[Senate Hearing 110-356]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-356
 
                SERVICE STANDARDS AT THE POSTAL SERVICE:
                       ARE CUSTOMERS GETTING WHAT
                             THEY PAID FOR?

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


                                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

                               __________

                             AUGUST 2, 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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37-367 PDF                 WASHINGTON DC:  2008
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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 Akaka................................................    16
    Senator Coburn...............................................    19

                               WITNESSES
                        Thursday, August 2, 2007

Hon. John E. Potter, Postmaster General, United States Postal 
  Service........................................................     3
Hon. Dan Blair, Chairman, Postal Regulatory Commission...........
Jody Berenblatt, Senior Vice President of Postal Strategy, Bank 
  of America.....................................................     5
Anthony W. Conway, Executive Director, Alliance of Nonprofit 
  Mailers........................................................    23
Robert E. McLean, Executive Director, Mailers Council............    27
James West, Director of Postal and Legislative Affairs, Williams-
  Sonoma, Inc....................................................    29

                     Alphabetical List of Witnesses

Berenblatt, Jody:
    Testimony....................................................    23
    Prepared statement with attachments..........................    50
Blair, Hon. Dan:
    Testimony....................................................     5
    Prepared statement...........................................    43
Conway, Anthony W.:
    Testimony....................................................    25
    Prepared statement...........................................   103
McLean, Robert:
    Testimony....................................................    27
    Prepared statement...........................................   110
Potter, Hon. John E.:
    Testimony....................................................     3
    Prepared statement...........................................    37
West, James:
    Testimony....................................................    29
    Prepared statement...........................................   114

  APPENDIX``Mail Service Performance, An International Perspective,'' 
 International Post Corporation presentation at July 11 Full Workgroup 
 Meeting by Ross Hinds, Director Operations & Technology submitted for 
                     the Record by Judy Berenblatt

                                                                     63
Questions and Responses for the Record from:
    Mr. Potter...................................................   121
    Mr. Blair....................................................   131


                    SERVICE STANDARDS AT THE POSTAL



                     SERVICE: ARE CUSTOMERS GETTING



                          WHAT THEY PAID FOR?

                              ----------                              


                        THURSDAY, AUGUST 2, 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 10:03 a.m., in 
Room 342, Dirksen Senate Office Building, Hon. Thomas R. 
Carper, Chairman of the Subcommittee, presiding.
    Present: Senators Carper, Akaka, and Coburn.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. The hearing will come to order. Welcome to 
our witnesses today, to our guests, especially to our first 
panel. I will be introducing General Potter and Mr. Blair in 
just a few minutes.
    The Senate is in session. We are expecting our first series 
of votes later today at roughly 11:45, and I don't know if this 
is doable, but my goal is that by the time we finish up, the 
first vote will have begun and we will be able to move from 
there to vote and everyone will have had a chance to make their 
presentations and we will have had a chance to ask questions 
and make it all work.
    A bunch of people missed a vote yesterday, and for some of 
the people, it was the first time they have ever missed a vote 
in the Senate. We are going to run under a little tighter rules 
as we come down the stretch here in the beginning of August on 
the Senate floor, so I want to make sure that we don't miss any 
votes over there today, but I want to also make sure we have a 
chance to fully hear from each of you that have come.
    This is the third hearing that we have had on this 
Subcommittee this year with respect to the legislation that we 
passed last year that a lot of the folks in this room and those 
who were here last week helped us to develop. The part of the 
