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



 
        WILL INCREASED POSTAL RATES PUT MAILERS OUT OF BUSINESS?

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



                                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

                             FIRST SESSION

                               __________

                            OCTOBER 30, 2007

                               __________

                           Serial No. 110-202

                               __________

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


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html
                      http://www.house.gov/reform


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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 HENRY A. WAXMAN, California, Chairman
TOM LANTOS, California               TOM DAVIS, Virginia
EDOLPHUS TOWNS, New York             DAN BURTON, Indiana
PAUL E. KANJORSKI, Pennsylvania      CHRISTOPHER SHAYS, Connecticut
CAROLYN B. MALONEY, New York         JOHN M. McHUGH, New York
ELIJAH E. CUMMINGS, Maryland         JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio             MARK E. SOUDER, Indiana
DANNY K. DAVIS, Illinois             TODD RUSSELL PLATTS, Pennsylvania
JOHN F. TIERNEY, Massachusetts       CHRIS CANNON, Utah
WM. LACY CLAY, Missouri              JOHN J. DUNCAN, Jr., Tennessee
DIANE E. WATSON, California          MICHAEL R. TURNER, Ohio
STEPHEN F. LYNCH, Massachusetts      DARRELL E. ISSA, California
BRIAN HIGGINS, New York              KENNY MARCHANT, Texas
JOHN A. YARMUTH, Kentucky            LYNN A. WESTMORELAND, Georgia
BRUCE L. BRALEY, Iowa                PATRICK T. McHENRY, North Carolina
ELEANOR HOLMES NORTON, District of   VIRGINIA FOXX, North Carolina
    Columbia                         BRIAN P. BILBRAY, California
BETTY McCOLLUM, Minnesota            BILL SALI, Idaho
JIM COOPER, Tennessee                JIM JORDAN, Ohio
CHRIS VAN HOLLEN, Maryland
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
                  David Marin, 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 October 30, 2007.................................     1
Statement of:
    Miller, James C., III, chairman, Board of Governors, U.S. 
      Postal Service; John Potter, Postmaster General, U.S. 
      Postal Service; and Dan G. Blair, chairman, Postal 
      Regulatory Commission......................................     4
        Blair, Dan G.............................................    23
        Miller, James C., III....................................     4
        Potter, John.............................................    14
    O'Brien, James R., vice president, distribution and postal 
      affairs, Time, Inc., Time Warner; Mark W. White, vice 
      president, manufacturing, U.S. News & World Report; Joseph 
      Schick, director, postal affairs, Quad/Graphics Inc.; Anita 
      Pursley, vice president, postal affairs, Quebecor World 
      Logistics; and Jerry Cerasale, senior vice president, 
      government affairs, Direct Marketing Association...........   143
        Cerasale, Jerry..........................................   178
        O'Brien, James R.........................................   143
        Pursley, Anita...........................................   173
        Schick, Joseph...........................................   164
        White, Mark W............................................   157
    Zipser, Andy, former president, International Labor 
      Communications Association; Victor Navasky, publisher 
      emeritus, the Nation, and chairman, the Columbia Journalism 
      Review; Jeff Hollingsworth, vice president, Eagle 
      Publishing; Max Heath, vice president of postal/
      acquisitions, Landmark Community Newspapers; Hamilton 
      Davison, executive director, American Catalog Mailers 
      Association; and David R. Straus, counsel, American 
      Business Media.............................................    52
        Davison, Hamilton........................................   117
        Heath, Max...............................................    97
        Hollingsworth, Jeff......................................    90
        Navasky, Victor..........................................    54
        Straus, David R..........................................   126
        Zipser, Andy.............................................    52
Letters, statements, etc., submitted for the record by:
    Blair, Dan G., chairman, Postal Regulatory Commission, 
      prepared statement of......................................    25
    Cerasale, Jerry, senior vice president, government affairs, 
      Direct Marketing Association, prepared statement of........   180
    Davison, Hamilton, executive director, American Catalog 
      Mailers Association, prepared statement of.................   119
    Heath, Max, vice president of postal/acquisitions, Landmark 
      Community Newspapers, prepared statement of................   100
    Hollingsworth, Jeff, vice president, Eagle Publishing, 
      prepared statement of......................................    92
    Miller, James C., III, chairman, Board of Governors, U.S. 
      Postal Service, prepared statement of......................     7
    Navasky, Victor, publisher emeritus, the Nation, and 
      chairman, the Columbia Journalism Review, prepared 
      statement of...............................................    57
    O'Brien, James R., vice president, distribution and postal 
      affairs, Time, Inc., Time Warner, prepared statement of....   146
    Potter, John, Postmaster General, U.S. Postal Service, 
      prepared statement of......................................    17
    Pursley, Anita, vice president, postal affairs, Quebecor 
      World Logistics, prepared statement of.....................   175
    Schick, Joseph, director, postal affairs, Quad/Graphics Inc., 
      prepared statement of......................................   167
    Straus, David R., counsel, American Business Media, prepared 
      statement of...............................................   129
    White, Mark W., vice president, manufacturing, U.S. News & 
      World Report, prepared statement of........................   159


        WILL INCREASED POSTAL RATES PUT MAILERS OUT OF BUSINESS?

                              ----------                              


                       TUESDAY, OCTOBER 30, 2007

                  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 10:01 a.m. in 
room 2154, Rayburn House Office Building, Hon. Danny K. Davis 
(chairman of the subcommittee) presiding.
    Present: Representatives Davis of Illinois, Norton, 
Sarbanes, Cummings, Marchant, McHugh, and Jordan.
    Staff present: Tania Shand, staff director; Lori Hayman, 
counsel; Cecelia Morton, clerk; Eleanor Hudson, intern; Ed 
Puccerella, minority professional staff member; and Benjamin 
Chance, minority clerk.
    Mr. Davis of Illinois. The subcommittee will come to order.
    Welcome Ranking Member Marchant, members of the 
subcommittee, hearing witnesses, and all of those in 
attendance. Welcome to the Federal Workforce, Postal Service, 
and the District of Columbia Subcommittee hearing, ``Will 
Increased Postal Rates Put Mailers Out of Business?''
    The hearing will examine the process for rate increases, 
the recent decision by the U.S. Postal Service Board of 
Governors to increase postal rates, and the impact of the new 
postal regulation on future rate increases.
    The hearing will also examine the impact the new rate 
increase will have on mailers.
    Hearing no objection, the Chair, 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.
    We are going to do our opening statements and then I am 
going to introduce the first panel.
    Ranking Member Marchant, members of the subcommittee, and 
hearing witnesses, welcome to the subcommittee's hearing on the 
2005 postal rate increase, ``Will Increased Postal Rates Put 
Mailers Out of Business?'' Today's hearing will examine the 
Postal Governor's decision to increase postal rates, the 
process for rate increases, and the impact of new postal 
regulations on future rate increases.
    The hearing will also review the impact the rate increases 
had on various small and large mailers.
    The U.S. Postal Service submitted a request for a rate 
increase through the Postal Regulatory Commission in February 
2007. The PRC, an independent agency, issued its decision on 
this request after a lengthy process that involved an open 
administrative proceeding involving mailers, employee 
organizations, consumer representatives, competitors of the 
Postal Service, as well as the public, on the recorded hearings 
broadcast over the Internet.
    On March 19, 2007, the PRC submitted its rate 
recommendations, which was endorsed by the Board of Governors. 
As part of this endorsement, it was decided that the new rates 
for periodicals would be delayed to allow for adjustments to 
mailers' software.
    The cost inefficiencies inherent with the handling of 
periodicals have long plagued the Postal Service. I know that 
the PRC has sought to keep periodical postage rates as low as 
possible in the face of declining magazine mail volume and 
increasing postal handling costs. The notion of implementing a 
rate structure based on paying for what you use was established 
to encourage better operational practices and eliminate 
unnecessary costs. This is the basis for the new rate 
structure.
    But the question is: is it working? In 1995, Time Warner, 
Inc., proposed that the periodical class be split into two 
segments and that rates be redistributed. This proposal would 
have effectively eliminated the historic policy of cross-
subsidization of low-volume periodicals by high-volume 
periodicals. Small magazines state that the new rates, which 
they feel were based on the proposal submitted by Time Warner, 
Inc., transferred the burden of postal costs from magazines 
with large circulation and heavy advertising to smaller 
publications with heavy editorial content.
    In 2004, Time Warner once again submitted a rate proposal 
that many mailers believe shifted the burden of mailing cost on 
to small publications.
    As a result of this controversy, the PRC recommended and 
ultimately endorsed a proposal where small publications with 
circulations of 15,000 or less received lower increases than 
the rates recommended in the proposals submitted by the large 
magazine publications, Time Warner, or the Postal Service. 
Small magazine publishers are not consoled by the lesser-
endorsed amount because they feel they bear the brunt of the 
proposed postal rate increase. Today we will hear from the rate 
setters and the small and large mailers a the need for the 
increase and its impact on mailers.
    A number of constituents have contacted the subcommittee 
and voiced their concerns regarding the Postal Service's 
elimination of an entire class of international surface mail. 
For decades this service has been the means by which thousands 
of Americans economically shipped books, professional and 
medical journals, and other materials overseas to support 
humanitarian projects. Today the only way to ship these 
reprimands overseas is by airmail, which has tripled and even 
quadrupled in shipping costs. The elimination of international 
surface mail has severely curtailed or in some cases shut down 
charitable programs which have demonstrated America's goodwill 
to people and nations around the world.
    I would like the Postal Service to address these concerns 
during its testimony.
    I want to thank all of our witnesses today, and look 
forward to your testimony on this important issue.
    I would now yield to the ranking member, Mr. Marchant, for 
his opening statement.
    Mr. Marchant. Good morning, Mr. Chairman. Thank you for 
holding this hearing today on the U.S. Postal Service's recent 
rate increase. As we continue our role on the subcommittee in 
providing oversight of the Postal Service, I am reminded that, 
as it has been said in the past, the Postal Service is not a 
perfect system, but one which is ever-changing and expanding.
    With recent enactment of postal reform legislation, I am 
sure we can expect many more changes as both the Postal Service 
as well as the mailing community adjust to a hopefully more 
robust and financially stable USPS.
    I look forward to hearing from all the witnesses today and 
hearing from all parties affected by the recent rate increase 
and what impact the new rate has had on cost and profits.
    Thank you.
    Mr. Davis of Illinois. Thank you very much, Mr. Marchant.
    Ms. Norton.
    Ms. Norton. Just a brief statement.
    Mr. Chairman, I appreciate that you have called this 
hearing. In a real sense, the mailers and the Postal Service 
suffer the same problem: the world is changing from underneath 
them, with technology, and somehow both entities have to find a 
way through it if they are to exist with efficiencies and, in 
the case of the Postal Service, with the burden, and the very 
important burden of understanding that a mail system is still a 
public service and an indispensable one in this country.
    Thank you again for this hearing, Mr. Chairman.
    Mr. Davis of Illinois. Mr. McHugh, do you have any opening 
remarks?
    Mr. McHugh. Nothing formal for the record, Mr. Chairman. 
Just let me thank you for your continued leadership in these 
critical areas and to add my words of welcome to this and the 
following panels. We look forward to their comments. Obviously, 
we wish to ensure that, from our oversight perspective, as the 
rate-setting process transitions from the old 1970's system 
into a new one, it is done in a way that is equitable and is 
fair and inflicts as little pain and as much benefit as 
possible. I think this hearing can add to that effort.
    Thank you. I would yield back.
    Mr. Davis of Illinois. Thank you very much, Mr. McHugh.
    We will now hear from our first panel. I will introduce the 
witnesses.
    Panel One, Mr. James C. Miller III, was elected chairman of 
the Board of Governors of the U.S. Postal Service in 2005. In 
addition to serving on the Board, he is senior advisor to the 
international law firm of Blackwell, Sanders, Pepper and 
Martin.
    Chairman Miller, we welcome you and thank you very much.
    Our next witness is Mr. John Potter. Mr. Potter was named 
72nd Postmaster General of the United States of America on June 
1, 2001. He has served as chief operating officer, vice 
president of labor relations, and in a number of other senior 
operational positions, both at Postal Headquarters and in the 
field.
    Mr. Dan Blair, our third witness, serves as the first 
chairman of the Independent Postal Regulatory Commission, the 
successor agency to the formal Postal Rate Commission. He was 
unanimously confirmed as a Commissioner of the formal Postal 
Rate Commission on December 9, 2006, and designated chairman by 
President George W. Bush on December 15, 2006.
    Gentlemen, it is the policy of this committee that all 
witnesses be sworn in, so if you will rise and raise your right 
hands.
    [Witnesses sworn.]
    Mr. Davis of Illinois. The record will show that each 
witness answered in the affirmative.
    Your entire statement is in the record. Of course, the 
green light indicates that you have 5 minutes to summarize your 
statement. The yellow light means that your time is running 
down and you have 1 minute remaining to complete your 
statement, and the red light means that your time is expired.
    We will begin with Chairman Miller.

     STATEMENTS OF JAMES C. MILLER III, CHAIRMAN, BOARD OF 
    GOVERNORS, U.S. POSTAL SERVICE; JOHN POTTER, POSTMASTER 
   GENERAL, U.S. POSTAL SERVICE; AND DAN G. BLAIR, CHAIRMAN, 
                  POSTAL REGULATORY COMMISSION

                STATEMENT OF JAMES C. MILLER III

    Mr. Miller. Thank you, Mr. Chairman.
    I note I have some of my family here.
    I would like to thank the Board of Governors of the Postal 
Service, whose testimony I represent today. Thank you, Jack 
Potter, the CEO and Postmaster General, and Chairman Dan Blair 
and his fellow commissioners at the Postal Rate Commission for 
all their work.
    I have a short statement with tables, which I ask to be 
submitted and included in the record.
    I would like to summarize this statement and extend it just 
a bit.
    The first point I want to make is that we Governors take 
very, very seriously our work in rate setting. We note that we 
are required by law to charge at least attributable cost for 
commercial services, but we note that if everyone paid simply 
attributable costs, our annual revenues would be only $44 
billion. Since our total cost is about $75 billion per year, we 
would be some $31 billion in the red, contrary to law. So the 
question is the amount of markup to apply to each class of 
service.
    Conventional approaches economists use in trying to figure 
out the best approaches often yields prices that are inversely 
related to the price elasticity of demand. Now, we believe that 
this policy should be tempered by business judgment.
    The second point I would like to make is with respect to 
the old versus the new law. Under the old law, the Postal 
Reorganization Act of 1970, the ratemaking process was long and 
tortured. Under the new law, the Postal Enforcement 
Accountability Act of 2006, ratemaking process is shorter and 
more streamlined. It is divided into two parts: competitive 
products of a 30 day wait period for published rates, or 15 day 
wait period for contract rates. And the PRC can establish 
minimum rates.
    In the market dominate products area, which is 90 percent 
of our business, we have a 45 day notice, and the PRC--the 
Postal Regulatory Commission--has a look-back provision. Under 
the new law, we have until December 19th of this year to decide 
whether to propose a new rate package under the old law or 
under the new law, either one. After that we, of course, would 
be under the new law.
    The third one is with respect to the ratemaking case that 
is so controversial here, that is R-2006-1. I would like to 
make several points.
    First, the Board of Governors engaged in a lengthy process 
in determining the rate package that we proposed in responding 
to the Postal Rate Commission's recommended decision. We began 
to look at this issue back in December 6, 2005. We had board 
meetings on January 10, 2006, February 7th, March 22nd, and May 
2nd, all addressing in part the question of a rate case, and 
that we initiated the rate case on May 3, 2006. Then we had 
Board meetings, a Board meeting on June 6th, we had a 
teleconference on July 12th, we met on September 11th, November 
14th, and December 5th, all addressing this issue in part. And 
on January 9th we had a Board meeting.
    On February 26th the Postal Regulatory Commission issued 
its opinion and recommended decision. On February 27th we had a 
Board teleconference, another one on March 6th, another one on 
March 14th, another one on March 16th, another one on March 
19th. And we had Board meetings on March 28th, on May 1st. We 
are dealing with a second opinion, etc. And then we had a 
teleconference on June 19th and a teleconference on June 10th. 
All told, we had 12 Board meetings and 8 teleconferences, for a 
total of 20 such meetings addressing in part this issue.
    I point this out simply to note that we laid a lot of 
attention to this matter and spent a lot of time on it.
    The second point is that our overall objectives in putting 
this package together was to meet the requirements of the old 
law, the revenue need, and to cover attributable costs, to 
apply the principles I just described and laid out in my 
prepared statement, including the inverse elasticity and 
business judgment, to differentiate by shape as well as weight, 
because the differences are substantial, and encourage mailers 
to use less-costly means of mailing.
    The result was mostly increases, some minor decreases, and 
some restructuring of rates, as described in table one of my 
submission. On the whole, our package and the Postal Rate 
Commission's recommended opinion are very similar, as you will 
see in table one.
    Now, last, with respect to publications, I would just like 
to make two points. First, they are the only class of mail that 
pays nothing toward overhead cost. Under the new system, the 
new set of rates, they pay just barely cover attributable 
costs, and before that they did not cover attributable costs, 
and the law requires everyone to cover attributable costs.
    The second point is that I have heard it said that somehow 
by raising the price or raising the rates on publications we 
are trampling on their first amendment rights. I have a copy of 
the Constitution. I read it very differently. I think that 
charge is really bogus.
    Thank you, Mr. Chairman. I would be glad to respond to 
questions.
    [The prepared statement of Mr. Miller follows:]

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    Mr. Davis of Illinois. Thank you very much, Mr. Miller.
    Mr. Potter.

                    STATEMENT OF JOHN POTTER

    Mr. Potter. Good morning, Mr. Chairman and Ranking Member 
Marchant and other members of the subcommittee. I appreciate 
the opportunity to discuss the Postal Service's approach to 
setting rates for periodicals, both under the Postal 
Reorganization Act of 1970 and the Postal Act of 2006.
    Because of the length and complexity of the price change 
process under the Postal Reorganization Act, prices have 
changed every few years. As a result, periodical mailers 
budgets and business models have been negatively impacted by 
some sharp increases in those years when rates were changed. 
Our most recent price adjustment is a good example of the 
weaknesses inherent in the old system. For a number of 
important reasons, before our 2006 rate filing, it had been 6 
years since the mailing community had the opportunity for a 
full examination of the relationship between the price of our 
services and the cost of providing them. Despite the fact that 
we improved network efficiencies and introduced more productive 
technologies to manage cost growth, our costs continued to rise 
over that period.
    Unlike other classes of mail and consistent with the long-
term pricing strategies that recognize the important role of 
magazines and newspapers in the intellectual, social, and 
political life of our Nation, periodical rates have been 
designed to just cover their costs. By 2006, relative cost 
coverage for some classes of mail had become markedly skewed. 
in the periodicals category, the revenue was less than our 
cost, a situation that did not meet the requirements of the 
law.
    There were many individual magazines that were 
significantly below their cost. Even for periodicals that did 
cover their cost, it was not significant enough to make up for 
those titles that were below our cost.
    In preparing our 2006 rate filing, we worked to make the 
cost coverage comply with the law, while doing our best to be 
sensitive to the pricing needs of smaller periodicals. Our 
proposal accommodated both of these needs, bringing cost 
coverage for that class to more appropriate levels, with price 
adjustments for publishers of all sizes held to a relatively 
narrow variance around the mean of about 12 percent.
    Our proposal encouraged more efficient mail preparation, 
with an $0.85 charge for each container, large or small. Our 
intention was to move as much mail as possible from expensive-
to-handle sacks to more efficient containers such as pallets, 
which hold about 40 times more mail than sacks and are more 
efficient to manage.
    Following the hearing process, our proposal for the single, 
simple charge had been expanded by the Postal Regulatory 
Commission to 55 different rates for different types of 
containers and different levels of preparation, leading to 
wider variations in overall prices.
    During the course of the rate case, we communicated 
frequently with mailers. We wanted to help them understand our 
proposal and have time to prepare for the changes. However, the 
outcome was unexpected. It was historically unusual, in my 
opinion, for the Commission's recommendation to differ so 
greatly from our original proposal. After careful 
consideration, taking into account the complexity of the 
Commission's recommendation, our Board voted to defer 
implementation for 4 months, twice the time period allotted for 
other mailers.
    Keeping the needs of periodical mailers in mind, we are 
focused on minimizing magazine and newspaper processing costs, 
and with the implementation of our state-of-the-art flat 
sequencing system, we expect to reduce costs by automating the 
sorting of this mail into delivery sequence.
    Mail rates are a product of the mailing industry and the 
U.S. Postal Service working together, committed to achieving 
the least possible combined cost.
    We are working with the periodical mailers to lower their 
rates by eliminating sacks and shifting their mail to pallets. 
Co-palletization, where you allow multiple titles on the same 
pallet, can be an effective strategy for smaller publishers, 
and co-mailing, which means you put two titles in the same 
bundle, for small mailers can increase the opportunity for them 
to take advantage of work share discounts.
    Ultimately, the new price-setting process contained in the 
Postal Act of 2006 can prevent the difficult and contentious 
rate situations we experienced this year. It will also address 
their underlying causes and offer a welcome degree of 
predictability and simplicity long sought by the mailing 
community as we transform from a break-even financial model to 
one that encourages retained earnings. The new law will 
eliminate the irregular and sometimes sharp price increase of 
the old system for our market-dominant products, primarily 
first-class mail, standard mail, and periodicals. That is 
because the new law anticipates annual price adjustments that 
are capped at the class level by the rate of inflation.
    This will allow incremental changes which will minimize the 
business impact of dramatic price adjustments in a single year. 
While the Postal Regulatory Commission has a far broader role 
than that of the formal Postal Rate Commissions, its role in 
pricing has changed considerably. Prior to a price change, the 
Commission reviews the new prices for compliance with the rate 
cap. The Commission also has the authority to adjudicate and 
direct the Postal Service to resolve any issues raised by 
customers after the new rates have been implemented.
    Without the inordinately lengthy review and hearing 
process, the Postal Service will have the flexibility to adjust 
prices and product offerings promptly in response to the 
dynamic market conditions and changing customer needs.
    This is important to our long-term success in providing 
everyone in America with affordable, universal mail service. 
The Postal Regulatory Commission, under the leadership of 
Chairman Dan Blair, has just taken an important step in helping 
us do that. Yesterday's publication of new rate regulations for 
our market-dominant and competitive products takes us a giant 
step closer to moving from an infrequent, primarily cost-based 
pricing model, to an annual one that is market based. We are 
grateful for the Commission's quick action in this area, many 
months ahead of their statutory deadline, and we look forward 
to moving toward this new pricing model soon.
    In closing, I would like to thank the subcommittee for the 
opportunity to discuss these issues with you today, and I would 
be pleased to answer any questions that you might have.
    [The prepared statement of Mr. Potter follows:]
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    Mr. Davis of Illinois. Thank you very much, Mr. Potter.
    Chairman Blair.

