[Senate Hearing 110-340]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-340
 
               THE ROAD AHEAD: IMPLEMENTING POSTAL REFORM

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

                                HEARING

                               before the

                FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
                   INFORMATION, FEDERAL SERVICES, AND
                  INTERNATIONAL SECURITY SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 19, 2007

                               __________

        Available via http://www.access.gpo.gov/congress/senate

       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs


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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
THOMAS R. CARPER, Delaware           GEORGE V. VOINOVICH, Ohio
MARK L. PRYOR, Arkansas              NORM COLEMAN, Minnesota
MARY L. LANDRIEU, Louisiana          TOM COBURN, Oklahoma
BARACK OBAMA, Illinois               PETE V. DOMENICI, New Mexico
CLAIRE McCASKILL, Missouri           JOHN WARNER, Virginia
JON TESTER, Montana                  JOHN E. SUNUNU, New Hampshire

                  Michael L. Alexander, Staff Director
     Brandon L. Milhorn, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk


FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, FEDERAL SERVICES, 
                AND INTERNATIONAL SECURITY SUBCOMMITTEE

                  THOMAS R. CARPER, Delaware, Chairman
CARL LEVIN, Michigan                 TOM COBURN, Oklahoma
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
BARACK OBAMA, Illinois               GEORGE V. VOINOVICH, Ohio
CLAIRE McCASKILL, Missouri           PETE V. DOMENICI, New Mexico
JON TESTER, Montana                  JOHN E. SUNUNU, New Hampshire

                    John Kilvington, Staff Director
                  Katy French, Minority Staff Director
                       Liz Scranton, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Carper...............................................     1
    Senator Coburn...............................................     4
    Senator Akaka................................................     6
    Senator Collins..............................................     7
    Senator Stevens..............................................    10

                               WITNESSES
                        Thursday, April 19, 2007

Hon. John E. Potter, Postmaster General and Chief Executive 
  Officer, U.S. Postal Service...................................    12
Hon. Dan G. Blair, Chairman, Postal Regulatory Commission........    14
Katherine Siggerud, Director, Physical Infrastructure Issues 
  Team, U.S. Government Accountability Office....................    16

                     Alphabetical List of Witnesses

Blair, Hon. Dan G.:
    Testimony....................................................    14
    Prepared statement...........................................    44
Potter, Hon. John E.:
    Testimony....................................................    12
    Prepared statement...........................................    35
Siggerud, Katherine:
    Testimony....................................................    16
    Prepared statement...........................................    51

                                APPENDIX

Questions and Responses for the Record from:
    Mr. Potter...................................................    84
    Mr. Blair....................................................   112
    Ms. Siggerud.................................................   119


               THE ROAD AHEAD: IMPLEMENTING POSTAL REFORM

                              ----------                              


                        Thursday, April 19, 2007

                                   U.S. Senate,    
          Subcommittee on Federal Financial Management,    
                Government Information, Federal Services,  
                                and International Security,
                            of the Committee on Homeland Security  
                                          and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:30 p.m., in 
room 342, Dirksen Senate Office Building, Hon. Thomas R. 
Carper, Chairman of the Subcommittee, presiding.
    Present: Senators Carper, Akaka, Coburn, Collins, and 
Stevens.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. We ask the Subcommittee to come to order. I 
would like to begin by thanking each of our panelists for being 
here today and for all the folks in the audience and those that 
aren't here who have worked with a bunch of us over the last, 
for me, 6 years, for others, as long as 10 years to update and 
attempt to make the first really major change in our postal 
system since Senator Stevens and his colleagues some 37 years 
ago worked to separate the U.S. Postal Department from where it 
was to bring it into, at that time, really into the 20th 
Century, and what we are endeavoring to do is to bring it into 
the 21st Century. I am proud of what we were able to accomplish 
and I am grateful to all who have played a role in its passage.
    I really want to thank Senator Stevens. One of the first 
meetings I had as a new Senator--I don't know if you remember 
it, but we had breakfast together and we talked about how you 
worked to develop consensus all those many years ago and I 
thank you for that counsel and certainly for your support as we 
tried to improve on your work today.
    As I have noted a number of times in the past, one of the 
first hearings that I attended of this Subcommittee some 6 
years ago was about the Postal Service's dire financial 
situation. I believe the Postal Service was nearing, at the 
time, its statutory borrowing limit and appeared to be close to 
financial collapse. Things have improved remarkably, thank 
goodness, since then, and under the leadership of Postmaster 
General Potter, the Postal Service has survived September 11, 
2001, survived anthrax attacks, and is currently on sound 
financial footing.
    Setting aside a one-time charge relating to a provision in 
the postal reform bill, financial data released in early 
February show that revenue at the Postal Service was up by a 
little more than 6 percent in the first quarter of fiscal year 
2007, and there is also another increase in productivity.
    These numbers are, I think, emblematic of the leadership 
that Mr. Potter and his management team have shown. But they 
also mask some serious long-term problems that threaten the 
viability of the Postal Service as we know it.
    As we are all certainly aware, the Postal Service must 
compete these days with cell phones, compete with e-mails, 
compete with fax machines and electronic bill payment 
technology. Mail volume in some areas, particularly First Class 
mail, has been declining in recent years, although I understand 
it was flat for the most recent year. In many cases, letter 
carriers are bringing fewer pieces of mail to the homes or 
businesses they visit each day. At the same time, the number of 
delivery points on the postal network, as we know, is still 
increasing by, I am told, some one million per year.
    Many observers have been saying for years that the Postal 
Service, due to the cost of its obligation to provide universal 
service, was entering a so-called death spiral of declining 
volume, leading to higher rates, leading to more declines in 
volume and yet still higher rates.
    The legislation that we enacted at the end of last year was 
intended to prevent or at least to slow this decline. We 
clearly could not outlaw e-mail or electronic bill payment in 
the legislation, but what we could do and what I believe we did 
do is to provide the Postal Service with more of the tools 
necessary to compete in a modern economy.
    Up until now, the Postal Service has been operating under a 
business model created by Senator Stevens and his colleagues 
some 37 years ago, a model that worked remarkably well. In 
order, though, to change its prices, postal management was 
forced to go through a ratemaking process that often took more 
than a year to complete, and at the end of the day, the Postal 
Service was given little incentive through that rate system to 
modernize its organization and modernize its operations because 
they were essentially entitled to receive whatever price 
increases they needed to cover their costs, whatever those 
costs might be.
    Well, that will soon no longer be the case. Under the rate 
system currently being developed by the Postal Regulatory 
Commission (PRC), the Postal Service will have significantly 
more freedom to price their products according to what the 
market will bear and tailor prices to the needs and demands of 
their customers. It will also be forced to live for at least 10 
years under a tight rate cap based on the Consumer Price Index 
that will force the continuation of the streamlining process 
that was begun under the Postmaster General.
    At the same time, the bill signed into law last December 
strengthened management and transparency at the Postal Service 
and it gave the Postal Regulatory Commission significant new 
authority to ensure that the Postal Service is complying with 
applicable laws and regulations. And the authority of the 
Commission will extend for the first time to service in 
addition to rates.
    The bill also looks to the future, requiring the Postal 
Service to come up with long-term goals for the right-sizing of 
its workforce and facilities network, and for the deployment of 
cheaper, more customer-friendly retail options. It also 
requires regular reports on the Postal Service's future. This 
will include recommendations on changes to the universal 
service obligation and the postal monopoly that are needed to 
ensure that those who depend on the Postal Service are getting 
the service that they need.
    And finally, the bill seeks to shore up the Postal 
Service's finances for years to come. Over the next 10 years, 
the Postal Service will be making aggressive payments toward 
paying down its more than $50 billion retiree health care 
liability, and at the end of this period, the Postal Service 
will have full use of billions of dollars every year that they 
had been paying first into the old Civil Service Retirement 
System Pension Program, and then for the last couple of years 
into an escrow account. This money will give the Postal Service 
the ability to maintain rate stability and continue carrying 
out its universal service obligation in the future when the use 
of electronic forms of communication can only be expected to 
grow.
    Starting today, it is the job of this Subcommittee to make 
sure that postal reform is implemented properly. In addition to 
hearing testimony about the current state of the Postal 
Service, I want us to closely examine some key provisions of 
the bill and the plans in place to carry them out.
    Mr. Blair, you and your team at the Postal Regulatory 
Commission certainly have your work cut out for you. You have 
got a number of regulations and reports that must come out in a 
very short period of time, as you know. We structured our bill 
this way not to test you, but to ensure that the Postal Service 
has the ability to access the significant pricing flexibility 
we gave them as soon as possible.
    We also wanted to give postal customers as soon as possible 
the benefit of the predictability and the stability that the 
rate cap offers them. This is especially important now that the 
Postal Service is implementing a rate increase and there is 
fear out there that another increase could be just around the 
corner. Personally, I would rather have the next rate increase 
occur under the new rules, not the old rules, so I look forward 
to hearing from you, Mr. Blair, and I know I have read a little 
bit of your testimony on this point already, but hearing from 
you about where we are in the rulemaking process and what help 
you might need from us and from the Postal Service in getting 
this new system up and running sooner rather than later.
    If I could, let me just close by noting that those of us 
who had a role in drafting the postal reform bill--and we have 
been joined by Senator Collins--I think nobody had a greater 
role, certainly in the Senate, than Senator Collins in drafting 
this compromise and helping to get it done, getting the support 
of the Administration.
    I want to just note that those of us who had a role in 
drafting a postal reform bill chose not to privatize the Postal 
Service and not to erode in any way the service level that the 
Postal Service provides. I have been concerned, then, with 
information my staff and I have learned about in the press and 
from postal employees and customers about the contracting out 
of mail delivery. I know that the Postal Service is under 
tremendous pressure to streamline and to cut costs and that 
this pressure will only grow once the rate cap being developed 
is in effect. I also know that contractors have always been a 
part of mail delivery, always have been, probably always will 
be, probably always should be, and I recognize that there may 
be some areas where the use of contractors could be expanded.
    However, I am concerned if what we are seeing now is the 
beginning of a rapid and wholesale transition from postal 
employees to contract employees in the area of mail delivery. 
If more mail delivery is to be contracted out, the Postal 
Service needs to be more open about its plans. Customers need 
to hear about the impact contracting decisions will have on 
service and employees need to know that they will be treated 
fairly. I, for one, would like to know some more about the 
process being used to solicit and review bids, and once a 
contract has been signed, to oversee the work done by 
contractors and whoever it is that they may subcontract with.
    Letter carriers are often the only contact most Americans 
have with the Federal Government almost every day. In many 
cases, they are also probably the only part of the Federal 
Government that people have, too often, positive feelings 
about. I think it is important, then, that there be more 
openness from the Postal Service about what their plans are if 
contracting out of mail delivery truly is to become more 
common.
    With that having been said, Senator Coburn, you are on.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. Thank you, Mr. Chairman. I have a statement 
for the record I would like to have admitted. I won't spend the 
time and I will apologize to our guests that we have a 
Judiciary hearing of some importance going on now and I will be 
called to that momentarily.
    I want to thank Senator Collins as well as Senator Carper 
and all those that worked on the postal reform bill. It is one 
of the few bills that I didn't try to stop last year and I want 
to be appreciated for that. [Laughter.]
    I had no part in its delay. I want to talk about long term. 
We have hundreds of thousands of great employees that work for 
the Postal Service. This is an estimate of revenues and 
expenses. You all didn't prepare this, I prepared this, looking 
at what is happening and where it is going under the revised 
postal reform bill that was passed. What we see very soon is 
red. We saw red, $600 million. The real number was $600 million 
this past year. I believe that what has happened is a great 
intermediate step and I think we have to keep our eye on the 
ball.
    People claim that I am an idealist. I am not. I am a 
realist that thinks in the long term, and so, therefore, that 
is reflected as being an idealist in the short term. But I 
think that the decisions that we ought to be talking about is 
what happens 10 years from now.
    I appreciate very much the Chairman having this hearing, 
but I also think it is important that we continue. What is the 
next step? What has happened is the Postal Service has watched 
its costs grow faster than its revenues since 2003. It needs to 
be freed up to run more like a business and less like a 
bureaucracy if it is ever to dig out of what that chart is 
estimated on our behalf. I am not sure that everybody would 
agree with that, but I will show that again in 3 or 4 years and 
we will see how accurate it was.
    The recently-passed reform legislation provided only for 
ways to increase postal rates without really creating ways to 
cut costs. Simply raising rates without cutting costs won't do 
anything in the long run to help the Postal Service because of 
who you compete with and how the world is changing. If Congress 
truly wants to reform the Postal Service, it will need to move 
beyond the traditional reforms that prop up monopolies and 
bureaucracy and move towards those that promote competition, 
markets, and innovation.
    Senator Carper mentioned the technologic changes that have 
come about that have impacted First Class mail, and I had a 
wonderful conversation with the Postmaster General in my 
office, I believe it was this week or last week--last week, the 
weeks run together--and I am committed to seeing and believing 
that his management and those that work under him are great and 
are what we need, and so I would compliment you in that regard.
    But my hope is that we are thinking 10 years down the road, 
because if we are and if we give you the tools, right now, 
three-quarters of your costs are labor costs, and yet on a 
large majority of those labor costs, you have no capability to 
control those. I don't begrudge the fact that the average 
postal employee in this country makes, with benefits, $20,000 
more than the average person in this country. That is the 
facts. But if that is the case, and it is, then efficiency 
ought to be the No. 1 thing and performance ought to be the No. 
1 thing and the power of management to get that efficiency that 
postal workers want to give ought to be there. The tools ought 
to be there.
    So I look forward to your hearing. I have some questions 
that I would like to submit. My staff will stay here during the 
hearing. And again, I apologize to you for not being able to 
stay. I have reviewed the testimony and I thank each of our 
witnesses today.
    [The prepared statement of Senator Coburn follows:]