bill that we are going to be focusing on today is one that I am 
especially proud of. Title 3 of the Postal Accountability and 
Enhancement Act (PAEA) requires the Postal Service to issue a 
new set of service standards for its so-called market dominant 
products, essentially those products that make up the Postal 
monopoly. That section of the bill also calls for the creation 
of a system for measuring service performance at the Postal 
Service.
    Senator Collins and my other colleagues who were involved 
in the drafting of this bill, along with our staffs and, as I 
said earlier, a number of others, sought to include this 
provision not because we wanted to micromanage the Postal 
Service. We micromanage plenty of other things. We don't need 
to micromanage the Postal Service. But we included it because 
we thought it was vitally important that the Postal Service 
find a way to make their products relevant and valuable to 
their customers as we go forward in the first part of this 
century.
    It doesn't take a Postal expert to figure out that the 
Postal Service has lost some customers over the years to 
innovations such as e-mail, electronic bill pay, fax machines, 
and cell phones--some of that business is, I think, likely gone 
for good. One look at the testimony, from Postal customers on 
our second panel, however, tells me this: Strong service 
standards coupled with an aggressive program to track and 
report on service performance will go a long way toward making 
at least some Postal products more competitive when compared to 
the new technologies that you go toe-to-toe with every single 
day.
    The Postal Service adds, as we know, between one and two 
million new addresses to its rolls every year. We are likely 
very far away from the point where those homes and businesses 
no longer require mail service. Businesses, charities, and the 
American public still rely on the mail. I do. I think we all 
do. The Postal Service will need to be more competitive, 
though, in order to bring in the kind of volume and revenue 
necessary to cover the cost of providing the universal service 
that our economy and our communities count on, depend on.
    The service standard provisions in the Postal 
Accountability and Enhancement Act are also important because 
the Postal Service is going to need to use the standards it 
sets to realign its workforce and to rationalize its network of 
processing and retail facilities.
    A large percentage of the Postal workforce, as is the case 
throughout the Federal Government, is close to retirement, or 
closer to retirement. That is everywhere except the U.S. 
Senate, and here in this body, they tend to go on forever, or 
it seems that way.
    In addition, the network of logistics centers and post 
offices the Postal Service depends on each day is something 
that has grown organically over the course of many years. It is 
not necessarily designed, to meet current needs.
    So I think a lot is at stake here. I know that and you know 
that, as well, and we look forward to hearing from our 
witnesses, our first panel and our second panel, too.
    General Potter, I never wanted to be a general. I was in 
the Navy and I would like to have been a commodore. It is a 
rank we have in the Navy, but nobody is a commodore. You go 
from being a captain to being a rear admiral, a one-star 
admiral. You are never a commodore. That was the rank I had 
aspired to. I would have been the only one in the Navy who 
would have been that.
    But you got to be general, our Postmaster General. You have 
been that since, I think, 2001. You took over your job about 4 
or 5 months after I came on board in my new responsibility. I 
think you have done a very fine job. But you are, I am told, 
the 72nd Postmaster General and began your career with the 
Postal Service in 1978. I kid him that in 1978, he was a 12-
year-old clerk, and over the years presided over, among other 
things, as our Chief Operating Officer at the Postal Service, 
Vice President for Labor Relations, and a number of other 
senior positions at the Postal Service's headquarters in 
Washington and out in the field.
    Dan Blair, welcome. Dan Blair comes before us today as the 
very first Chairman of the Postal Regulatory Commission, which 
is the successor, as we know, to the old Postal Rate 
Commission. Mr. Blair was confirmed by the Senate as a 
Commissioner on the Rate Commission last December and was named 
Chairman by President Bush later that very same month. Chairman 
Blair previously served as the Deputy Director of the Office of 
Personnel Management and put in 17 long, hard, arduous years 
here on Capitol Hill.
    We welcome you both. Your entire testimony will be made 
part of the record and feel free to summarize. If you can stay 
fairly close to 5 minutes, that would be fine. If you run a 
little long, we will give you some leeway. Thank you.
    General Potter, would you like to begin.