                   STATEMENT OF DAN G. BLAIR

    Mr. Blair. Chairman Davis, Ranking Member Marchant, members 
of the subcommittee, last April I had the opportunity to appear 
before you in an oversight hearing with the two gentlemen to my 
side to take questions on the operations of the new Postal 
Regulatory Commission. At that time, the rate case was still 
fresh, and I had announced an ambitious schedule for the PRC to 
have in place by October new rules for a new price cap system, 
as envisioned by the enactment of the Postal Accountability and 
Enhancement Act.
    Mr. Chairman and members of the committee, I am pleased to 
report that the Commission has accomplished that goal. The 
rules were posted on our Web site yesterday. I am extremely 
proud the Commission has completed its task 8 months ahead of 
the statutory deadline. I want to thank my fellow 
Commissioners, two of whom are in the audience today--
Commissioner Mark Acton and Commissioner Don Tisdale--and the 
staff of the Commission for their hard work and dedication to 
accomplish this substantial goal.
    I know many Members still have questions regarding the 
previous rate case under the old system. I am happy to answer 
them from the Commission perspective. In my opinion, that case 
highlighted many of the problems of the old system: lengthy in 
time, litigious in format, and a zero sum gain. The ratemaking 
structure provided little incentive for the Postal Service to 
contain costs.
    This subcommittee led the 10-year fight for postal reform 
because you believed that the system needed reforming. Some 
fought hard against that reform, but the leadership of 
Representative McHugh, Chairman Davis, full committee Chairman 
Waxman, and then-Chairman Tom Davis paid off. Together with the 
Senate and the administration, a bill came forward that the 
President signed last December.
    This last omnibus rate case was the first fully litigated 
case since 2000. It was preceded by two subtle rate cases 
which, because they are a negotiated nature, prevented the 
Commission, the Postal Service, and mailers from addressing the 
growing cost imbalances, operational concerns, or the Postal 
Service's desire to move to shape-based pricing.
    While lengthy and litigious, the last case presented ample 
opportunity for public participation and comment. Sixty parties 
participated in the hearings, which were open to the public and 
broadcast live by way of the Internet. Thirty-nine witnesses 
filed 139 submissions of testimony, all of which remain 
available for public review. In fact, most of the witnesses 
appearing today participated in our proceedings, either 
individually or through their business or professional 
associations.
    Our recommended decision in this case had the unanimous 
backing of all five of the Commissioners.
    The contrasts between the old and new systems are quite 
stark. Under the old system, the Postal Service set forth its 
revenue requirement. The Commission then had to apportion the 
required revenue among the classes of mail. That system 
produced winners and losers.
    The new, modern system of ratemaking is designed with an 
eye toward predictability and stability and doesn't play the 
zero sum gain. For most postal products, rate increases will be 
tied to consumer inflation, thereby giving incentive to the 
Postal Service to keep its costs at or below increases in 
inflation.
    The Postal Service has the flexibility to increase rates 
for its market-dominant products, subject to the price cap; 
however, its actions will be monitored and regulated by newly 
empowered Postal Regulatory Commission. The Commission and the 
Postal Service have a full agenda ahead in implementing the 
requirements of the act. Having the new system in place sooner 
rather than later allows us the opportunity to focus on the 
task ahead and hopefully avoid an old cost of service rate 
case.
    We are now in the 9th month following our recommended 
decision. While some are still battling the old case, I am very 
pleased that we can present you with a new system that will 
avoid the pitfalls of the past and provide a stable and 
predictable rate environment for mailers. I suspect that, had 
the Commission done things different in the last case, a 
different set of witnesses would be here today airing their 
concerns over how the Commission had done its work.
    My written statement fully addresses our actions in this 
hopefully last rate case under the old regime.
    I look forward to working with Members of Congress, 
Chairman Miller, Postmaster General Potter, and the mailing 
community to ensure that this new law and the new structure 
which it produced benefits our entire postal system.
    I look forward to responding to your questions.
    [The prepared statement of Mr. Blair follows:]
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    Mr. Davis of Illinois. Thank you very much, Mr. Blair.
    We will now proceed with questions for the witnesses.
    I would like to begin with you, Chairman Miller. The Postal 
Service has a program in place to automate the carrier 
sequencing of flat mail. That is the flat sequence and sorting 
called FSS system. Do you anticipate that this will 
significantly decrease the cost of handling periodicals? What 
is the timeframe for the deployment and full implementation of 
the FSS system?
    Mr. Miller. Thank you, Mr. Chairman.
    A couple of years ago the Board visited a plant in 
Indianapolis where they were beta testing the system. We have 
approved major acquisitions of flat sequencing systems, and we 
anticipate those coming on-board in sequence over the next 
several years.
    We think it has the potential of lowering the cost, as well 
as improving the service offered to publications. In that 
event, of course, it at least holds out potential of giving 
some rate relief to publications, but we will just have to see 
how that system works.
    We have confidence that it will pay off handsomely, but how 
handsomely we are not sure, and we are not sure how 
differentially it will affect each of the various classes of 
mail. But there is a great deal of potential there for 
publications.
    Mr. Davis of Illinois. The subcommittee has had a 
tremendous amount of inquiry relative to international 
charitable mail. What is the Board's position on international 
charitable mail?
    Mr. Miller. Well, as a business proposition, we think that 
all mail, whether it is charitable or not, should cover the 
relevant attributable cost plus some contribution to overhead. 
We have addressed the question of international mail. I suspect 
what you have heard is about the so-called M-bags that is of 
great controversy. I think that would be best addressed by the 
Postmaster General.
    Mr. Davis of Illinois. In a recent case involving review of 
a negotiated service agreement, the Bank of America, NSA, the 
Postal Service gave the Postal Regulatory Commission data that 
was 8 years old. Of course, the PRC rejected that data as not 
being data that they could effectively use.
    Mr. Miller. Right.
    Mr. Davis of Illinois. As chairman of the Board, would you 
agree with me that the PRC must get the best possible data to 
make use of when they are trying to evaluate and make a 
determination?
    Mr. Miller. I absolutely agree, and I think that was a 
serious oversight, and the Board of Governors is not happy 
about that. We are addressing that issue in a serious manner.
    Mr. Davis of Illinois. You indicate that you are addressing 
it. Would you amplify a little bit?
    Mr. Miller. I have asked the Inspector General to look into 
the matter and to give us a report, and he anticipates giving 
us a report in the next several weeks.
    Mr. Davis of Illinois. Thank you very much.
    Mr. Potter, does the Postal Service intend to introduce a 
new rate case before the end of this year?
    Mr. Potter. The Board of Governors decides whether or not 
we are going to implement a new rate case or introduce one this 
year. Just yesterday, late yesterday afternoon, we received a 
final rules and regulations for the rates process under the new 
law. We are in the process of evaluating that and giving a 
summary of that information to the Board so they can render a 
decision, hopefully at their Board meeting in November, as to 
what path we will choose. But it is not my decision; it is the 
decision of the Board of Governors, and we will, after 
evaluation of the rules that have been published, make a 
recommendation to them, but it would be premature for me to say 
right now.
    Mr. Davis of Illinois. Let me ask you, regarding the 
elimination of international surface mail and its negative 
impact on some of the humanitarian issues and causes, how can 
the Postal Service address these concerns?
    Mr. Potter. Mr. Chairman, if I could just describe, 
international mail is probably our most complex rate area. M-
bag service is a service that was designed to move on ships 
around the world. Over the last few years, the volume of mail 
that was sent on the M-bags has been declining. In addition to 
that, our ability to get service to many of the countries where 
the charitable organizations sent their books has been 
eliminated or limited severely. So in many cases we found 
ourselves flying mail just to make sure that it got there.
    So as we looked at the international rates, we decided to 
recommend to the Governors that we eliminate those surface 
movements because of a lack of market interest, as well as the 
fact that we had, in many cases, been forced to fly the mail 
and were losing money on it.
    That is not to say that we are not insensitive to the needs 
of the charitable organizations, and we are looking at ways 
under the new rate structure that we might be able to 
accommodate them. But suffice it to say it is a very difficult 
market, a declining market, and one where service simply is not 
available to us.
    Mr. Davis of Illinois. We are going to have a second round, 
and so I am going to shift and go to Mr. Marchant.
    Mr. Marchant. Thank you, Mr. Chairman.
    This will be a question for all panel members. With the 
continuing pressure on postal mail being lost to electronic 
means, what measures is the Postal Service taking to attempt to 
minimize these losses?
    Mr. Potter. Well, first of all, the Postal Service is doing 
everything it can to increase the level of service that we 
provide to America, because if we provide a good level of 
service we are obviously providing value, and that will help us 
keep the mailers that we have and grow new mailers.
    In addition to that, we are looking to take cost out of our 
system wherever it is practical, so efficiency is a paramount 
issue for us.
    Third, we are looking to grow and take advantage of the 
inherent value of the network that we are very proud and 
honored to be able to work for.
    So over the course of time you have seen people who 
traditionally have not used mail, such as folks who rent DVDs. 
It is now a market advantage to use us to deliver DVDs. We are 
looking at other places where we can do that.
    The key going forward for us, though, is to ultimately 
improve the quality of the product we have, the efficiency of 
the product we have. One of the big steps we are going to take 
is to introduce an intelligent mail bar code that will allow us 
to track and trace every piece of mail. Once we are able to do 
that, I think it is going to open up a world of opportunities 
for new products and will increase the use of mail.
    The threat from the Internet is very real. It is not 
something that we can compete with head-on because of costs. 
But I think we can complement the Internet and find places in 
the market where we fit and where people will value the service 
that we provide.
    Mr. Marchant. Mr. Blair.
    Mr. Blair. I think a good way to answer that question is 
how it turns on to ensuring the viability of the postal system 
in the United States. From the regulator's perspective, we are 
moving in the right direction in that area. First we introduced 
the new rate structure for market-dominant, competitive 
products yesterday. I think that will help us lead toward an 
environment that will see more predictable and stable rates, 
and that way the customers can better plan their business 
cycles according to how those rates are going to be increased. 
Generally speaking, they will be capped at inflation.
    We are also looking at how you bring value to the mail. 
From the regulator's perspective, we have been joined with the 
Postal Service over the course of this past summer in 
consultations over the development of service standards and how 
to measure those service standards. If you have a product, you 
need to know how it is going to perform and you need to be able 
to measure it, so the Commission has been bringing value to 
that respect by working with the Service to ensure that these 
standards are, in fact, realistic, don't impose new costs on 
the system, but are viable and allow customers a realistic idea 
of how well their mail is going to be received into the system.
    Also, from the regulator's viewpoint, we are going to bring 
transparency and openness to the system. We will be looking at 
financial data. We will be looking at the competitive playing 
field. And we will be looking at the ways the Postal Service is 
offering its new products and a whole host of other things down 
the line. We are charged with doing numerous new studies, as 
well.
    I think that from that perspective I don't know if it will 
stem the loss so much as you may bring value to the mail and 
bring value to the system, ensuring the viability of that 
system as an integral part of our economic sector.
    Mr. Miller. Mr. Marchant, first I want to assure you the 
Board of Governors is committed to growth as well as cost 
cutting. Growth means new innovations, service improvements, 
just the kind of thing that the Postmaster General was speaking 
about.
    The second thing is there is an empirical question, and 
that is to what extent has the e-mail phenomenon or the 
electronic bill-paying and all sort of run its course. Is it 
going to accelerate or is it going to bend over in terms of the 
rate of its growth. That is something that, frankly, I am 
frustrated because I don't have good numbers on. I am asking 
some of the people at the Postal Service to do some more 
research about.
    Keep in mind that electronic communications both create new 
messages as well as divert messages. And, as Jack I think 
referred to, there are ways in which electronic mail and 
electronic communications can be complementary to Postal 
Service, and vice versa. I mean, a lot of people order things 
electronically and get them delivered by us. A lot of mail 
comes and suggests people to order things electronically. So 
there is a symbiosis here that we need to explore, as well.
    Mr. Marchant. Well, I will tel you, from my personal 
observation, that there are at least three different ways now 
that I use the mail that I didn't use even a year ago. The 
movies is one of them. I am now finding that a lot of the stuff 
that I am ordering on the Internet is coming by the Postal 
Service instead of UPS or one of the other dreaded three or 
four. And I am finding that--maybe it is because I am getting 
older or I don't know what it is--I am getting about twice the 
amount of print mail, the catalog mail, than I was a year ago.
    In my household, the growth of our mail is actually 
growing. Our kids are out of the house now, but our mail is now 
actually growing and we are getting more mail now than we did a 
year ago and are using the Postal Service more heavily.
    Mr. Miller. The loss is really in the first-class mail. 
That is really where it is limited.
    Mr. Marchant. Yes. The first-class mail is fairly non-
existent, except for those constituents that feel like it is 
the most effective way to get to me. And it is.
    Mr. Miller. Yes.
    Mr. Davis of Illinois. Well, I'm glad that you get time to 
watch a movie every once in a while.
    Mr. Marchant. Yes, between 2 and 4 a.m.
    Mr. Davis of Illinois. Right on for you.
    Ms. Norton.
    Ms. Norton. Well, we, of course, have to accept and indeed 
have pressed the business model that is being used now and 
obviously will have differential effects. I am concerned about 
the difference between mass periodicals that have advertisers 
and small periodicals that thrive simply on what they have to 
say and for whom, therefore, the postal rates are a large cost 
of doing business.
    Rates have reflected this difference before, and you now 
have some saying that essentially you are raising rates at such 
a rate some allege that they expected rate hikes, for example, 
for catalogers and small periodicals, in the range of 9 to 12 
percent, and that it could be as much as 20 to 40 percent.
    It seems to me very important to encourage efficiencies of 
these periodicals, as well as everybody else, including the 
Postal Service, but I wonder if you truly believe that the 
special circumstance of small publications with little or no 
advertising has been taken fully into account, and that these 
rates are bearable by such publications with efficiencies. Or 
do you envision that perhaps they are going to go out of 
business and so be it?
    Mr. Miller. Ms. Norton, let me reply by saying first of all 
we delayed the implementation of the increases to give the 
publications a time to gear their software to the new rate 
system. Second----
    Ms. Norton. To do what?
    Mr. Miller. To give the publications time to change their 
software to reflect the new rates.
    Ms. Norton. Does that respond to my question? Will any kind 
of adjustments of software make up for the difference between 
what very small periodicals who have no advertising can do with 
large increases that come at one time, and mass mailers or 
periodicals like Time Warner, for example, who depend on 
advertising as much as or far more, and who have, of course, a 
great deal of advertising.
    Mr. Miller. I am trying to be responsive, Ms. Norton. I am 
saying that our delay in implementing the new rates helped the 
small as well as the large.
    In terms of the small, we have recently changed our rules 
to make small publications eligible for the lower rates, 
depending on editorial content versus advertising, and so 
forth. We have bent over backward to accommodate them in that 
fashion.
    But we are required by law to charge attributable costs, 
and so we did raise the rates.
    You settle on an important point here, or you focus on an 
important point, and that is that under this new rate package--
and I am sure that Chairman Blair wants to explain this, as 
well--some of our rate packages to which larger publications 
can more easily be accommodated or could pool their 
publications, they weren't hit as hard as some of the smaller 
ones. But the prices do reflect. I mean, we might have some 
differences here and there, but, I mean, by and large the 
prices do reflect the cost, the higher cost that the Postmaster 
General was alluding to earlier that palletized costs are lower 
than individual cost handling bags, and so forth. We had to 
make them reflect those differences in cost.
    Mr. Potter. Ms. Norton, if I could?
    Ms. Norton. Yes, Mr. Potter.
    Mr. Potter. I am concerned about periodicals, in general, 
and moving forward. We are very concerned about our ability to 
live within the rate cap for periodical mail.
    There are a number of ways that I think we have to go about 
the business of addressing them. First, we have to help 
periodical mail grow, because overall in the industry there is 
a debate about editorial versus advertising content--and don't 
get me wrong, it is a laudable debate and it is one that you 
could easily get into. From the person who is trying to, again, 
run it as a business, I prefer to have very thick periodicals 
that pay a higher rate.
    Ms. Norton. But how do you get periodicals to grow in the 
Internet and technological climate we have today? That is an 
interesting notion.
    Mr. Potter. Well, it is, but there have been things that 
would preclude you from putting a periodical into the mail, and 
what prices they could charge. For example, there used to be a 
nominal rate that said that you had to charge somebody for a 
subscription if you used the mail at least 50 percent of what 
the newsstand price was, the basic rate was. So whatever the 
basic subscription rate is, you had to charge at least 50 
percent of that for the folks that bought the publication. We 
have lowered that to 30 percent to give them pricing 
flexibility so they can help grow the number of magazines they 
had.
    As the chairman was just saying, we ended up, and we have 
worked with them to try and improve those magazines that are 
starting a new launch to enable them to take advantage of using 
the periodical mail stream long before they have sufficient 
publications to qualify. So it is a way of easing their way 
into new hard-copy magazines.
    In addition to that, we want to make the system as 
efficient as we possibly can, and so the notion is that 
everybody is going to have to change. The Postal Service will 
change by trying to make its operations more efficient. As the 
chairman alluded to, we have a flat sequencer, and I said 
earlier to try and make that more efficient.
    In addition to that, we have a committee that we work with, 
Postal Service one-on-one, a periodicals advisory group that 
has newspapers and magazines of all sizes to come together and 
to look at the issues from an industry standpoint, and it 
involves not only the Postal Service and the periodicals as 
well as the suppliers, because there are printers out there, 
logistics companies. The notion if we could bring the mail 
together and process it in bulk, more of the work could be done 
during the printing process.
    Change is tough. I am not trying to negate the fact that 
this change will be difficult.
    We also have a broader group called the Periodical 
Operation Advisory Group that is part of the Mailers Technical 
Advisory Committee, where we have people from outside of 
periodicals who are helping us trying to address this problem. 
But the notion that the business challenge is we have a 
declining mail base because, as you alluded to, magazines are 
going online now, as well as in the mail. We have a declining 
mail base, and that mail is being delivered to a growing 
delivery base. It is a very challenging issue.
    Ms. Norton. As I said in my own opening statement, I think 
you and most of these periodicals are in the same boat.
    Mr. Miller. Right.
    Ms. Norton. Indeed, the very small opinion periodicals I am 
talking about who don't rely on any advertising do seem to me 
to be an alternative, particularly since they often cater to 
fairly high income and educated people, and that is go online. 
It seems to me that one of the challenges you face, just as 
they face the challenge of meeting the postal rates--and I am 
the first to understand the challenge you face. You, in fact, 
serve the public, and that has to be my first concern. But, 
just as you face those challenges, it seems to me that for 
these periodicals the technology is a much more viable 
alternative than for many of your customers.
    Mr. Blair.
    Mr. Potter. I would agree with that.
    Mr. Blair. I think two points I would like to bring out. 
One fundamental question is why are these costs so high in the 
first place. We have seen in first class and standard class 
over the last 10 years the cost remain fairly constant. In 
periodicals they have shot up by about 50 percent.
    Over the last 10 years, periodicals as a class has lost 
about $3 billion. They failed to cover $3 billion of their 
direct costs, and they have made virtually zero contribution to 
the institutional costs of the Postal Service.
    So it is not that it was a robust class of increasing 
volumes and increasing revenues; it is just the opposite. So 
with that you need to ask the second fundamental question of: 
then who pays?
    Ms. Norton. Who pays? And how much do each pay?
    Mr. Blair. Exactly. And do you ask the smaller periodical? 
It is really not a question of size so much, although size does 
have a bearing on it, but it is efficient versus inefficient, 