                  OPENING STATEMENT OF SENATOR COBURN

    My view of the U.S. Postal Service is akin to an iceberg floating 
in the Caribbean: even the best efforts can only help a little. This 
might seem harsh for an agency that recently had life breathed back 
into it through reform legislation passed late last year. But, if we 
are honest and face the facts, it is difficult to imagine a postal 
service in twenty years that looks anything like it does today.
    For years, pressures inside and outside the Postal Service have 
mounted, pushing it dangerously close to the breaking point. Without 
the recently passed Postal Reform legislation the situation would be 
worse, for sure. But, it's is my opinion that the reforms we passed 
will do no more than simply keep the agency afloat a little longer than 
it otherwise would--I don't believe it can reverse the downward trend.
    To roughly outline the problems, we have a situation in which 
revenues are growing at a rate of less than 2.5% per year while costs 
are growing around 5% per year. First-Class mail volume is plummeting, 
electronic communications are increasing, and labor costs are 
threatening to eat up any revenues that the postal service makes. It 
doesn't take much to realize that none of this adds up to a healthy 
bottom line.
    The problems faced by the postal service, though, cannot simply be 
laid at the feet of management. Although every large organization can 
rise or fall on good management--which the postal service has had under 
Postmaster Potter--I want to emphasize that I believe the problem is 
primarily structural. By that, I mean that the postal service's 
problems cannot be solved with new management or by tinkering around 
the edges. The Postal Service must operate under conditions placed on 
it by Congress, and those conditions, if unchanged, will bring 
inevitable failure to thrive in the market and a financial millstone 
around the taxpayer neck.
    There are three things I'm primarily talking about:

Structural Challenges Facing the Postal Service
Competition
    First, competition with private industry is a significant challenge 
and it does so with its ``competitive'' products--Express Mail, 
Priority Mail and Parcel Post. Most other products are protected by a 
Congressionally-mandated monopoly, though, which shields the Postal 
Service from having to compete in everything it does. But, even limited 
competion has proven to be a huge challenge as we see in the fact that 
since 2002, revenues for Priority and Express Mail have been stagnant 
and volume has been down.
    Competing with the private sector is good for the American public, 
and the fact that it is bad news for the Postal Service is a sign that 
the Postal Service is fundamentally structurally unsound. The only 
response to tough competition is to provide better services at better 
prices or continue to lose its share of the market. No reform 
legislation can completely address the challenge of competing with 
industry.

Labor Costs
    Second, labor costs are another significant structural problem 
facing the Postal Service. Despite a decrease of 10,000 employees since 
2004, the Postal Service's costs for compensation and benefits have 
increased by over $4 billion annually. Right now, labor costs account 
for over three-quarters of their annual operating budget. On the 
contrary, the Postal Service's competitors face far lower labor costs 
and are able to keep them under control.
    Again, this is not necessarily the fault of the Postal Service, 
it's been imposed by a Congress that lacks the accountability that Fed-
Ex or DHS owes to its shareholders. Powerful politicians and employee 
unions have combined forces to thwart any effort of the agency to 
control its labor costs. Until it is able to do so, labor will eat an 
ever-growing percentage of its budget and threaten to drag the agency 
into ruin.

Technological Advances
    Even without the problems of competition and labor costs, the 
business model of the Postal Service would be fatally flawed. That's 
because the most significant problem facing the Postal Service is that 
it is losing relevance in the face of technology advances. The 
Internet, telephone and fax have displaced much of what was previously 
sent by mail. Instead of sending bills or taxes by mail, more and more 
Americans are going online. In fact, according to the IRS more than 73 
million Americans filed taxes online last year.
    These advances are revolutionizing the world of communication in 
business, entertainment and social relationships. This is a great 
thing--consumers are getting high-speed, well-documented, convenient 
services and these have revolutionized our world. We should be 
applauding these changes. It is the American people who are our 
``clients'' not the Postal Service--and we must first and foremost 
think of what they want, need and expect--what's good for them, not 
what's good for the government.

Where Do We Go From Here?
    The three factors I've laid out--competition, labor and 
technology--were not challenges created by the Postal Service, but they 
are real, and they must be faced.
    Facing these challenges will require the Congress to go beyond the 
typical ``reform'' legislation that addresses how rates are changed, 
escrow accounts are tallied or members are appointed to boards. Rather, 
we will need to reconsider the very fundamental questions such as:

      Is it essential that mail delivery remain a core 
government function?
      Is it time to rethink the definition of ``universal 
service''?
      Whose needs are being served by the current system? The 
American public or others?

    These, I believe, are the questions that need to be asked and the 
questions I hope to answer in this hearing in the months to come.

    Senator Carper. Let me yield now to Senator Akaka for any 
statement he might have.

               OPENING STATEMENT OF SENATOR AKAKA

    Senator Akaka. Thank you very much, Mr. Chairman. I am 
pleased to be with you here this afternoon. I want to add my 
welcome to the witnesses. I first want to commend my 
colleagues, especially you, Chairman Carper and Senator 
Collins, who worked tirelessly to craft a bill that will 
hopefully not only preserve the Postal Service, but also 
improve it.
    I am pleased to see that the Postal Service has been taken 
off the GAO's high-risk list, in large part due to the passage 
of the Postal Accountability Enhancement Act (PAEA). One area I 
am particularly interested to hear about is the effort to 
implement the new accounting standards called for PAEA. While 
the Postal Service has made strides in the area of financial 
transparency, including quarterly reporting of data and making 
that data more accessible, the Postal Service will now be held 
to similar disclosure standards as private companies are under 
the Sarbanes-Oxley Act.
    Another issue is the creation of new regulations that will 
give the Postal Service increased flexibility in responding to 
costs by allowing them greater latitude in setting new rates. 
It is my hope that the Postal Regulatory Commission will be 
able to write strong regulations in a timely manner. I also 
hope that if the final rate change case under the old system is 
put into motion this year, that the Commission can still work 
to develop these regulations as soon as possible.
    I have also been made aware about issues regarding the use 
of contractors for delivering mail. While the Postal Service 
has long used contractors for extremely rural routes and for 
limited highway routes, we have seen an increase in the use of 
contractors for more urban routes. I believe there is a place 
for contractors in the Postal Service, but the practice should 
never be abused or unnecessarily expanded. Mr. Potter, I hope 
that you can share with us what the Postal Service is doing in 
this area.
    Chairman Carper, again, I thank you for calling this 
hearing and look forward to the testimonies here and look 
forward to working with you on this matter. Thank you.
    Senator Carper. Senator Akaka, thanks much. Thanks for 
joining us today. Thanks even more for your counsel and input 
and that of your staff as we worked on this endeavor for the 
last half-dozen or so years.
    I want to yield now to Senator Collins and just say, thank 
you so much not for just being here, but for allowing me to be 
your sidekick as we tried to craft this legislation and to get 
it done last year. Senator Collins.

              OPENING STATEMENT OF SENATOR COLLINS

    Senator Collins. Thank you very much, Mr. Chairman. I very 
much appreciate the opportunity to join you today.
    You know, the last postal reform bill before ours was more 
than 30 years ago and the author of it was Senator Stevens. 
This has taught me that postal reform only comes around every 
30 years, and I don't know about you, but after working so hard 
over 3 years to get our bill passed, I think we should wait 
another 30 years before there is another one.
    Senator Carper. Senator, I don't plan to be around then.
    Senator Collins. Neither do I.
    Senator Carper. Senator Stevens might be, but I will be 
long gone. [Laughter.]
    Senator Collins. I would ask unanimous consent that my full 
statement be put in the record, but I do want to make just a 
few comments, if I may.
    Senator Carper. Without objection.