TESTIMONY OF HON. JOHN E. POTTER,\1\ POSTMASTER GENERAL, UNITED 
                     STATES POSTAL SERVICE

    Mr. Potter. Good morning, Mr. Chairman and Members of the 
Subcommittee. I am pleased to be with you to discuss one of the 
most difficult challenges faced by the Postal Service, the need 
to balance rising costs within a rate structure defined by a 
price cap.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Potter appears in the Appendix on 
page 37.
---------------------------------------------------------------------------
    By law, we are required to keep price adjustments at or 
below the rate of inflation for market dominant products, which 
represents over 90 percent of our revenue base. Unfortunately, 
our costs are not governed by the same standard and many have 
been rising faster than the Consumer Price Index. Like other 
employers, we have been affected by sharp increases in the cost 
of energy and health benefits, and for the Postal Service, cost 
per work hour for our career employees has been growing at a 
rate above inflation.
    At the same time, First-Class Mail volume, which represents 
over 50 percent of our revenue base, is declining. The number 
of addresses we serve, as mentioned by the Chairman, is 
increasing by almost two million each year. This means, on 
average, even with the recent rate change, we are delivering 
fewer pieces of mail to each address and revenue per delivery 
is decreasing. This is not a formula for long-term success. The 
challenge is to close the gap between prices and costs while 
improving our quality of service.
    How do you do that? As I see it, management can proceed 
along three paths. First, we can continue to operate as we have 
been for decades. After all, that brought a level of success no 
one anticipated when the law was passed in 1970. Service rose 
to record heights. We achieved our break-even mandate, and we 
reached unprecedented levels of efficiency.
    But the environment in which we achieved that success has 
changed and it is continuing to change. The business model that 
was created in 1970, in my opinion, is broken. We can no longer 
depend on mail volume growth to produce revenue needed to cover 
the costs of a growing delivery network. That model helped us 
to limit increases in postage rates to the rate of inflation 
over the 35 years prior to the new law, but the mail volume 
growth necessary to do that is no longer there.
    To proceed along the path of business as usual would be 
inconsistent with our rate cap obligations or the expectation 
of the American public. We no longer have the option of just 
adjusting rates if our costs get out of balance. We have to do 
more, much more, if we are to keep costs in check with the 
overall growth no higher, as I said, than the rate of 
inflation, but we must continue to provide universal service. 
We understand that is our primary mission, is to deliver 
universal service to the American public.
    The second path to closing the gap between rates and costs 
would be wholesale, and absolute expansion of outsourcing of 
work now performed by Postal Service employees and use that as 
a cost reduction strategy. But there is much more at stake than 
simply costs. Pursuing this strategy could come with its own 
costs, and those costs would be a lost focus on service and 
damage to our brand.
    That is why I prefer a third path, working directly with 
our unions and customers to confront the critical issues that 
we are facing as an organization, to address the demands of 
growing our business and the needs of our customers to better 
serve America and to protect universal service for the next 
generation. I am personally committed to the process of 
collective bargaining as an important tool in achieving these 
goals, and I have seen time and again that it works.
    The latest example is the tentative collective bargaining 
agreement we reached with the National Association of Letter 
Carriers. It keeps the most important focus where it must be, 
on our customers, by helping us to improve service and 
operational efficiency, and it provides our employees with a 
fair wage. This is more important than ever as we operate in a 
competitive environment in which customers vote with their 
feet, no longer bound by a monopoly that is meaningless in 
today's world.
    We were successful in reaching negotiated agreements with 
all of our major unions this year in this round of bargaining. 
We don't expect to agree on every issue, but we have 
demonstrated our ability to overcome our differences, confront 
our shared challenges, and negotiate bargaining agreements that 
benefit everybody--the Postal Service, our employees, and most 
importantly, the people we serve.
    I strongly believe that we should rely on the collective 
bargaining process going forward and that the parties should be 
challenged to make the collective bargaining process work. The 
continued viability of the process requires that we retain our 
ability to bargain on a level playing field and that we have 
agreements that allow management certain rights and we 
shouldn't tinker with those. They have worked for us in the 
past and we would prefer that all parties to the collective 
bargaining agreements to continue to focus on that process and 
not focus on a change in the law.
    Before I close, I would like to discuss our progress in 
developing modern service standards. Both of these and the 
related measurement systems, are required by the new Postal 
law, as you mentioned, Mr. Chairman. Since early this year, we 
have been working with a large and diverse group representing 
all parts of the mailing industry to identify what changes in 
standards are warranted. We are on target to complete this 
process this summer. We are already consulting with the Postal 
Regulatory Commission so that the new service standards can be 
published by December.
    In developing measurement systems, we are exploring the 
possible use of our new Intelligent Mail bar code. It is a 
passive internal data collection capability which will allow us 
to efficiently measure actual service performance, not in an 
aggregate way, by individual mailers, because at the end of the 
day, mailers care about their own mail. It is nice to know that 
we are performing at 95 percent, but if their experience is 75 
percent, it doesn't matter to them. So our goal is to get as 
granular as we possibly can and give the people who are paying 
for postage information about their mail.
    We look forward to working with all of our stakeholders, in 
particular the Postal Regulatory Commission, in achieving 
agreement on revised service standards and a measurement 
system. I appreciate the opportunity to testify today and would 
be happy to answer any questions you may have.
    Senator Carper. General Potter, thank you very much for 
your testimony and for being here with us again today.
    Mr. Blair, you are recognized. Again, your full statement 
will be entered into the record and feel free to summarize as 
you see appropriate.

