to--what kind of bond rating does it 
have?
    Ms. Siggerud. I do not know the bond rating on that, Ms. 
Norton. The Postal Service does have a cap on the total amount 
of debt that it can carry as well as the amount it can accrue 
each year.
    Ms. Norton. But you are saying increase debt in order to 
deal with loss?
    Ms. Siggerud. It also was using debt to make capital 
investments.
    Ms. Norton. Yeah. It carries a loss over from year to year. 
How much--are these losses annual, have they been of this 
magnitude for some years now?
    Ms. Siggerud. The losses actually are largely due at this 
point to the fact that the Postal Service is complying with the 
Postal Accountability and Enhancement Act's requirement to pay 
into retiree benefit funds. That will continue to be true for 9 
years, 8 or 9 years following this year. That will continue to 
be a heavy lift for the Postal Service. It does have plans, 
however, to try to continue to grow revenue and reduce cost in 
order to deal with that situation.
    Ms. Norton. You mentioned an obvious terrible problem that 
any business like the Postal Service has, and that is dealing 
with fuel costs.
    Ms. Siggerud. Right.
    Ms. Norton. Is the Postal Service as it purchases new 
vehicles, which it must have to do very often, converting to 
hybrid vehicles or the like?
    Ms. Siggerud. This is an interesting question. We did some 
work on this very question last year and reported out in 
February the Postal Service has a number of different 
approaches to try to save fuel. But with regard to the 
vehicles, under the previous Energy Act, it was required to 
primarily purchase alternative fuel or flex fuel vehicles.
    My understanding is under newer legislation the Postal 
Service is able to go in the direction of purchasing hybrids, 
which it expects to have better payoff in terms of fuel 
efficiency.
    Ms. Norton. What alternative fuel, what kinds of--biofuel?
    Ms. Siggerud. The flex fuel vehicles of course typically 
run on ethanol when they are not running on gasoline.
    Ms. Norton. So you're saying that--I guess you're saying 
the new Energy Act we passed just a few months ago enables them 
to use any kind of alternative fuel or alternative----
    Ms. Siggerud. Ms. Norton, I would like to provide the 
details for the record, but as I understand it, all the entire 
Federal fleet, including the Postal Service, has more 
flexibility under that act to look for the most fuel efficient 
vehicles that it can use rather than being required to purchase 
flex fuel vehicles.
    Ms. Norton. Well, the obvious thing you can do, without 
having to do a whole lot, certainly would be to--I have great 
problems with ethanol, when you consider what's happening to 
the price of grain. I understand where that comes from because 
there are parts of the country for which that is important.
    Ms. Siggerud. Yes.
    Ms. Norton. But I think I would appreciate your providing 
us, and if you would provide me as well, with this information.
    Ms. Siggerud. Absolutely.
    Ms. Norton. As an obvious way to cut costs. We are sure it 
will continue to rise. Thank you, Mr. Chairman.
    Mr. Davis of Illinois. Thank you very much.
    While we are setting up for our third panel, which will 
consist of Mr. John Potter, the postmaster general; the 
Honorable James Bilbray, member of the Board of Governors of 
the U.S. Postal Service; and of course Mr. Dan Blair, chairman, 
Postal Regulatory Commission, confirmed on December 9, 2006 by 
the U.S. Senate and designated chairman by President George W. 
Bush on December 15, 2006.
    Gentleman, as you know, it is the custom and tradition to 
swear witnesses in so if you would stand and raise your right 
hands.
    [Witnesses sworn.]
    Mr. Davis of Illinois. The record will show that the 
witnesses answered in the affirmative.
    Gentlemen, we thank you all so much for being here. And of 
course it is indeed a pleasure to see you, Mr. Bilbray, again 
and welcome. All of your statements are included in the record. 
If you would take 5 minutes and summarize your statements, we 
would appreciate that. We begin with you, Mr. Postmaster 
General, Mr. Potter.

  STATEMENTS OF JOHN E. POTTER, POSTMASTER GENERAL/CEO, U.S. 
 POSTAL SERVICE; JAMES H. BILBRAY, MEMBER, BOARD OF GOVERNORS, 
    U.S. POSTAL SERVICE; AND DAN G. BLAIR, CHAIRMAN, POSTAL 
                     REGULATORY COMMISSION

                  STATEMENT OF JOHN E. POTTER

    Mr. Potter. Thank you, Chairman Davis, and good afternoon. 
I am pleased to report to you today on the Postal Service's 
first year of operation under the Postal Act of 2006. The new 
law creates welcome pricing flexibilities that can and will 
benefit the Nation by keeping now a welcome, efficient and 
effective method to link every household and every business in 
America.
    A financially healthy mailing industry based on a 
financially sound Postal Service supports local, regional and 
national economies. But with a growing network that reaches 148 
million homes and businesses every day, the mail business is 
extremely sensitive to fluctuations in the economy, and to 
changes in the consumer preference of hard copy or electronic 
communication. The new law, for all its benefits, does not 
exempt the Postal Service from these facts.
    Compounding the diversion of some mail to the Internet, we 
have been hard hit by today's underperforming economy. The 
financial credit and housing sectors are key drivers of the 
mail business. The recessionary trend in these industries was 
quickly reflected in declines in mail volumes and revenues. By 
the end of the first quarter mail volume was down 3 percent 
from a year earlier. First class mail fell by almost 1 billion 
pieces, or 4 percent. Standard mail fell by some 750 million 
pieces, 2.6 percent. Less mail volume means higher costs per 
piece of mail handled. Revenue was $525 million below plan and 
net income fell short by $83 million. We see no improvements 
this quarter.
    Facing this extremely difficult situation, the men and 
women of the U.S. Postal Service have stepped up. They brought 
down spending, narrowing the huge revenue gap created by the 
sudden steep volume decline. Faced with a possible $2 billion 
shortfall this year, we are cutting $1 billion in costs on top 
of the 1 billion that was already built into our plan, but not 
at the cost of service. Despite quarter one's challenges, our 
people delivered the strongest service in our history. On-time 
delivery of next day first class mail reached 96 percent, our 
2-day mail rose to 93 percent, an all-time high. Our 3-day 
matched our all-time high of 88 percent. We saw similar gains 
with remittance mail, payments to payments and credit card 
companies. Performance here is measured in hours, not days. And 
we cut 2 hours from payment processing and delivery between 
April and October, an all-time best.