                  OPENING STATEMENT OF SENATOR COLLINS

    Thank you, Mr. Chairman. I appreciate the opportunity to join you 
today for this very important hearing.
    This Committee has invested a great deal of time and effort on the 
issue of postal reform. This process, which began in 2002, included 
numerous hearings and close consultation with the entire range of 
experts and stakeholders, from the managers of the United States Postal 
Service and employee unions to non-profit organizations and other 
members of the mailing community.
    I was proud to stand alongside Senator Carper last December as the 
President signed the postal reform legislation that bears our names 
into law. Through the long and complex process of crafting this 
comprehensive modernization of the Postal Service, it became clear to 
us why postal reform is enacted only every 30 years.
    But enacting legislation is only part of the equation. The other is 
implementation, and that is why we are here today. Although the issues 
that we confronted were many and complex, our purpose was 
straightforward: to position the Postal Service for the 21st Century, 
to ensure the affordable universal service that is essential to the 
American people, and to strengthen a service that is the linchpin of a 
$900-billion mailing industry that employs 9 million Americans in 
fields as diverse as direct mailing, printing, catalog production, 
paper manufacturing, and financial services. The health of the Postal 
Service is essential to the vitality of thousands of companies and the 
millions that they employ, as well as to the more than 750,000 postal 
employees.
    Given the important contributions of the mailing industry to the 
Postal Service and our economy, I am particularly concerned by the 
sudden and sharp rate increases proposed by the Postal Regulatory 
Commission for Standard Mail flats. These proposed rates could drive 
smaller catalog companies out of business or at least undermine their 
profitability. This is exactly the kind of double-digit, unpredictable 
jump in rates that our reform bill was designed to prevent.
    Let me illustrate the damage this proposal will cause to the 
catalog mailing industry with some examples from my home state of 
Maine. Geiger Brothers, a family business in Lewiston, is a 
manufacturer, supplier, and distributor of catalogs, calendars, and a 
wide variety of other printed materials, including the world-famous 
Farmer's Almanac. This company estimates this decision would cause an 
increase in mailing costs of 29 percent. This proposed increase would 
cost Geiger Brothers an additional $600,000 this year.
    Another fine Maine company, Cuddledown is a nationally renown 
manufacturer of luxury down comforters and other high-quality bedding 
products with a heavy reliance on mail orders. This family-owned 
business, located in Portland, estimates that this proposal would 
increase its mailing costs by 18 percent.
    I have also heard from L.L. Bean, Maine's legendary outdoor 
outfitter and a world leader in catalog sales, which would be 
negatively affected by the rate increase and may need to reduce its 
mailings in order to maintain postage costs at a sustainable level.
    These unexpected and steep increases will cause similar harm to 
catalog mailing businesses throughout the nation. Not surprisingly, the 
comments filed in response to the proposed rates indicate that this 
increase will cost jobs and stifle economic growth of companies vital 
to communities throughout our country.
    In addition to the concerns I have with the current proposed rate 
increase, I would strongly discourage the Postal Service from filing a 
``final'' rate case under the old rate setting rules before postal 
reform is fully implemented. Filing a new rate case would divert 
resources and effort from developing a modern system of rate 
regulations as required under the new postal reform law.
    I look forward to the testimony we will hear today concerning how 
the PRC and the Postal Service are working to ensure predictability and 
stability in the rate setting process and implementing other core 
principles of the postal reform act. 
    Thank you, Mr. Chairman.

    Senator Collins. We are very proud of the postal reform 
legislation that all of us on this panel worked so hard to get 
signed into law last year, but enacting legislation is only 
part of the equation. The other is implementation and that is 
why I really commend the Subcommittee Chairman for holding this 
hearing today and that is why we are here.
    Although the issues that we confronted in enacting this 
legislation were many and complex, our purpose was 
straightforward and that was to position the Postal Service for 
the 21st Century to ensure that affordable universal service 
that is essential to the American people was continued and to 
strengthen a service that is the linchpin of a $900 billion 
mailing industry that employs some nine million Americans in 
diverse fields such as direct mailing, printing, catalog 
production, paper manufacturing, financial services--the list 
goes on and on.
    Given the important contributions of the mailing industry 
to the Postal Service and to our economy, I am particularly 
concerned by the sudden and sharp rate increases proposed by 
the Postal Regulatory Commission for standard mail flats. These 
proposed rates could drive smaller catalog companies out of 
business or at least undermine their profitability. This is 
exactly the kind of double-digit unpredictable jump in rates 
that our reform bill is designed to prevent.
    Let me just illustrate the damage that this proposal would 
cause to the catalog mailing industry with some examples from 
my home State of Maine. Geiger Brothers is a family-owned 
business in Lewiston, Maine, that is a manufacturer, supplier, 
and distributor of catalogs, calendars, and a wide variety of 
printed materials, but it is probably best known to most of you 
as the publisher of the famous Farmer's Almanac. This company 
estimates that the proposed decision would cause an increase in 
mailing costs of 29 percent. This proposed increase would cost 
this family-owned business an additional $600,000 this year.
    Another fine Maine company, Cuddledown, is a nationally 
known manufacturer of luxury down comforters and other high-
quality bedding products. It, too, has a heavy reliance on mail 
orders. It is essentially a catalog company. This is another 
family-owned business. It is located in Portland, Maine, and it 
estimates that the proposal would increase its mailing costs by 
18 percent.
    I have also heard from L.L. Bean, Maine's legendary outdoor 
outfitter and a world leader in catalog sales. It would be 
negatively affected by this sudden and substantial rate 
increase and tells me that they are looking at whether they 
need to reduce mailings in order to maintain postage costs at a 
sustainable level, and that is what happens when you have a 
sharp increase in postal rates. Then mailers look for other 
ways to deliver their products and that causes a decline in 
volume, which is the last thing we want for the Postal Service.
    Not surprisingly, the comments filed in response to the 
proposed rates indicate that this increase would cost jobs and 
stifle economic growth of companies vital to communities 
throughout the country.
    In addition to the concerns that I have with the current 
proposed rate increase, I want to publicly and strongly 
discourage the Postal Service from filing ``a final rate case'' 
under the old rate-setting rules before postal reform is fully 
implemented. All of us knew that this particular rate increase 
was going to come about, but the authors of the bill certainly 
hoped this would be the last one under the old system. Filing a 
new rate case would divert resources and efforts from 
developing a modern system of rate regulations as required 
under the new postal reform law. We did give a substantial 
implementation time, but frankly, we did not expect two rate 
filings during that time and I hope that this is the last one 
that we will see under the old system.
    Again, I appreciate how vital the Postal Service is for our 
economy, for our society. You have no stronger supporter than 
the Members who are here today and we want to continue to work 
with you to ensure predictability and stability in the rate-
setting process, to ensure a strong Postal Service not only for 
the dedicated employees of the Postal Service, but also for the 
Americans throughout this country who rely upon it. We hope you 
will work closely with us in implementing the core principles 
of the Postal Reform Act.
    Thank you, Mr. Chairman.
    Senator Stevens, I should have come to you--I apologize. I 
should have come to you sooner. I didn't, but we are delighted 
that you are here and hope that you are not disappointed with 
the work that we have done to carry on after you.

              OPENING STATEMENT OF SENATOR STEVENS

    Senator Stevens. I am delighted with the work that you and 
Senator Collins have done, there is no question about that. I 
am saddened that we did not get started at two o'clock, because 
I had hoped to hear the statements. I do have a conflict, as 
Senator Coburn did. I greet you all.
    I understand that we have this rate increase scheduled for 
May 14. It will affect everyone nationwide, I am sure, but no 
one will be affected the way rural Alaskans will be because of 
bypass mail. As you all know, we are in a situation where 70 
percent of the cities and villages of our State can be reached 
only by air, so very few people out there, Mr. Potter, know the 
President's name, but they all know your name. [Laughter.]
    They all know the Postmaster General, and there is no 
question about it that this increase--for example, my staff 
tells me that in terms of shipment to Barrow in bypass mail, a 
gallon of milk will increase from $8 to $9 a gallon. You buy it 
at the store for, what, $1.50? A 10-pound bag of flour will 
increase from $11.50 to $13. That is the cost that it is going 
to go up on these goods and foods that my people, really our 
people, totally depend upon. This is the lifeline to Alaska, is 
the Postal Service, and these communities already pay twice as 
much for their necessities as the average American.
    So this is something that bothers me considerably. I do 
hope, and as I said to the Postmaster General, I am working 
even today, tonight, with a group of Alaskans who are trying to 
suggest ways we might change the way packages are prepared and 
are handled so that we can take some of the costs off of the 
Postal Service and deliver a product to them that would reduce 
your costs with the hope that somehow or other those could be 
reflected in adjustments of the cost increases that are 
proposed.
    We understand it costs. We understand right now some of our 
people are paying more than $5 a gallon for diesel fuel. We 
know we are all paying around $3 a gallon for gasoline; they 
are paying $12. Even though we have all of that oil, it still 
has to be delivered in cans that you deliver through bypass 
mail. So this is a very important subject for us.
    I would hope, Mr. Blair, that sometime you would bring the 
Commission back up to Alaska. They haven't been up there for 
about 15 years, as I recall. I think it would be good for 
people who inspect the Post Office to come take a look. It is a 
workable system, but we cannot break it down by forever 
increasing costs that make it impossible for the people to pay. 
I think we can make some suggestions to you that will alleviate 
this need for increasing as much as it will the cost of bypass 
mail in Alaska.
    I appreciate your concern, and thank you, Mr. Chairman.
    Senator Carper. Thank you, Senator Stevens.
    Let me just take a moment, if I could, to introduce our 
witnesses. We apologize for not starting at 2 o'clock. We had a 
vote that was called. In fact, two votes were called and we 
ended up having just one. Maybe when I get to be leader of our 
side, then we can schedule these votes at a time that is more 
convenient for subcommittees like this one to meet, but that 
hasn't come yet.
    I want to just take a moment, if I can, to introduce our 
witnesses. Jack Potter is the 72nd Postmaster General of the 
United States. He assumed his current duties in June 2001, 
almost 30 years after going to work for the Postal Service. He 
started there in 1978 as a clerk and has served through the 
years as Chief Operating Officer, Vice President for Labor 
Relations, and in a number of other key posts here in 
Washington and out in the field. He holds a Bachelor's degree 
from Fordham University and a Master's from Massachusetts 
Institute of Technology, where my oldest son, by the way, is in 
his freshman year.
    Dan Blair is the chairman of the newly-created Postal 
Regulatory Commission. Congratulations, I think. He was 
confirmed by the Senate as a Commissioner on the Postal Rate 
Commission, the predecessor agency to the Regulatory 
Commission, on December 6, 2006, and named as chairman by the 
President, no less, on December 15. Prior to coming to the 
Commission, Mr. Blair served as Deputy Director of the Office 
of Personnel Management. He also worked for 17 years here on 
Capitol Hill, including some time on the full Committee. How 
long were you on this Committee?
    Mr. Blair. Four years.
    Senator Carper. Four years. He holds a B.A. and a J.D. from 
the University of Missouri at Columbia.
    Kate Siggerud is a Director of the Physical Infrastructure 
Issues Team at the Government Accountability Office. She has 
directed GAO's work on postal issues for several years, 
including recent reports on delivery standards and performance, 
processing and network realignment, contracting policies, 
postal stamps, and biological threats. She has an M.A. in 
public policy from the Hubert H. Humphrey Institute of Public 
Affairs at the University of Minnesota and a B.A. from 
McCallister College.
    We welcome each of you here today. We thank you for your 
help in crafting the legislation that we are beginning our 
oversight hearing on at this time. So thank you for coming, and 
Mr. Potter, you are the lead-off hitter.