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

    Mr. Blair. Thank you, Chairman Carper. I appreciate this 
chance to come before the Subcommittee. I ask that my full 
statement be entered in the record and I am prepared to 
summarize.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Blair appears in the Appendix on 
page 43.
---------------------------------------------------------------------------
    First, I would like to acknowledge my fellow Commissioners 
with me here today, Commissioners Goldway, Tisdale, Acton, and 
Hammond. I appreciate their attendance and their support----
    Senator Carper. Could I ask you a favor? Would you just 
repeat those names slowly, and as you repeat those names, I am 
going to ask each of the Commissioners to raise their hand.
    Mr. Blair. Yes. Commissioner Tony Hammond is in the 
audience, and also Commissioner Dawn Tisdale, Commissioner Mark 
Acton, and Commissioner Ruth Goldway.
    Senator Carper. Welcome. Thank you.
    Mr. Blair. Since I last appeared before the Subcommittee in 
April, the Commission has put into place what I call a 360-
degree approach in soliciting public input on both the new rate 
system and service standards. First, in February and May of 
this year, we published Federal Register notices seeking public 
comments on how best to structure the new ratemaking system. 
The public response has been extremely gratifying. We received 
approximately 100 separate responses in all.
    Although the Commission has until next June to develop the 
new system, we are moving quickly to beat this deadline. We 
hope to have in place a basic ratemaking framework by this 
October, which would provide the Postal Service with the 
flexibility to use the new system, a new streamlined system, 
should it need to raise rates.
    Second, as you pointed out, the Act requires the Postal 
Service to consult with the Commission on the establishment of 
modern service standards for market dominant products. To 
fulfill this requirement, and as part of our ongoing outreach, 
we published a Federal Register Notice of Public Inquiry in 
June soliciting input on service and performance standards. The 
Commission received 35 comments in response to this notice. 
Further, we reached out to Postal stakeholders outside 
Washington, DC through field hearings in Kansas City, Los 
Angeles, and Wilmington, Delaware, where we ran into Brian 
Bushweller, your State Director.
    Both the formal comments received in response to our 
notices and the testimony we heard during our field hearings 
share a number of common themes. Our written statement 
discusses these comments more fully, but let me give you some 
of those highlights.
    In general, the mailing community is eager to move to a new 
system with the expectation of more stable and predictable 
rates. I know that you, Chairman Carper, and Senator Collins, 
are also very interested in seeing the new system set up as 
quickly as possible. You have my personal commitment that this 
goal is met.
    Senator Carper. Thank you.
    Mr. Blair. We also heard that consistent and reliable mail 
service is critical. Most mailers consider the existing Postal 
Service standards acceptable, but insist that these standards 
should be a floor for all mail within a class. Further, there 
needs to be system-wide performance measurements that provides 
detailed information and is available to the public. 
Specifically, we heard that mailers, their customers, and the 
Postal Service would best be served by publicly-available 
reports listing the service performance regionally and possibly 
in greater detail. Moreover, details such as between specific 
three-digit ZIP code pairs or zones should be available to 
mailers on request.
    Several mailers listed measurement of what is called the 
``tail of the mail'' as being especially problematic and noted 
that product delivery delayed beyond the expected time frame 
results in decreased customer satisfaction and increased costs 
of shipping of replacement goods. Mailers also believe 
information beyond days to delivery are important components of 
service standards.
    For instance, the critical entry or cut-off time for 
business mail and the last collection time from neighborhood 
mailboxes are important, as well as the length of the ``tail of 
the mail.'' Another issue is whether there should be separate 
service standards for non-contiguous areas like Hawaii and 
Alaska.
    While the current performance measures for First-Class Mail 
are generally considered adequate, measurement tools for other 
classes of mail are lacking. The new law requires measurements 
for all classes of mail. The Commission is encouraged by plans 
to implement the Intelligent Mail initiative over the next 
several years. Until it is widely operational, however, an 
interim system of measurement is needed. We do not believe that 
the Act envisioned modern service standards being enacted but 
with a 2 to 3-year delay in their measurement.
    Regarding our consultation with the Postal Service, we 
appreciate that the Postmaster General has sent a strong team 
to work with us and has designated Deputy Postmaster General 
Pat Donohoe to lead these efforts. To date, the Commission and 
the Postal Service have engaged in three substantive standard-
related meetings. We anticipate another meeting later this 
month, culminating in a final formal consultation toward the 
end of September. Based on the cooperative tenor of the 
meetings thus far, the Commission has every reason to believe 
that its input will be reflected in the final regulations 
adopted by the Postal Service.
    Clearly, the Commission has its work cut out for it. The 
coming 12 months will be a time of intense work at the PRC as 
we move to carry out our new responsibilities.
    Again, thank you for inviting me to testify, and I am ready 
for any questions you might have.
    Senator Carper. Mr. Chairman, thank you for that testimony.
    Chairman Blair, I am going to ask you to go back and just 
briefly give us a little primer on how the rate-setting 
structure used to work for the Postal Service up until the 
enactment of the legislation last fall, how it is going to be 
working going forward into the future, and particularly go back 
to the first paragraph or so of your statement and just give us 
the status report of where we are. And then I am going to ask 
General Potter to react to that, if you will.
    Mr. Blair. We have a lot of lawyers in this room. There 
might be second-guessing my answers on this, but I will give it 
my best try.
    Senator Carper. I see some of them. They are already at it. 