    We have a lot going for us the third straight time. We have 
been rated the most trusted government agency and one of the 10 
most trusted organizations in the Nation. Customer satisfaction 
remains high at 92 percent. Americans view the Postal Service 
more favorably than any other government agency and have done 
so for the past 10 years. Our brand is sound and our business 
is well positioned to rebound with the economy, but we cannot 
simply wait for a recovery, we must also pursue aggressive 
revenue growth.
    On May 12th, we are addressing prices for our market 
dominant products, first class mail, standard mail, periodicals 
and package services. Under the law's new simplified pricing 
regulations and conforming to the CPI price cap, this can 
produce $735 million in additional revenue this year. To close 
the remaining gap, we are pursuing growth opportunities to a 
new and innovative price structure for competitive products. We 
will make these products more attractive through incentives and 
enhanced features. We will be announcing the prices shortly for 
a May 12th implementation.
    Our people are ready. They understand the challenge and are 
ready to take up every new tool the law provided us. I am 
particularly gratified by the support of our unions in this 
area. With their help our employees are aggressively talking up 
and selling our products. They are making sure customers know 
how the mail can work for them. Every employee in the Postal 
Service understands that growth is necessary to produce the 
revenue and to support our mission of serving America, and 
every employee is part of that effort.
    Over the past year other agencies in the mailing community 
have also been a part of the focused efforts to implement the 
requirements of the new law. Together our progress has been 
significant. We have adjusted workers' compensation procedures. 
We reported on the issue of commercial best practices in our 
purchasing regulations. We revised our policies on handling 
data in connection with legal and judicial activities. The 
Office of the Inspector General reported on the progress of our 
employee safety program. We created a plan for implementation 
of international customs requirements throughout our system. We 
developed and submitted our initial mail classification 
schedule to the Postal Regulatory Commission.
    A report by the Office of Inspector General examined our 
assessment and appeals process for nonprofit mailings. The 
Treasury Department submitted its recommendations on separate 
accounting for our market dominant and competitive products. 
The Government Accountability Office published an internal 
report on the Postal Service and mailing industry recycling. We 
submitted the initial version of our annual compliance report 
to the PRC. We have made steady progress in compliance with the 
Sarbanes-Oxley Act requirements in the law, including the first 
quarterly filing of our 10-Q report.
    A study by the Federal Trade Commission found that the 
Postal Service's status as a government agency provides us with 
a net competitive disadvantage versus private carriers. With 
the cooperation feedback and creative ideas of every part of 
the mailing industry, we created modern service standards for 
our market dominant products. I appreciate their help. With 
their input and consultation with the Postal Regulatory 
Commission, we have also begun work on new service measurement 
systems. Perhaps, most importantly, PRC issued its new price 
regulations well ahead of schedule.
    I want to thank Chairman Dan Blair, his fellow 
commissioners and their staff for moving so quickly on this 
very, very important issue. All of these important tasks 
required community-wide cooperation. I'm grateful for 
everyone's assistance.
    Beyond the specific requirements of the law, we are also 
changing how we speak about our business so it is clear to our 
customers. We no longer talk about rates, we talk about prices. 
We no longer talk about negotiated service agreements, we are 
talking about contract pricing, and referring to market 
dominant products as mailing services and to competitive 
products as shipping services. We are entering a period of 
profound change. Through the new postal law you have provided 
us with a new ability to navigate that change.
    As we begin this journey, I am grateful for your continual 
support of a sound and financially independent Postal Service 
that can serve our Nation long into the future.
    I will be pleased to answer any questions. Thank you, Mr. 
Chairman.
    [The prepared statement of Mr. Potter follows:]
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    Mr. Davis of Illinois. Thank you very much, Mr. Potter. We 
will proceed to Mr. Bilbray.

                 STATEMENT OF JAMES H. BILBRAY

    Mr. Bilbray. Thank you, Mr. Chairman. Please don't confuse 
me with my crazy cousin Brian, too. He went bad somewhere along 
the line and became a Republican.
    Anyway, Chairman Davis, Ranking Member Marchant, not here, 
but members of the committee, thank you for inviting me here 
today. This is my first opportunity to testify before you as 
member of the Board. I have only been on--this is the beginning 
of my second year.
    I want you to know that I am honored and pleased that my 
fellow Governors have asked me to represent the Board today, 
and I take this responsibility very seriously. I am fortunate 
to serve on a strong board with committed members who have a 
wide range of experience in business and public service. I am 
fortunate that we have an excellent leadership team.
    The record speaks for itself, postal employees are 
providing record levels of service to the American public. Our 
employees and leadership team have risen to the occasion during 
particularly a challenging time. As we know, mail volumes have 
gone down and fluctuated, consumer habits and pricing is 
changing, and weather conditions have plagued much of the 
country, affecting mail service. Each of our labor contracts 
had to be renegotiated and worked on successfully.
    Against this backdrop the most significant change in our 
35-year plus history is the passage of the Postal 
Accountability and Enhancement Act of 2006.
    Last year the Postal Service, the Postal Regulatory 
Commission, and a myriad of other stakeholders and mailers 
immediately went to work to implement the new laws provisions. 
Under the guidance of PRC Chairman Dan Blair and Postmaster 
General Jack Potter, we have tackled these challenges 
aggressively. As a result, and in some cases ahead of schedule, 
timetables in the law have been met.
    Today some 14 months later we can collectively be proud of 
our progress. We are pleased to report to Congress to date we 
have detected no need for changes in the new law. And so far 
parties have the tools necessary to implement the law as 
Congress intended.
    I would like to recognize the PRC for its hard work in 
enabling this to happen. The Postal Act in 2006 changed 35 
years of history by creating a new pricing model. The Governors 
had an option to file one last rate case under the regulations 
used since 1971. However, under Dan Blair's leadership, the PRC 
accelerated the finalizing of their pricing rules which allowed 
the Governors to choose to move forward under the new pricing 
rules. This was an important vote of confidence in the new 
system.
    Across the spectrum the Postal Service is working to 
deliver for the future. We are engaged in a broad effort to 
implement the wide range of requirements in the new law and 
have spent much of the first year meeting with the PRC, our 
Federal agency unions and mailers.
    Congress requested two updates from the Board on different 
aspects of diversity within the postal system. The first dealt 
with the extent that women and minorities are represented in 
supervisory and management positions. The second centered upon 
the number and value of contracts and some contracts the Postal 
Service has with women, minorities and small businesses.