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

    Mr. Potter. Good afternoon, Chairman Carper. I will have to 
get used to that now.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Potter appears in the Appendix on 
page 35.
---------------------------------------------------------------------------
    Senator Collins. So do I. [Laughter.]
    Mr. Potter. Senator Collins, Senator Akaka, and Ranking 
Member Senator Coburn, I am honored to be here as America's 
Postal Service enters a new era.
    The Postal Reorganization Act of 1970 converted a heavily 
subsidized Post Office Department into a self-supporting Postal 
Service, one defined by excellent service, customer 
satisfaction, and productivity. Our people have done an 
outstanding job. Unfortunately, significant changes in the 
communications and delivery markets have made continued success 
under the original law problematic. That is why our Nation is 
so fortunate that so many have recognized this and acted to 
preserve universal affordable service to the American public.
    I appreciate the extraordinary efforts of the Members of 
this Subcommittee. I know that we wouldn't have had that 
package had it not been for the leadership of Senator Collins, 
particularly in the financial area, and the leadership of the 
Chairman, Senator Akaka, Senator Stevens, everyone, Senator 
Carper, everyone supported this effort and it is our job to 
make it work. Both Houses of Congress, the Comptroller General, 
David Walker, the Administration, the President's Commission on 
the Postal Service, all made great contributions to the new 
law. It is my hope that 30 years from today, a future 
Postmaster General will sit at this table and report on the 
progress made possible by the Postal Accountability Enhancement 
Act of 2006.
    Unfortunately, our business model remains broken, even with 
the positive pricing and product changes and all of the 
positive changes when it comes to employee retirement benefits 
that are built into the new law. With the diversion of messages 
and transactions to the Internet from the mail, we can no 
longer depend on printed volume growing at a rate sufficient to 
produce the revenue needed to cover the costs of an ever-
expanding delivery network. This is not to say that the new law 
does not offer opportunities. We are in better position than 
ever to respond quickly to market conditions and we will 
operate more nimbly in the expedited and package product 
sectors. Growth is our greatest challenge as we shift from a 
transaction-based mail stream to one centered on lower-margin 
marketing and advertising mail.
    People are also finding new uses for the mail and I am 
encouraged by that. For example, the State of Oregon conducts 
elections through the mail, resulting in greater voter 
participation. Not only is this encouraging from a mail point 
of view, but it presents a unique opportunity for our 
democracy.
    We will continue our work with all mailers and use the 
latest technology to add even more value to the mail. One 
example is the new intelligent mail bar code. It improves 
quality. It cuts costs. And it increases convenience for 
mailers and for the Postal Service.
    The good news for us all is that marketers have learned 
that direct mail adds to the value of campaigns and that mail 
complements other advertising media, including the Internet. 
Overall, direct mail is among the fastest growing and most 
effective advertising channels in America today. That is why I 
am very bullish on the mail.
    But I am also a realist. Success under the new law will not 
be easy. We have never worked under a fixed rate cap. We have 
never had to manage our costs by class of mail. Both are 
extremely challenging. Because we have little control over some 
of our major costs, such as fuel and employee retirement and 
health benefits, we must maintain an intense focus on managing 
those costs. Keeping our rates under the rate cap and being 
able to pay our employees a fair wage requires us to find ways 
to remove an additional $1 billion a year in costs from our 
system.
    Our preferred path to staying under the rate cap is to 
achieve productivity targets consistent with the needed $1 
billion savings. Management and the unions can and should work 
together to increase productivity in processing, retail, and 
delivery operations, thus keeping costs at or about the rate of 
inflation. If we do not do that, we will have created a 
situation that requires other actions, such as contracting out.
    Since the earliest days of the American Postal Service, 
contractors have transported and delivered the mail safely and 
securely. They are screened by the Postal Inspection Service, 
and like career employees are subject to the legal penalties 
under Title 18 of the U.S. Code for criminal mishandling of the 
mail. Procedures governing contracting out are contained in the 
labor-management agreements with our unions. They are a product 
of the complex give-and-take that marks collective bargaining.
    Let me assure you that it is not our intention to take 
delivery work performed by postal employees today and contract 
that work out. We do contract out, though, new deliveries, but 
only in those locations where it makes sense and in accordance 
with our national agreement. Ninety-four percent of new 
deliveries, that is homes and businesses in 2006, some 1.8 
million new deliveries, today are performed by U.S. Postal 
Service city and rural letter carriers. I do not foresee laying 
off any carriers as a result of outsourcing because we are only 
outsourcing new deliveries, and we are only doing it on a very 
limited basis, and that is something I pledge not to do, not to 
lay anybody off. I stand ready to work with our unions to 
secure the future of our organization, its people, and the 
people we serve.
    In closing, let me reiterate my sincere belief that the new 
postal law offers opportunities to the Postal Service and the 
entire mailing community to have success going forward. We will 
take full advantage of these opportunities in support of our 
historic mission of providing affordable, universal service to 
our Nation.
    Once all the other panelists are done, I would be pleased 
to answer any questions that you might have, and I also have a 
longer version that I ask be put into the record. Thank you.
    Senator Carper. We will be happy to put that longer version 
in the record and thank you for summarizing your testimony.
    Mr. Blair, you are next. Thanks very much.

TESTIMONY OF HON. DAN G. BLAIR,\1\ CHAIRMAN, POSTAL REGULATORY 
                           COMMISSION

    Mr. Blair. Thank you, Mr. Chairman, Senator Collins, 
Senator Akaka, Members of the Subcommittee. Thank you for the 
chance to testify today on the operation of the new Postal 
Regulatory Commission and our strategy for implementation of 
the Postal Accountability and Enhancement Act.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Blair appears in the Appendix on 
page 44.
---------------------------------------------------------------------------
    I wish to particularly thank you, Chairman Carper and 
Senator Collins, for your unrelenting efforts on behalf of 
postal reform, but I would also like to thank other Members of 
the Subcommittee for the confidence they have shown in the 
Commission. I would also like to acknowledge my fellow members 
of the Commission in the audience today, Vice Chairman Dawn 
Tisdale, Commissioners Ruth Goldway, Tony Hammond, and Mark 
Acton.
    The Act represents a profound change in our regulatory 
functions and significantly enhances the Commission's 
authority. As noted, the Postal Service will have more autonomy 
in setting rates, particularly for its competitive products. 
However, the ability to increase rates for market-dominant 
products will be limited ordinarily by increases in the 
Consumer Price Index.
    To ensure transparency and accountability under this new 
system, the Act assigns continued oversight responsibilities to 
the Commission. The law provides the PRC with new enforcement 
tools, including subpoena power, the authority to direct the 
Postal Service to adjust rates and take other remedial actions, 
and levying fines in case of deliberate noncompliance with 
applicable postal laws.
    The Commission is fully engaged in implementing the Act as 
well as completing pending business. We understand that 
transforming the Commission into the regulator envisioned by 
the reform legislation will result in changes to our 
organizational structure and workforce capacity. The PRC is 
working with an outside expert in this regard.
    As you know, on February 26, 2007, the Commission rendered 
its recommended decision on the most recent omnibus rate case. 
We audited the Service's projected revenue needs and made 
adjustments to their initial estimates. We also made 
improvements in the design of rates for many postal products at 
the Postal Service's request to better align rates more closely 
with shape. Our decision relied on well-established ratemaking 
principles, including a reaffirmation of the principle that 
work sharing discounts should be limited to the amount of cost 
savings accrued to the Postal Service, the approach ratified by 
the Act.
    I would like to point out that the current ratemaking laws 
require the Commission to design rates that encourage efficient 
practices by mailers and the Postal Service. This last rate 
case was the first fully litigated case in 7 years. Therefore, 
the need for rates that encourage efficiencies was greater than 
normal because the past two rate cases resulted from 
settlements that didn't focus on changes in the cost of postal 
operations.
    On March 19, 2007, the postal governors endorsed the 
Commission's rate recommendations with three limited 
exceptions, including those for standard rate flats mail. On 
March 29, 2007, the Commission issued an order establishing 
procedures for further consideration of these issues and we 
invited comments from interested parties before the end of this 
month. Because the Commission's deliberations are ongoing, I 
hope you will understand that it is inappropriate for me to 
address them specifically at this time.
    One of the most critical responsibilities the Act assigns 
to the Commission is the establishment of a modern system for 
regulating rates and classes for market-dominant postal 
products. We are moving quickly to develop regulations for the 
new ratemaking system. The Commission published an Advance 
Notice of Proposed Rulemaking on January 30, 2007, soliciting 
public comments on how the Commission can best fulfill these. 
The initial round of comments was due on April 6, 2007, and the 
reply comments are due on May 7, 2007. To date, 32 parties have 
submitted comments.
    Creating a new regulatory framework for the establishment 
of a more modern rate setting system is only one of the many 
actions facing the Commission. The Act directs the Postal 
Service, in consultation with the Commission, to establish 
service standards for market-dominant products and assigns 
regulatory oversight to the Commission. The Act also directs 
the Postal Service and the Commission to consult on developing 
a plan for meeting these standards. We look forward to full 
consultation as envisioned by the Act with the Postal Service 
later this spring and summer.
    A key aspect of the Commission's ongoing efforts is 
outreach, soliciting input from postal stakeholders, specialty 
mail users, and consultation with other covernment agencies, 
such as the Department of the Treasury, State Department, the 
FTC, Customs and Border Protection, the Postal Inspector 
General, and the GAO. Appearing before this Subcommittee today 
and hearing your views and concerns is a critical part of this 
process.
    Mr. Chairman, the benchmarks established for the Commission 
pose some daunting challenges, and especially in light of the 
Postal Service's opportunity to file one last omnibus rate case 
under prior law. There is no question that this final rate case 
would divert Postal Service and Commission resources that, in 
my opinion, would be better devoted to developing a new system 
of regulatory oversight. Nevertheless, the Commission is 
committed to a timely performance of all of its statutory 
obligations and to doing so in a reasoned and balanced manner.
    Mr. Chairman and Members of the Subcommittee, thank you for 
this opportunity to testify today. I appreciate being on the 
panel with the Postmaster General and with Ms. Siggerud. I ask 
that my written statement be included in the record and I am 
happy to answer questions you may have.
    Senator Carper. Thanks, Mr. Blair, and your written 
statement will certainly be included in its entirety in the 
record.
    Ms. Siggerud, you are recognized. Welcome. Thank you.