Go ahead.
    Mr. Blair. Under the old system, there was cost-of-service 
pricing in which the Postal Service priced its products 
according to the costs of delivering those services. The Postal 
Service would come before the Commission with a request to 
raise rates in an omnibus case. That case would take 10 months. 
There were hearings on the record. Witnesses came before the 
Commission. They were subject to cross-examination. Briefs were 
filed. Reply briefs were filed, and after a period of 10 
months, the Commission would come forth with a recommended 
decision which was based on that record. That decision would 
then go to the Governors of the Postal Service who could adopt 
it, send it back, or take other options.
    Oftentimes, the Commission recommendations did not mirror 
the initial Postal Service request. It was a lengthy, 
litigious, and costly process that took place before the 
Commission.
    Congress recognized that. Congress also recognized that 
mailers were saying that they need more stable, predictable 
rates. That every 3 to 4 years, when the Postal Service came in 
for rate increases, many times, mailers would see their rates 
jump, for which they were not prepared. And so Congress took 
action, which resulted in the legislation passed last year, the 
Postal Accountability and Enhancement Act.
    Under that legislation, the PRC was charged with devising 
regulations that would allow the Postal Service to seek yearly 
rate increases subject to a CPI cap per class.
    Senator Carper. And now fast forward, if you will, to where 
we are at the current time----
    Mr. Blair. Well, at the current time----
    Senator Carper [continuing]. In implementing the 
legislation.
    Mr. Blair. At the current time, Congress gave us 18 months, 
until June 2008. When I came into office at the middle of 
December, we were in the midst of a very contentious--it was 
the first litigated rate case, I believe, since 2001. We gave 
our recommended decision back in February, but there was also 
talk that the Postal Service would have to seek another 
increase in order to cover its costs within a short time frame, 
as well.
    In order to avoid another lengthy go-around, although the 
Congress clearly contemplated there could be another cost-of-
service rate case, the Commission thought it was in the 
community's best interest and in the public's best interest, 
that we try to get our regulations in place sooner rather than 
later. That is why we are targeting October of this year.
    We have gone through two Advance Notices of Proposed 
Rulemaking, back in the spring and then again in June, in which 
we asked the community to give us ideas on what these 
regulations should look like. We had good responses to those. 
We also had the field hearings in which we went to three 
different places across the country and heard from 
stakeholders. We also looked at service standards during both 
proceedings, and for service standards, we put out a Notice of 
Public Inquiry. So we have been very engaged with the public 
and the community on what these new regulations should look 
like.
    Senator Carper. This is August. This is the first of 
August. What happens next?
    Mr. Blair. The next public step would be for the Commission 
to publish the Proposed Rules for notice and comment. We hope 
to do that soon.
    Senator Carper. OK. General Potter, would you care to just 
weigh in and share some thoughts, reflections, on what Chairman 
Blair said, particularly as we go forward?
    Mr. Potter. Maybe I would respond from kind of a Postal 
Service business perspective----
    Senator Carper. Sure.
    Mr. Potter [continuing]. In the sense that the big changes 
that in the past, under the old rules--I don't disagree with 
anything that Chairman Blair said--the difference for us from a 
business perspective is that under the old rules, the Board of 
Governors determined what the revenue requirement was. So they 
looked out into a future year and said, this is how much money 
we are going to need to operate the business, and then they 
suggested rates to the Commission and the Commission made 
comment, but ultimately, the Board of Governors could decide 
whether or not--had the ultimate decision about what the 
revenue would be, the revenue stream, and obviously the 
Commission could make recommendations around it, but the 
Governors could overrule it.
    Going forward, there is a very hard rate cap for market 
dominant products, which is 90 percent of our revenue. It is 
not just----
    Senator Carper. Could I interrupt for just a second? Excuse 
me, but 90 percent of the revenue is market dominant products. 
What percent of the volume are represented by those market 
dominant products? Do you have any idea?
    Mr. Potter. I would venture to say it is about 98 percent, 
because the competitive products we are talking about are 
package products. We are not talking about significant volumes 
of packages. Maybe 99 percent. It is very high. But you get 
much more revenue per package than you do for a letter, whether 
it is an advertising letter or a First-Class letter.
    Senator Carper. Alright.
    Mr. Potter. But the real change is that we have this rate 
cap now for market dominant that says we have to operate at the 
rate of inflation, but even more difficult than that, the cap 
is at the class level, and we have never managed an 
organization by class of mail. We have managed product by 
shape. If it is a letter, we manage it as a letter. A flat is a 
flat.
    Now we are going to have this rate cap by class, so it is 
going to introduce a whole new layer of complexity that we have 
never seen before. I talked to other business leaders and said, 
how do you do that in the business world, and they say, we 
don't. So this is kind of a real unique situation that we are 
going to have to attempt to manage.
    In addition to that, going forward, then, we have the 
competitive product arena and we are going to have to--
obviously, the intent was that we become even more competitive 
and grow our revenue. The key factor there for us is going to 
be what is the required cost coverage, because at a minimum, 
those products have to cover attributable costs. In addition to 
that, they have to make a contribution to overhead to be 
determined by the Regulatory Commission.
    So that is a key element of us understanding what that is. 
We have had discussions with numerous mailers who are looking 
to us to work with them on offering discounts and other things. 
It is kind of, until we see the rules, we really can't make 