    The Postal Service remains one of the leading employers of 
women and minorities. Representation of both groups has 
continued to increase. Consider that last year minorities 
represented 38 percent of the work force in the USPS. The Board 
is equally proud of the Postal Service's commitment to building 
strong relationships with small minority owned and women owned 
businesses.
    The Board recognizes the Postal Service work is never done 
in this area. We are a dynamic, changing society with changing 
demographics. The Postal Service is competing with both Federal 
agencies and private workplaces for the best and brightest 
talent. But we have strategies in place to counter this. We 
have formed a talent and acquisition group, and they are 
recruiting on our college campuses and military bases.
    Last year the Postal Service issued a new supplier 
diversity corporate plan. The plan focused on continuous 
improvement of our business relationships with small minority-
owned and women-owned businesses. We remain committed to a 
competitive supplier base. The Post office mission to provide 
universal service was reaffirmed by the new postal law. Our 
mission is still to provide every American with real world 
access and affordable, dependable mail service, even though we 
have nearly 2 million new addresses per year.
    To help support the universal service, the Postal Act 
allowed greater price flexibility for shipping services. We 
recognize the significant challenges posed by some of the 
fiercest competitive global companies in the realm. We are 
forging ahead to provide options to the American public. The 
Postal Service has set up a new express mail division and 
ground package unit to focus efforts on this market.
    As Governors set the strategic direction of the Postal 
Service, we are continuing to seek improvement and providing 
value to the American public, organizing, communicating that 
685,000 employees in a new way of thinking. A new way of doing 
business is no small task. Congress understood the challenges 
brought about by the changes in the marketplace and technology 
and now Postal Service employees are delivering.
    Much of the new law's first year was devoted to setting up 
our future systems and processes. We have begun the next phase, 
implementation. Much more critical deadlines are fast upon us 
for this year, but 2007 and 2008 thus far have been good, 
productive years. We have learned much, forged new 
partnerships, and had interesting debates and discussions.
    On behalf of the Board, I would again like to thank you and 
acknowledge Postmaster General Potter and PRC Chairman Dan 
Blair and our stakeholders who have worked tirelessly to ensure 
the groundwork was laid to position the Postal Service well 
into the years to come. Thank you, Mr. Chairman and members of 
the committee and Mr. Waxman.
    [The prepared statement of Mr. Bilbray follows:]
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    Mr. Davis of Illinois. Thank you very much, Mr. Bilbray. 
And Mr. Blair, with your indulgence we are going to alter the 
procedure just a bit. Chairman Waxman is under tremendous time 
constraint, but has questions that he would like to ask, and I 
would like to yield to him for the questions and then we'll 
return it our normal procedure.
    Mr. Bilbray. I love that title, Chairman Waxman.
    Mr. Waxman. Thank you very much.
    Thank you very much. And than you very much, Mr. Chairman, 
for letting me ask my questions, and forgive me for 
interrupting the testimony of the panel.
    We had some hearings in our committee about charities that 
are supposedly helping the veterans and these groups raise 
money to assist U.S. military personnel and veterans, but a 
number of these veteran groups spend far more on executive 
salaries and fundraising than they do on delivering goods and 
services to the veterans. For example, we had testimony from 
one of the fathers of a veteran who was wounded in the Iraq 
war, and he was struggling. The father ended up giving up his 
job just to try to take care of the followup medical services 
for his son. And when he heard about these so-called veterans 
charities that raise money and pocket most of it and used a 
little bit for the helping of the veterans, he said, my son as 
well as the other thousand of injured soldiers from this war or 
any other war are not commodities. I don't think it is right 
that you can use these soldiers as commodities to raise funds 
and then turn around and give a small percentage of that to 
what you're saying you are going to do with the contributions.
    Since that hearing, my staff has been talking to charity 
experts and regulators to understand how these groups can get 
away with this sort of thing. We had heard that one important 
factor is the lack of disclosure and awareness by donors about 
how charities are spending their money.
    There is man by the name of Roger Chapin. He is the head of 
Help Hospitalized Veterans and Coalition to Salute America's 
Heroes, two of the veterans charities that appear to be abusing 
their nonprofit status. His testimony at our hearing was quite 
revealing. He said, if we disclose, which I'm more than happy 
to do, we'll all be out of business and the charities will be 
out of business and nobody would donate and it would all dry 
up. This is his words to justify the very small amount of money 
that actually got to the veterans. And he, by the way, was 
making a very nice income on all of this.
    The disclosure is one of the problems, but another appears 
to be an exception to the cooperative mail rule. Under this 
rule, which Mr. Potter instituted in 2003, for-profit 
fundraisers are able to use the nonprofit mailing rate so long 
as they share a small part of the proceeds with a nonprofit 
organization. My concern is that this rule allows unscrupulous 
fundraisers to negotiate contracts that enrich the for-profit 
companies and take away funds from the intended beneficiaries.
    Mr. Potter, we've been talking to the National Association 
of State Charity Officials and other charity experts, and they 
are telling us that this cooperative mail rule is being abused. 
They describe situations where the for-profit direct mailers 
keep both 80 percent of the proceeds and the list of donors. 
They told us that these arrangements are abusive because the 
nonprofit gets so little of the money and yet at the same time 
becomes dependent on the mailer because of the mailer's control 
of the donor list.
    I have two questions for you, Mr. Potter, are you concerned 
about the abuse that appears to be occurring? And two, what 
steps are you going to take to address these issues?
    Mr. Potter. Thank you, Mr. Chairman. Yes, I am concerned 
about the abuses. When we instituted that rule in 2003, the 
motivation was to try and help charities because there were 
many charities who did not have the funds to put up for the 
mailing campaigns that they had. And so it was a matter of 
having others take risk, and that was the motivation, was to 
help. Obviously it has backfired in some cases, so we are 
exploring and we have been monitoring the hearings that you've 
had.
    Mr. Waxman. Good.
    Mr. Potter. We are very concerned about some of the abuses 
that you through your hearings have identified and we are 
exploring ways of changing that rule such that we can make the 
American public more aware of, you know, the actual--through 
our regulations, through the actual charity, the actual amount 
of funds that ends up in those who they were intended for. And 
we're continuing to try to figure out how to do that. At the 
same time----
    Mr. Waxman. I want to address the same question to Mr. 