    TESTIMONY OF KATHERINE SIGGERUD,\1\ DIRECTOR, PHYSICAL 
  INFRASTRUCTURE ISSUES TEAM, U.S. GOVERNMENT ACCOUNTABILITY 
                             OFFICE

    Ms. Siggerud. Thank you. Chairman Carper, Senator Akaka, 
thank you for your invitation to testify at this hearing on 
implementation of the Postal Accountability and Enhancement 
Act. To begin, I wanted to recognize the Congress's efforts, 
particularly yours, Chairman Carper and Senator Collins, in 
passing this law. It provides tools for establishing an 
efficient, flexible, transparent, and financially sound Postal 
Service, one that can more effectively operate in an 
increasingly competitive environment.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Siggerud appears in the Appendix 
on page 51.
---------------------------------------------------------------------------
    My remarks today will focus on, first, why we recently 
removed the Service's transformation efforts and outlooks from 
our high-risk list; second, the Service's financial condition; 
third, opportunities and challenges facing the Service; and 
finally, issues and areas for continued Congressional 
oversight.
    First, when we placed the Service on our high-risk list in 
2001, we stated that a structural transformation was needed to 
address the financial, operational, and human capital 
challenges that threaten its ability to deliver on its mission. 
We use this list to bring attention to issues that we think 
need action from the Administration and the Congress. We 
decided to remove the Postal Service from the high-risk list 
because of the significant changes that occurred.
    Specifically, the Service issued a transformation plan in 
2002 and demonstrated commitment to the plan by cutting costs, 
improving productivity, downsizing its workforce, and improving 
financial reporting. The 2003 law reduced the Service's 
payments for pension obligations, allowing it to achieve record 
net income, repay debt, and delay rate increases.
    Elements of the 2006 postal reform law that were responsive 
to our concerns include, first, a framework for modernizing the 
ratemaking process; second, an opportunity to preserve 
affordable universal service by reassessing customer needs and 
identifying efficiencies; third, recognition of the Service's 
long-term financial obligations by pre-funding retiree health 
benefit obligations, resulting in short-term costs but long-
term benefits; and fourth, enhanced transparency and 
accountability.
    Turning now to the Service's current financial condition, 
it will be affected by the postal reform law and the upcoming 
rate increase. The law has better equipped the Postal Service 
to control its costs and operate in a financially sound 
business-like manner. It places the Service on the path to 
eliminating its multi-billion-dollar retiree health 
obligations, which in turn provides an opportunity to better 
position the Service financially in the long term.
    Changes to the Postal Service finances this year besides 
the pre-funding of retiree health and transferring 
responsibility for military pensions include expensing escrowed 
funds and eliminating future escrow payments and eliminating 
certain pension funding requirements. The Service expects to 
lose $5.2 billion this year, largely due to the one-time 
expensing of $3 billion escrowed last year and then transferred 
this year to the Retiree Health Benefit Fund and the additional 
contribution to this fund the Service must make. The Service 
plans to borrow $1.8 billion, $600 million more than it had 
originally planned for this year. Nevertheless, other expenses 
and revenues have closely tracked projections. Factors that 
could still affect the Service's finances this year are the 
impact of rate increases on mail volumes, changes in fuel 
prices, and the resolution of labor agreements.
    Although we removed the Service from our high-risk list, 
there are continuing and new challenges. These include 
generating sufficient revenues to cover costs as the mail makes 
changes; controlling costs, particularly for compensation and 
long-term health benefits; and improving productivity while 
operating under the price cap structure; promoting the value of 
mail by providing affordable, quality service and establishing 
mechanisms to measure and report on performance; providing 
useful and reliable financial data; and managing the Service's 
infrastructure and workforce to respond to operational needs 
and financial challenges.
    The reform law provides opportunities, tools, and 
flexibilities to address these challenges. A series of new 
regulations, frameworks, and studies over the next few years 
for both the PRC and the Service will be key to implementing 
the law.
    Finally, with regard to potential areas of Congressional 
oversight, two particularly important areas are: Ensuring the 
Service's future financial condition remains sound; and 
ensuring that the new legal and regulatory requirements are 
carried out in accordance with the intent of the postal reform 
law.
    Other areas that warrant continued monitoring include: 
First, the impact of the upcoming rate increases on mail 
volumes, mailers, and the Service's financial condition; 
second, actions by the PRC and the Service to establish a new 
price-setting framework; third, the Service's ability to 
operate under a price cap while some of its cost segments are 
increasing above the rate of inflation; fourth, actions to 
establish modern service standards, monitor delivery 
performance, and the Service's plan for meeting those 
standards; and finally, the Service's ability to provide high-
quality delivery service as it takes actions to deliver costs 
and realign its infrastructure.
    Successful transformation of the Postal Service will depend 
heavily upon the innovative leadership by the Postmaster 
General and the Chairman of the PRC and their ability to work 
effectively with employee organizations, employees, the mailing 
industry, Congress, and the general public.
    Mr. Chairman, this concludes my statement. I am happy to 
answer any questions from the Subcommittee.
    Senator Carper. Thanks, Ms. Siggerud. I am going to ask the 
first question of you, and just give me a fairly short answer, 
if you would, and then I am going to go to Mr. Blair with some 
questions regarding how quickly he and his team might be able 
to put the new ratemaking process into place.
    Ms. Siggerud, I think it was about 6 years ago that David 
Walker, the Comptroller General, sat, I think here, and talked 
about the Postal Service being a high risk. Two or 3 months 
ago, there was good news that GAO has taken the Postal Service 
off the high-risk list. Why were they put on? Why were they 
taken off?
    Ms. Siggerud. Sure. Let me give you a couple of answers to 
that. Let me re-mention the reasons that we typically put 
agencies on the high-risk list. That is because there are a 
number of indicators which are giving us concern which we feel 
can be addressed through Administration and Congressional 
action.
    At that time, there was a very high level of debt, reduced 
capital investment, flat productivity, and the changes in the 
mail mix that we have all mentioned today that were threatening 
continued revenue. We also did not see in place a plan to deal 
with those very significant challenges to the Postal Service's 
continued financial health and operations.
    Since we put the Postal Service's outlook on the high-risk 
list, we have seen significant action both from the Postal 
Service and from the Congress in dealing with these issues. We 
felt it was important to recognize that in taking the Postal 
Service off.
    Second, on all of the indicators that I mentioned that were 
underlying causes, we saw progress on all of those in the 6 
years since we put the Postal Service on that list. We thought 
it was time to recognize that progress and the actions by the 
Service and the Congress and to recognize that and to take them 
off the list.
    Senator Carper. Thank you. Mr. Blair, I think Senator 
Collins and I both touched on this and if I don't ask it, she 
will. She might ask it anyway. As we both mentioned in our 
opening statements, I would prefer that the next rate case, 
whenever it needs to happen, happen under the new rate system 
rather than under the old one. The determining factor in 
whether or not that happens will be how long it takes for you 
and your staff to issue the regulations implementing the new 
rate system.
    The legislation enacted gave you, I think, 18 months from 
December to put that new system in place, and I understand 
there has been discussion around the possibility of a final 
roll-out happening much sooner.
    Let me just ask to share with us your time line, and what 
you need from us and from the Postal Service in the coming 
weeks and months in order to get the new rate system up and 
running as quickly as possible.
    Mr. Blair. Thank you, Mr. Chairman. I appreciate the 
interest in this. You are right that we think it might be a 
better idea to focus our resources on getting the new system up 
and running than working on a rate case under the old system. 
But we will do whatever it takes and we will do what is 
required of us under the law.
    We were very proactive from the beginning and in January 
put out that Advanced Notice of Proposed Rulemaking. We were 
pleased to see 32 unique comments come into the Commission. We 
have gone through those and we are waiting for the reply 
comments at this point. Some have said they think it is a good 
idea to get it up and running sooner. Others have come back and 
said, they think we need to wait a little bit longer just 
because they want to make sure that we think fully through the 
regulatory structure.
    Over the next few weeks, and I say few weeks--I used to 
have the luxury of saying months, now I say the next few 
weeks--we will make some decisions on how we are going to 
proceed. I have had good discussions thus far with the 
Postmaster General. We have highlighted some areas for 
potential discussion, including transition issues, at what 
point do we have a rate date each year, and I think those are 
all going to be helpful as we proceed to getting a new 
regulatory system in place.
    At the summit that was held last month, I threw out the 
idea of getting a framework in place by October. I stand by 
this. I think it would be a good idea, and I know that the 
Postmaster General on Tuesday, before your House counterpart, 
said he wanted to get a better idea of what that system would 
look like. I think that is fair, and so within the next few 
days and weeks, we will be having further discussions as to 
what that system will hopefully look like. We can hopefully be 
able to have a better idea sometime this summer on what the 
timing for this will be, if it is going to be this October or 
if it is going to take the full 18 months.
    Senator Carper. Alright. Let me just reiterate again, I 
appreciate the need to receive input from a number of different 
interested parties. I am glad you have done that and am glad 
they have shared their comments with you. I just really do hope 
that the next rate case, whenever it needs to happen, happens 
under the new rate system rather than the old and I would ask 
that you and your colleagues take that to heart.
    Mr. Blair. We will, and that is why we would like to get it 
done sooner rather than later. I would note that decisional 
filing isn't mine, so we will have to wait and see on that. But 
I think that your sentiments expressed are good ones and that 
is why you enacted a new system. You didn't want to see the 
kind of jumps in rates that we saw in the last case, and I 
think it is a good idea to get the new system up and running.
    Senator Carper. And in case I failed to mention it, let me 
just say that I personally prefer that the next rate case--no, 
I have said it enough. You get the message. Thank you.
    Let me ask a question, if I could, of Mr. Potter, and Ms. 
Siggerud, I may ask you to comment as well. I think you have 
already commented on this to some extent, so I probably won't 
ask you to comment. But Mr. Potter, it was in a little bit of 
discussion in some of the statements here and some of what you 
all have testified to on this front, but I just want to come 
back and close the loop on it.
    I think in the early part of February, I am not sure what 
the date was, but Postal Service, you were good enough to call 
me, I suspect you called Senator Collins and others, but the 
Postal Service issued a press release announcing that you 
reported a $2.7 billion loss in the first quarter of fiscal 
year 2007 and the Postal Service was projecting, I think, about 
a $5 billion loss by the end of the current fiscal year. I 
understood from that conversation and what I have heard since 
that these losses are due largely, maybe entirely, to an 
accounting anomaly brought on by the enactment of the postal 
reform bill late last year and your actual financial results 
for the first quarter were actually pretty good. I am told they 
were in line with your plans. I believe the Postal Service may 
have actually had about a $1.2 billion budget surplus if you 
take out those sort of one-time anomalies.
    Let me just ask you again to take a minute to explain to 
us, why has the Postal Service had to report such a loss of 
that magnitude.
    Mr. Potter. Senator, last year under the old law, Public 
Law 108-18, the Postal Service was required to hold about $3 
billion in a restricted cash fund and that was held and we had 
$3 billion in cash ready to pay in whatever direction we were 
directed by the Houses of Congress. This year, once the law was 
enacted, that $3 billion that we had as restricted cash became 
an expense, as well as the monies that we planned to set aside 
this year for an escrow fund. So where we had planned to have 
at the end of fiscal year 2007 about $6.2 billion in restricted 
cash on the books, that $6.2 billion became an expense.
    And so as I said to you on the phone and I also had a 
conversation with Senator Collins and Comptroller David Walker, 
that although there was an accounting change and we had to 
conform to Generally Accepted Accounting Principles, in terms 
of our cash flow there was no change and that the Postal 
Service was still in a very favorable cash position and that we 
would have to incur some debt as a result of it. It was a very 
awkward situation. You are sitting with restricted cash. How do 
you approach a rate case without that cash being defined as to 