decisions around what is going to happen with that product 
line. So we are very anxious and we are very appreciative that 
Commissioner Blair and the other Commissioners are looking to 
accelerate the pace at which they promulgate rules, not only 
for the market dominant products but for the competitive 
products, as well.
    Senator Carper. Alright. Thank you.
    Let me just change our focus a little bit. General Potter, 
I think it was the last time you came before the Subcommittee, 
I think you indicated that the Postal Service was on track to 
suffer some very substantial losses, report some very 
substantial losses this year, and I believe you said the loss 
was projected at the time to be a little over $5.5 billion. It 
is my understanding, however, that most of the loss is not a 
real loss in the traditional sense but really a one-time 
accounting charge that relates to the passage of our Postal 
reform legislation and the treatment of funds that have been 
deposited in the former escrow account.
    I think I have that right, but I want us to compare apples 
to apples if we can here for a moment. But how much worse off 
is the Postal Service at this point on a cash basis compared to 
your plan for the year, and is there anything new that you can 
tell us about the impact that the recently-implemented rate 
case has had on your finances?
    Mr. Potter. In terms of financial impact, obviously, there 
is going to be a--we are looking at about a $5.5 to $6 billion 
loss this year on paper. We are also looking, because we are 
taking what was planned to be restricted cash this year for 
escrow contributions in 2006 and 2007, and now they become an 
outflow of cash. So we don't have that cash. Borrowing is going 
to probably go up above $4 billion this year, which is not 
something we are proud of, but when you are in a restricted 
cash mode, you have cash at hand and so you don't need to 
borrow----
    Senator Carper. That is borrowing from the Treasury?
    Mr. Potter. Yes, borrowing from the Treasury. So in terms 
of where we expected to be, probably the best thing to do is 
look forward and look at 2008, and so the cost of the new law 
is going to be about $800 million. Our plan was to break even 
next year. We are probably going to lose $800 million to $1 
billion.
    But I am glad you mentioned the recent rate case because 
there has been rate shock in the sense that people are trying 
to react to changes that were made and the recommendation of 
the Governors by the Commission, and so certain classes of mail 
got hit very hard by recommended changes and our volume, I will 
just talk to this month, or last month, the month of July, it 
looks like our revenue is probably going to be about $100 to 
$150 million off of plan. And a lot of it has to do with the 
fact, in my opinion, that the mailing community is trying to 
respond to the higher growth in revenue, in cost for certain 
classes of mail than they anticipated, so they have budgets for 
the year, the calendar year in a lot of cases. They don't have 
the ability to go back and increase their budget by 20 percent 
or 30 percent to account for the new rate. So it appears that 
they are holding back mailings and are coming up with new 
strategies on how to approach the use of mail as part of their 
advertising dollars and it has hurt us.
    My hope is that they don't walk away from the mail, that 
they are just recalculating what their plan for this year is. 
We will have a better handle on that in the fall. If mail has 
migrated away from us, if people have made permanent decisions 
to get out of the mail, then the estimates for next year of an 
$800 million to a $1 billion loss could grow rather 
dramatically.
    Senator Carper. Alright. Thank you.
    Chairman Blair, would you just weigh in on this, as well?
    Mr. Blair. Well, the recommended decision that came forward 
was the first litigated case since 2001, and both the 
Commission and the Governors are on record as saying that a 
litigated case was going to cause some rate shock for mailers. 
I don't want to mitigate it. I don't want to in any way 
disparage the rate shock that mailers are experiencing.
    However, again in this last case, the full revenue request 
was granted to the Postal Service. Particularly with regard to 
letter mail, efficiencies were rewarded and there was a 
rebalancing that took place that didn't occur in the previous 
two settled cases.
    But I think that more than anything, this underscores the 
fact that the old system was, indeed, broken. If we continue 
under an old cost of service requirements, I think history 
would have repeated itself over and over again. You and your 
colleagues wisely chose to take a different path, and that was 
to impose a different type of pricing system on the Postal 
Service. It was a historic step that Congress took, and I look 
forward to implementing that new system with my colleagues.
    Senator Carper. Alright. Thank you.
    General Potter, I want to take a moment to follow up on 
some testimony we heard at our hearing last week with the 
Postal unions and some of the management organizations. You may 
have gotten some feedback on this already. But more than one of 
our witnesses testified that there has been an erosion of 
service in recent years, at least in their view, if not 
nationwide, in at least some pockets of the country they 
mentioned. We talked a bit about Chicago. They talked a bit 
about L.A. The erosion was blamed in part on the incentives 
that the pay-for-performance system used to make decisions on 
managers' pay.
    Our witnesses said that some managers--not all, but some 
managers were sometimes incentivized to sacrifice service to 
meet cost-cutting goals, and I just want to ask you to take a 
minute, or maybe a minute or two, and tell us your thoughts on 
this issue and what you might be doing to address it.
    Mr. Potter. Well, first of all, let me talk a little bit 
about that incentive system. It is a balanced system. People 
are rewarded for service. They are rewarded for costs, and they 
are rewarded for people, and by people I mean safety, our Voice 
of the Employees Survey, where we take--every employee has the 
opportunity to fill out a survey once a year to talk about the 
workplace, the workplace environment. They are rewarded 
equally. So, when I look at the three categories, I think we 
have been successful in all three.
    We are going to report for the Postal Quarter Three service 
results next week. Those who are at the Board of Governors 
meeting will hear a report about our Postal Quarter Three 
service results. They are at a record level. We broke through 