or lack of efficiencies. Let's put it that way. And the 
question is who pays.
    If you can't engage----
    Ms. Norton. You can talk efficiencies when you are talking 
about large periodicals. It is very hard to talk efficiencies 
when you are talking about these small opinion periodicals and 
magazines----
    Mr. Blair. You are correct.
    Ms. Norton [continuing]. For whom efficiencies of scale are 
simply unavailable, sir.
    Mr. Blair. You are correct, and so the question then still 
becomes fundamentally who pays. Do you ask other mailers to 
pick up those costs?
    Ms. Norton. Well you ask them to pay. As I say, the 
question is I don't think they expected not to pay any of the 
institutional costs; I think the question is how much can we 
reasonably expect them to pay without driving them either out 
of business or into another mold which would not be available 
to the Postal Service at all.
    Mr. Blair. But who picks up the deficit? That is the 
question. Do you ask other mailers? Do you ask the postal 
system to absorb it? Do you ask rate-payers? Do you ask 
taxpayers? That is the question.
    The rates that we recommended in the last case were cost-
based, and those were consistent with the Postal Reorganization 
Act in 1970. We now have a new system. Hopefully you won't see 
the rate spikes, the rate shocks under the new system because 
it is capped at the class. But the fundamental question is: who 
pays when you have these high costs?
    Mr. Davis of Illinois. Thank you, Ms. Norton. We are going 
to have another round, and I am going to go to Mr. McHugh.
    Mr. McHugh. Thank you, Mr. Chairman.
    Let's talk about costs. How much costs are we talking about 
here if this Congress decided, because I think there is a lot 
of sympathy that there is a political content value of these 
mailers, and we wanted to hold them harmless, how much money 
would have to be found either from the taxpayers or from within 
the system? I suspect about $500 million, but is that about 
right?
    Mr. Potter. Well, under the recently adjusted rates, there 
is nothing. I mean, they are going to cover their cost. The 
question is how much relief do you want to give. I think at 
that point you can decide what the number is.
    Mr. McHugh. But the rate increase for this group that was 
put into place, as we have been told ranging from 5 to 45 
percent, depending on where they fell on the efficiency 
spectrum, all told, the information I had was around $500 
million, ball park.
    Mr. Potter. I think it is probably half that.
    Mr. McHugh. Half that?
    Mr. Potter. Yes.
    Mr. McHugh. So $250 million?
    Mr. Potter. And if you talk about the difference between 
that and the average price increase, it would be half that 
again, so it would be about $125 million.
    Mr. McHugh. So what we would be reassessing and what Mr. 
Blair and his Commission would have to do is reassess that $100 
million if the law provided you the flexibility to do that, 
assess that $100 million across others, yes? That is a 
question, Dan.
    Mr. Blair. I would have to go back and look at the figures 
on that. Mr. Potter is correct that the class, as a whole, now 
covers all its cost, how you apportion it within that class. if 
you capped it for some mailers and not for other mailers, I 
would have to go back and check the record to see exactly how 
much that would be.
    Mr. McHugh. Well, it seems to me as a Congress, if we are 
going to consider the totality of this challenge, we need to 
understand how much money we are talking about, so maybe we 
ought to do that. It would be of interest.
    As to these mailers, I know you have heard, as we have 
heard, that, while suggestions like co-mailing and co-
palletization and other efficiency measures sound nice, that 
when it comes to these particular publications it is really 
efficiencies beyond their ability--in fact, beyond their 
printers' ability.
    Dan Blair, I would ask you, sir, to what extent did you 
look at the reality of the accessibility of true efficiencies 
as a way for these mailers to address their concerns? Is that 
something you looked at?
    Mr. Blair. Well, when we assessed these rates we did it 
based on a data base that was provided to us by the Postal 
Service and accepted by the parties in the litigation. We saw 
that there were small mailers who were very efficient. We saw 
that there were large mailers who were inefficient. So there is 
ability among some to do that.
    We are also seeing that there are changes, in fact, going 
on in the system. You are going to be hearing from two 
panelists after us who represent printers who are talking about 
responding to the market realities and making themselves 
available.
    But besides making it a cold, hard determination based on 
efficiencies, the Commission tried to ameliorate that by saying 
when we upped the editorial discount available for these small 
magazines of opinion or for magazines, in general.
    Second of all, according to our study, the smallest 
circulation magazines, those under 15,000, saw the smallest 
percentage increase overall, as well.
    Third, even though it is not making an institutional 
contribution as a class, that does relieve mailers across the 
class from additional burdens in terms of rates.
    Mr. McHugh. Help me understand, if, as Chairman Miller has 
said a number of times this morning, and if, as the law has 
stated at least since 1970 that these publications, as other 
classes of mail, have to cover costs, I am assuming they have 
through the various rate-setting procedures; is that correct? I 
am curious why 45 percent fell upon some of these mailers and 
not others if they were, indeed, covering cost under previous 
rate cases.
    Mr. Blair. I don't know if the individual mailer was 
covering those costs. The recommends were tied to what are 
called rate elements, which are tied to particular mailing 
practices.
    We looked at how a mailer prepares his or her mail, how 
they present it, what kind of container it is in. Is it in a 
bundle? Is it in a sack? Is it in a lightweight sack? Can it be 
palletized? Where is it entered into the mail stream? Where is 
it going? Is it going to a business? Is it going to a 
household? Is it going to a classroom? The editorial percentage 
discount, a whole host of factors go into that. So each 
mailer's rate will differ depending on his or her practices. In 
fact, the number of pieces they mail at the time will also 
determine.
    The old structure was premised on pieces and pounds. Now 
what we have done is we have introduced other cost elements, 
including pieces, pounds, sacks, bundles, and pallets. Those we 
identified as different cost drivers, and, depending on how 
they are utilizing them will determine how much an individual 
mailer pays.
    Mr. McHugh. One final question, if I may, Mr. Chairman.
    Under the bill that this Congress passed and you published 
your ratemaking regulations on yesterday, there is a 
requirement, because I think we all understood in the Congress 
that, as has been said, periodicals has been a troubled class 
for some time, that the Postal Service and the Postal Rate 
Commission shall study and submit to the President and Congress 
a full report on the accuracy, the quality, the completeness of 
information that you used in assessing rates against 
periodicals and other requirements of that study.
    I am assuming that you will follow that part of the law, 
but I am wondering, have you had a chance yet, either 
individually as the Postal Service or the Rate Commission, to 
talk about how and when you might go forward on that study?
    Mr. Blair. Your assumption is correct. That is something 
that we would hope to start working on with the Postal Service 
soon. We have been working with them on the establishment of 
the rate system, as we have with other members of the 
community. We have been working on the service standards and 
focusing on those aspects of the bill that had a time deadline. 
But this is something, given your concerns or the committee's 
concerns or something, that we will look forward to working 
with Mr. Potter and Mr. Miller on.
    Mr. McHugh. Mr. Miller.
    Mr. Miller. Yes, sir. Could I just make three quick points? 
One, when we are talking about Dan or Jack or I talking about 
covering costs, I want to make sure we understand that we are 
talking about covering attributable cost, which is only 59 
percent total cost. The rest is overhead. We have said that the 
publications are not, under the new regime, publications as a 
whole would not cover anything, would not contribute anything 
to overhead.
    Second, in the past, because we did not break out the cost 
differences, not for the larger publications but the kind of 
service that we have, by kind of service, palletized and 
otherwise, those that were using the bags and otherwise were 
being subsidized by other publications and other users of mail. 
So we made this reality check, and that is a reason that the 
rate structure for a publication is a little more complicated 
today.
    Finally, I read some of the testimony from some of the 
publishers and also the letters that we received--we received 
hundreds of letters in response to our rate proposal. I don't 
recall anybody talking about, well, we could raise rates. It is 
always, We will suffer this loss, that loss, and so forth. But, 
I mean, if these publications--and I subscribe to some of these 
very small publications--I think that the consumers could bear 
higher costs, as well. So I don't see that they would go out of 
business. Maybe some cutbacks or whatever, but I think that the 
allegations that the sky is falling are simply that.
    Mr. McHugh. Thank you.
    Thank you, Mr. Chairman.
    Mr. Davis of Illinois. Thank you very much, Mr. McHugh.
    Mr. Sarbanes.
    Mr. Sarbanes. Thank you, Mr. Chairman.
    I am going to follow the same line of questioning for a 
couple of minutes in terms of the impact on the small mailers.
    Mr. Blair, you said that there are small mailers that you 
have discovered are quite efficient, and there are large 
mailers that are inefficient. The theme of your remarks and the 
answers to your questions seem to be that the same expectations 
of efficiency ought to be brought to the large mailers as to 
the smaller mailers. I think what you are hearing up here is 
that I am not sure we agree with that; that there shouldn't 
necessarily be the same expectation, the same standard 
applying, because, as a class or group or category, the smaller 
mailers are going to be inherently less efficient and, as has 
been said by others, can't expect to achieve the kinds of 
efficiencies across the board that the larger mailers can.
    I don't claim to be an expert on the PRA, but a number of 
you referred to the fact that the law requires you to recover 
these costs and so forth, but the law doesn't say that you 
can't group people together in a way that some cross-
subsidization is occurring, does it?
    Mr. Blair. Well, the law basically directs that mail cover 
its cost, and the Commission has certainly followed, over the 
course of the 37 years, that when cost drivers have been 
identified, they have applied it to those mailers. That seems 
to be the question of who pays. If you do have inherently 
inefficient--and I don't want to make that a value judgment--
inherently inefficient, small mailers who just can't avail 
themselves of this, then the question is: who pays the 
difference between what would have been an affordable rate and 
what the real rate is?
    Mr. Sarbanes. Right.
    Mr. Blair. And you can ask the big mailers to do that, and 
you are going to be hearing from some big mailers after us. I 
think that they are going to certainly have an opinion.
    Mr. Sarbanes. Well, you are always going to hear from 
someone.
    Mr. Blair. Exactly.
    Mr. Sarbanes. I guess the concern is we are hearing from 
small mailers who have high levels or high amounts or high 
volume of political content in them, editorial comment, and we 
are particularly concerned that gets crowded out over time. So 
maybe we would choose to hear more from the large mailers and 
the small mailers. I think that is kind of what the discussion 
is.
    But I don't buy the idea that a situation where you draw 
the line at a place that still allows for reasonable cross-
subsidy is something that can't continue to be part of the 
approach and thinking of the regulatory commissions.
    Mr. Blair. I think that some would say there is still a 
reasonable cross-subsidy. The full efficiencies weren't 
completely passed through on to the small mailers in this case.
    Mr. Sarbanes. And we talked about overhead versus 
attributable cost.
    Mr. Blair. Right.
    Mr. Sarbanes. And I am talking about within the 
attributable cost we really----
    Mr. Blair. Even within that class, so you are talking of 
who is going to pay those attributable costs, not all the 
efficiencies were completely passed through to the more 
efficient mailers. More-efficient mailers are still paying for 
the cost of the less-efficient mailers, to some degree. Not as 
much as they were before the old structure.
    Mr. Sarbanes. OK.
    Mr. Blair. And I am sympathetic to where you are coming 
from, but I would ask you to understand that if this was a 
robust class where you had growing revenues, I think that you 
could say let's level the playing field a little bit more. But 
it is not. I mean, having not attributed $3 billion over the 
last 10 years, plus made no contribution to the overhead cost 
of the Postal Service says something has to be done.
    The old rate structure sent out the wrong messages. It is 
my understanding that under the old rate structure incentives 
were given to mailers to use what are called lightweight sacks. 
Oftentimes those sacks would spill or break, causing more hand 
processing, which added to cost. Why were incentives given to 
using those sacks?
    Those things had to be re-adjusted. So you are right that 
there is more of a burden placed on these smaller publications 
who can't reach these efficiencies, but then the question then 
comes down to who pays for those. At this point, I think it is 
consistent with the PRA that once those cost drivers are 
identified, that you go forward and you ask those mailers to 
pay for those costs.
    Mr. Sarbanes. Well, the fact that you are describing a 
group of mailers, generally periodicals, that you seem to say 
may be going ultimately the way of the dinosaur in terms of 
their declining base and all the rest of it, I guess whether 
that is true or not, as they head in whatever direction they 
are heading in, we are just saying that the burden ought to be 
spread a little bit more.
    Can I ask one more question, Mr. Chairman? I am going to 
completely switch gears and get back to this issue of other 
sources of revenue and so forth and other uses of the Postal 
Service.
    I have been intrigued for a long time, ever since I read 
about the response after Katrina, where you had U.S. Postal 
Service in places where no one else dared to go, and 
understanding and knowing everybody in a community and being 
able to reach out to them, and in some instances were the first 
responders on the scene. Could you just talk briefly about the 
extent to which the Postal Service is thinking about how it 
becomes part of a first responder network and whether--I mean, 
there wouldn't be commercial sources of revenue from that, 
presumably, but you might be able to convince other agencies 
that are keen on being prepared in a disaster scenario to 
contribute toward that kind of effort. If you could just speak 
to that.
    Mr. Blair. I will defer to the Postmaster General on that 
one.
    Mr. Potter. Well, first of all, we are very proud of our 
people and the way they respond to any emergency situation that 
occurs anywhere in the country. We are very proud of the fact 
that we have service back up and running in California, and, 
for those people that have lost their homes, we have managed to 
provide temporary delivery as convenient as we possibly can to 
them.
    I personally was in Florida after Hurricane Charlie, and 
then was down in New Orleans and Mississippi after Katrina. I 
have to tell you that I think we can bring a level of 
coordination to something that is extremely important after a 
disaster, and that is to help find others get connected with 
each other when it comes to family members.
    I was a little surprised when I walked the streets in 
Florida with a letter carrier to see people from other 
agencies, Federal agencies and private concerns, out doing 
reconnaissance when it came to what homes were occupied, where 
the residents might be. Those folks didn't even know what 
street they were on. Our letter carriers had the day before not 
only gone out to determine which homes were occupied, but had 
forwarding information, knew where they were located.
    Likewise, in the Katrina situation people came and 
registered with us, gave us change of address, and we were able 
to again help people get connected.
    We are very proud of the work we are doing right now with 
Health and Human Services and Homeland Security around what 
might happen if there was a biological attack in different 
parts of the country, and we have done tests in major cities 
around the country, most recently in Boston, where the Postal 
Service, working with our unions, volunteered to help with the 
delivery of medications to people who would be recommended to 
stay homebound.
    We would like to even go farther than we did. We showed 
that we could deliver in a matter of a couple of hours 
medications to every address in a geographic area because our 
people have assigned routes, they have assigned routes, they 
know who is behind the door.
    The one thing I would like to do is allow the carriers the 
flexibility to determine how much medication is left on a door 
because they are more knowledgeable about how many folks reside 
in a residence than a data base might give you.
    So I think there are numerous ways that we can do this. 
First and primarily is to help locate people after a disaster, 
but I think it would require some change in the law to allow us 
to share information.
    Today there are all sorts of restrictions about our ability 
amongst agencies and private sector folks to share information 
about what they know about the whereabouts of folks after a 
disaster, and that could be very helpful. And then, working 
with the Federal Government, we can be an active participant in 
the logistics around moving supplies to needed areas, as well 
as to provide contact, whether that is the hand delivery of 
information in written form if other communications are down, 
or the delivery of medications.
    Basically, if it is hard copy or physical, I think you have 
a ready resource. The Federal Government has a ready resource 
in the Postal Service to provide service.
    If I could go and burden you a little bit to go beyond 
that, I view the Postal Service as the presence of the Federal 
Government in every community. When you think about the Federal 
Government, we are the piece of the Federal Government that 
touches everybody at their door every day. I would love to 
engage in a conversation about how the Postal Service could 
help the Federal Government interface with its constituents, 
whether that is today we work with the Secretary of State with 
the issuance of passports. We would invite all thought on how 
we could better serve the American public as the arm of the 
Federal Government in every community and every door.
    Mr. Sarbanes. And I think you should be paid for that 
service.
    Thank you, Mr. Chairman.
    Mr. Davis of Illinois. Thank you very much, Mr. Sarbanes.
    Mr. Jordan.
    Mr. Jordan. Thank you, Mr. Chairman.
    I want to thank the gentlemen for joining us this morning. 
I am just beginning to get my arms around this issue, but, with 
respect to the periodical issue, how long were we functioning 
under the old structure, the kind of two-tiered or cross-
subsidization, whatever you want to call it? How long did that 
go on?
    Mr. Blair. That old structure was in place since 1970.
    Mr. Jordan. And then someone mentioned earlier the lead 
time you were giving periodicals and companies today. How much 
lead time was given to those individuals?
    Mr. Potter. Well, the Postal Service would consult with 
mailers as we were formulating a rate proposal. We would file a 
rate proposal with the Postal Regulatory Commission, and they 
had 10 months under that law to preside over a rate case with 
an evidentiary procedure. At the end of 10 months they made a 
recommendation to the Board of Governors regarding the rate 
proposal that was put forth in front of them.
    Basically, the Board of Governors could make a decision to 
go along with the recommendation. At the end of the day, the 
Board of Governors has, I guess, the ability to overrule the 
Commission when it comes to the revenue requirement; however, 
when it comes to rate structure, the rate structure is pretty 
much under the domain of the Postal Regulatory Commission.
    Generally, after that recommendation is made and the Board 
of Governors has made their decision, there was a 2 month to 3 
month period of time to allow for mailer implementation. 
Whether it was 2 months or 3 months was largely determined by 
the financial position of the Postal Service. If there was an 
ability to allow them to go 3 months, it would. In the case of 
this past rate case, we chose to implement within 2 months 
because the new law basically had us lose $5 billion last year, 
so it was not a good year to give anybody charity.
    Mr. Jordan. Are the numbers thirty-seven years under the 
old structure, 2 months lead time? Is that accurate?
    Mr. Blair. No, 37 years under the old law. From time to 
time the Postal Service would come in with a new rate case. 
Last year--was it January or February?
    Mr. Potter. No, it was May. May 2006. Let me just describe 
it to you a little bit. In effect, when we file our rates we 
are putting people on notice that a year from that date they 
can expect a rate change.
    Now, historically what we file is in the ballpark of what 
the outcome is. By in the ballpark, I am talking a couple of 
percent high or low.
    In this case what happened was we filed a rate case. The 
Postal Service was working with mailers saying here is what we 
filed, here's the new rules and regulations around that filing, 
and we published them and had regular meetings with them on 
that so that they could begin to anticipate their software 
requirements and build those costs into their budgets.
    What happened was we had an outcome that varied rather 
dramatically for some mailers from what the Postal Service had 
filed.
    Mr. Jordan. Is it fair to say in that 37 year timeframe 
that there have been several occasions like what we are 
discussing here today, so several times this thing has 
happened, but this particular time it is to a larger degree 
than in previous occasions? Is that accurate?
    Mr. Potter. My experience was there wasn't as dramatic a 
difference in the rate structure. It generally followed along 
the lines of what the Postal Service had proposed. In this case 
there was a big difference for some mailers.
    Mr. Jordan. OK.
    Mr. Potter. So we might have proposed an increase of 20 
percent and it went to 40 percent. In other cases, mailers' 
rates dropped versus our proposal. It is that change and the 
width or the breadth of that change that has a lot of mailers 
concerned. That is one of the reasons they are concerned. They 
are also concerned because the nature of just you raise any 
rates they are going to be concerned.
    Mr. Jordan. I understand. And in that 37 years, there has 
always been some degree of what has been called cross-
subsidization or different tiers. In fact, I forget which one 
of you gentlemen said it earlier, you said something about with 
new periodicals you have some kind of different structure that 
is in place.
    Mr. Potter. Well, if I could respond, first of all, there 
always has been cross-subsidization within every class, because 
there is a different cost to the Postal Service for handling 