what you are going to expend it on.
    So it is strictly a matter of the transition from the old 
law to the new law with the added complexity of Public Law 108-
18, which gave us relief from overpayment of CSRS for 3 years 
after which we had to put money into an escrow account. So 
again, from a cash flow standpoint, we are sound and we will 
work hard to try and pay down that $4.1 billion in debt in the 
years going forward.
    Senator Carper. Alright. Thanks very much. My time has 
expired. Senator Collins.
    Senator Collins. Thank you, Mr. Chairman.
    Mr. Blair, there obviously is a substantial difference 
between what the Postal Service asked for or recommended for 
rates in the flats and catalogs category versus what the PRC 
decided. I realize there is a limit to what you can tell us 
today and I am not trying to cross that line, but it would be 
helpful for us to know generally to what extent does the PRC 
take into account rate shock? In other words, do you look at 
what the impact of a rate increase is going to be on a specific 
segment of the mailing community?
    Mr. Blair. That is a good question and I think I can answer 
that without giving my general counsel too much heartburn. We 
do look at rate shock. It is one of the factors that we balance 
in deciding how much of a rate increase will be decided. We 
look at the attributable costs of the subclasses. We assign 
this attributable cost to the subclass. We divvy up the 
institutional costs. But we also look at--there are certain 
factors in the Act that can help mitigate and one of those is 
rate shock. Others that would be considered would be whether 
rates are properly aligned with costs and the extent to which 
the rates are fair and equitable.
    In this specific case, I would just urge the Subcommittee 
to consider that these proposed rate increases came on the 
heels of two settled cases over the course of the last 7 years. 
The settled cases produced some across-the-board increases and 
were not the result of the fully litigated case that this last 
rate recommendation came under. Because of these settled cases, 
some mailers benefited and were insulated somewhat from higher 
rates than they would have received had those cases been fully 
litigated. What happened this time was we had a fully litigated 
rate case in which the rates were intended to be more fully 
aligned with costs.
    The Postal Service came to us and proposed rates that were 
shape-based, meaning that the shape of the mail actually has 
costs causing attributes and those were recognized in the 
regulations. The bottom line is that we attempted to align the 
rates with the costs. We understand that these are high 
increases and may be a heavy burden for some mailers. The 
governors have asked us to reconsider and that is the process 
in which we are in.
    I hope I shed a little bit of light on what the 
Commission's thought processes were along those lines.
    Senator Collins. And what is the process from here on for 
this particular case? You have made your decision. The Board of 
Governors has given you its judgment. It asked you to take a 
second look at three elements, I believe. So what happens now? 
What is the time line?
    Mr. Blair. The governors have asked us to reconsider our 
recommendations. I think the first two items that they asked us 
to reconsider, we can dispatch pretty quickly. But this one, we 
have asked the parties to comment. A coalition of catalog 
mailers has asked to reopen the record. They asked to do this 
last week and we gave interested parties an opportunity to file 
reply comments until the end of today. We will take those into 
account and we will be making our decision over the course of 
the next few days, if not this week, whether or not to reopen 
the record.
    At that point, even if we don't reopen the record, we will 
still be asking parties to submit their briefs, reexamining the 
old record to see what we could find and cull from that that 
might benefit the parties involved. A number of interested 
parties have commented thus far. We have heard from the catalog 
folks. We have also heard from other flats mailers. We have 
heard from other mailers, as well, and so this is proving to 
draw quite a bit of interest.
    Senator Collins. Thank you. Mr. Potter, I want to switch 
issues and bring to your attention an issue that the Maine 
Postmasters have brought to my attention, and that is some of 
your local postal managers believe that they are not being 
given the opportunity to adequately staff carrier routes and 
window positions. Front-line managers are communicating to us 
that inadequate staffing is, in turn, hurting their ability to 
provide the kinds of first-rate service that all of us want to 
see. I don't know whether you get the Pine Cone Postmaster 
publication. If not, you should. But this is the monthly 
periodical that is published by the Maine Postmasters and the 
cover story talks about this problem.
    First, let me ask you, are you aware of concerns about 
inadequate staffing at postal windows at post offices and also 
on carrier routes?
    Mr. Potter. The Postmaster organizations have brought to my 
attention concerns about, not on a national level because 
statistically on a national level, we have sufficient staffing 
for carriers, but on a site-specific basis, they have brought 
that to my attention. They have also brought to my attention 
that in some cases staffing is a concern and is causing stress 
in the workplace. I have asked them to bring that back to me 
and let me know where that exists, because I very much want to 
deal with that right away.
    In addition to that, I have asked the folks at headquarters 
to do a review from the top down, because we have the data on 
all these post offices, to make sure that we have sufficient 
staffing per route, and we are in the process of going through 
that. Unfortunately, I can't be everywhere, nor can the people 
at headquarters, so in some cases, people in the field 
substitute their judgment for ours about what an appropriate 
staffing level is and we have to address them when they are 
brought to our attention or when in the process of analysis we 
find out that somebody has been shortsighted in terms of their 
hiring plans.
    We do have other issues, though, Senator, where we have 
attendance issues and we have people on light and limited duty 
and places where we have to use casual or non-career workers, 
according to the contract, to cover those jobs. In some cases, 
people aren't quick enough to make that happen. For example, if 
somebody goes and is called back to service, to serve in Iraq, 
we can't fill their job on a permanent basis. We have to hold 
it, and so there were some issues around that, as well.
    So we are addressing them and we are working with our 
Postmaster organization, as I have said. We have asked them to 
bring specifics to our attention so that we can address their 
concerns, not only with staffing, but as well as any kind of 
workplace climate issues that they perceive.
    Senator Collins. That brings me to the last issue, and let 
me just touch on it very quickly because my time has expired, 
if I may, Mr. Chairman.
    Senator Carper. Certainly.
    Senator Collins. I toured Maine's new processing plant in 
Scarborough recently and I know you have been there, as well. 
It is an absolutely beautiful plant. But I did hear from some 
of the employees continued concerns again about staffing, about 
schedules, and I would just ask that you work with me to try to 
make sure that we are looking at the concerns both at the 
Scarborough processing plant and the concerns that the 
postmasters in Maine have brought to my attention. I realize 
you have an enormous operation and clearly you can't be 
everywhere at once, but I would very much appreciate your 
working with me to take a look at both of these concerns.
    Mr. Potter. I would be very happy to.
    Senator Collins. Thank you. Thank you, Mr. Chairman.
    Senator Carper. Thank you, Senator Collins. Senator Akaka, 
would you like to proceed?
    Senator Akaka. Thank you, Mr. Chairman.
    Mr. Potter, thank you so much for your testimony. As I have 
indicated in my opening statement, I have had some concerns and 
one of them has been on contracting out. In your testimony, you 
mentioned that 94 percent of the deliveries are made by postal 
employees and that among the actions that you have taken, you 
said other actions could be contracting out. So let me ask you 
about contracting out. What are your criteria for deciding to 
contract out a new route or to give it to a Federal postal 
employee?
    Mr. Potter. Thank you, Senator. First, let me clarify. When 
I referenced that 94 percent, I put it in a positive way of 
mail being delivered by postal employees. That is of new 
deliveries in 2006. Overall, I think it is a little more than 2 
percent of deliveries are contracted out and they have been 
historically since, I think it is 1785 when the Congress 
directed us to do some contracting out of delivery. And so 
therefore, of the 97 percent, I think it is about point-five 
percent of all deliveries in America are done by National Rural 
Letter Carriers or members of the National Association of 
Letter Carriers.
    Going forward, what we have done is we are taking a look at 
our challenges as described on that chart, our costs are going 
up and so we are looking at what is the most economical way to 
perform new delivery. So from a criteria standpoint, since 
about 2005, we have been looking at some city delivery areas, 
all city delivery areas, and saying where does it make sense to 
potentially contract out delivery, and what we have concluded 
is that the only place it does is if you have a body of work 
that would lend itself sufficiently to be sufficiently big to 
contract out.
    So since 2005 when we began this program, we have been 
working very hard at it and we have contracted out a total of 
18 routes, some of which have as few as 50 deliveries because 
they are in places that will grow to be 500 or 600 deliveries. 
So we are really just, in terms of National Association of 
Letter Carriers and big cities, we are just scratching the 
surface now, trying to figure out does this make sense, how 
would it work, and we have criteria around who we hire and how 
they deliver, but we are really just kind of at the infant 
stages of that.
    In rural and suburban America, we have always used highway 
contract routes, particularly for those deliveries where there 
was a greater distance than a mile between each delivery stop, 
and now we have expanded that. And again, it is along the lines 
of new territory, where are new communities being built, and 
what is the most economical way to provide that level of 
service.
    I know concerns have been raised about security and 
sanctity of the mail, and believe me, we are very much in tune 
with that. The contractors are screened by our Postal 
Inspection Service. They are monitored by the Postal Inspection 
Service. And in my experience, we have human beings doing the 
work, and so nobody is perfect, including our own, and so 
occasionally problems crop up and they are dealt with just as 
they are with our own employees.
    Senator Akaka. Well, as you know, we take pride in the 
Postal Service employees because they are Federal workers and 
in many cases, especially in isolated places, the only 
connection people have or citizens have with the Federal 
Government is the Postal Service employees. We want to keep 
this as close to that as we can.
    Mr. Potter, does the Postal Service tell managers at any 
level whether specific routes should be filled by a contractor 
instead of a postal employee?
    Mr. Potter. If there is an existing route with a postal 
employee, they are replaced by a postal employee. The only 
contracting out we are doing is new territory. So if there is 
an established delivery route and somebody builds a building 
and there are 20 deliveries in that building, it goes to 
whatever craft currently delivers that. So if it is the NALC or 
the Rural Letter Carriers, it would go to that person. Again, 
the focus here is on new territory.
    Senator Akaka. Mr. Potter, I have heard from postal 
employees in Hawaii that this may not be the case. I have been 
told that regional managers have been told to contract out any 
new routes. I urge you to go back and confirm that the Postal 
Service is not giving specific direction in requiring 
contractors for new routes. That is the word that I get back 
and I thought I would pass it on to you.
    Mr. Potter. I appreciate that and we would be happy to 
share the data with you that would show you that is not the 
case.
    Senator Akaka. Director Siggerud, thank you for attending 
today. As I said in my statement, I am pleased to see the 
Postal Service removed from GAO's high-risk list. However, I am 
concerned that in the short term, the Postal Service's 
financial situation has taken a turn for the worse, and this, 
of course, was mentioned by Mr. Potter as something that 
concerns him. In light of this, do you believe they will be 
able to stay off the high-risk list?
    Ms. Siggerud. Well, it certainly is our hope, Senator 
Akaka, that the Postal Service's outlook will stay off the 
high-risk list, but I assure you we will be in an oversight 
mode together with this Subcommittee to monitor the financial 
condition and the very significant revenue and cost challenges 
that Mr. Potter mentioned. I think some particular issues to 
keep an eye on are the debt level, for example, was one of the 
reasons we originally put the Postal Service on the high-risk 
list.
    I would observe that we are in a several-year period of 
transition as this new rate-setting process and the new 
flexibilities are to be implemented and it is hard to tell 
exactly what the result of that will be. The Postal Service 
today is in a relatively good financial condition and our hope 
is that will be true going forward. We will be monitoring that 
situation.
    Senator Akaka. Thank you very much. I want to tell you, I 
am glad to hear that. I am sure Mr. Potter is glad to hear 
that, as well. Thank you very much, Mr. Chairman.
    Senator Carper. Thank you, Senator Akaka.
    I would like to come back, Ms. Siggerud, to you for a 
question relating to productivity and then maybe to bounce that 
one over to Mr. Potter, as well. It is really remarkable, going 
back 6 years, and I said earlier when I first sat in on a 
hearing and we considered some of the reasons why the Postal 