some barriers. They are at record levels for service. When it 
comes to cost, our productivity is at an all-time high and we 
are very proud of the fact that productivity has gone up in 
each of the last 7 years and will continue to go up.
    When it comes to people, our Voice of the Employees Survey 
said despite the fact that we have downsized considerably, our 
employees are satisfied, our safety record is impeccable. We 
have brought OSHA in to help us with our ergonomic issues that 
have affected a number of our employees over the years. We have 
Voluntary Protection Program participation on the part of the 
Postal Service. It is an OSHA program to make sure that the 
workplace is safe. We have more Voluntary Protection Program 
sites than any other organization in America, private or 
public. Our grievances have been dropping dramatically and will 
continue to do it. And we have moved aggressively on equal 
employment opportunity.
    So when I think if you step back and look at this 
compensation system, it is a balanced system, and yes, there 
are cases where we are asking people to do more with less, but 
given the fact that the revenues of the Postal Service are 
challenged and the volumes are challenged, people are just 
going to have to do that.
    Now, that is not to say that we are perfect and that every 
manager manages each of those categories equally. But the fact 
that the bottom line results are there speak for themselves. We 
do have people who are not effective when it comes to service 
and we do have slippages, and when we do, we move in and we 
look to resolve them. When we have issues where there are cost 
overruns, we move in and take care of those. And in cases where 
we have workplace issues, we have intervention teams that go in 
and review workplace problems because there are some.
    Despite the fact that there is an overall good record, 
there are pockets of problems within each of those three 
categories, and with an organization our size, I don't expect 
it to be perfect, but I expect, when problems do occur, for us 
to react and we are doing that as best we can.
    Senator Carper. One of my credos when I was in the Navy and 
as governor and today is, ``If it isn't perfect, make it 
better.'' I always say that to my team, whatever team I happen 
to be leading at the time. And obviously, you and the folks 
that you work with and lead at the Postal Service, have 
realized that your operation wasn't perfect and you sought to 
make it better in a lot of different ways and I commend you for 
that. I know we all do. I would just urge you, as you find 
those pockets, whether it is Chicago or L.A., where you find 
that folks aren't measuring up or your leaders aren't measuring 
up, that you act expeditiously to address those and I am 
confident you will.
    Mr. Potter. Well, I think when you see the service results 
for Chicago, you will see that there has been a lot of progress 
made.
    Senator Carper. That is good to hear.
    Another question, if I could, for General Potter, and then 
Chairman Blair, I will probably pick on you for a little bit.
    About a year or so ago, General Potter, the Postal Service 
announced a number of processing facility closures and 
consolidations. It has been unclear, at least to me, where the 
process is at this point. I understand that some announced 
closures and consolidations are going forward and some 
apparently are not.
    In addition, there was language in the Postal reform bill 
that you may recall required that the Postal Service comply 
with certain disclosure and consultation requirements before 
doing anything with a facility. And then there is the fact that 
you must come up with a new strategy for handling your 
facilities by next spring based on the outcome of the service 
standards project that is currently underway.
    Could you just take a minute and give us an update on what 
your current plans are in this area and what you plan on doing 
to incorporate community, employee, and customer input into 
those plans? Go ahead and answer that one, and then I have just 
a related follow-up, please.
    Mr. Potter. OK. Well, we have guidelines that we follow and 
we have revised them to provide for more input at the local 
level, particularly community input. The fact of the matter is 
that the Postal Service is in a constant state of evolution and 
so people are always asking me what is your facility game plan? 
As if we have some exact science when it comes to that, and you 
can't have an exact science because our business is related to 
and responds to the use of our systems by mailers throughout 
the country. And it also involves the introduction of new 
technology over the years.
    Right now, we are planning to introduce a flat sequencing 
machine that will make the sortation of flats to delivery order 
much more efficient than it is today. Today, it is in a manual 
mode. It is going to go to an automated mode. That piece of 
equipment is going to require a lot of space. We are 
reevaluating our facility plans based on, again, revised 
projections in volumes as a result of some of the rate changes 
that were made because we anticipate a change in shape use by 
mailers as described by Chairman Blair. There are incentives 
now to use letters versus using flat mail. We anticipate the 
introduction of the FSS, as I said, and we look to greater 
mailer adoption of drop shipment, which means they bring mail 
closer to the destination. So we are constantly evolving our 
network.
    Suffice it to say the migration of mail to automation and 
the migration, which means we are more efficient and can do 
things in less places, the migration of mail to destination 
means that we have the ability and the opportunity to shrink 
our network somewhat, and over the course of time, we are going 
to do that, but we are going to do it in an evolutionary kind 
of way, not in any kind of dramatic way.
    The last factor that has to be built into the plan that we 
are going to submit next June are the standards for service, 
and those are in the process of being discussed with a number 
of folks in the Postal community and we will be prepared to 
present that to the Postal Regulatory Commission and they will 
have final say on that. I think we have, as Chairman Blair 
said, I think we are well along our way there in terms of 
progress.
    But let me assure you, we understand that the closing of a 
facility has a major impact on the community, a potential loss 
of jobs, although our employees won't lose jobs. Our employees 
will probably be relocated to different locations, and that can 