different mailings. Let's take periodicals. If you take a 
periodical mailer and you produce a magazine that stays within 
your local area, if it is a Washington, DC, magazine and 95 
percent of the recipients are right here in Washington, it is a 
lot easier to handle that mail than it would be if you had that 
magazine and it went to a dispersion of people around the 
country. So there is always going to be a variance on cost. And 
there has always been cross-subsidization.
    The Board of Governors has exercised their judgment in 
terms of how much of that cross-subsidization they would allow, 
and their filing last May in 2006 reflected their judgment 
regarding that cross-subsidization that they would allow to 
happen. They knew that some mailers weren't covering their 
costs, while others were more than covering their costs. So 
there was a balance there that led to what would be an average 
price increase for periodicals.
    In the case of what just happened, the Board of Governors' 
judgment was overridden by the Rate Commission's or Regulatory 
Commission's view of the prices that were proposed in light of 
their interpretation of the law and how they should apply those 
economic principles.
    Mr. Jordan. Thank you, Mr. Chairman.
    Mr. Davis of Illinois. Thank you, Mr. Jordan.
    Mr. Cummings.
    Mr. Cummings. Good morning.
    Let me see if I can get a handle on some of this.
    This basically is a done deal, isn't it? I am just trying 
to figure out whether we are here wasting our time, because 
time is short. I am just curious. It sounds like you are 
basically saying this is a done deal. Somebody answer me, 
please.
    Mr. Potter. Well, by law the case that was proposed last 
year is a done deal, but I think the value of this discussion 
will help shape us and our thinking for future rate cases.
    Mr. Cummings. Well, I am glad you said that, Mr. Potter, 
because the new law basically gives mailers even less input, is 
that right?
    Mr. Potter. Not in my opinion.
    Mr. Cummings. No? I see you shaking your head, Mr. Miller. 
Why are you shaking your head?
    Mr. Miller. Well, they can have a lot of input, and my 
understanding is the new law--and I may be incorrect in this. I 
am not a lawyer, but I am advised by lawyers that the new law 
gives the Board in its rate changes the discretion to include 
other things, things in addition to attributable cost.
    Mr. Cummings. Mr. Potter, did you have something that you 
wanted to say?
    Mr. Potter. I just wanted to agree with them.
    Mr. Cummings. I guess where I am going with this is I am 
trying to figure out, we have, say, for example, in my District 
the African American newspaper. This is a newspaper that 
basically has been around for over 100 years. A lot of the 
people that they mail to don't have the Internet, and so I am 
sitting here and I am thinking I would hate to see a business 
like that go out of business. I understand this balance thing 
you are all talking about, making sure that folks carry their 
weight, smaller mailers. But we also have another issue here, 
and that is, I guess, I wonder about Government and what part 
Government should play in making sure that free speech is out 
there, that speech is out there.
    I am just wondering, when you talk about this transition 
and the effects it is going to have on the smaller folks. I 
understand you have given a 4-month window to try to work some 
things out. What is it that you plan to work out in that 4 
months?
    Mr. Miller. Well, Mr. Chairman, we gave a delay of several 
months before the rates went into effect.
    Mr. Cummings. Right.
    Mr. Miller. We want to have continual discussions with all 
of our customers and to work ways of making it a win/win 
proposition for them as well as us. I do not anticipate a 
rollback in the rates that the Postal Regulatory Commission has 
approved but----
    Mr. Cummings. So if these folks go out of business is that 
a win/win?
    Mr. Miller. Well, it would be----
    Mr. Cummings. If these small publications go out of 
business, is it a win/win?
    Mr. Miller. But that is a hypothetical.
    Mr. Cummings. No, no. No, no. I am asking you a question. 
Is it a win/win if they go out of business?
    Let me tell you why I am asking you that. I think that is 
pretty much largely why we are here today. You have a lot of 
businesses that put out publications that are saying that this 
is going to affect them in a negative way. I am not going to 
ask the people out there in the audience to stand up who feel 
that way. I am not going to do that. But I can tell you that we 
get the complaints in our office about people who have been in 
business going out of business. I am just asking you a simple 
question: if they go out of business, is it a win/win 
situation? That is all.
    Mr. Miller. I would say if they cannot cover their cost it 
is a win/win situation. Let me tell you why I think that: 
because other classes of mail would be covering their cost. 
Talking about first amendment, if you write a letter right now 
to your Congressman expressing your opinion about something, or 
you write a letter to your local paper to have it published, or 
you write your friend and encourage them to work with you in 
achieving certain policy goals, you are paying 200 percent of 
attributable cost.
    Again, under the package that the Postal Rate Commission 
approved--and it was more complicated, and that part was 
different than what the Postal Governors had recommended--under 
that proposal, under that new system, though, publications are 
covering 0 percent of overhead. The markup for them is zero. So 
if they were given some preferential treatment, it would mean 
that others, such as people who write letters expressing their 
first amendment rights, or using their first amendment rights, 
would have to pay the difference.
    Mr. Cummings. And so your answer is it is a win/win for 
everybody but the people who go out of business?
    Mr. Miller. Yes, but it is an empirical question, Mr. 
Cummings, of whether they would go out of business. Again, in 
the testimony that I have read and the things that have been 
printed, editorials, etc., they don't talk about raising their 
prices or being more efficient to comply with the opportunities 
this new rate system gives them to commingle and to co-
palletize and so forth. It is not that I am heartless. it is 
not that we are heartless.
    Mr. Cummings. I didn't say you were. I just asked the 
question.
    Mr. Miller. Yes. But, I mean, we have to consider all 
sides, and I think the fairest thing is for each class of mail 
to at least cover the cost directly attributable to carrying 
their mail.
    Mr. Cummings. Let me ask you this: you all do projections, 
right? You project we are going to go through this again fairly 
soon, this rate increase situation, this rate adjustment? And 
just one thing, because I want to interject this into your 
answer. I want you to consider this. I noticed that with all 
businesses when we are talking about retiree payments and 
things like that go to benefits, we have the Baby Boomers 
retiring and all that kind of thing. How do you see that 
affecting what will happen in the future with regard to any 
kind of rate adjustments?
    Mr. Miller. That is an excellent question, sir.
    Mr. Cummings. Thank you.
    Mr. Miller. I am sure that maybe Jack, as well, but some of 
the analysts at the USPS have probably looked into that. Let me 
answer your first question. We do anticipate having another 
rate case. Whether we file under the old rules or the new 
rules, I assure you that it will not be more than the CPI; that 
is, for every class of service the increase would not be more 
than the increase in the CPI. That is the law now. That would 
be the case into the future, so you wouldn't have another 
situation like the one that we have just gone through, just to 
answer your question.
    The other thing, though, is how would readership change 
with the Baby Boomers and their retiring and so forth. How 
would that mix of things change? I mean, on the one hand people 
have more time to read things; on the other hand, maybe they 
would have other interests. I don't know. But that is a very 
good question.
    Jack maybe has a thought.
    Mr. Potter. First let me address the issue of benefits. 
Postal Service pension programs are fully funded. We are fully 
funded. As far as health benefits for retirees----
    Mr. Cummings. That is what I was aiming at, the health 
benefits.
    Mr. Potter. We have been on a pay-as-you-go basis, but the 
new law requires us to build a health benefit fund for 
retirees. As a result of the new law, we already have some $20 
billion in that fund. We are on track within 10 years to have a 
nearly fully funded retiree health benefit program. I think we 
will probably be the only agency in the Federal Government that 
can make that claim, that the moneys are there now.
    In having us pay that almost fully funded within 10 years, 
which the new law did, it has put a burden on all mailers 
because, in effect, we are paying into a fund the equivalent of 
what we would have overpaid our pension program for, and so we 
could have been provided some relief by, rather than having 
that paid off in 10 years if we would amortize it over 40.
    But, be that as it may, we built a plan and we are working 
hard to build a plan that will go beyond the next couple of 
years that will allow us to live within the law which says 
basically that we will keep our rates below the rate of 
inflation for each class of mail. It is going to require us to 
work with the mailers to make sure that we are moving mail as 
efficiently as we possibly can, work with our unions to help us 
deal with the challenges of the law.
    So going forward I wouldn't consider it a win if we lost 
mailers because of price, because I think there are 
alternatives for small publications that we need to do a better 
job of working with to help them make their product more 
efficient. The industry I think is ready to help, as well. I am 
talking about the printers.
    And it is going to require change. People are going to be 
hurt at the end of the day, but if they want to stay in the 
mail we want to try and work and help them to do that.
    Mr. Cummings. I will finish, Mr. Chairman. You have to 
wonder whether, as a society, Congress needed to do more to 
subsidize some of this more than what we need to do. The reason 
why I say that is because I think that, just like with NPR and 
the kinds of things that we do as a society to provide people 
with information, it seems to me that this is the kind of thing 
with these small periodicals that we need to find ways to try 
to help them. That is on us. I got that.
    But it certainly concerns me, and I do not consider it a 
win/win when a business has to go out of business. I have been 
in business before, and it is not a good feeling for people--
and I have represented people who have gone out of business--
when they have given their blood, their sweat, their tears, and 
then next thing you know they have to close their doors. It is 
a very, very, very, very painful thing.
    Thank you all for your testimony.
    Mr. Davis of Illinois. Gentlemen, thank you very much. We 
have a vote on. We have only got two votes, so if you could 
stay until we return I would appreciate that.
    [Recess.]
    Mr. Davis of Illinois. The subcommittee will resume.
    Let me thank you gentlemen so much for waiting for us and 
being available.
    Let me go right to you, Mr. Blair. We have talked a great 
deal about rate increases and how much it is and who is paying 
and why, but let me just ask why are the costs so high for 
periodicals in the first place?
    Mr. Blair. That is a real good question. I think that, to 
the extent that you have to have any kind of hand processing 
that is not machinable or automatable, that drives up the 
process. I think the Postmaster General's statement reference 
the fact of the flat sequencing sorter, the new machine that 
will be coming online the end of this year or next year, and 
that holds promise to keeping costs down, if not driving some 
costs down.
    But one of the questions is: to whom will those cost 
savings and benefits be available? If you don't have machinable 
mail, will that work in something like that?
    But I think that you did hit the nail on the head on this: 
why are the costs so high in the first place? That is the 
fundamental question, and what can be done to drive down these 
costs.
    Mr. Davis of Illinois. You know, I was just remembering 
when I used to work in the Post Office and we used to have fun 
throwing the flats. We would pretend that we were playing 
basketball, and we would have the racks, and we would kind of 
toss them over and it was a lot of fun. It was good, clean, 
hard work.
    Let me ask you also, What is the difference between the 
percent increase for big mailers as opposed to those that we 
would call small mailers?
    Mr. Blair. I don't know if we have a percent increase. I 
would be happy to try to supply that for you for the record. I 
will tell you that for the group called small periodicals, 
those at 15,000 or under, they received overall the smallest 
percentage increase due to the fact that pass-through discounts 
were, in fact, tempered; the low institutional cost 
contribution for the class overall; and the fact that the 
editorial discount was increased, and that benefited those 
smallest of periodicals, as well.
    Mr. Davis of Illinois. Thank you.
    I know that we are going to hear testimony from the 
National Newspaper Association that in the most recent rate 
case the PRC essentially gave the Postal Service a pass on 
providing data within respectable ranges of reliability for 
their in-county mail cost, yet the PRC had, in the past, gone 
so far as to point out the unreliability of this data to the 
GAO. Can you explain to us why the PRC did not zero in on this 
problem in this past case?
    Mr. Blair. I don't remember that being highlighted as a 
problem in this past case. I can tell you for within county the 
PRC's recommended decision substantially cut the proposed 
increased by the Postal Service. As I recall, that was in the 
24 percent range and we knocked it down to 18 or 19 percent, 
and so the within counties benefited by the Commission's 
recommendations.
    Mr. Davis of Illinois. Let me ask, Is it a continuing 
concern to your economic experts that the Postal Service seemed 
to see large cost increases in small mailing classes, where 
perhaps what there really are are wide margins of error that, 
in terms of what is being assessed and determined? Are you 
comfortable that the data that you are using is not error-free 
but does not contain enough error to maybe skew the decision in 
a way that is obviously not favorable toward the small mailers?
    Mr. Blair. Data has always been a fundamental question. We 
worked consistently with the Postal Service over the years to 
improve the quality of the data. I remember in 1995, then PRC 
Chairman Ed Glassman complaining about the quality of the 
Postal Service's data in that rate case. In response, the 
subcommittee at that time authorized a study. It was a joint 
study of the Postal Service and Rate Commission study with the 
help of GAO in looking into that.
    Improvements in the data have been forthcoming over the 
years; however, it is a continuing problem. But I think that 
the new tools that you provided to the Regulatory Commission 
will help us in that area, as well.
    It is important that we get the good data. We want to work 
closely with the Postal Service to improve that quality, and 
that is something we will be doing over the course of my tenure 
at the Commission.
    Mr. Davis of Illinois. Thank you very much.
    Let me ask you what perhaps will be my last question. Mr. 
Potter, of course we get continuous complaints from our fellow 
colleagues relative to a continuous flow of complaints that 
they receive relative to time-sensitive mail like newspapers 
and weekly magazines and, of course, sometimes their 
newsletters where they expect to convey certain information to 
their constituents, and it is sometimes not in a timely enough 
manner.
    Why is the slow processing of periodicals such a problem?
    Mr. Potter. Well, let me address periodicals, in general. 
Earlier you asked about the cost of periodicals. Well, 
periodicals as a class, in data that I have reviewed over the 
years, have the worst addresses of any class of mail. You start 
with a bad address, you are going to get a bad delivery. You 
also have with periodicals a situation where we have tried to 
move them from preparing mail in the old-fashioned way, I will 
call it, in sacks, to getting it on pallets. In fact, we have 
upped the amount of flats that you had to put, or periodicals 
you had to put into a sack, from 6 to 24, just to bring them in 
line with the way other mails are being processed.
    So there is a whole host of reasons to why periodicals cost 
more than what would be catalogs in terms of comparability, so 
we have to address that going forward.
    From a service standpoint, this is a situation that needs 
to be addressed long-term. It starts with understanding the 
whole supply chain. From the time that mail is printed, the 
logistics companies that bring it to the Postal Service just to 
take advantage of discounts I periodicals, you have to use 
them, and then our handling of the mail. We are preparing and 
moving ahead on a plan that would have every piece of mail have 
a bar code on it such that we can get at some of the costing 
issues that you asked Chairman Blair about, because we would be 
able to measure each piece of mail and where it was processed 
and how much it cost us to process that mail.
    It would also enable us to track, from a service 
standpoint, where, first of all, the mail was deposited, when 
it was printed, when it was deposited with us, and then how we 
handled it through the system. That will give greater 
transparency to where problems lie. And I would be the first to 
tell you that we are going to have problems in our system, but 
our goal is to fix those problems and to improve service going 
forward.
    I welcome what Chairman Blair talked about earlier, the 
fact that we are going to publish and we have right now in the 
Federal Register standards for all the market-dominant 
products, as required by law. We are going to seek the input of 
the public to determine whether or not those are appropriate, 
and we look forward to their input. And then we are going to 
establish goals and track ourselves against that.
    The key, in my mind, is the big step, which is to put 
intelligent mail barcodes on each and every piece of mail that 
comes into the system, enabling us to track mail and, in the 
long run, deal with the issue that you have just described so 
we can deal with it from a point of data, as opposed to, at 
times, what turns out to be some rhetoric. So we would like to 
pinpoint the problems and fix them, and our goal is to do that.
    Mr. Davis of Illinois. Well, I do have one additional 
question that comes to mind for you and Chairman Miller. During 
the exchange between yourself and Mr. Sarbanes, both of you 
talked about the tremendous infrastructure that the Postal 
Service provides for certain kinds of services that could be 
provided to the Federal Government, especially in the area of 
disaster relief or disaster assessment. He ended by suggesting 
that the Service could also get paid or could get paid or 
should get paid for those services. How would you respond to 
that as a kind of possibility?
    Mr. Potter. Well, let me just speak to some of the services 
that we provide. When it comes to passport services, the Postal 
Service charges those who use us for passports the same fees 
that the State Department would allow others to charge for that 
service, so there is a mechanism for us to get compensated.
    When it comes to disaster relief, we do get some funds 
transferred from HHS, the Health and Human Services Department, 
when we conduct these tests.
    What I am saying is I would like to look beyond those to 
determine where are other opportunities for us to generate 
revenue on behalf of the Federal Government by representing the 
Federal Government.
    In addition to that, again, the reconnaissance, if there is 
money to be had that is great. I do want the revenue, but when 
I spoke I was talking about just using the system to better the 
well-being of the American public in those places that might be 
hit by a hurricane or other natural disaster. Certainly, I 
think there could be a value placed on the information that we 
could provide to others and to generate a source of additional 
revenue for the Postal Service.
    Mr. Davis of Illinois. Mr. Chairman, let me ask if you have 
any comments that you want to make.
    Mr. Miller. Well, Mr. Chairman, I agree with what Jack just 
said. We already asked Congress to appropriate moneys for the 
foregone opportunities, the services that we already provide 
for free, and Congress, the appropriators, don't ante up fully 
on that. I would be hopeful, but not real optimistic on 
something like that.
    Mr. Davis of Illinois. Well, let me just say I raise it 
because I think that revenue generation and enhancement is 
going to be an ongoing discussion that we will be having 
relative to postal matters for some time to come.
    Mr. Miller. Right.
    Mr. Davis of Illinois. And, like you, I share the 
recognition of need, understanding that you can't get blood out 
of a turnip, as we discussed earlier as we talked about 
efficiencies and improving systems and all of those things. 
Eventually you get down to the point where the only thing that 
supplies the need is some resources. You can be as efficient, 
as effective, and we want to make sure that all of that 
happens, but I don't think that there is anything that takes 
the place of money.
    So let me thank you gentlemen very much. We appreciate your 
being here, and you are excused.
    Mr. Miller. Thank you, Mr. Chairman.
    Mr. Potter. Thank you, Mr. Chairman.
    Mr. Blair. Thank you.
    Mr. Davis of Illinois. Let me go ahead and introduce the 
witnesses for panel two as they are being seated.
    We have Mr. Andy Zipser. He is the Editor of the Guild 
Reporter and is a Past President of the International Labor 
Communications Association [ILCA]. The ILCA works to strengthen 
and expand labor publications, Web sites, and radio, 
television, and film productions by providing resources, 
expertise, and networking opportunities for labor 
communicators.
    We have Mr. Victor Navasky, who is Publisher Emeritus of 
the Nation, and the Columbia Journalism Review. The Nation is 
America's oldest and most widely read weekly journal of 
progressive political and cultural news, opinion, and analysis.
    We have Mr. Jeff Hollingsworth, who is vice president of 
Eagle Publishing and Assistant Secretary of the Phillips 
Foundation. He has monitored legislative and regulatory 
activities at the local, State, and national levels.
    Mr. Max Heath is vice president of Postal Acquisitions for 
Landmark Community Newspapers, Inc., in Shelbyville, KY, where 
he is responsible for postal issues.
    Mr. Hamilton Davison has been the executive director of the 
American Catalog Mailers Association [ACMA], since its founding 
in April 2007. Mr. Davison's involvement in postal affairs 
started in 1992 with his service as part of the Greeting Card 
Association's Postal Affairs Committee, which has been an 
intervener in virtually every rate case since the PRC was 
committed.
    Gentlemen, we thank you very much for being here. It is our 
custom of this committee, we always swear in our witnesses. If 
you would stand and raise your right hands.
    [Witnesses sworn.]
    Mr. Davis of Illinois. The record will show that each 
witness answered in the affirmative.
    Of course, your entire statement is in the record. The 
green light indicates that you have 5 minutes to summarize your 
statement. The yellow light means that your time is running 
down and you have 1 minute remaining to complete your 
statement, and the red light means that your time is expired.
    Thank you all again for appearing, and we will begin with 
Mr. Zipser.