Blair because he is the head of the Postal Regulatory 
Commission. In the 2006 legislation I insisted on a provision 
that gave the PRC the authority to examine the abuses of the 
nonprofit rate, make recommendations to the Postal Service, and 
act on its own initiative if the Postal Service didn't respond.
    We want the Postal Service to thrive. We know they are 
facing difficult challenges, but it is not acceptable for the 
Postal Service to encourage these deceptive mailings simply 
because they may generate more volume for the Postal Service. 
And this is a problem that I think ought to be addressed.
    I'd like to ask you the same two questions. Are you 
concerned about the abuse that appears to be occurring? And 
what steps would you be willing to take to address these 
issues?
    Mr. Blair. I appreciate you, Mr. Chairman.
    I appreciate you raising this with us. This is an issue at 
first impression with us. I'm not aware of the former rate 
commission or the regulator at this point undertaking these 
types of investigations. We'd like to certainly learn more 
about this. You reference a section in the new law. That's 
something that we certainly would look at and we'll be happy to 
work with you.
    On first impression I look at this and I see this as the 
Inspector General's primary role as well. We work quite closely 
with the IG's office at the Postal Service. While we look at 
the data and we look at the rates, any revenue protection and 
law enforcement seem to be their primary purview, but we're 
happy to work with you and your staff to see what we can do in 
this regard.
    Mr. Waxman. I thank you very much. I think it is an 
important issue. I want to bring it to both of your attentions, 
and perhaps the IG ought be involved as well, but I would like 
you to review it because I think it is being abused.
    Thank you for your courtesy, Mr. Chairman, I appreciate it. 
I regret that I have to leave to go to California, not that I 
regret going to California, it is always a wonderful place to 
go, but I have to leave. Thank you very much.
    Mr. Davis of Illinois. If it was anyplace else we 
wouldn't--thank you very much, Mr. Chairman, and thank you, Mr. 
Blair. And we can now proceed to your opening statement.
    Mr. Blair. You saved the best for last, right, Mr. 
Chairman?
    Mr. Davis of Illinois. That's right.

                   STATEMENT OF DAN G. BLAIR

    Mr. Blair. Mr. Waxman, Mr. Davis, thank you. I appreciate 
this opportunity to present you with an update of the 
activities of the Postal Regulatory Commission. I am pleased to 
be here with Postmaster General Potter and Governor Bilbray, 
and I appreciate their kind words about the Commission as well. 
My written testimony gives a complete agenda of our activities, 
but I am pleased to summarize my statement.
    It has been a very busy year for us at the Commission. 
Standing up the regulatory framework 8 months ahead of 
schedule, consulting with the Postal Service on the development 
of modern service standards, completing one last final rate 
case under the old regulatory regime tops the list of those 
activities. It was a fulfilling year, but we can't rest on our 
accomplishments since the upcoming year presents equal, if not 
greater challenges.
    Our agenda includes further consultation on service 
standard goals and performance measurement systems. I want to 
compliment the Postmaster General and his team at the USPS, 
headed up by Deputy PMG Pat Donahue, for their work with us on 
the development of the service standards and our continuing 
consultation.
    The PRC's efforts in this area added value, and I'm pleased 
that many of our suggestions over the past few months were 
incorporated in the final performance standards. Our monthly 
meetings have proved to be a good conduit for consultations and 
communication into other issues which rise from time to time. 
This open and ongoing dialog helps make our system work better, 
and I look forward to continuing this practice.
    Currently we are undertaking two new Postal Accountability 
Enhancement Act reviews. First, we are reviewing the data 
provided by the Postal Service as part of its annual compliance 
report, annual review in the rate adjustment filing under the 
new regulatory framework submitted by the Postal Service on 
February 11th. With the experience gained in the review of the 
first annual data submission by the Service we will shortly 
propose rules to tighten the process. The review of the first 
annual report has identified areas for data collection, special 
studies and cost models can be updated.
    We are also beginning work on the universal service 
obligation study which was mandated by the PAEA. We plan to 
seek the views from the Postal Service, other Federal agencies, 
the postal community and general public on their expectations 
of universal postal service.
    Given the scope of this study, we are supporting our 
commission of work through a competitively awarded contract 
with George Mason University School of Public Policy. Your 
first witness today, Professor Wolak, will be among those 
providing assistance to the Commission as part of GMU's work 
for us.
    We expect to engage in broad public outreach as well as 
conduct several field hearings to gauge the mailing public's 
needs and perceptions in this area. We plan a very 
comprehensive and well-documented report.
    As I mentioned in my statement, we believe our 
congressionally mandated report will have the benefit of the 
findings and recommendations of a separate report being 
prepared by the Postal Service through the National Academy of 
Science. I want to thank Postmaster General Potter for his 
assistance in this effort.
    To conclude, Mr. Chairman, those are several of our front 
burner issues. An additional priority is to see the successful 
nomination of the new commissioner to fill our one vacant seat. 
I am pleased to report that yesterday President Bush nominated 
Nancy Langley to fill that seat. Many of you may know Nancy 
from her longtime work for Senator Akaka on the Homeland 
Security and Governmental Affairs Committee. She's currently 
the Commission's Director of Public Affairs and Government 
Relations. I'm sure you will join my fellow commissioners and 
me in wishing her a speedy confirmation.
    My written testament goes into further detail. I am pleased 
to answer any of your questions.
    [The prepared statement of Mr. Blair follows:]
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    Mr. Davis of Illinois. Thank you very much, Mr. Blair. I 
want to thank all three of our witnesses for your indulgence 
and for being here with us this afternoon.
    Mr. Potter, let me discuss, can you give us a status report 
on the financial reports in the second quarter to date and 
indicate whether or not the economic downturn that we've heard 
so much about has continued to affect postal revenues.
    Mr. Potter. Mr. Chairman, as I said in my opening 
statement, our revenues after the first quarter went down some 
$525 million. After the first 2 months of the second quarter 
they are down another 400 million. So the economy continues to 
hurt the Postal Service's revenues.
    Mr. Davis of Illinois. Also, last year the Postal Service 
issued a request of information related to outsourcing the mail 
processing activities conducted in its bulk mail centers. Could 
you tell us the status of this proposal and whether or not it 
involves outsourcing a core postal function?
    Mr. Potter. We received that--got the information through 
that request for information. We've analyzed that information, 
we've shared it with our unions, we are working with the 
American Postal Worker Union and the Mail Handler Union. We 
intend to go out with a request for proposal. Again we are 
doing it in consultation with them, very close consultation 
with them. That's where we are at right now.