Service was on the high-risk list and some of the challenges 
they faced, challenges that came across the bow, September 11, 
2001, and the anthrax attacks that followed that, but it has 
been a remarkable turnaround. I would like to think that our 
legislation that we enacted late last year had some impact on 
the GAO's decisionmaking----
    Ms. Siggerud. Yes.
    Senator Carper [continuing]. But a lot, frankly, occurred 
before that in the good work done under the leadership of Mr. 
Potter working with a lot of folks, the employees, the 
governors, the Postal Regulatory Commission, and some of the 
folks in this room.
    Let us talk about productivity. One of the reasons why, in 
the eyes of this layman, you have come out of the woods to get 
off the high-risk is because you were able to harness the 
technology that had been purchased. It was put in place, but 
you really harnessed it, and I think you have been able to trim 
your workforce, I am told by close to 100,000 people. You have 
not fired anybody that I know of or laid people off but it has 
really happened through attrition. We still have very high 
ratings in terms of customer satisfaction. I think you are, 
what, 92 percent excellent, very good, or good. That is 
probably higher than me and most of my colleagues who work down 
here.
    But I looked at the productivity numbers. I think one of 
the reasons why you made great progress is productivity, and 
the productivity growth that occurred. I think, again, for the 
last year, it slowed a bit and I would like to talk about that 
and focus on that a bit. Ms. Siggerud, if you could share your 
thoughts with us, I don't know how closely you follow that, but 
then to go back to Mr. Potter.
    Ms. Siggerud. Well, Senator Carper, we certainly have 
followed that particular trend and I think it was somewhat 
harder in the last year or two for the Postal Service to 
achieve the type of and level of productivity increases that it 
had in the years previous to that. We have not looked at the 
specific reasons for that. I suspect that there are a fair 
number of low-hanging fruits in terms of work hour decreases 
and other types of efficiencies that were undertaken in the 
last 6 years and it may be difficult to continue to achieve 
that kind of productivity increase.
    The Postal Service does plan to enter into a new round of 
automation in the next few years. I think it is looking to that 
with regard to flat sorting as another opportunity to increase 
efficiency and productivity. But I think that Mr. Potter may be 
in a better position to say exactly why there was a struggle 
with productivity in the last year.
    Senator Carper. Mr. Potter, should we be alarmed or 
concerned? As Ms. Siggerud said, maybe you have gotten the 
long-hanging fruit.
    Mr. Potter. That is what I always look for at first. 
Instead of operating under the new law--with or without the new 
law, operating in an environment where you have an increasing 
work base of deliveries and a flat or declining mail base is a 
problem, and we have that mail base moving to--as we have 
gotten more effective at delivering mail on time, people have 
moved down the ladder in the sense that they have moved from 
First Class mail to the standard rate because we have delivered 
it. In my opinion, one of the reasons they were able to do it 
is because we have improved the delivery times on that standard 
mail.
    But when I look back at the last 5 or 6 years, I am very 
proud of the fact, the total fact that productivity has gone up 
in each and every year and I am also very proud of our 
employees, because when all is said and done, it was them that 
had to make the changes that were necessary in order to improve 
that productivity. And we did take advantage of automated 
equipment investments that had occurred in the 1990s and that 
continue to occur in the new century.
    In addition to that, I think we have to give a lot of 
credit to the relationship that we have with the mailer base. 
Mailers have made their mail more efficient, and the way they 
have done that is by bar coding their mail, making it 
compatible with our machines, and by depositing the mail in 
locations upstream of origin. So they are able to do things at 
a more reasonable price. We have opened our systems to allow 
them to use that. And so this notion of least combined cost 
between mailers and the Postal Service, I think has also made a 
significant contribution.
    Going forward, as Ms. Siggerud said, I think we have an 
opportunity to invest in equipment that will walk sequence our 
flat mail and make that more productive. In addition to that, I 
am excited about the intelligent mail bar code, and the reason 
I am really excited about that is because of the quality 
improvements that I believe we will see in mail that is being 
deposited into the system.
    What that system will do, once we have it up and running, 
it will track mail from the time a mailing list is thought 
about, through the printing process, through the logistics 
process if the Postal Service is not used, to the time that 
mail is deposited into the system. Using an expanded bar code, 
one with 39 digits of information, we will have information 
about who sent the mail, what class of mail that was sent. We 
will have a unique identifier for each piece and we will have a 
code that tells us where it is being delivered to.
    What that will enable us to do is eliminate the need to 
count mail when mail is deposited. It will allow us to count 
mail as it is being sorted. And the most exciting part from a 
quality standpoint, it is going to allow us to give us 
information--produce information that we can give back to the 
mailer to improve the quality of what they have put into the 
system.
    Senator Carper. When do you expect to have that capability?
    Mr. Potter. We have that capability today, but not on a 
scale that would allow everyone to do it. We have asked mailers 
to put that new code on beginning in 2009, but we have done 
test mailings today with what we thought were some very high-
quality mailers. We found out that we were able to count the 
mail and do verification, postage statements by counting mail 
on automated systems, and we are also able to improve, on 
average, the quality of the mail base by about 7 percent.
    If we put this system in place, I believe that we can drive 
over $1 billion worth of costs out of the system just through 
the implementation of this system, and I believe that we can 
improve the value to the sender because our systems will be 
totally transparent, not only ours, but the whole mailing 
industry system will be transparent. They will know where their 
mail is. It will be coded. Trays will be coded. If they put 
mail on pallets, it will be coded. We will have a transparent 
system and we will have a much more efficient and effective 
system and the value of product in the mailstream will go up.
    So I am excited about the future. I think that we probably 
don't talk enough about the opportunities that are out there.
    Now, in addition to that, we are seeing mailers continually 
moving to make their mail more efficient, not just with this 
new bar code, but also by making it compatible with equipment, 
by taking advantage of discounts that are out there. Some of 
the rates that were referred to earlier are a concern to us. We 
don't want to drive anyone out of the mail stream. We want them 
to think about how they could use or package their mail a 
little differently so that they can continue to stay in the 
mail.
    One thing we were concerned about with the recent rates, 
the ones we proposed as well as some of the changes at the Rate 
Commission, we want to make sure that we communicate to people 
and the message is not to drive people out of the system, but 
make your mail compatible with automation and take advantage of 
discounts because we want everyone to stay in the mail stream.
    Senator Carper. I would like for Mr. Blair to comment. One 
of the responsibilities that you have in light of the new 
legislation is to focus on service, what we can do to make the 
products that the Postal Service delivers more valuable to 
customers. My time is expired, so I am just going to ask you to 
be ready, when I ask another question, to respond to that and 
to follow up with what Mr. Potter said.
    And Mr. Potter, I want to come back to you and talk about 
some of the partnerships that you have begun, working with 
people like e-Bay. What you are doing with e-Bay, I think, is a 
really interesting partnership. Also, the kind of opportunities 
that you have maybe out in Oregon and as people vote by mail as 
opposed to just going to the polls. But I want to ask you to 
explore with us some of those new opportunities.
    Senator Akaka, thank you.
    Senator Akaka. Thank you very much, Mr. Chairman.
    Mr. Potter, employees at the Postal Service have contacted 
me about involuntary reassignments or repositioning rules that 
cover the assignment of displaced management and supervisory 
employees in downsizing situations. This, in particular, 
concerns me as Chairman of the Veterans Affairs Committee. 
These employees allege that such action is directed against 
veterans. They charge that these rules are a way of 
circumventing the prohibition on designer reductions in force. 
If true, such repositioning rules appear to violate the spirit 
of veterans' preference laws.
    Can you tell me how many veterans have been subject to 
these repositioning rules and what rights and protections are 
available to veterans of the Postal Service who are subject to 
these repositioning rules?
    Mr. Potter. Senator, I am sorry. I don't have a specific 
number of people who are affected, but we can try and generate 
one for you. Let me just describe for you in layman's terms, 
because I am not a warrior and I don't know the exact verbiage, 
but what we are trying to do, and we are trying to live up to 
the spirit of OPM's efforts to place people in jobs 
voluntarily. So when there is a RIF, what we basically have 
done is allowed people to volunteer to get out from under the 
RIF, so that if we are moving people and they can get closer to 
home or they have a job that works for them, we allow them to 
volunteer first.
    Now, unfortunately, some people have taken that, the way we 
are trying to do this, as a means of being anti-veteran. It is 
not. We are very proud employers of veterans. We have more 
veterans working for us than any company in America. So we are 
very proud of all our veterans. But when there is a need to 
have a reduction in force, our preference would be that we 
allow people to volunteer to go to other locations, and in the 
process of doing that, hopefully avoid a reduction in force.
    And again, I believe that we are very consistent with 
guidelines that have been put out by OPM, and I believe in the 
spirit of those guidelines. I believe that we should allow 
people to volunteer. And again, unfortunately, I guess, some 
people are assuming that there is some other motivation. There 
is absolutely no other motivation other than to try and allow 
people to volunteer for assignments and give people the 
opportunity to do that.
    Senator Akaka. Thank you for that response.
    Mr. Potter, because of Hawaii's geographic location, 
consumers and businesses are dependent on the U.S. Mail for 
many commodities, including prescription drugs. In areas of 
rapid growth, such as the islands of Hawaii and Maui, there are 
insufficient postal facilities to serve residents. On the big 
island of Hawaii, many residents do not have home delivery. 
Rather, they must pick up their mail at the post office. 
However, we now see that post office boxes in some areas are 
over-subscribed and residents must use a post office that can 
be up to 30 minutes from their homes. So my question to you is, 
what steps are being taken to address these types of problems?
    Mr. Potter. This is the first that I am hearing of that 
problem, so what I will do is I would rather work with you and 
your staff to get the specifics of it and then come back to you 
one-on-one and let you know what we are doing to address those 
specific concerns.
    Senator Akaka. I would appreciate that, Mr. Potter.
    The Postal Accountability and Enhancement Act requires the 
Postal Service, in consultation with the Postal Regulatory 
Commission, to set service standards for mail products. I 
understand that the PRC has sat in on meetings of the Mailers 
Technical Advisory Committee, which is reviewing the needs of 
mailers. Do you view the PRC's current involvement in these 
meetings, attending them, as fulfilling the consultation 
required by the Act?
    Mr. Potter. First of all, let me speak from a Postal 
Service perspective and then perhaps Mr. Blair would like to 
speak from a Regulatory Commission standpoint.
    When we are establishing--the new law says we have to 
reevaluate our service standards and then put measurement 
systems in place to measure our performance against those 
standards and then establish goals. The first thing we did was 
said, well, OK, if we are going to establish standards, then we 
need to reach out to the mailing community and we have the 
Mailers Technical Advisory Committee. We formed subcommittees 
around standards for different classes of mail, subcommittees 
of the Mailers Technical Advisory Committee, to give us some 
guidance on what the requirements of the mailing community are. 
This is not about the Postal Service, this is about the mailing 
community.
    And as part of that effort, we invited members of the 
Postal Regulatory Commission to participate in that process. We 
want to be open and transparent around the process that we are 
going through and the procedures. We invite them to sit in and 
listen and participate in the discussions around the 
establishment of standards. And then as soon as that is 
complete, we are going to enter into a discussion around 
measurement systems and how that might be accomplished, and we 
might have differences of opinion on that, but we will, over 
the course of time, come to some agreement on how that should 
be done.
    You asked a very technical question. I don't know if that 
fulfills the obligation for their comment. I would rather let 
Mr. Blair respond to that.
    Senator Akaka. Mr. Blair.
    Mr. Blair. Thank you, Senator Akaka. I think this will 
probably also go to part of the question that you may be asking 
next, too, Mr. Chairman. Our observance on the Mailers 