  STATEMENTS OF ANDY ZIPSER, FORMER PRESIDENT, INTERNATIONAL 
  LABOR COMMUNICATIONS ASSOCIATION; VICTOR NAVASKY, PUBLISHER 
  EMERITUS, THE NATION, AND CHAIRMAN, THE COLUMBIA JOURNALISM 
 REVIEW; JEFF HOLLINGSWORTH, VICE PRESIDENT, EAGLE PUBLISHING; 
  MAX HEATH, VICE PRESIDENT OF POSTAL/ACQUISITIONS, LANDMARK 
  COMMUNITY NEWSPAPERS; HAMILTON DAVISON, EXECUTIVE DIRECTOR, 
  AMERICAN CATALOG MAILERS ASSOCIATION; AND DAVID R. STRAUS, 
                COUNSEL, AMERICAN BUSINESS MEDIA

                    STATEMENT OF ANDY ZIPSER

    Mr. Zipser. Thank you, Mr. Chairman. Good morning. My name 
is Andy Zipser, and I am the editor of the Guild Reporter, but 
you have given me a promotion. I was a past vice president of 
the ILCA, not a past president. I appreciate it.
    Founded in 1955, the ILCA is an AFL-CIO and Change to Win 
affiliated professional organization of labor journalists and 
communicators in North America. Our several hundred members 
produce newspapers, magazines, newsletters, and other media 
with a total circulation in the tens of millions.
    Robert McChesney, the journalist and media critic, has 
said, ``It was Postal policy that converted the free press 
clause in the first amendment from an abstract principle into a 
living, breathing reality for Americans.'' Although he wasn't 
thinking specifically of us when he made that statement, Mr. 
McChesney may as well have been describing what we do. We are 
the communications lifeblood of the union movement.
    The Postal Service that delivers our publications from one 
end of the country to the other is the primary medium through 
which our union leaders speak to their members and the members 
to them. If this link is broken, that exchange is silenced.
    The recent postal increase, an increase that has hit our 
publications with disproportionate harshness, is threatening to 
do just that. While benefiting large publishers who can exploit 
economies of scale to take advantage of various discounts, the 
new rate structure is slamming smaller publications with 
increases of up to 30 percent. These crippling increases are 
even more onerous when one recognizes that relatively few union 
publications carry paid advertising.
    Moreover, as in-house organs that are published 
specifically for our members, union publications do not have 
subscriber bases. That means any postal increases come directly 
from dues-sustained union treasuries, without the possibility 
of offsetting increases in advertising or subscription rates.
    Mr. Chairman, let me give you some examples of how the 
increased mailing costs affect us.
    The paper I edit, the Guild Reporter, was slapped with a 27 
percent hike. It now costs more to mail the Guild Reporter than 
it does to print it. The Communicator, a glossy magazine of 
about 70,000 circulation produced by a New York based affiliate 
of the American Federation of Teachers, estimates its increased 
cost at about 21 percent. For the Labor Paper, a tabloid with 
80 percent of its circulation within just two counties in 
southern Wisconsin, the increase was approximately 15 percent.
    As a result, many of our publications are being forced to 
reduce page counts or publication frequency, and there is a 
very real possibility that some may cease publishing 
altogether.
    The International Musician, a 36 to 40 page magazine with 
circulation of about 100,000 produced by the American 
Federation of Musicians, saw its mailing costs jump 
approximately 25 percent and is looking at changing its 
publication frequency from once a month to once every 2 months.
    The American Federation of Government Employees has chopped 
its publication size in half in order to qualify for cheaper 
non-profit mailing permit.
    Some defenders of the new postal rates point to the 
Internet as a cheap distribution alternative for publishers. 
While the Internet holds great promise for democratizing media, 
union surveys consistently show members still prefer paper 
publications delivered to their mailboxes. Moreover, not all 
union members have personal computers, nor do they all have 
Internet access. Many who do are still using dial-up modems, 
which are less than optimum for distributing publications.
    Mr. Chairman, in the labor movement, as with all of the 
advocacy press, the consequences of this dramatic run-up in 
postal rates are predictable: fewer voices, less discourse, 
withering democracy. This is the legacy you leave if you don't 
change policy direction now. That is why we respectfully but 
urgently request this subcommittee to do whatever is in your 
power to restore the more progressive postal rate structures of 
the past.
    Thank you for giving me the opportunity to testify today on 
behalf of the ILCA and small labor publications across the 
Nation. I will be happy to answer any questions you may have.
    Mr. Davis of Illinois. Thank you very much.
    Mr. Navasky.

                  STATEMENT OF VICTOR NAVASKY

    Mr. Navasky. Thank you. I am grateful for the opportunity 
to testify before this subcommittee, but let me make it clear 
that I hope to speak today not only on behalf of the Columbia 
Journalism Review, which I chair, and the Nation, but also on 
behalf of independent, small-circulation, political journals, 
in particular, and on behalf of the readers of these journals, 
and all of those engaged in and informed by the public 
discourse that these magazines exemplify.
    Before I present my formal testimony, I want to make a 
confession about my personal bafflement and bias. Of all the 
services Government provides, only the mails are required to 
break even or make a profit. The founders, who saw the mails as 
a circulatory system of our democracy, made no such 
presumption. George Washington, himself, was in favor of the 
free delivery of newspapers--which, by the way, in those days 
were often weekly, usually partisan, and as such the equivalent 
of today's journals and political opinion.
    These journals, whose core franchise is public discourse 
about public affairs, are a public good, like education and 
defense. Yet, as a result of the new periodical postal rates in 
place as of July 15th of this year, precisely those magazines 
that can least afford it and devote the most space to public 
affairs bear the heaviest burden.
    In the case of the Nation, the cost of mailing the magazine 
is already more than three times the cost of the paper on which 
it is printed. Its new rate increase will be 20 percent and 
will cost the magazine an additional $500,000 a year. The 
Nation, by the way, which has the highest circulation among the 
opinion weeklies and bi-weeklies, is in better shape than many 
small-circulation periodicals, some of which will undoubtedly 
expire in the months ahead.
    The bi-monthly Columbia Journalism Review estimates that 
its postal rate increase could be as high as 30 percent. The 
American Journalism Review, the only other impartial media 
monitoring journal in this country, has announced that it may 
have to go out of business by year's end.
    We hear stories on a weekly basis of magazines 
contemplating cuts to their frequency of publication or going 
out of business entirely.
    On the other hand, under the new rate structure, more 
opulent mass-market magazines with heavy advertising content 
enjoy a lower rate increase or, as we understand it, some 
magazines are seeing actual rate decreases.
    How did this happen? From the outside, it appears as if 
Time Warner lobbyists carried the day. We can't say for sure, 
because lobbyists are a luxury small journals can't afford. The 
big publishers have spent millions of dollars over the years 
arguing for a reversal of public interest postal policy that 
supports a diversity of voices in the periodical class. It is 
important to point out that the Postal Rate Commission has 
repeatedly rejected this kind of argument for many years, 
supporting instead the postal policies of the founding fathers.
    It is for Congress to decide if the PRC was correct in 
finally acceding to Time Warner and abandoning this public 
service principle. This begs the question, did the Commission 
know precisely what would happen in the marketplace, not to 
mention the marketplace of ideas, if this decision was 
implemented?
    According to the rate case, the data base that the PRC used 
to make its recommendation turned out to be deeply flawed. In 
fact, the Commission had no real data to project how the rate 
changes would impact the periodical industry. The result, not 
matter how well intentioned--and I am sure it was well 
intentioned--was a disaster.
    The Commission's hope was to increase efficiency, as we 
heard this morning, by creating a set of rewards and penalties 
for different mailing practices. In practice, this resulted in 
giving large-volume periodicals big discounts for what they 
already do, and it hit huge rate penalties. It hit on weekly 
periodicals that cannot take advantage of efficient mailing 
practices which are dependent on economies of scale and have no 
sensitivity to timely delivery. My definition of small, by the 
way, is anything under 250,000.
    Further, there was no attempt at all to weigh the public 
interest in the circulation of information and opinion against 
this so-called efficiency standard. Had they done so, they 
might have considered the option of re-allocating costs within 
the periodicals class, itself, to benefit the public interest, 
as has been postal policy for over 200 years.
    In my written testimony I suggest 10 ideas on what is to be 
done. Here let me mention only four. Congress should: One, 
instruct the USPS that the rate-setting system should be based 
on a public interest standard first and foremost, favoring 
diversity over so-called efficiency in the periodical class.
    Two, Congress should change the law so that in the future 
either the requirement that each class pay its own way be 
struck and/or that social mission be emphasized in the 
allocation of charges within each class. For example. charge 
dramatically less to publications with a higher percentage of 
editorial content and more to periodicals with a higher 
percentage of advertising content.
    Three, the Congress should issue its own fact-finding 
report, including a history of postal policy on small-
circulation magazines, but also impact studies using an 
enlarged and open data base.
    Four, why not revive the proposal put forward by 
Congressman Morris Mo Udall and supported by Barry Goldwater 
and others many years ago, that the first 250,000 copies of all 
publications be mailed at reduced rates? Or the legislation 
proposed as recently as 2002 by Bernie Saunders that would 
place a moratorium on postal increases for magazines with a low 
percentage of advertising content, low circulation, or non-
profit status?
    Alternative, if you and we do nothing, the impact of the 
new postal rate increase on the flow of ideas and opinions in 
America is likely to be significant and devastating. The 
periodicals that have been hurt the worst by this rate increase 
are the seed bed of American journalism, the life blood of 
democracy in our society. I urge you to take immediate action 
to reverse course.
    Thanks for your time. I look forward to your questions.
    [The prepared statement of Mr. Navasky follows:]
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    Mr. Davis of Illinois. Thank you very much, Mr. Navasky.
    Mr. Navasky. Thank you.
    Mr. Davis of Illinois. We will go to Mr. Hollingsworth.

                STATEMENT OF JEFF HOLLINGSWORTH

    Mr. Hollingsworth. Thank you, Mr. Chairman.
    I am Jeff Hollingsworth, vice president of Eagle 
Publishing. We are the leading publisher of materials on public 
policy that appeal to a politically conservative readership. 
Our products include Human Events, the national conservative 
weekly, which has been published continuously since 1944 and 
which will be the focus of my comments today; Regnery Books; 
the Conservative Book Club; the Evans-Novak political Report; a 
stable of highly regarded financial and investment newsletters; 
and RedState.com, one of the country's top conservative blogs.
    Today the survival of Eagle's products is in jeopardy. 
Human Events, in particular. This isn't due to a lack of demand 
or declining interest in what we market; rather, it is because 
of the caprice of Government. Regrettably, it seems that when 
you are dealing with Government it is not what it can do for 
you, it is what it can do to you. Such is the case with the 
latest in a dizzying round of postal rate increases.
    The July increase has had the effect of punishing 
publishers of periodicals high in editorial content, such as 
scholarly publications, newsletters, non-profit organization 
bulletins, and journals of culture and opinion, such as Human 
Events. More precisely, the July rate increase socked Human 
Events with a staggering 17 percent increase in postal costs.
    While we are paying more, we are getting less. This is 
because the USPS expects mailers to do more preparatory work 
than ever before. Chronic slow delivery of Human Events 
ultimately forced us to go to a split print with facilities on 
both coasts. Unfortunately, while this arrangement has improved 
the timeliness of delivery, it is not amenable to co-mailing or 
other efficiencies the PRC incorporated in the rate case.
    Maintaining profitability in the publishing industry has 
always been challenging. For small- and medium-sized 
publishers, the postal rate increase is making an already 
difficult job even more so.
    When established more than 200 years ago, the Postal 
Service was intended to be the means to bind the Nation 
together. Its purpose was to improve communication; aid 
commerce; allow news, ideas, opinion, learning, and culture to 
reach all Americans. It was and has been a key facilitator in 
the exercise of our first amendment rights to free expression. 
For generations, small journals of opinion and culture mailed 
to subscribers have enriched the lives of countless Americans 
and contributed substantially to our national identity and the 
body politic.
    But this hallowed legacy is on the verge of being crippled, 
not by virtue of the ebb and flow of market forces, nor by 
consumers deciding for themselves what they wish to read or not 
read, but by the actions of a single Government agency. By 
imposing unreasonable rate increases without analyzing 
adequately and thoroughly the potential consequences to small- 
and medium-sized publishers, the Postal Regulatory Commission 
may be responsible for wiping out Americans' access to various 
journals of opinion and culture. It may be responsible for 
diminishing the marketplace of ideas. It may be responsible for 
making the exercise and enjoyment of our first amendment rights 
to free speech and expression more difficult.
    If Congress fails to take notice of what is happening and 
what is at stake and fails to act, it, too, will deserve its 
fair share of responsibility for the deleterious impact of this 
rate increase.
    Since the Postal Service is a monopoly protected by 
statute, publishers in financial distress, thanks to the rate 
hikes, have almost nowhere else to go. Many have turned to the 
Internet, and Internet content by newspapers, magazines, 
journals, and other periodicals is growing at light speed.
    In another example of the law of unintended consequences, 
the more the Postal Service balloons its rates, the more 
customers it either puts out of business or drives away to the 
electronic media.
    Ultimately, in my opinion, the answers to these problems 
are two-fold. No. 1, the Postal Service must be privatized. As 
Former Postmaster General William Henderson wrote in a 
Washington Post essay shortly after stepping down, ``The time 
is now for privatization.'' Suggestions on how to do this 
include selling it to its employees, making it a public stock 
company, or breaking it up into regional companies.
    No. 2, modify or repeal the private express statutes. Users 
of most classes of mail services currently have nowhere else to 
turn. They deserve alternatives. And because the Postal Service 
has no competition in those areas, it has no incentive to be 
customer friendly, efficient, or truly business-like in its 
operations.
    With competition, when our mailboxes are finally liberated, 
the results will be good for the Postal Service, entrepreneurs, 
and postal stakeholders.
    As for the here and now, we urge the Congress to act 
promptly in order to make it crystal clear to the PRC and the 
Board of Governors that it never intended any of its statutes 
on postal policies to be construed such that rate hikes can be 
imposed with the effect of stifling free expression, driving 
publishers out of business, and unfairly imposing onerous 
financial burdens on entities least able to afford them.
    We urge Congress to work with the Postal Service to revisit 
the July rate increase before even more damage is done to the 
publishing industry.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Hollingsworth follows:]
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    Mr. Davis of Illinois. Thank you very much.
    We will go to Mr. Heath.

                     STATEMENT OF MAX HEATH

    Mr. Heath. Thank you, Mr. Chairman and members of the 
subcommittee. I am Max Heath, Chairman of the National 
Newspaper Association's Postal Committee since 1984, and am a 
senior rep on the Mailers Technical Advisory Committee at the 
Postal Service since 1989.
    I would like to reassure the subcommittee that rumors of 
small papers' demise from Internet news is vastly exaggerate. 
Though our industry faces many challenges, the Internet thus 
far has shown little ability to provide truly local news and 
information, which are the trademarks of community newspapers. 
That is not to say that the 2,500 community newspapers which 
are mostly family owned and serving smaller communities across 
America have smooth sailing ahead. Our postal problems are real 
and troubling, and that is why your work here today is so 
important.
    I will be speaking both about the in-county periodical 
subclass, which is highly pre-sorted and locally entered, and 
the outside county regular rate subclass which we use to mail 
to readers farther away.
    You asked us, are newspapers being put out of business by 
the 2007 rate cases? The short answer is, not yet. But the 
rates hit us very hard and will affect our ability to cover the 
news because the only way to survive increases in the 20 to 30 
percent range and more for lightweight titles is to cut costs 
or sharply increase subscription prices, which will cause a 
drop in subscribers for us and the U.S. Postal Service.
    But the deeper answer is more complex than that. I have 
provided in our written testimony a sad farewell column by one 
of our most loyal members, half of a husband and wife team in 
Vandalia, MO. Gary Sosniecki lays out in poignant detail how 
hard it is to do this work in the 21st century. He lays a 
portion of his terminal exhaustion at the door of the Postal 
Service. It isn't just about steep rate hikes, it is worrisome 
service problems that cost us subscribers and cut the artery 
that keeps us alive.
    I am going to quickly summarize the points that I made in 
our testimony.
    First, NNA believes that the root of the recent steep 
increase in our in-county postage rates was flawed data, 
trouble capturing accurate data. The Postal Service has had 
trouble capturing accurate data on in-county mail, since it is 
such a small segment of the volume. In the past, the PRC 
applied pressure to improve the data or the Postal Service 
smoothed out bumps created by small data samples. That did not 
happen last year.
    The Postal Service asked for a 20 to 30 percent increase, 
and the PRC gave the Postal Service a pass on the poor data. We 
are now stuck with the rate base that we believe is inaccurate.
    Second, our regular rate periodicals mail was hit hard by 
the new container and bundle prices that were suggested by Time 
Warner and put into place by the Commission. NNA has fought 
since 1996 to keep the larger magazine publishers from de-
averaging the periodicals class. We understand their goals. It 
enables them to take advantage of the privileges that 
periodicals receive without bearing the cost of smaller 
mailers.
    Regardless of the costing data that swayed the Commission, 
we believe it is bad policy to allow this degree of de-
averaging in a mail class whose very purpose is to disseminate 
a wide range of information.
    While most newspaper mail is local and extremely efficient, 
our longer-distance mail comes in small, diffuse volumes. The 
so-called price signals that were intended to force mailers 
into co-mailing and palletizing and other efficiencies are 
signals to which most small-volume newspapers are unable, by 
their very nature, to respond. So the signal to us is: go away, 
you are bothering us.
    Finally, we are troubled by misunderstandings of the in-
county prices community newspapers pay. We have heard more than 
once that our 20 to 30 percent increase has amounted to only a 
few cents, and that our mail price is about $0.10 a piece. Our 
mail is highly pre-sorted, more than three quarters of it 
carrier route mail, and almost all entered at the delivery 
office, and most of that walk sequence.
    I would like to point out that our in-county mail is 
probably the first or second most efficient subclass within the 
Postal Service, the other one being enhanced carrier route 
standard mail, which our papers also heavily use to serve non-
subscribers with advertising information.
    We have many worries ahead. First, the new postal reform 
law has made our in-county subclass vulnerable to steep 
increases, despite the price cap. That is because the cap was 
set at the class level. We hope the Postal Service will observe 
the spirit of the law and keep our increases within the CPI 
levels.
    Second, our service problems are agonizing. Delays to mail 
that must go through processing plants have increased. Even 
local mail has new service problems with the advent of the 24 
piece container minimums in May 2006. But generally, since 
postal reclassification in 1996, and flats automation in 1998, 
outside county delivery has worsened both in time and 
consistency.
    Finally, with the new flat sequencing system [FSS], coming 
next year, we have fears for our primary mail entered at 
delivery offices, and now given timely service. If we cannot 
keep local delivery unit entry for our periodicals and standard 
mail products, I fear it will really be the end of us. It has 
been heavily involved in consultation on the mailing standards 
for this new machine, but we must have the ability to drop our 
mail at the local office and keep the drop-ship and carrier 
route walk signals discount for doing so.
    FSS is simply not going to be able to provide us workable 
deadlines with the assurance of same day or next day delivery 
of the mail often dropped from the press to the dock at 
midnight to be in the mail the following day. Without that 
assurance, Mr. Chairman, we are toast.
    We have been trying for nearly 3 years to get the Postal 
Service to provide that we will keep our privileges, and we 
cannot get that assurance. We hope the committee might inquire 
on behalf of community newspapers on this topic.
    To summarize then, the newspaper mail was hit hard. We are 
surviving it so far, but we fear it is the first of many such 
blows. We think the increase was unfair and wrong headed and we 
vigorously oppose the de-averaging of periodicals and mail.
    We need stable rates, better service, and we need to keep 
our local delivery unit entry in the FSS environment.
    We appreciate your interest in our problems and would be 
happy to supply any other information that you need. Thank you.
    [The prepared statement of Mr. Heath follows:]
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    Mr. Davis of Illinois. Thank you very much, Mr. Heath.
    We will go to Mr. Davison.