    Mr. Davis of Illinois. I also know that the Postal Service, 
and we were pleased to see the Postal Service and the National 
Association of Letter Carriers reached some agreement and the 
agreement ended up being a 6-month moratorium, only in the 
efforts to contract out the delivery of city or suburban 
routes. The moratorium ends next month. What do we see 
happening at this point?
    Mr. Potter. Well, part of that agreement was we would enter 
into a period of dialog with the NALC. We got off to a slow 
start. It has become productive and we have extended that 
moratorium through the end of July.
    Mr. Davis of Illinois. And so there will be continuous 
discussions I would----
    Mr. Potter. We are doing it because the discussions have 
been productive. As I said, we got off to a late start so we 
didn't want to curtail them, and we're hoping that we're able 
to work that issue through and reach an amicable agreement on 
it.
    Mr. Davis of Illinois. Let me be just a little bit self-
serving. You did mention in your testimony record service 
performances for first class mail. What has been the experience 
in the Chicago area?
    Mr. Potter. Mr. Chairman, as you know all too well, we had 
service problems in Chicago for the last couple of years. I'm 
very proud of all the folks in Chicago who have really stepped 
up their efforts to improve service. We have seen a great 
improvement in overall service in the city of Chicago. It is 
through the efforts, as I said, everyone who works there. 
They've worked hard to improve the quality of addresses that we 
have in Chicago in our address data base. We have upgraded all 
of our machines. We are in the process of upgrading our 
facilities, and we've realigned our staffing. And so I think 
you can count on the fact that service will continue to get 
better there.
    Mr. Davis of Illinois. Would the activities that took place 
be perceived perhaps as a model or an approach that might be 
used in other areas that might be experiencing and are having 
the same problems?
    Mr. Potter. I think the approach is one that could be 
replicated in other places where similar problems hopefully 
don't exist today, but if they were to happen we could 
replicate that effort in Chicago in other locations.
    Mr. Davis of Illinois. Thank you very much.
    Mr. Bilbray, let me ask you, has the Board of Governors' 
role changed in your perception since the postal reform law was 
enacted?
    Mr. Bilbray. Mr. Chairman, it has in the sense that again I 
was only a member of the Board for a short period before the 
change took place. But in talking to other members that were 
there before and also the few months that I was there before, 
our load has really increased. I think it is because we have 
the Sarbanes-Oxley provisions going forward. The Audit 
Committee is meeting all the time. I mean they meet, where they 
used to meet maybe 3 or 4 hours about every fourth week. When 
they do meet 2 or 3 days it's--we're on the phone constantly, 
not only with the meetings that we personally come to, but 
telephonic meetings. Virtually everything that is done is with 
the goal of transparency. I know we have--they don't have to 
call us on levels that are spending below certain amounts. The 
fact is it seems like with the cost of everything going up and 
even the cost of construction, I mean we've had to pull back on 
construction, because construction costs are shooting out of 
sight and our bids are coming in at 25, 30 percent higher than 
we estimated. So the board is really active.
    When I was asked to serve by Senator Reid on this board and 
went through the process, nobody told me that it would be a 
full-time position but a part-time position. But it virtually 
is. I spend 2 to 3 hours a day going through documents sent to 
me from the Postmaster General and his office. It is quite a 
job and just remember something I would like to point out, the 
$300 we get paid per meeting was set in 1970. Hint, hint.
    Mr. Davis of Illinois. Maybe Senator Reid just didn't want 
you to get too comfortable.
    Mr. Bilbray. I can tell that.
    Mr. Davis of Illinois. In your testimony you also put 
emphasis on the role of minorities and women, especially as it 
relates to small business and small business development and 
activity. The Board was required under the Postal 
Accountability and Enhancement Act to conduct a study on the 
representation of women and minority members in supervisory and 
management positions. Would you reemphasize for us the findings 
to date of that study?
    Mr. Bilbray. Mr. Chairman, the findings are out, the 
recommendations are not. And what I was told by staff before I 
came here is that they were finalizing that and that would be 
made available to the committee and to yourself as soon as we--
but we have increased, they say, the numbers--we're not--in 
fact I asked for it. I said can you give me the total percent, 
just like they did with 38 percent of our postal employees are 
minorities or women. I asked for the number, the total number, 
and they said it is not broken down that way, it is broken down 
into a percent here, a percent there, something here. And I 
said, well, that's not satisfactory. So they said they would 
get that information for me as soon as possible and they would 
forward it to you and the committee to see. But there has been 
a drastic improvement and we are moving forward on that. So 
we'll have those numbers to you in a very short time.
    Mr. Davis of Illinois. Well, thank you very much.
    Let me ask you, Mr. Blair, what criteria will the 
Regulatory Commission use for evaluating the quality, 
completeness, and accuracy of ratemaking data?
    Mr. Blair. We have approximately 36 years of ratemaking 
experience in this regard. And we'll use sampling techniques, 
we look at the statistics. We will also apply special studies 
of operations using calculations, certain discounts that are 
recommended by the Postal Service.
    Many of the problem areas identified through the annual 
data submissions by the Postal Service. We are currently in the 
annual compliance review process. We've asked the Postal 
Service for certain information, clarifications and updates of 
certain information, and we are receiving that as we speak. We 
are also in a--not annual, but a rate review period as well in 
which we have asked for additional data.
    As time goes on we'll develop more and better ways of 
getting this, but there are certainly areas where studies need 
to be updated. For instance, city carriers' street time studies 
can be updated. The region acceptance rates can be updated. And 
also as the Postal Service implements the new flat sequencing 
system and employs those sorters, we will need new sortation 
cost studies. So this is going to be an ongoing area.
    I can't emphasize enough, though, how important it is that 
we have good quality data, and that's something that the 
Commission has long held, that the quality of the data that we 
get from the Postal Service is extremely important because it 
goes into the costing methodologies that were employed in the 
old ratemaking process. Now it goes into the methodologies that 
are employed in the compliance process. So we will remain 
vigilant and constantly monitor the quality of the data that 
comes out.
    Mr. Davis of Illinois. Now let me ask you, as part of its 
reorganization we understand that the PRC has abolished the 
Office of Consumer Advocate. Can you tell us how you expect now 
to make sure that consumer interests and concerns, you know, 
remain prominent in the process of the ratemaking that will 
take place?