Technical Advisory Committee is a good first start. But the 
legislation clearly requires consultation and we believe that a 
vigorous consultation and a true consultation that should take 
place would be a give-and-take between the two bodies, as well 
as hearing from the mailers. That hasn't taken place yet, not 
that the opportunity has been foreclosed at all. We are in the 
very initial stages of that.
    But my discussions with the Postmaster General and with 
others in the community is that my view of consultation is a 
vigorous give-and-take here. The Postal Service clearly has the 
power of the pen in this, but that we would expect to see our 
input into subsequent drafts and into subsequent iterations of 
what these standards will eventually look like. We look forward 
to that full consultation. We have high expectations for it and 
we think that our initial observance on the impact is a 
productive prelude to these consultations.
    Senator Akaka. Mr. Blair, it sounds like the Postal Service 
may think this is the extent of your statutory involvement. 
What makes you believe that the Postal Service will collaborate 
with the Commission further outside of these meetings?
    Mr. Blair. Well, I am an optimist and I think that the 
Postal Service and my good friend Mr. Potter will engage fully 
in the consultation, and I really do expect that. But I also 
know that this Subcommittee has high hopes for this 
consultative process, too, and so I know that the exercise of 
your oversight authority will also spur these activities 
forward, as well.
    Senator Akaka. Thank you, and I thank you all for your 
responses. Thank you, Mr. Chairman.
    Senator Carper. Thank you, Senator Akaka.
    Mr. Chairman, let me come back to you and just ask you to 
follow up in terms of the kind of value added that Mr. Potter 
was talking about earlier to products. Any comments that you 
might have on that?
    Mr. Blair. I think that the idea, and what I have heard so 
far of intelligent mail is exciting. I think it is providing 
value to the mail. It is providing a reason that people will 
continue to use the mail stream. And in moving forward on 
something like that, I know he said at this hearing that they 
have the capabilities today. The question is, at what point 
will the implementation be? I think that is something the 
Regulatory Commission, the mailing community, and this 
Subcommittee will have high hopes for seeing good 
implementation strategies. I think it is an example of giving 
value to a product that otherwise might not be used as heavily.
    And so the ability for the Postal Service to move forward 
into these areas, using technology to their advantage, will 
hopefully stem off that red and blue on the chart--and I hope 
that is red and blue because I am colorblind--but the red and 
blue converging, or if that convergence is well out into the 
future.
    Senator Carper. Alright, thanks.
    Mr. Potter, talk to us for a minute or two about some of 
the opportunities that you see. You obviously have a good one 
with e-Bay. The folks out in Oregon decided they would rather 
mail their ballots in. We have 49 other States, some 
territories, what kind of opportunities do you have there? And 
I think there are some others you probably mentioned in your 
written testimony that I read.
    Mr. Potter. Well, the Secretary of State from Oregon came 
and visited me recently in Washington, DC and he told me that 
he was hosting a conference of his peers this summer out in 
Oregon and we quickly decided we would help sponsor that event 
and that I would be a keynote speaker at the event because I 
see the value of expanding the use of the mail, particularly 
for elections, where it drives participation up and makes it 
very convenient for people to vote. I am basically out there 
looking for any new users and uses of the mail, and there is 
one that is a great example, where the Postal Service has the 
ability to, I think, enhance the democracy of the United States 
because of more ubiquity and the ease of use of using the mail.
    We have worked closely with NetFlix, as an example, for the 
rental of DVDs, and I think if you look at the fact that their 
competitors are also offering a similar product, there is a 
case where the convenience of the mail has become a competitive 
advantage in that marketplace. We have opened up our network so 
anyone that wants the Postal Service to deliver a package the 
last mile is free to bring the mail to our delivery units with 
a parcel select product and we will take that package and 
deliver it the last mile.
    It is interesting that, of our top four customers, three 
are the ones you would think of as our natural competitors 
because of the fact that there is an efficiency, an inherent 
efficiency in the rural areas to have one person who is already 
going there every day because of delivering letter and flat 
mail to also carry packages. So we are basically looking at 
this infrastructure that the American public has built and we 
are trying to figure out how we can get that infrastructure to 
best serve the American public.
    One of the areas I would love for the Federal Government to 
think about is the notion of the fact that we have 37,000 
retail outlets. I would hope the Federal Government would think 
of them having 37,000 physical locations throughout the 
country, and what in the future that might mean and how you 
might use it is something that I think we have to let our 
imaginations run wild here.
    But we have a dilemma going forward. How do we maintain 
that infrastructure, and believe me, Americans love their post 
offices and I know that, but how do we find new sources of 
revenue so that we can maintain that brick-and-mortar structure 
going forward?
    So today, we help the State Department with passports. In 
the future, we would like to help other Federal agencies with 
whatever services that they need to bring to the American 
public. One person came to me and said, what do you think about 
having a kiosk in a post office? And I said, for what? And they 
said, well, so that John Q. Public could come in and get in 
there and sit in a cubicle and talk to somebody at the Secret 
Service, talk to somebody at Medicare, Medicaid, or any other 
service that they might need to be provided by the Federal 
Government, and it would take some infrastructure out of the 
Federal Government. When you say to somebody, go to your post 
office, it is kind of a no-brainer. They know where their post 
office is. We could work something like that out.
    So we are very open minded about taking the infrastructure 
we have, whether it is delivering hard-copy mail or packages 
and making sure that we have as open a system as possible for 
people to use it so that we can generate revenue going forward 
to keep universal service available to the American people, and 
we would also entertain anything that would make our post 
offices serve the government or any other function that would 
make a contribution to our maintenance of universal service.
    Senator Carper. Alright. Thank you. My little State of 
Delaware is small and a lot of times people have said, well, 
isn't that a disadvantage? And what we have done in my State is 
we have taken that disadvantage and made it our advantage. 
Because we are small, we are able to be responsive, turn on a 
dime, and think quicker and smarter, hopefully, to do any 
number of things.
    You clearly have the opportunity to do that, as well, to 
take what can be a big disadvantage in that you have got this 
huge infrastructure, all these routes and the requirement to go 
to everybody's house every day or everybody's business every 
day, but there are advantages there and you just mentioned some 
ways to more fully capitalize on those advantages.
    Mr. Blair, as I have mentioned, predictability and 
stability in rates for mailers was one of the major goals of 
postal reform, at least from my perspective. We did, however, 
include a provision in the legislation calling for the creation 
of a mechanism within the new rate system whereby the Postal 
Service may raise rates above the CPI cap that we put in place, 
and when we went back and forth on this exigency language, as I 
am sure some of you recall--I see Ann Fisher out in the 
audience. I am sure she recalls going back and forth on that, 
as does John Kilvington over my left shoulder here.
    But we came up finally with language that says the Postal 
Service can raise rates above the CPI cap during, I think, 
extraordinary and exceptional circumstances. My definition of 
extraordinary and exceptional circumstances has been something 
like the September 11, 2001 attacks, a major natural disaster, 
or some other event that causes a significant spike in costs or 
drop in volume that the Postal Service really couldn't be 
expected to handle in the normal course of business.
    Senator Collins and I laid all this out in a letter to you, 
Mr. Blair. Your thoughts in responding to that letter?
    Mr. Blair. I think your sentiments speak for themselves. It 
is, indeed--I think that most in the postal community believe 
that it is a high bar for an exigency rate case. It wasn't 
considered to be routine. We have had a number of comments on 
that. I think one of the comments that the Postal Service made 
is that you evaluate it on a case-by-case basis. We are still 
evaluating all the comments, but I think those are all good in 
helping guide the Commission into what the procedure should be 
for the consideration of a case like this.
    It clearly is a September 11, 2001 or anthrax-like 
situation. While those are not deemed to be the two cases in 
which it should be exercised, I think it gives us some 
framework for how we would consider that. I think that if you 
don't have a strong exigency case, it makes almost a mockery of 
the rate cap. So you want to make sure that, indeed, it is the 
rare bird case, and that while you evaluate it in my view, I 
would want to evaluate it on a case-by-case basis, we 
hopefully, during my tenure, wouldn't have to see something 
like that. But we will evaluate the comments, evaluate the 
reply comments, and come forward again. But your sentiments are 
appreciated.
    Senator Carper. Good. Thank you. I don't pretend to speak 
for Senator Collins, but in this case, I will. Both she and I 
appreciate the words that you have just said, your response.
    I just have maybe one more question for Mr. Blair, and I 
will yield to Senator Akaka if he has anything further. As we 
have discussed a little bit here today, the Postal Regulatory 
Commission is currently considering, I think, three requests 
from the Postal Service to revise rate recommendations that you 
made earlier this year, and I just want to clarify for the 
record one point, if I may, about these rates.
    If the Commission does decide to alter its initial 
recommendation by lowering rates in some cases and those 
recommendations are accepted by the Postal Service's Board of 
Governors, rates for other mailers may need to go up to cover 
the shortfall. I would ask, is that true? Will this be a factor 
during the Commission's consideration of the rate request?
    Mr. Blair. Not to be unresponsive, but since this is 
pending litigation, I am reluctant to go into that area. Let me 
just speak hypothetically, however, that under the general rate 
regime now, with the Postal Service's revenue requests, you try 
to build in a rate structure in which you have rates that meet 
that revenue request. If you don't raise rates in one area, 
then you have to raise rates in another area. It is a zero-sum 
game.
    Now, we will see what happens with the reconsideration. 
Again, the one party has asked that the record be reopened. New 
evidence may be introduced. Should that record be reopened, 
other parties will have the opportunity to respond, as well. So 
the process will play itself out.
    But just to give you a flavor of what cost-of-service 
ratemaking is like is that it oftentimes can be a zero-sum 
game.
    Senator Carper. Well, this hearing has not been a zero-sum 
game. This has been a good hearing and this is probably not the 
last hearing that we will have of this nature.
    We are, again, mindful of all the work that was done by so 
many people and organizations, some represented in this room 
but a lot not, and I just want to express on my behalf, and I 
think certainly Senator Collins, for the good work and the 
spirit, including the participation of the Administration, that 
was pivotal in adopting the legislation that we did.
    I think everything that I have ever been a part of doing, I 
know I can always do better. We can do better and my guess is 
that we will certainly be able to improve on the work of the 
last several years and the bill that was enacted last December. 
One important thing for us to do from time to time is just to 
sit down, to invite you in to talk with us. We are mindful that 
there are going to be ways to improve our legislation. We don't 
know what they are yet. I think for the most part, we want to 
let this play out for a while and make, as best we can, this 
system work. But as we go down the line, we will find ways that 
we can improve on this.
    I want to thank each of you for taking your time to be with 
us today. We thank you for your testimony. We thank you for 
responding to our questions. I ask that you especially remember 
us to Postmaster General Walker. We thank him for being present 
about 6 years ago when we sort of kicked this into gear and he 
has been a good counselor to us in the intervening years.
    Ensuring that postal reform is implemented properly is real 
important. I will just mention this. There is a trillion-dollar 
mailing economy. It depends on the efficient operation of our 
Postal Service, so we look forward to working with our 
colleagues, Senators Akaka and Collins and others, and with the 
Postal Service and the Postal Regulatory Commission in the 
months and years ahead to come to make sure that this new 
business model turns out the way that we intended it.
    The hearing record is going to stay open for 2 weeks for 
the submission of additional statements and questions. I just 
ask each of our witnesses for your cooperation in getting 
prompt responses to any questions that might be submitted for 
the record.
    With that having been said, this hearing is adjourned. 
Thank you all so much.
    [Whereupon, at 4:15 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X

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