                 STATEMENT OF HAMILTON DAVISON

    Mr. Davison. Mr. Chairman and distinguished members of the 
subcommittee, I am Hamilton Davison, the executive director of 
ACMA, the American Catalog Mailers Association.
    Thank you for having me. I would like to address three 
topics, and I go into greater detail in my written testimony.
    First, catalog mail is valuable. Second, the rate increase 
had a serious impact on our industry. Third, we have some 
concrete suggestions that we feel the Postal Service can work 
with us on this crisis to their own financial self-interest.
    Catalogs play a critical role in both the economy and in 
the U.S. mail. Half of all consumers buy through catalogs. 
There are some 20,000 catalog companies nationwide. In recent 
years, our industry has been vibrant and growing.
    Rather than be pushed out by Internet commerce, we have 
thrived online. Studies show that some 80 percent of all online 
orders have a catalog somewhere along involved in the process. 
Whether through the mail or online, we deliver revenues of $270 
billion a year, or roughly $1 million every 2 minutes.
    All of that catalog-driven commerce benefits the U.S. mail. 
In addition to invoices and letters to customers and shipment 
advisories and tons of parcels, catalog mailers send between 20 
and 30 billion catalogs a year. I would note that we have 
always covered our attributable costs and we paid billions of 
dollars in institutional costs.
    Catalog companies are not occasional mailers. They mail 
every day of every year and spend billions in postage annually.
    And catalogs have a strong multiplier effect that provides 
recurring revenue to the Postal Service. Each time a catalog 
prospect becomes an ordering customer, it generates 30 to 40 
new pieces of mail in the form of future catalogs, invoices, 
and packages. But more importantly, catalogs help keep the mail 
relevant, because people like catalogs.
    Postal Service surveys show that, unlike some kinds of 
mail, people look forward to receiving catalogs. They read, 
save, and order from them. They like catalogs for the same 
reason they like magazines: they offer products and ideas and 
information about their specific interests.
    How has the rate increase affected our industry? It has 
been brutal. We expected 9 to 12 percent increases; we got 20 
to 40 percent increases. Postage represents one of the largest 
cost centers for our members. This put enormous pressure on the 
entire catalog industry. Nor can we turn on a dime, given our 
carefully calibrated and integrated marketing plans.
    So, as a result, nearly all of our members have been forced 
to make some hard decisions. Some are looking at layoffs. Some 
are limiting future hires. Others are actively reducing their 
reliance on mail. And, of course, some, in fact, many, are 
cutting circulation. But the response that should alarm the 
Postal Service most is that catalogers are cutting prospect 
mailings. Prospect mailings are a vital source of new business 
and a key to the industry's future growth. When a potential 
customer responds to a prospect catalog, the Postal Service 
gets dozens of new pieces of mail as a result, so cutting 
prospect mailing today limits the Postal Service's revenues 
tomorrow.
    Let me offer some ways that the Postal Service, using its 
new authority to set rates, can work with us to grow both of 
our businesses and ensure that the mail remains a vibrant 
channel of communication.
    First, the Postal Service should price catalogs separately. 
Catalog mail represents a unique product different from other 
forms of standard mail. We have a different business model, and 
we make different mailing decisions. In addition, we add value 
to the mail stream.
    Second, the Postal Service should work with our industry to 
adopt creative pricing arrangements, including pricing to 
encourage prospect mailing.
    Third, the Postal Service should ensure that negotiated 
service agreements are accessible not only to the largest 
mailers, but also to smaller and medium-sized mailers or 
catalogers that were particularly hard hit in this last 
increase.
    Fourth, we would like, as an association collectively and 
individually as companies, to work directly with the Postal 
Service on the operational and pricing details of its new FSS 
equipment and how declining flats volumes might affect the FSS 
roll-out.
    I believe we can make a strong business case that growing 
catalog volume is in the short- and long-term best interest of 
the entire mail stream and the Postal Service.
    That concludes my testimony. Thank you.
    [The prepared statement of Mr. Davison follows:]
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    Mr. Davis of Illinois. Thank you very much, Mr. Davison.
    We will go to Mr. Straus.

                  STATEMENT OF DAVID R. STRAUS

    Mr. Straus. Thank you. As a 37 year veteran of postal wars, 
I am here representing American Business Media, whose members 
produce about 2,000 high-quality business-to-business 
publications a year and spend about $400 million a year on 
periodicals postage.
    I am going to have to divert from what I was proposing to 
say today because there is so much confusion that was left, I 
believe, on the record this morning about the relationship 
between the requirement that the periodicals class cover its 
attributable costs and the 20 and 30 and even 40 percent rate 
increases that some of our members have experienced.
    The problem has nothing to do with attributable cost 
coverage for the class. The Postal Service proposed rates in 
this case would have had an average increase of about 12 
percent on periodicals, and periodicals would have covered 
attributable costs. The Postal Regulatory Commission's 
recommendation produced exactly the same dollars, the same cost 
coverage, but it chose to broaden the band of increases and 
decreases such that, instead of having no increases very much 
smaller than or larger than the average, there were some 
decreases and some increases in 30 to 40 percent. Again, it has 
nothing to do with the requirement that the class cover 
attributable cost; it has only to do with how the Postal 
Regulatory Commission decided it would be best to accumulate 
those dollars.
    American Business Media, in fact, supported the Postal 
Service's proposal in R2006-1. The Postal Service opposed the 
Postal Regulatory Commission's approach because it opposed the 
Time Warner proposal. American Business Media urged the 
Governors of the Postal Service to ask the Regulatory 
Commission to reconsider its decision that was opposed by most 
parties in the case, and it didn't do so, so our grip was with 
the Regulatory Commission for recommending those rates, and 
with the Postal Service for accepting that recommendation 
without question.
    Now, American Business Media member publications average 
about 65,000 circulation. Some of them are a lot smaller, some 
of them are somewhat bigger, but rarely do they exceed 100,000 
copies. Compare that with the mass consumer publications like 
Time, Newsweek, Sports Illustrated, and the like, with multi-
million circulations.
    Because of this difference, American Business Media, for 
its 100 year existence, has basically taken to position that it 
is there to represent the little guy, but I recognize, as Mr. 
Sarbanes suggested this morning, that this case is over. The 
rates have been implemented. There is no more judicial review. 
As he said, this sounds like a done deal, and I feel a little 
bit like Vice Admiral Stockdale at the 1992 Vice Presidential 
Debates where he famously asked, ``What am I doing here?''
    I ask myself that. What am I doing here? Why am I 
testifying in this hearing? I guess the reason that I am is 
that if the 11.4 percent increase for periodicals had been 
spread relatively equally across the class, I wouldn't be here 
and you wouldn't be here. The problem was that it wasn't spread 
equally across the class, and somebody has to let the Postal 
Service and the Postal Regulatory Commission know and let 
Congress know that it has an oversight obligation not to let 
this happen again, certainly not to let it happen again, but 
also to take a look at the rates the next time they are changed 
to see whether something could be done.
    The rates that are in effect now are not going to be in 
effect as of June of next year, it looks like, so there is 
really nothing that can be done about these rates. It is the 
next rates we are concerned with.
    Where the Postal Regulatory Commission went wrong in this 
case is it looked at periodicals as a test tube for 
experimenting with price signals, with efficient component 
pricing, with matching precisely cost with rates. Interesting, 
periodicals are a content-based class, yet the Regulatory 
Commission decided it should be the most cost-based rate. 
Catalogs did get hit hard, but catalogs don't have bundle 
charges and pallet charges and sack charges. Only periodicals, 
the content-based class, has to pay rates that are strictly 
based on cost. That wasn't necessary. It didn't have to happen 
that way.
    We heard today that periodicals haven't even covered 
attributable costs. From the perspective of periodical mailers 
I guess that is a good thing, but it is not going to continue 
indefinitely.
    The point is that periodicals as a class get a subsidy. 
They pay no institutional cost. All other mailers pay the 
institutional costs that periodicals might otherwise be 
responsible for. That is, in a sense, a subsidy paid by other 
mailers into the periodicals class.
    The problem that Time Warner identified and that the 
Commission bought was that Time Warner's subsidy isn't as big 
as it ought to be because small circulation publications, 
journals of opinion, get a little bit bigger subsidy to keep 
them in existence. So it is not that the big guys are 
subsidizing the little guys; it is that the subsidy provided by 
the first class mailers and the standard mailers goes more to 
some periodicals and less to other periodicals. That is the 
issue, and that is what the Postal Rate Commission decided it 
would not allow to continue.
    If you don't believe that, ask Time Warner what its 
periodicals would pay if they paid catalog rates, and you will 
see that if they paid catalog rates those rates would be much 
higher than they pay today, than they paid last year under the 
old rates, because they were enjoying a subsidy. They just 
wanted more of that subsidy.
    This desire of the Regulatory Commission to closely match 
cost and revenues is something that even Time Warner has 
admitted can be very harmful.
    In the rulemaking that was just concluded by the Regulatory 
Commission, Time Warner was in opposition to a proposal to 
bring together costs and revenues, not when the big subsidy for 
all periodicals was put in jeopardy. This is its word. It 
called totalitarian any proposal that ``subordinates every 
other possible consideration to a single, narrow principle.'' 
That dastardly principle was that cost and revenues must 
converge. In fact, in Time Warner's own words, the rate 
increases that would result from that principle might result in 
``driving some thousands of magazines out of the mails and out 
of business.'' To that we can say, exactly.
    The PRC guessed that this wouldn't happen because people 
would co-mail. I won't go into the detail, but in our written 
statement we explain why co-mailing simply isn't available for 
most of the small circulation publications, for weeklies, for 
tabloids, and for others.
    In conclusion, I would like to say that ABM has not opposed 
changes in rate design. We have been accused of being the 
Ludites of the periodicals class. It isn't true. We have 
supported pallet discounts, bar code discounts, pre-sort 
discounts, drop ship discounts. What we don't support is 
discounts that are not imposed in an incremental fashion but 
are imposed all at once to the detriment of small circulation 
periodicals.
    We have already seen publications closing their doors or 
trying to survive by going digital, and more will soon follow.
    Thank you.
    [The prepared statement of Mr. Straus follows:]
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    Mr. Davis of Illinois. Thank you very much. I want to thank 
each one of you gentlemen for your testimony.
    I believe I heard you, Mr. Navasky, suggest that each class 
maybe ought not have to pay its own attributable way. Is that 
right?
    Mr. Navasky. I said two things, Mr. Chairman. No. 1, yes, 
maybe the law ought to be changed, because to speak only of 
journals of political opinion, but across the political board 
they are a public good. This country was founded on the idea 
that free speech and robust public discourse is a good thing.
    Like education and defense and the environment, the 
Government, in my view, ought to subsidize that. But short of 
that, within the existing system, if you are going to keep the 
class and require each class to pay its own way, then it seems 
to me the way to make it work and to make democracy work is to 
reallocate the cost within the class.
    The panel this morning recognized that, but they seemed 
unwilling to take the next step. It seems to me that there is 
nothing wrong with saying that the huge mega-corporate 
magazines that are crammed full of advertising ought to pay a 
little more, and these marginal publications that are dealing 
in ideas and that didn't go into business in the first place to 
make money ought to make a little less.
    This is where they are technically non-profit or not. One 
of the reasons that political journals like National Review and 
the Nation and the New Republic are not non-profit is that, 
under the law, if you are non-profit you can't endorse 
candidates for political office and you can't devote more than 
a certain percentage of what you do to try and influence 
legislation. That is what we are in business to do, but we are 
not in business particularly to make money, and we just want to 
survive.
    Mr. Davis of Illinois. Let me ask you, Mr. Straus, how 
would you respond to Mr. Navasky's comments?
    Mr. Straus. I think it is exactly right. It is a little bit 
artificial to divide mail into classes and say each class has 
to cover attributable cost, but within each class some mail has 
to and some mail doesn't.
    You in Congress were faced with a real dilemma with the 
price cap system, whether applied at the class level, the 
subclass level, or the rate element level.
    I am very troubled by something that Chairman Dan Blair 
said this morning, which is exactly the same thing they said in 
their rulemaking order issued yesterday, which is the price cap 
will prevent future rate shock. Well, no, it won't. If there 
were an 11.4 percent price cap in effect in 2006, the 
periodicals rate would have gone up 11.4 percent, but they 
still could have raised some 40 percent and reduced some, but 
the price cap will not prevent rate shock. Only the Postal 
Service reviewed by a Postal Regulatory Commission that cares 
about avoiding rate shock will avoid rate shock.
    The notion that every piece of mail has to cover its 
attributable cost is wrong for two reasons. First of all, there 
is no logical foundation for that. Second, how do you know what 
the costs are of each individual piece of mail? Do you want to 
charge me more if I hand-write a greeting card to my brother, 
charge me even more than that if my handwriting is messy and 
hard to read? I don't think so. What you have to do is set fair 
rates that in large groups are cost effective.
    Mr. Davis of Illinois. Mr. Zipser, let me ask you, How was 
your organization notified of the July rate increase?
    Mr. Zipser. I'm not sure our organization was notified. Our 
individual publications were through our mailing houses. But 
when I talked to our mailing house back in May trying to get a 
handle on what to expect in terms of an increase, just for the 
Guild Reporter now I am speaking, I was told, I don't know yet. 
It looks like maybe 10 percent. So when it was 27 percent, that 
came as a bit of a shock.
    Mr. Davis of Illinois. So you did experience some shock?
    Mr. Zipser. Yes, enormous shock, and we are in the process 
right now of discussing whether or not to go entirely online, 
whether we should cut our publication schedule in half and have 
alternating issues online and in print. We are looking at 
changing the physical size of our publication so it can be 
folded down to a size that qualifies for a non-profit rate. 
Then that brings up other considerations the they have heard 
regarding political advocacy.
    There are all kinds of things we are looking at because we 
can't continue going on the way we are right now.
    Mr. Navasky. Can I add to that, Mr. Chairman?
    Mr. Davis of Illinois. Yes.
    Mr. Navasky. You know, this morning we were told that there 
was a year in which to comment on these rate increases. Aside 
from the fact that we were led to believe it was only going to 
be an 11 percent increase, the only way you can take advantage 
of that year is to have yourself a representative technically 
known or popularly known as a lobbyist. We went and asked what 
it would cost us to have someone to monitor this process and 
got rates that ranged from a quarter of a million dollars to a 
million dollars. We as a class cannot afford that. So 
effectively we are denied the opportunity to participate in the 
rate-setting process.
    Mr. Davis of Illinois. Let me ask this question, and 
perhaps each of you do agree that mail delivery should be a 
function of the Federal Government, with the exception of Mr. 
Hollingsworth.
    Mr. Zipser. Yes. I view it as a public utility.
    Mr. Davis of Illinois. Mr. Heath.
    Mr. Heath. Yes. I think I do.
    Mr. Davis of Illinois. Mr. Davison.
    Mr. Davison. I'm sorry, Mr. Chairman. I missed the 
question.
    Mr. Davis of Illinois. You do believe that mail delivery 
should be a function of the Federal Government?
    Mr. Davison. Mail delivery should be a function of the 
Federal Government? Yes, I think I do.
    Mr. Straus. I absolutely agree. I think people would be 
shocked at what periodicals rates would look like if all of the 
first class mail were skimmed off by private industry.
    Mr. Davis of Illinois. Mr. Hollingsworth, let me ask you, 
How would privatization perhaps balance more equitably the 
notion that there is fairness in the process of determining the 
rates?
    Mr. Hollingsworth. Normally I would caution against 
international comparisons, such as comparing the United States 
to some other country in terms of it being an equivalent 
comparison, and I would subscribe to that in what I am about to 
say to an extent. However, I do believe that we can learn from 
what is being done in some other countries, such as Japan, 
maybe particularly Japan, certain parts of Europe, New Zealand, 
and elsewhere where their postal services are on an inevitable 
and no-looking-back pathway to privatization and it is working.
    What privatization offers is competition and choice. We see 
that with the one aspect of mail that is not as tightly 
regulated by the monopoly statutes, and that is with regard to 
parcel post, where we have thriving competition amongst the 
Postal Service, United Parcel Service, DHL, FedEx, and others.
    It is also a question of whether or not we will ever see 
the liberation of our mailboxes. It is also against the law to 
put anything that you might want other than regulated mail into 
a mailbox.
    So I think with competition you have better options, better 
choices, better pricing, and I think in the long run it is 
going to be beneficial for the stakeholders, for the mailers, 
and for the customers.
    This is not a process, I would add, that is going to happen 
overnight, but I think we can look at what is going on 
elsewhere in the world and take those necessary steps that 
former Postmaster General Henderson said we need to do.
    Mr. Davis of Illinois. Do you believe that small mailers or 
smaller mailers would be at a serious disadvantage under such a 
system?
    Mr. Hollingsworth. Not necessarily, because they will have 
wider choices and better prices from which to choose. As of now 
they are captive. They have nowhere else to turn. So who is to 
say that a monopoly system is going to treat them any better?
    Mr. Davis of Illinois. Thank you.
    Mr. Heath. Mr. Chairman, in regard to our feeling about 
that, we would just like to say that the community newspaper 
industry is primarily more rural oriented, and our concern with 
privatization would be that it would kill rural delivery and, 
in fact, kill the small newspapers.
    Mr. Straus. I think we can look to the electric utility 
industry for an example of where theorists suggested that 
competition would lead to lower prices when, in fact, 
competition, in those States that have opened up their systems 
to competition, electric utility prices have soared because 
there is no real competition. The same thing would happen with 
the Postal Service. There will be no competition to carry a 
30,000 or 40,000 circulation publication to 30,000 or 40,000 
addresses dispersed across the entire country.
    It was suggested to look at the parcel industry. OK. If I 
want to mail one parcel from my house, I have to drive. There 
are two United Parcel Service deposit points, I think, in the 
Washington metropolitan area. Now, a big company with thousands 
of parcels, they come and pick them up. They will come to pick 
it up for me if I pay an extra charge. But competition in 
parcel service is great for the mass parcel mailer, not so good 
for the individual parcel mailer who has to go stand in line at 
a post office or drive 30 miles to Springfield to put it into 
their system.
    Mr. Davis of Illinois. Thank you, gentlemen, very much.
    I am going to go to Mr. McHugh.
    Mr. McHugh. Mr. Chairman, thank you very much.
    I don't have a lot of questions. I wanted most of all to be 
here because of the enormous respect I have for people on the 
panel who are known to me personally and, where I don't know 
them personally, I know of the work that they do. I don't 
always agree with it, but I always admire it. I thought their 
comments were important, and I would hope instructive.
    I would say to Mr. Navasky, because I don't think you heard 
Mr. Straus when you were quoting the quotes you received on 
lobbying. He said you should have come to him. Apparently he is 
willing to save you money next time. I am just trying to create 
a business deal here. But your point was taken in the broader 
context.
    I was going to pursue the issue of the privatization 
question, Mr. Chairman. I appreciated your doing that. I think 
there is always some fundamental questions as to how we best 
provide the mail in this country. I happen to believe with the 
majority of this panel that, for all its flaws, that the 
Government is certainly in the main--not always, but in the 
main--the appropriate source of that service. As we have seen 
here, it is a very difficult challenge to make sure we balance 
all of the various interests.
    I would note with the upcoming regime the change from the 
task that, as I commented to the first panel, we do have a 
mechanism in place in this bill that will provide the 
opportunity for periodicals to be re-examined, and I would hope 
provide the opportunity for individuals and organizations such 
as these good folks to have a more direct influence and, in 
their minds, I am sure, more appropriate outcome as to rate 
determinations under the new regime as ahead in the future.
    I am curious, though, there was the opportunity under this 
rate case to take the grievance to the Federal courts that have 
certainly been an avenue of relief that has been accessed by 
many in the past under past rate cases. Did any of you consider 
that? If so, why didn't you pursue it? And if not, why was it 
not considered?
    Mr. Straus. We probably thought about it for all of about 3 
seconds and rejected the notion. A couple of reasons why it 
would not be a good idea to do it. First of all, there has to 
be legal error. Merely a different judgment is not going to get 
a court of appeals to reverse a Federal agency. They give a lot 
of discretion to the judgment, and here the judgment of the 
Postal Regulatory Commission was different from that of 
American Business Media, different from that of magazine 
publishers of America, different from that of the Postal 
Service, pretty much in line with that of Time Warner, but not 
so unreasonable that we thought that a court would reverse it.
    But, more importantly, a court of appeals cannot enjoin 
rates; it can only find them unlawful. By the time a court 
would have acted, this rate would have been long since over and 
the law under which it was devised would have been long since 
over, and so we could have spent $50,000 or $100,000 on an 
appeal. Even if we won, we would have won absolutely nothing 
because if the court found that those rates were unlawful they 
would no longer have been in existence. That just would have 
been a silly thing to do.
    Mr. Navasky. Mr. McHugh, I would add that it would never 
occur to us to do that because lawyers are, for most small 
journals--again, that may publish 20,000 or 25,000--if they are 
weekly, they don't have time to do anything except get their 
magazine out, no less money to pay a lawyer, so it is way 
outside of what the reality of the business of putting out one 
of these journals is.
    One of the problems with the suggestions of the postal 
authorities that we heard this morning, co-mailing, is we did 
try that, and we found that one of the consequences of it was 
it delayed delivery to the District, for example, for up to 11 
days late. This is for a weekly magazine. It is from another 
planet to make that suggestion to this class of magazine.
    So the idea of going to court to stop it, the idea of co-
mailing to overcome it, they really are off the point of what 
is the equation that Congress ought to consider when it deals 
with this mailing question, and what our big suggestion is that 
you ought to go beyond efficiency, go beyond the market, and 
consider the public interest and the social mission of these 
publications when you set the rules.
    Mr. McHugh. Mr. Heath.
    Mr. Heath. Mr. McHugh, we considered that primarily on the 
grounds of the tub charge, flat trays or tubs. The container 
charge, which is the most harmful thing to small newspapers in 
this rate case, was applied, we believe, illegally to flats 
trays. We are trying to move toward those. We have worked with 
the Postal Service very favorably to move toward those. The PRC 
did give the opinion that charge for containers should not 
apply to the flats tubs because there was no cost basis, no 
cost studies that would indicate that they should apply.
    They were applied anyway. However, our association, small 
as it is, and made up of rural members like the community 
newspapers that you are very familiar with in your rural 
District, and the chairman I believe is originally from 
Arkansas where there are many small, rural papers where he grew 
up. Those papers don't have the revenue base to support the 
dues to file the kind of lawsuits that would require to be 
successful, so we are not able to do so.
    Mr. McHugh. I thank you all for saying that. I think it is 
important to get that on the record, because I have already 
heard, and I am sure as this process goes forward we will 
continue to hear, from those who don't share your positions, as 
I am sure you might gather, that was an avenue and somehow you 
are not pursuing it would suggest you understood you were in 
the wrong.
    I thought it was important to get your side of that on to 
the record.
    With that, Mr. Chairman, again, as I opened up 5 minutes 
ago saying I had nothing to say, no questions to ask, I shall 
now be happy to yield back with my thanks to this panel for 
being here.
    Mr. Davis of Illinois. Thank you very much, Mr. McHugh. I 
have no further questions. Gentlemen, I want to thank you very 
much. We appreciate your being here.
    While the third panel is being seated, I will go ahead with 
the introduction of the panelists.
    We will have first Mr. James O'Brien for Time Warner. He is 
vice president of Distribution and Postal Affairs. Mr. O'Brien 
has been involved with the printing, publishing, and 
distribution of magazines for more than 35 years.
    Then we will have Mr. Mark White, who is vice president of 
manufacturing at U.S. News and World Report LP. In that role he 
has responsibility for production and distribution of the 
company's weekly news magazine, U.S. News and World Report, 
which last year mailed more than 95 million copies using 
periodicals class postage.
    Mr. Joseph Schick is director of postal affairs for Quad/
Graphics. He is the primary liaison with the U.S. Postal 
Service on all matters affecting Quad/Graphics and their 
customers. Mr. Schick joined Quad/Graphics in 1981 and was 
named to his current position in 1990.
    Ms. Anita Pursley is vice president, postal affairs, for 
Quebecor World Logistics, a division of Quebecor World, Inc. In 
her capacity, she is responsible for establishing corporate 
postal policy and is the primary liaison with the Postal 
Service on all matters affecting Quebecor World and its 
customers.
    And last but certainly not least, Mr. Jerry Cerasale joined 
the Direct Marketing Association [DMA], in January 1995 as 
senior vice president, Government Affairs. His primary 
functions are working with Congress, Federal agencies, and 
State and local governments.
    Thank you all very much.
    It is the custom of this committee to swear in all 
witnesses, so if you would stand and raise your right hands.
    [Witnesses sworn.]
    Mr. Davis of Illinois. The record will show that each of 
the witnesses answered in the affirmative.
    We will then proceed. Of course, the green light means that 
you have 5 minutes. The yellow light means that you have 1 
minute left. And the red light means that your time is up.
    We will begin with Mr. O'Brien. Thank you very much.