    Mr. Blair. We're talking a two-pronged approach on this. We 
have reorganized to reflect the new reform environment brought 
about by the enactment of the Postal Accountability Enhancement 
Act. First, we're mindful that the new law requires the 
appointment of a public representative in proceedings before 
the Commission. That's a very important public role.
    What we are doing with that is under the old structure, 
under the Postal Reform Act, that the Commission developed, we 
had a standing office and that was designed to litigate omnibus 
cases over a 10-month long case period. The PAEA changed that 
paradigm. We expect now shorter, more limited, more focused 
dockets and significantly pure of major litigated cases. In 
order to best utilize the resources before the Commission, what 
we will do is appoint a public representative from among our 
commission staff offices. That allows us to better pinpoint and 
target the type of expertise we need to engage in that public 
representation. We think this will be a better and more 
effective way than the old structure would have allowed in this 
new environment.
    We've also developed a--we have also implemented an Office 
of Public Affairs and Government Relations. One of the primary 
responsibilities of this new office is to interact with the 
public, field questions, and help resolve informal inquiries 
regarding the Postal Service. In addition, the Commission will 
be coming forward over the next few months with new complaint 
procedures to supplement the current ones that we have in 
place, and those will be subject to public notice and comment.
    Mr. Davis of Illinois. Not that you would have any kind of 
crystal ball, but given all of the discussions relative to the 
economic downturns, new ways of doing business, e-commerce, 
what would you sort of see as a super major challenge of the 
Postal Service in order to try and keep rates at a level that 
consumers will be most appreciative of?
    Mr. Blair. I think there are several fronts that they will 
be needing to focus on. One will be to keep their labor costs 
in line. Two, better rationalize their networks. I was 
listening to the GAO testimony in the anteroom and the GAO 
provided a good outlook saying that there are some plants that 
are at over capacity and some are at under capacity. And a 
better rationalization of that network is important. Good data 
is needed to rationalize that network. But I think that the 
Postal Service needs and I know that the Postmaster General is 
committed to doing more in order to cut costs and better 
utilize that network.
    I think more innovative ways need to be developed in which 
we keep mailers in the system, be it first class mailers or the 
ones--the business mailers, the banks, the insurance companies, 
those major mailers who utilize first class, the flagship 
product of the Postal Service, keeping them in the system. What 
can be done to give added value to that mail, to standard mail 
and also the Postal Service General referenced some new 
competitive products. The regulator wants to create an 
environment which is flexible, yet transparent. It will be a 
balancing act. It is not an easy balancing act either. We want 
to make sure that there is flexibility there, yet there is the 
requisite accountability and transparency to the postal pricing 
and operations that the public demands and deserves.
    Mr. Davis of Illinois. Thank you very much.
    Let me go to Delegate Norton.
    Ms. Norton. Thank you, Mr. Chairman.
    Mr. Potter, you say at page 5, I believe it is, of your 
testimony that you've identified savings of an additional $1 
billion over the $1 billion already built into your savings 
budget. Where would those savings come from?
    Mr. Potter. They will come from a number of things. First, 
there will be--there is less mail anticipated.
    Ms. Norton. How is that saving? It sounds to me like loss 
of business.
    Mr. Potter. It was lost business, but in terms of the 
budgets that we give, work hours, if there is less mail, then 
there is less work hours needed. So in terms of a reduction off 
of the plan, the plan will be reduced to reflect the lighter 
workload. In addition to that, we're----
    Ms. Norton. I'm not sure private business calls those 
savings, but I'll take it, Mr. Potter.
    Mr. Potter. OK. In addition to that we're reducing and 
streamlining our transportation network because we're looking 
at all of the network and revising the number of trips and the 
size of the trucks which are all contracted to determine 
whether or not they are actually needed and whether or not we 
can streamline the number of trucks. We're about to--this week 
we've been counting our rural carrier routes as part of our 
contract. It is going to reflect the fact that there's been a 
decline in volume on each of those routes since they have been 
last counted 2 years ago, and so that will result in a 
reduction in terms of the amount of compensation that those 
folks are given.
    In addition to that, we're looking at the productivity of 
each and every operation and we're working to improve our 
efficiency in those operations. So its basically very hard work 
to try and----
    Ms. Norton. It is very hard work, it is very hard work. You 
are very fuel and car and truck oriented. You may have heard me 
asking the previous witness about conversion to alternative 
vehicles. Are you still using vehicles that largely rely on 
traditional fuel?
    Mr. Potter. Yes, we are.
    Ms. Norton. Are you doing that even as you have to replace 
vehicles, as you must have to do quite often?
    Mr. Potter. No, we're not. We have the largest alternate 
fuel fleet of vehicles in America.
    Ms. Norton. Are those biofuels and ethanol?
    Mr. Potter. Yes. In addition to that we have gas powered 
vehicles, we have hydrogen vehicles. We're looking at 
everything that we possibly can and we're testing them all.
    Ms. Norton. There was some feeling that you were 
constrained in what kind of alternative vehicle you could use. 
Are you constrained at all in that way any longer after the new 
energy bill was passed last year?
    Mr. Potter. No. No, we're not. In fact now we are looking--
we delayed the replacement of engines and other vehicles of 
some 150,000 vehicles in anticipation that we would have 
greater flexibility should that law pass. That law has passed. 
We now have the greater flexibility. So we're once again 
looking at what we do with the existing fleet. And we know we 
have an opportunity to improve----
    Ms. Norton. What's the turnover? How many vehicles do you 
buy a year?
    Mr. Potter. Well, the last several years we've only bought 
about 10,000.
    Ms. Norton. You just don't have the money, so you just kept 
rolling over?
    Mr. Potter. No. About 14 years ago to 17 years ago we 
bought a fleet of aluminum body vehicles, we call it our long 
life vehicle, and that vehicle is probably overdue for 
replacement. About the last 4 years we should have replaced 
them. Again we had this energy issue that we wanted to work our 
way through.
    Ms. Norton. So would you buy any traditional fuel vehicles 
at this point? If you had to buy one tomorrow, would you be 
looking exclusively at some kind of alternative fuel vehicle?
    Mr. Potter. Not necessarily exclusive. We buy a myriad of 
vehicles, from very large trucks to----
    Ms. Norton. So sometimes with very large vehicles you must 
use----
    Mr. Potter. We would use traditional diesel, we don't have 
alternatives.
    Ms. Norton. Where are there alternatives?
    Mr. Potter. Where there are alternatives we attempt to buy 
alternative fuel vehicles.
    Ms. Norton. Do you feel you are under pressure to buy 
biofuel as opposed to, for example, some of the other----
    Mr. Potter. Not now.
    Ms. Norton. That's very important.
    Mr. Potter. It is. I thank the Congress for helping us with 
that law. It is extremely important. You have really increased 
our flexibility, and I'm very appreciative of it. And as I 
said, we delayed a decision until we determined whether or not 
we would be able to and we are very grateful for the 
flexibility.
    Ms. Norton. Very small. There are not many things you can 
do but to continue to spend money in the good old days or 
whatever we now want to call them.
    I was interested in page 7 of your testimony, where you 
talk about express mail and priority mail. I just have to 
congratulate what you report that you have penetrated, gone 
beyond express mail and priority mail in some respects. You say 
express mail offers Saturday delivery at regular weekday 
delivery price. That must match the competition, I take it, 
because you go on to say and the Postal Service alone is 
offering Sunday and holiday delivery at this guaranteed 
overnight delivery price.
    Mr. Potter. If I could explain. With the new law we've gone 
back and we now have pricing flexibility, so we are looking at 
ourselves in the marketplace to determine what prices we could 
charge. And we're looking to try to charge market based prices 
for the competitive products. We found out we're the only ones 
who sell Sunday delivery. And so we want to make it clear to 
all Americans that if you want express mail on Sunday or you 
want to be able to walk into a lobby and buy it, the place to 
do it is with us.
    Ms. Norton. Let me ask you, how long have you been doing 
the Sunday mail?
    Mr. Potter. We've been doing it a long time, but the profit 
on Sunday mail has been low.
    Ms. Norton. Is that why your competitors are not rushing to 
get into the Sunday mail competition?
    Mr. Potter. Well, they are not open 24 hours a day like we 
are with all of our plants from around the country. They have 
much different operation, much more defined operations.
    Ms. Norton. They are not retail basis, they are not open?
    Mr. Potter. They are not open on a Saturday on a retail 
basis in a lot of cases, but they don't have 24-hour 
operations, 365 days a year necessarily, particularly with 
express mail. In our case we do and so since we have that 
infrastructure we try to maximize our opportunity for revenue 
off that infrastructure. So what we are doing with the new law 
is we are going to put a surcharge on Sunday delivery, because 
we have people come in and buy a product on Saturday and 
they'll request Sunday delivery because it is free. We are the 
only ones that don't surcharge Saturday delivery. And so since 
that's a normal day of operation, we are not looking to 
surcharge Saturday. But since Sunday is an unusual day for us, 
our carriers aren't out there anyway. We are going to surcharge 
that and we are going to do it in any market that places or 
private competitors would do. You charge what the market will 
bear, and we believe that if the competition puts a surcharge 
or premium on Saturday delivery, the least we should do as a 
start is put it on Sunday.
    So we are looking forward to additional revenues from those 
pieces we deliver on Sunday. For those people that don't 
require Sunday delivery, they'll get their mail delivered on 
Monday, which they would have done, you know, with others. We 
are the only ones, as I said, who really have an operation on 
Saturday.
    Ms. Norton. And since you got it, so you got a volume here 
that nobody had before, a volume of business that nobody had 
before?
    Mr. Potter. We had an opportunity to increase the revenue 
on the business that we have.
    Ms. Norton. Do you lose my money on this?
    Mr. Potter. No, we weren't losing money, but we were not 
making it. It costs 5.50 cents more to deliver a piece of mail, 
an express mail piece on Sunday than it does on the rest of the 
week, and that cuts into our profits on Sunday. And so I think 
just by raising the price we're going to increase the awareness 
of the fact that we are doing it. The fact that we didn't have 
a high profit on Sunday was a motivation not to really be 
aggressive about selling it. Now that we can sell it and make a 
profit, a sizable profit, we will be out there in the 
marketplace and sell it. So we are taking an advantage of the 
new law that you provided.
    Ms. Norton. Now that you've got the infrastructure and the 
overhead anyway, maximizing that is--I don't know if you can 
think of anything else to do with it, but that's terrific.
    Mr. Potter. Thank you.
    Ms. Norton. Finally, let me ask you about the flat rate 
boxes. You seem to imply, by the way, because you talk about 
scratching the surface. We just scratched the surface. I'm 
going to ask, I'm going to have a question. What other kinds of 
terrific things can you do to keep scratching? But you talk 
about the new larger priority mail flat rate box. That was a 
response to that competition that is already doing that?
    Mr. Potter. No. We were the first to have a flat rate box 
for priority mail, and it was a smaller box. It was extremely 
popular. We've had a lot of growth in terms of that product. 
And the competition--one of our competitors matched that and 
put out a box that's a comparable size and so we recognize that 
flat rate box is attractive to customers because you pay one 
price, whatever fits, it works. And so we wanted to give the 
American public another option. And that's why we went to the 
larger flat rate box and we appreciate the fact that the Postal 
Regulatory Commission has approved that, that option. And it 
begins on March 3rd.
    Ms. Norton. They invited it into their market because they 
felt the competition. So you upped them because you now are 
doing a bigger box?
    Mr. Potter. Well, we have a bigger box and that bigger box 
also has--we tried to respond to a concern of those folks and 
the families of the folks that we have serving overseas in our 
military. And we have a discount on that box for military 
addresses. And so----
    Ms. Norton. Does the competition do that, too?
    Mr. Potter. No. No. And we're very happy and pleased that 
we're able to do that.
    Ms. Norton. Are you going to do flat boxes on Saturday and 
Sunday since they can't work at all, since they don't do 
anything on Saturday and Sunday?
    Mr. Potter. I'll be honest with you. With the downturn in 
revenue and the concern about diversion to the Internet, we're 
working very closely with all of our employees, our unions and 
others to try and generate revenue to support this very vital 
system that serves each and every American 6 days a week. And 
I'm really happy with the level of support that everyone has 
shown the Postal Regulatory Commission. But in particular our 
employees who are out there and who are going to help spread 
the word about the fact that they now have the ability to 
compete and they're anxious to compete and they're anxious to 
grow revenue.
    Ms. Norton. My final question really is related to this 
question because I can guarantee you now, they're sitting down 
right now thinking of a way to take away your Saturday and 
Sunday business with no--which depends on your infrastructure, 
depends on your 24-hour service, with no extra cost to them. 