 STATEMENTS OF JAMES R. O'BRIEN, VICE PRESIDENT, DISTRIBUTION 
  AND POSTAL AFFAIRS, TIME, INC., TIME WARNER; MARK W. WHITE, 
VICE PRESIDENT, MANUFACTURING, U.S. NEWS & WORLD REPORT; JOSEPH 
  SCHICK, DIRECTOR, POSTAL AFFAIRS, QUAD/GRAPHICS INC.; ANITA 
    PURSLEY, VICE PRESIDENT, POSTAL AFFAIRS, QUEBECOR WORLD 
     LOGISTICS; AND JERRY CERASALE, SENIOR VICE PRESIDENT, 
        GOVERNMENT AFFAIRS, DIRECT MARKETING ASSOCIATION

                 STATEMENT OF JAMES R. O'BRIEN

    Mr. O'Brien. Thank you. I would like to begin by thanking 
Chairman Davis and the committee for inviting me to testify at 
this hearing.
    My testimony will focus on how the current periodicals rate 
structure was adopted and why that structure is critically 
needed.
    The issues involved are not new. They have been discussed 
widely in the postal community for at least a decade. This 
chart shows the rise in what it costs the Postal Service to 
process a periodical from 1986 through 2006. The red line is 
periodicals cost, the black line is CPI.
    As you can see, these costs have outpaced inflation by over 
60 percent. In 1998, the magazine publishing industry and the 
Postal Service formed the Mail Processing Task Force in order 
to determine why periodicals' costs were rising so rapidly. I 
was a member of that task force, as were representatives from 
the Magazine Publishers of America, American Business Media, 
other publishing companies, and printers. We visited 17 postal 
facilities and identified a number of contributing factors.
    One of the most prominent was the fact that the 
periodicals' rates were misaligned with Postal Service's cost. 
I can best explain this by giving an example.
    This is a periodicals mail sack. Depending upon where it is 
entered into the mail stream, it costs the Postal Service 
between $1.58 to $6.23 to process this sack, not counting the 
cost of transporting, sorting, or delivering the magazines 
inside. Until last year, this sack could be placed in the mail 
containing as few as six copies of a magazine, which might 
collectively pay postage as low as $1.50. In short, the total 
postage would be less than the handling costs for the sack, 
alone. In other words, the rates were not aligned with the 
costs.
    Because of this, the unanimous report of the task force 
that included large and small periodicals mailers issued 9 
years ago concluded that ``periodicals rate structure should be 
reviewed to ensure that it is consistent with the overall 
periodicals processing strategy and induces appropriate mailer 
behavior.''
    Because the postal rates for periodicals did not reflect 
the Postal Service's cost and gave mailers little reasons to 
choose more efficient mailing practices, periodicals' costs 
continued to escalate. Something had to be done to break this 
pattern. For this reason, in January 2004 Time Warner, Conde 
Nast, Newsweek, Reader's Digest, and TV Guide filed a complaint 
with the Postal Rate Commission requesting that it recommend to 
the Postal Service a rate structure that reflected the cost of 
processing periodicals mail. In other words, pay for what you 
use.
    We proposed that if the Postal Service incurred $1 in cost 
to process a sack, the mailer would pay a sack charge of $1.
    The Commission conducted a 22 month proceeding in the full 
regulatory limelight, including hearings on the record, with 
the opportunity for all interested parties to present 
testimony, conduct discovery on other parties, and cross 
examine their witnesses, and file briefs. In its 235 page final 
order, the Commission expressed concern over the potential 
impact upon some smaller mailers and declined to act at that 
time. But it also stated, ``Progress toward a more cost-based 
rate structure is both possible and necessary.''
    In 2006, the Postal Service filed for a general rate 
increase, and once again Time Warner submitted a cost based 
rates proposal. However, at this time we substantially modified 
our previous proposal to reduce the impact upon smaller or less 
efficiently prepared publications. The key adjustment was that 
we proposed passing through on rates only 60 percent of the 
cost associated with bundles and containers. In other words, if 
a sack costs the Postal Service $5 to process, the rates would 
only reflect $3.
    After 10 months of on-the-record hearings, testimony, and 
cross-examination, the Commission recommended to the Postal 
Service a rate structure that was more cost-based than the 
existing structure, but that reduced the potential impact on 
smaller mailers even further by passing through only 40 percent 
of the actual bundle and container costs.
    As a result of this decision, 60 percent of those costs 
continue to be covered by the periodicals class as a whole, 
rather than the mailers who cause them.
    I would also like to say a word about subsidies. Many 
people are unaware of the fact that, other than free mail for 
the blind and overseas voting, the Postal Service receives no 
taxpayer subsidies from Congress. As a result, periodicals 
rates must cover their cost, and each mailer should pay for the 
services that they consume.
    The rate structure proposed by Time Warner is based upon 
the premise of paying for what you use. If mailers are given 
the proper price signals by being held responsible for the 
costs they impose on the system, they will find ways to become 
more efficient.
    In the absence of cost-based rates, periodicals class costs 
will continue to out-pace inflation, and that is something that 
our industry cannot afford.
    Thank you.
    [The prepared statement of Mr. O'Brien follows:]
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    Mr. Davis of Illinois. Thank you very much.
    We will go to Mr. White.

                   STATEMENT OF MARK W. WHITE

    Mr. White. Thank you for providing me this opportunity to 
clear up several misconceptions regarding periodicals' postal 
rates. There is no question, as you have already heard, that 
many publications have large increases in their postage this 
year, but it is not a small versus large issue. Many large 
circulation publications, including our own, had higher 
increases than average. We mail nearly 2 million copies of 
every issue, mailed extremely efficiently, yet our postage 
rates went up about 15 percent, much higher than average.
    The issue comes down to lightweight publications, light, 
nationally distributed publications. Virtually all of us had 
large increases, whether large circulation or small 
circulation.
    Another misconception is that the new rates are cost based. 
They are a move in the right direction, but they are not truly 
cost based. One problem or one flaw is that they still 
undercharge for bundles and containers. That means for the 
periodicals class to break even there must be overcharges in 
other areas. For U.S. News, that means that, though we are an 
efficient mailer, we still are overcharged. We are still 
subsidizing other magazines, including those published by much 
larger publicly traded corporations, because they are mailing 
their magazines less efficiently.
    I would also like to point out that, contrary to some of 
what you have heard, time-sensitive publications can take 
advantage of incentives in the new rates. Weekly publications 
can join freight pools to gain drop-ship discounts in a way 
that is efficient. We have been doing it for more than a 
decade, despite the fact that many people told us it couldn't 
be done.
    Weeklies can engage in co-mail and similar activities to 
reduce postage. We mail nearly all of our copies with another 
weekly, binding on the same binding line, despite our high 
volume which makes the incentives not as attractive for us as 
it is for smaller mailers to join such co-mail pools.
    Many people claim that these programs will delay delivery. 
Our experience is that drop-shipping or pool-shipping, co-
binding, co-mail actually improve delivery. We are able to 
create more-efficient bundles, more finely sorted pallets, 
drop-shipped further into the postal system.
    Let me also point out that true cost-based rates would not 
automatically hurt small circulation publications. Many local 
newspapers and regional magazines are inherently efficient 
mailers. Many small publications have joined co-mail pools and 
have taken other tactics to become efficient mailers. As an 
aside, I will point out that I worked with two other 
publications the last couple of years, one a small publication 
typically mailing about 20,000 copies, did it very efficiently. 
Another one, when I started working with them, was mailing 
500,000 to 600,000 copies, doing it very inefficiently. It is 
not a strictly small or large issue; it is efficient versus 
inefficient.
    The problem we had is the old rate structure that we 
inherited. Mailers were subsidized for mailing inefficiently 
because periodicals rates did not send the right signals to 
mailers. The disconnect between what we publishers paid and the 
Postal Service's cost caused inefficient mailing behavior. That 
led to rapid rate increases for all of us.
    The new rate structure is the beginning of a cure, though 
admittedly one with bitter medicine that treats some symptoms 
while largely ignoring others. But this partial cure is already 
having the intended effect, causing publishers to mail more 
efficiently, which is minimizing costs for the entire 
periodicals class. Such moves toward greater efficiency are our 
best hope for reigning in future increases in periodicals 
rates.
    Thank you.
    [The prepared statement of Mr. White follows:]
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    Mr. Davis of Illinois. Thank you very much.
    We will go to Mr. Schick.

                   STATEMENT OF JOSEPH SCHICK

    Mr. Schick. Mr. Chairman and members of the subcommittee, 
thank you for providing me with this opportunity to testify on 
behalf of Quad/Graphics. Quad is the largest privately held 
printer and third largest commercial printer, public or 
private, in the United States. Last year we distributed more 
than 9 billion magazines, catalogs, and direct mail pieces 
through the Postal Service, equating to about $2 billion in 
postage paid by our clients. We are headquartered in Sussex, 
WI, and have other printing plants across the Nation.
    While it is true we don't pay postage for the books that we 
print, postal rates do have a major impact on the printing 
industry. Every time the Postal Service increases rates, our 
clients react in a way that is detrimental to printers. They 
reduce circulation. In worst-case scenarios, they may 
discontinue a publication. They cut back on the number of 
pages. They reduce their frequency. In some cases, they may 
move to the Web. The result is a reduction in total print 
volume, and therefore our business.
    Because of the volume of mail we and our colleagues in the 
printing industry produce, it is a necessity that we work very 
closely with the Postal Service to create an end-to-end process 
that results in the lowest combined cost for our mutual 
clients. It is a term we have coined over the years with the 
Postal Service, basically stating that we don't want costs 
pushed to one side or the other, because at the end of the day 
our customers still end up paying for it.
    We are business partners with the Postal Service. Think of 
the Postal Service as the next department in a printing 
operation. We hand off the product to the Postal Service for 
final delivery, and our clients expect that to be a seamless 
process. That requires us to continue to find ways to be able 
to prepare mail in its most efficient way so that the Postal 
Service will incur the least amount of cost in carrying out 
their part of the process.
    As a large mailer, it is obvious that the long-term 
viability of the Postal Service is critical to our success and 
that of our clients. Over the last 25 years, through 
technological advances and process changes resulting in 
productivity gains of more than 4 percent annually, the 
printing industry has been able to actually reduce the price 
for printing adjusted for inflation. On the other hand, the 
Postal Service has seen their overall cost continue to rise, 
which has resulted in higher postage rates for mailers. So it 
becomes even more imperative that we try to do as much as 
possible in preparing and distributing the mail before we 
present it to the Postal Service.
    Over the years the printing industry has worked with the 
Postal Service and others to develop drop-shipping for 
transportation efficiencies, bar coding for automation, mail 
dock for distribution planning, Postal One for postage payment, 
and numerous other products and services. And many years ago 
carrier-out pre-sort was established as the finest level of 
pre-sort, which eliminated a great deal of work in postal 
processing and delivery, and therefore costs for the Postal 
Service.
    There was a time when only large circulation or local city 
regional publications could realize carrier route savings. 
Thankfully, that changed with the advent of co-mailing. I am 
proud to say that Quad/Graphics pioneered co-mailing in 1986 
when we were a much smaller printer. In fact, we were about a 
$260 million printing company with 2,100 employees. We knew it 
was the right thing to do at the time to help our clients 
reduce the heir postal costs, but at the end of the day we also 
have a business to run, and we knew that we needed to provide a 
unique service that would help us grow our business, as well. 
Thankfully, that happened.
    Today we offer four different co-mail processes, both in-
line and off-line, with options for virtually every one of our 
clients, regardless of circulation or trim size.
    Over the years, many other companies, printers large and 
small, and third-party logistics providers have made 
investments in co-mail equipment and technology. One size does 
not fit all, and that is apparent by the different co-mail 
processes that have been developed.
    As with any other investments, there has to be a return on 
that investment. We are in this to make money. In this case, 
that would equate to work share discounts provided because of a 
savings realized by the Postal Service. Over time, we have to 
drive behavior through those work share incentives for the 
continual process improvement of the technologies that prove 
successful, as well as using them to help Postal Service reduce 
their cost. Co-mailing is that successful technology. The new 
rate structure is the driver that will provide the incentives 
to continue to grow co-mail and make it even more viable for a 
larger audience of users.
    We don't like to see postal increases any more than the 
next guy. We suffer, as do our clients who have to deal 
directly with the postage increases. We are sympathetic to all 
mailers, big and small. Our clients run the gamut from niche 
publications with print orders of 60,000 copies, of which only 
10,000 are distributed through the mail, to some of the largest 
general interest publications and catalogs with circulation in 
the millions.
    Regardless of the quantities mailed, each publication is 
challenged to find ways to reduce the impact of a rate 
increase. If our clients are challenged, that means we are 
challenged to provide them with the opportunity to reduce those 
costs. That is our business.
    There is no debating the fact that we have just experienced 
the most challenging rate increase in recent history. Many 
mailers experienced higher increases than had been originally 
proposed. Periodicals question the rationale of the complexity 
of the new rate structure.
    As a printer, we were faced with having to explain to our 
clients what happened and what we were going to do for them to 
help them survive. While this was a challenge, it was not 
unlike what has happened after every rate case that I have ever 
been involved with over the last 20 years. A main reason for 
that is the ratemaking process under the old law. Everything 
about it created a situation where we all had to react to 
something that was usually unexpected. In this case, that was 
taken to the nth degree.
    We are encouraged by the signing of PAEA in 2006 because it 
limits rate increases to CPI, takes a 10-month rate-setting 
process out of play, and gives the Postal Service an 
opportunity to use market pressures on different classes of 
mail as a guide for setting rates. It should allow us the 
opportunity to better plan and manage our businesses.
    I fully expect that going forward we will continue to work 
with the Postal Service as business partners to do whatever it 
takes to maintain the concept of lowest combined cost. Because 
of PAEA, there should be more opportunities than ever to 
accomplish that goal. The viability of the printing industry 
and the Postal Service is at stake.
    Thank you for allowing me to make those views known.
    [The prepared statement of Mr. Schick follows:]
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    Mr. Davis of Illinois. Thank you very much.
    We will go to Ms. Pursley.