Depend on it. But if they find a way, they're going to find a 
way through investment in some kind of equipment. Most of the 
advances in productivity we see around the world come that way.
    What about your capacity? Leave aside the investment that 
is taking away mail from you or communication vehicles from 
you. What about your capacity to invest in the kind of 
equipment needed to move forward to keep up with whatever the 
competition is doing, especially in these sectors like express 
mail and the rest?
    Mr. Potter. Well, fortunately for us we have existing 
capacity, particularly in the delivery area because we are at 
every door every day. When it comes to plan capacity, the law 
provides that we have the opportunity to borrow and invest. So 
it's up to the Board of Governors and postal management to use 
that authority to invest wisely in the capacity that you 
describe.
    Ms. Norton. Are you keeping up with the kinds of 
investments--the delayed gratitude of the private sector is 
very interesting when it comes to these kinds of investments 
because they know the payout--they call it all kinds of 
flexibility to put it on different lines and stuff that you 
can't do. Do you feel that you are keeping up with this modern 
technological equipment that the private sector is using and 
you are able to do so through the authority you have to borrow?
    Mr. Potter. Well, let me speak of it in two ways. When it 
comes to mail, whether that is solicitation of letter mail or 
flat mail or first class mail and advertising mail, the Postal 
Service, the U.S. Postal Service has the best equipment in 
world. We are world-class bar none because we've had the scale 
and the scope of our delivery.
    Ms. Norton. Well, you are losing money.
    Mr. Potter. And unfortunately that's where mail will be 
diverted or potentially diverted.
    Ms. Norton. Yeah.
    Mr. Potter. On the other hand, when it comes to package 
service, I will be very honest with you, we are not and have 
not been investing as aggressively on the mail side, only 
because of the fact that we didn't have the ability to compete. 
So if you don't have the ability to compete, you know, you 
aren't going to make investments. Now that the new law is in 
place and now that we have the ability to set a plan and know 
where we're going to be longer term, we're re-evaluating that. 
And we do have the funds available to us within our borrowing 
limits. We've borrowed from the Treasury, we have capital 
program. I'm convinced that we have sufficient funds to make 
the type of investment that will be needed to compete.
    Are we where they are? No. We're behind. But through proper 
investment, we can catch up and catch up rather quickly.
    Ms. Norton. Borrowing from the Treasury is a great 
advantage.
    Mr. Potter. Exactly.
    Ms. Norton. Thank you very much, Mr. Chairman. Thank you, 
Mr. Potter.
    Mr. Davis of Illinois. Thank you very much, Delegate 
Norton.
    Mr. Potter, you've mentioned cost cutting, increased 
efficiency. In the way of cost cutting ideas, what can we 
expect to hear about?
    Mr. Potter. Well, I'll give you examples of some of the 
things that we're doing on the competitive side of the aisle. 
One of the things that we're doing there is just beginning to 
put the data bases in so that we're tracking productivities by 
different operations. There's still some areas where we don't 
have good information systems and simply by tracking them we'll 
give people--and I'm talking about craft employees as well as 
managers, you know, information about how well they're doing. 
And that often is a big motivation. In addition to that, we do 
have some redundancies in the system and we're looking at 
minimizing the number of handlings that we have in the system. 
We're looking at error rates on machines. And we've made some 
good strides in improving error rates on our machines. We're 
also looking at the quality of mail that's produced by the 
mailing community to try and improve the quality of the mail, 
either through the address and/or the physical piece itself. 
And by improving that quality, we reduce the number of 
rehandlings that occur in the system. It's a matter of just 
tightening up on our processes, making sure that people have 
the data that they need to manage and understand how well 
they're performing. In my opinion, it will continue to drive 
the efficiency of the Postal Service.
    Mr. Davis of Illinois. Are we likely to continue to hear 
much about outsourcing, contracting out?
    Mr. Potter. Well, you won't hear about it from me, but 
there are others who might comment about it here. But in all 
candor, we do have ongoing dialog with the NALC and rurals are 
participating on that panel. As I said, we've extended the 
moratorium to July 31st. In addition to that, you referenced 
earlier the discussion about the request for information that 
we put out about our network. And we're engaged with the Mail 
Handlers and the American Postal Workers Union on discussing 
what options we have. You know, there are some very real 
business decisions that have to be made. When we look at our 
end-to-end network on the ground nationwide, we don't have a 
big demand for that service. In fact, the volume of mail that 
moves end to end, parcel post on the ground is in a state of 
decline. That's a product that has a rate cap on it. If the 
volume declines and we're forced to maintain the current 
network, we don't see how we're going to be able to stay under 
a rate cut. If that system's inefficient, it won't be very long 
before it will be cheaper to fly the mail, which means it will 
be a high-cost product and no one will use it. There's some 
very serious business issues and we're sharing those in a very 
candid way with our employees to try and figure out how we're 
going to be successful under the new law and meet the 
requirements of the new law to stay under the rate of inflation 
and at the same time have a viable product.
    We are a challenged business in the sense that every one of 
our products are being completed. In some cases, there are 
cheaper alternatives than the Postal Service. People believe 
services like the Internet are more effective. So I think this 
is part of the overall kind of evolution of the Postal Service. 
In the last 200 years there have been a lot of changes. We're 
at a period of time and again I think we have to have the 
debate about what are we going to evolve into next.
    Mr. Davis of Illinois. Well, let me thank all of you. And 
let me thank you for the information that you have shared with 
us. Obviously I was very pleased to hear you talk about the 
improvements that we have experienced across the board and 
especially in some particular areas. I just remind you of a 
story my mother used to tell me, ``Good, better and best. Never 
let it rest until your good becomes better and your better 
becomes best.'' And so I guess we keep striving to make sure 
that we get there.
    Finally, as you talked about the cost cutting and savings 
and figure out how to do it, you reminded me of my father who 
was a very frugal man. But then he would even get to the point 
where he would say, ``you know, you can't get blood out of a 
turnip. You can slice it, you can dice it, you can do 
everything with it. And you still end up with turnip juice.'' 
So I recognize the difficulties which our system face.
    Thank you, gentlemen, so much for being with us. Thank you 
all for coming. And this meeting is adjourned.
    [Whereupon, at 4:18 p.m., the subcommittee was adjourned.]

                                 
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