                   STATEMENT OF ANITA PURSLEY

    Ms. Pursley. Good afternoon, Chairman Davis, Congressman 
McHugh. Thank you very much for this opportunity to testify 
today.
    Quebecor World is the second-largest commercial printing 
company. We offer products and services to numerous market 
segments, magazines, catalogs, retail mailings, and within 
those market segments to small, medium, and large customers. 
Quebecor World strives continuously to bring high value and 
lower cost solution sets to the customers we serve in these 
markets. With that said, I am pleased to present to the 
subcommittee information about Quebecor World's logistics 
express collation mailing system [ECMS].
    The ECMS system is our version of what is commonly referred 
to in the mailing industry as a co-mailing system. As you have 
heard today, co-mailing is one of the few options that short-
run publications have that provide them the opportunity to 
qualify for the same types of postage discounts as larger 
circulation publications.
    As with all successful work sharing programs, we recognize 
that co-mailing will help many but not all, at least in the 
short term, publishers mitigate the impact of the most recent 
postage rate increase.
    Additionally, due to the reduction in postal handlings, co-
mailing allows magazines to arrive to their subscribers in 
better condition and in a narrow, more predictable time window.
    Although we have been co-mailing longer-run publications 
since 1998, our ECMS, we began that system program in May 2005 
in the Chicago area. In that year, we co-mailed a total of 30 
million magazines. The program grew to slightly over 100 
million co-mailed magazines in 2006, and we expect to exceed 
150 million this year. Today, almost 900 titles participate in 
our program.
    As a result of the new rate structure and increased demand, 
we recently opened the program to publications that are printed 
elsewhere, and already 50 publications printed by other 
companies participate in our program. We expect to see this 
number grow significantly.
    The core of this program, as I said, is the short-run 
publication market, because these type of publications have the 
most to gain. For example, co-mailing gets mail out of sacks 
and onto pallets, while larger publications generally can 
palletize on their own.
    Given this focus, the average size of publications in our 
program is approximately 30,000 copies, and has actually 
dropped each year as our program has expanded.
    In response to this demand, and in order to meet the needs 
of even smaller publishers, we recently reduced the minimum to 
as few as 5,000 copies per issue, and we have also tailored the 
program to be extremely user friendly.
    Two key aspects of the program are timeliness and 
flexibility. To ensure timely delivery, we typically run four 
co-mail pools for magazines each week, with one always 
beginning on a Monday. This ensures that magazines do not sit 
at the plant waiting for the next pool.
    Our experience has shown that for most publications the 
time required to co-mail a publication is more than offset by 
the delivery improvements that result from entry of co-mail 
publications deeper into the postal network.
    To allow publishers scheduling flexibility, we allow them 
to move publications in and out of the program from one issue 
to the next without penalty and with only 72 hours of notice. 
Similarly, they can move from one pool to another with only 36 
hours notice.
    Publishers simply need to provide us with their mailing 
lists 3 days prior to the start of a co-mail pool, and the 
actual magazines 1 day prior to the startup.
    Quebecor World Logistics recently announced plans to 
significantly expand our co-mail operations to meet this 
increased demand. To better service the non-Quebecor World 
print marketplace, we are moving into a new and larger 
consolidation facility in the northeast in 2008. This expansion 
will allow us to serve a broader spectrum of publications. And, 
unlike some previous co-mailers, the new generation of 
equipment that we would begin deploying in 2008 can process 
poly wrapped and tabloid-sized publications.
    The first two machines will be deployed into this facility, 
and we have agreements in place to purchase an additional four 
machines. This added capacity in the northeast will allow us to 
serve additional customers and plants in this region.
    In closing, I would like to add that Quebecor World does 
not support rate increases of this overall magnitude for any 
class of mail, but supports a rate structure that promotes 
efficiently prepared mail and reduces overall USPS processing 
costs.
    Moving forward, we fully expect that PAEA's rate indexing 
system will prevent such large rate increases in the future, 
while allowing the Postal Service to encourage efficient 
preparation. We also recognize that no single solution will 
satisfy all market segments or customer sizes. But we are 
committed to invest as appropriate to allow our customers to 
take advantage of whatever rate structure is in place.
    Thank you very much. I would be happy to answer any 
questions.
    [The prepared statement of Ms. Pursley follows:]
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    Mr. Davis of Illinois. Thank you very much.
    We will go to Mr. Cerasale.

                  STATEMENT OF JERRY CERASALE

    Mr. Cerasale. Mr. Chairman, Mr. McHugh, it is a pleasure to 
have the opportunity to testify before you on this important 
subject.
    I want to first take a minute to personally from the DMA 
thank the chairman for taking time out of his busy schedule to 
attend our conference and meet DMA members in the beautiful 
facility in the wonderful city of Chicago located in your 
District, Mr. Chairman. Thank you.
    The DMA is a premier association of direct marketers using 
all channels of communications, but the mail is still a very, 
very important channel to our members.
    I want to look at just four categories of mail today, not a 
periodicals--that has already been taken--but looking at 
standard mail flats, first class mail flats, standard mail 
parcels, and standard mail not flat machinables.
    All of them received rate increases, which will have affect 
on volumes and affect decisions of those mailers who mail in 
those classes and subclasses of mail.
    Looking at standard mail, since 1990 the Postal Service 
began moving rates in standard mail to reflect the cost 
differences between handling letter-shaped mail and flat-shaped 
mail. They started to do that gradually, little step at a time, 
to avoid rate shock, to eventually reach that goal.
    In this last rate decision, the Postal Regulatory 
Commission [PRC]--and I really have to thank all of you for 
changing the name from the Postal Rate Commission to the Postal 
Regulatory Commission, keeping the abbreviation PRC the same 
for old guys like me. But the PRC jumped immediately to full 
recognition of the cost differential between handling letters 
and flat-shaped mail.
    It is too early to tell right now what the full impact is 
of that on volume to the Postal Service. We do not know the 
impact of how much more volume there will be in letter-shaped 
mail than that proposed by the Postal Service, nor are we fully 
aware of the full impact of a 20 to 40 percent increase in 
flat-shaped mail, including most of the catalogs.
    The DMA believes that the PRC over-estimated the conversion 
of flat-shaped mail to letter-shaped mail to try and avoid that 
huge rate increase. As in my written testimony, for catalogers 
it takes a great deal of lead time to produce a catalog. You 
have to determine what you will order. You have to order those 
products. The products have to be created, delivered to the 
cataloger, put in the warehouse, and then sold through the 
catalog. So by the time the rate increases went into effect in 
May, the holiday season ordering was already in effect, and the 
size of the catalogs was likely already locked into place, 
since they had the products that they were going to try to sell 
already on order.
    So what is happening? What is this causing these flat-
shaped mailers to do? They are looking at co-mailing, 
commingling, and, more importantly, they are looking to a more 
rapid change to the Internet. I attended a conference of 
catalogers, and over half of the programming was on Internet 
marketing.
    That is what is happening a little bit in standard mail.
    Looking at first class mail flats, we see a greater 
conversion of first class mail. First class mailers are able to 
fold their flat-shaped mail and put it in letter-shaped pieces, 
so we are seeing less of an impact of the 20 percent increase 
on first class flats because they can convert more easily.
    Looking at standard parcels, a very small part of the 
standard mail stream, we see the 40 percent increase, far below 
the increase that was requested by the Postal Service. I think 
that the fear going forward is for standard parcels, Will the 
Postal Service go forward and really raise the rates here? We 
want to work hard with them to try and not have that happen to 
destroy standard parcels.
    Finally, not flat machinables. What are those? A good 
example are non-profits sending out premiums such as pens or 
pins. They had a rate increase of 200 plus percent, some of 
them. They have virtually been priced out of existence, to the 
detriment of some of our non-profit mailers who have those pins 
and pens on inventory. They are just no longer there. This is a 
type of mail that is gone due to the rate increases.
    So what do you do? What is the solution here to try and 
take a look at these disparate things? I think you created that 
solution with the postal reform. We have to let it work. We 
have to give the Postal Service the opportunity to look at the 
market impact of rate increases and take into account volume 
changes caused by the PRC recommendation, take into account the 
cost of paper that is dramatically rising, especially coated 
paper. Take a look at the new machines, the new equipment for 
sorting letters and flats. And, finally, hopefully, some 
changes allowing mailers to commingle and co-mail different 
classes of mail, so periodicals and catalogs can go together.
    Fortunately, yesterday the PRC promulgated rules to 
implement the reform, and we hope with that act that the old 
rate system is now gone forever.
    Thank you.
    [The prepared statement of Mr. Cerasale follows:]
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    Mr. Davis of Illinois. Thank you all very much. We have 
just two votes. We are about 5 minutes away from the first one, 
and the next one is a 5-minute vote. That means that we have to 
be gone about 10 minutes, 12 at the most. I do have some 
questions I would like to ask, so if you could remain I would 
really appreciate it.
    Thank you very much.
    [Recess.]
    Mr. Davis of Illinois. Thank you all so much. We will 
resume.
    Why don't I begin, Mr. O'Brien, what would you say to those 
mailers who blamed Time Warner for the rate increase? I mean, 
they say Time Warner gave us this rate increase.
    Mr. O'Brien. Well, I think, Mr. Chairman, they should first 
take a look at that graph. It is not Time Warner, it is the 
industry that for many, many years we as an industry allowed 
inefficiency to come into the process and we drove up the 
costs. That example that I gave you earlier about a sack 
costing $5 or $6 and only containing $1.50 worth of revenue 
really happens.
    So we were driving up the cost. It costs the Postal Service 
a lot of money to process these things, and we turned a blind 
eye to it.
    I think the other thing that has happened is, to be honest, 
we magazine publishers are junkies and we got hooked on a 
number of bad practices, one of which was a discount for bar-
coded copies at the five-digit level. The discount was 899 
percent above what the Postal Service's cost savings were. So 
you are giving away much more money than you are actually 
saving by the value of that discount.
    So what is wrong with this picture? We are all junkies. We 
all got hooked on that discount. It was reduced in this case 
back to only giving away 100 percent of what the Postal Service 
saves instead of 899 percent. That is one thing that was out 
there.
    Time Warner had nothing to do with that discount getting 
put back to where it should have been all along.
    Another thing that happened in this case was that the 
Postal Service recommended a shift from pounds to pieces, 
moving cost away from pounds to pieces, so, as you heard some 
of the earlier witnesses say, I have a lightweight publication 
and we got hit harder. That wasn't Time Warner's doing; that 
was a result of a proposal by the Postal Service to shift from 
pounds to pieces. All lightweight pieces got hit, including our 
publications.
    The whole idea behind these rates, Mr. Chairman, was not to 
put publishers out of business. We are as strong a proponent of 
the first amendment rights as anyone. We own CNN. We own Time 
Magazine. We want news. We want information to get put out to 
the public. But I think at the same time we want mailers to 
change their behavior to try and become more efficient.
    I thought it was kind of interesting earlier that Mr. 
Zipser said we are doing all kinds of things to try and offset 
this increase. That is exactly what was supposed to happen as a 
result of this proposal. Mailers were supposed to change their 
mailing behavior, not go out of business.
    So for everyone that comes up and tells you I am getting 
hit with a 20 percent or 30 percent or 40 percent increase, you 
have to take that with a little bit of a grain of salt because 
they haven't tried to do what Mr. White is doing with his 
weekly publication or what Mr. Schick and Ms. Pursley are doing 
for their customers in trying to make them become more 
efficient.
    See what their rate increases are after they change their 
behavior, and I think you will get a completely different 
picture.
    Mr. Davis of Illinois. So you are saying that it is a 
matter that the industry took a good look and decided, in a 
sense, to propose what you consider to be in the best interest 
of the industry, as well as the best interest of the Postal 
Service?
    Mr. O'Brien. Yes, Mr. Chairman. You know, this task force 
that we were on took place in 1998, 9 years ago. Big mailers, 
small mailers. Mr. Straus, one of your earlier witnesses, was 
on that task force right alongside me at every one of those 
postal facilities. We all looked at everything that was out 
there, and we came to the conclusion that there were 15 things 
that the Postal Service needed to change, and one of them was 
to have the rate structure get more closely aligned with the 
costs.
    We as an industry said that 9 years ago. The Postal Service 
didn't take action. It was incumbent upon the industry to take 
action. And yes, we had the courage to step forward and take 
that fight on on behalf of the industry, but I think it is for 
the long-term survival of the industry. Yes, there is short-
term pain until people change their mailing behavior, but once 
that is done I think in the long term you are going to see an 
effect on that curve, on that red curve, because if we don't 
change that, the Postal Service will never be able to meet the 
requirements of the new law to keep periodicals class cost 
below the rate of inflation. It won't happen.
    Mr. Davis of Illinois. Thank you very much.
    Mr. O'Brien. Thank you.
    Mr. Davis of Illinois. At this point let me ask you, have 
you noticed any changes, new trends with your publication, 
since the new rates have gone into effect?
    Mr. White. You mean in our own mailing behavior?
    Mr. Davis of Illinois. Yes.
    Mr. White. Yes. We are doing many of the things, but I 
think it helped us to be able to co-bind all of our magazines. 
Before we were only co-binding most of them. It clearly 
increased the incentives for potential co-binding partners. We 
have changed some of the rules that we used for pre-sorting to 
try to avoid sacks and to create more efficient pallets.
    I think more broadly, industry-wide, certainly there are a 
lot of people looking at things like co-mail again, and our 
message to printers has been co-mail or no mail. Either figure 
out how to help your customers minimize their postal cost or 
get out of the business of printing stuff that is mailed. That 
is a necessary part of the business, as these folks have 
pointed out.
    Mr. Davis of Illinois. Ms. Pursley, let me ask you, have 
you noticed any change, trends, since the new rates were 
implemented?
    Ms. Pursley. Well, it is very, very obvious in our 
operation. Our co-mail facility has just exploded, the demand. 
The customers are knocking down the doors. We are, as I 
mentioned in my testimony, expanding the program to not only 
offer our northeast customers co-mail operations or co-mail 
offerings, but also to non-Quebecor World print customers. Many 
of our customers now are other printing companies that may not 
be able to invest in co-mail equipment and make the return on 
the investment necessary in order to make it successful as a 
small printing company. So we are working in tandem.
    It is very, very impressive how our program has grown 
significantly just in the last 2 to 3 years.
    Mr. Davis of Illinois. Would you suggest that efforts to 
educate the members has had that kind of impact to be more 
efficient or to find more efficient ways of mailing?
    Ms. Pursley. Educating those customers? Definitely. I mean, 
it is an education process, because co-mailing doesn't work for 
everybody and a customer may have to make a few changes in 
their existing practices, but you can make it work. I mean, 
there are a lot of options. As with every rate case, we have 
customers who come to us and say, What is it that we can do to 
lower our postage costs? Many times it is suggestions such as 
lowering paper weights or reducing trim size. It is no 
different in a co-mail environment where we may be suggesting 
slight operational changes for them to be able to participate. 
But overall it is working very successfully.
    Mr. Davis of Illinois. Thank you.
    Mr. Schick, what efforts have you made to help your 
customers take advantage of more of the discounts in standard 
mail?
    Mr. Schick. Well, Mr. Chairman, I think I will concur with 
Anita's comments on trying to get more of our catalog customers 
to look at co-mailing. I can tell you that this year over last 
we have already seen about a 75 percent increase in the volume 
just in standard mail catalogs that are currently taking the 
opportunities to do some kind of co-mailing.
    But we actually went back to our customers when we saw what 
the rates were going to be and said, Let's start from the 
beginning. Let's focus first of all on your mailing list. Let's 
ensure that you are mailing to the right people. Let's ensure 
that you have good addresses, because there are opportunities 
to save some money on that side of the business, and then that 
savings just kind of compounds going forward because you are 
able to do so many more things without adding some cost.
    Likewise, if you don't do those things up front to ensure 
that you are mailing good addresses, you are just adding cost 
as it gets piled on through the process.
    So we took that approach, then we also said let's look at 
our transportation planning and distribution to see where we 
can take better advantage of some of the transportation 
efficiencies and opportunities for additional drop shipping.
    Then, while we were doing that, we were also focusing on 
helping them with their response rates, and looking at the 
technology that we have available to them to help them target 
their customers better so that they can raise the rate of 
response. By the time you raise the response rates and get more 
sales and reduce your costs a little bit, at the end of the day 
you are able to manage those overall costs pretty well. I think 
we have seen a lot more customers with open eyes taking 
advantage of all those different processes.
    Mr. Davis of Illinois. Thank you.
    Mr. Cerasale, as you know, the PAE makes it considerably 
easier for the Postal Service to engage in pricing experiments. 
Can you describe for the committee one or two experiments that 
you would like to see the Postal Service try?
    Mr. Cerasale. I think the first one is the one I mentioned, 
could happen relatively quickly, is to allow commingling of 
more than one class of mail. As Mr. Schick talked about, 
catalog mailers going in and commingling, we can take the 
smaller publications and put them on those pallets as well and 
kind of reduce those costs. So I think that is one that can go 
fairly quickly and one that would have a great impact on 
helping especially the smaller mailers and the lighter weight 
mailers, the ones who were hit most hard in this past rate 
case, both in periodical class and in standard mail.
    I think the push toward having mail, it started with the 
NSA from Bank of America, which is still a question as to 
whether or not that will be approved, but the idea of moving 
forward to try and get what the Postmaster General explained, 
the intelligent bar code forward, to try and really cut costs 
out of the system.
    One of the things that has been delayed is when everyone 
will be required to use the intelligent bar code. It may be 
time to, through the NSA, through maybe experiments, to try and 
push more and more mailers to start using the intelligent bar 
code and see what savings we can have here, what other 
offerings can come off of it, including potential of being able 
to help mailers target mail better and get a better rate of 
return. So I think that is an area where the Postal Service 
should probably look at quickly, as well.
    Mr. Davis of Illinois. Well, thank you very much. Let me 
ask one last question that any of you might answer. In our last 
panel we had some discussion of privatization. Would any of you 
characterize privatization as perhaps a better way to deal with 
the issues and problems that we have discussed?
    Mr. O'Brien. Mr. Chairman, I have some experience in this 
area. I used to be CEO of a company called Publishers Express 
that competed with the U.S. Postal Service for delivery of 
magazines and catalogs, and we were in business from 1989 until 
1996. During that period of time, we took the business from two 
zip codes in Atlanta to 1,000 zip codes in 36 cities throughout 
the United States.
    The way that we did the business was we licensed our 
business to local newspapers, and when they were delivering 
their saturation products that would go to every household in a 
zip code, those carriers would deliver magazines and catalogs 
along with them.
    What we found, we were in business for that period of time. 
We made money exactly 1 month. We were in business 6 years and 
made money 1 month, so it is a tough business. The quality of 
delivery is suspect. I know it was kind of funny because I was 
running this company and yet Time, Inc.'s magazines were some 
of the customers. What we found was that our level of quality 
for the private delivery was 10 times worse. We received 10 
times more complaints in the zip codes where Publishers Express 
existed.
    So it was very, very difficult because we were using part-
timers. We were not allowed mailbox access, so we had to hang 
magazines and catalogs in a little plastic bag on a door knob. 
Because people were part time, sometimes they delivered, 
sometimes they didn't. We had problems with consumers saying I 
don't want this, I want the product in my mailbox, put me back 
the other way, put me back in the Postal Service. We had to 
honor those requests.
    So privatization may be held out as a panacea here. I can 
tell you from personal experience it is a very, very difficult 
business.
    Mr. Davis of Illinois. Thank you very much.
    Anyone else care to comment?
    Mr. Cerasale. Yes. The mail represents $900 billion a year 
in economic impact. Unlike some of the experiments that are 
going on in Europe where privacy laws really diminish the 
amount of advertising mail that can be put into the system, the 
United States, with its economic model, mail volume, mail 
advertising is thriving. It is growing faster than the growth 
of the economy, as a whole, so it is continually growing in 
that kind of a view, even in the face of the Internet.
    I think it is a little bit premature to take a look at 
privatization now. You really have to look at the postal reform 
legislation and see how this works. We have to give it an 
opportunity to work, and if it fails for some reason then we 
might start to look at it.
    Also, I think we are seeing in Europe just there still is a 
vestige of part of a monopoly in the European systems, and they 
are moving now to get rid of that. It is probably time to take 
a look and see. If you want to look at Europe, you have to wait 
and see what happens when it is really, truly privatized, 
understanding that they are not as mail centric as the United 
States is, with the type of the economy that we have.
    Mr. O'Brien. Mr. Chairman, just one followup to that. I 
second what Jerry says. The thing that killed Publishers 
Express was mailbox access, that we could not deliver to the 
mailbox. The other thing that you ought to think about is the 
fact that the new law just went into effect in 2006, and I 
think we need to let that play out.
    But I do say that if you ever elect to look at this, 
private delivery will not survive without mailbox access. There 
is a tradeoff there with the American public. A lot of people 
say, I get my retirement checks in the mail. I don't want 
anyone else's hands going into that mailbox. There are very, 
very difficult issues that need to be wrestled with.
    So I would say let the new law play out, and if it doesn't 
play out in a number of years down the road, then maybe we 
would consider that, but it has to go hand-in-hand with the 
mailbox.
    Mr. Davis of Illinois. All right.
    Mr. Schick. I would just make one other comment, and that 
is, from a business perspective, when you look at the 
environment the Postal Service works in today where they 
deliver to every address 6 days a week, with diminishing 
revenues in each of those delivery points, there isn't a 
business out there that would ever want to do that. So without 
changes to the requirements of how many days you deliver and 
how many times you have to go to each household, or without the 
opportunity to surcharge, as the competitors of the Postal 
Service do, I really don't see that being a viable thing at 
this time.
    I also believe that the Postal Service's last mile delivery 
is their bread and butter, and it is what is really of value. 
As long as we as an industry can continue to work with the 
Postal Service to develop work sharing opportunities so that we 
can cut some of the costs out of the Postal Service's 
processing network, their delivery still is the best delivery 
and I wouldn't want to see that go away any time soon.
    Mr. Davis of Illinois. Well, thank you all so very much. It 
has been a pleasure. We certainly appreciate your patience and 
endurance.
    Jerry, let me just say it was good to see you and other 
members of the Direct Marketing Association in Chicago. If you 
ever want to come back, the city is yours.
    Mr. Cerasale. Thank you.
    [Whereupon, at 2:30 p.m., the subcommittee was adjourned.]

                                 
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