disrupt their family life. So we take these things very 
seriously. We do seek input, as you said. There were some 
plans. When we do a study, oftentimes people conclude that the 
outcome of the study is predetermined, but I think over the 
course of the last year, as you mentioned, some facilities are 
closed, others are not, and it is a factor of looking at all 
the different elements involved and taking the input and then 
factoring in changes that happen, such as introduction of new 
equipment.
    So there is no static answer. You can't draw a chart and 
say, here is what the place is going to look like in 10 years, 
because quite frankly, there is nobody on the face of this 
earth who can predict what Postal volume is going to look like 
in 10 years, what mailer behavior is going to look like in 10 
years, what printing presses they are going to use, and so it 
has, as it has since Ben Franklin, it evolves to meet the 
needs, the changing needs, of the American public using the 
best tools available to the managers who try to perform the 
service.
    Senator Carper. Alright. Thank you.
    I am going to ask Chairman Blair, do you think the Postal 
Service is doing enough to solicit input and to take it into 
account?
    Mr. Blair. Before I joined the Commission last December, 
the Commission issued an advisory opinion on these issues and 
basically said that the Postal Service needed a better defined 
strategy on how they were going to go about this process. 
Better management of these plants is a good idea. What is 
needed, however, is a more definable, more transparent, 
auditable, and consistent strategy in which the public, 
mailers, employees, and communities can understand and rely 
upon.
    The new law requires a consultation akin to the service 
standards on this, and after we establish the service 
standards, we will be entering into another similar 
consultation preluding up to a 2008 report that the Postal 
Service will be issuing.
    What is important here is looking at, from a service 
standard viewpoint, the closures of these facilities and what 
impact closures would have on delivery. How does it impact the 
time for delivery? Are we tracking that, and those types of 
things. Those are answers that we will be looking forward to 
when it comes to that consultation.
    Senator Carper. Alright. Thank you.
    The next question I ask, I am going to initially direct it 
to General Potter, to you, but Chairman Blair, I would 
appreciate your responses, as well. General Potter, I 
understand that the Postal Service does not currently have 
performance standards in place for most of its market dominant 
products. If that is the case--and if it isn't, tell me, but if 
that is the case, what are your plans for developing a useful 
system for tracking performance under the new set of service 
standards that you are due to issue at the end of, I believe, 
this year?
    And second, how are you measuring, or how are you going to 
measure, the impact that decisions in areas like facilities 
closure and consolidations will have on service?
    Mr. Potter. Let me address the second part of your question 
first.
    Senator Carper. OK.
    Mr. Potter. When we close a facility or consolidate, our 
goal is not to shrink service. In many cases, service improves 
because you get greater reach, and that is an element of the 
review, And again, it is auditable by our Inspector General. 
They look at the finances, whether or not they are met. They 
also look at the service performance and they do an after-
implementation study. Occasionally when we do the 
consolidation, there might be some mitigation in service, but 
it usually quickly comes back. In fact, I haven't seen a case 
where it hasn't.
    But we don't go in with this notion of downgrading service 
to any party. Again, that is not--an element of the review is 
to make sure that we are not doing that. We don't design a 
system to reduce service levels, either standards or 
performance. And so, again, that is an important element of the 
study.
    What was the first part of your question?
    Senator Carper. The first part of my question is if you 
don't have performance standards in place just yet, what are 
your plans for developing a useful system really for tracking 
performance?
    Mr. Potter. Well, our discussions right now with all 
parties, what we are basically planning to do is lay out a 
three-digit to three-digit service performance matrix for all 
classes of mail. So you enter the mail in any one location, 
pick any three-digit ZIP code in the country, and there will be 
a service standard for that origin to that destination.
    I think we are all pretty much agreed on where we are going 
to go long-term. Again, the feedback that I have gotten is we 
are all pretty much agreed that in the long-term, our intent is 
to put a bar code on each piece of mail that has the 11-digit 
bar code--in other words, our ability to allow us to walk-
sequence mail for that piece of mail. It will have the class of 
mail. It will have any special service that is required--that 
could be a signature or address change service. It will also 
have the sender of the mail, so we will be able to track mail 
by sender. And it will have a unique identifier for every 
piece.
    So if you think about it, it is every piece of mail that 
enters the system where people pre-bar code mail, we will 
create the ultimate transparency. You will see that mail every 
time we touch it. We will also put bar codes on containers and 
trays of mail. People will have this ultimate transparency, 
because I believe when it comes to service standards, yes, it 
is nice for me as the Postmaster General or Mr. Blair to know 
as the Chairman of the Regulatory Commission what the average 
is, but at the end of the day, what counts is what you 
experience as an individual mailer, and that is what is going 
to keep you in the system and give you confidence that this 
system works.
    So we are going to move to this new Intelligent Mail bar 
code in January 2009. We are going to make it a requirement for 
everybody to use it that qualifies for a discount from the 
Postal Service. My intent is that even people who don't have 
automated mail use that code so that we will be able to provide 
service tracking for them.
    So ultimately, everything will be tracked. Anything can be 
aggregated in any form that anyone would like it to be 
aggregated in. What do we do between now and the time that code 
becomes mandatory and we begin providing those systems. As I 
said, my intent is to push so that in January 2009, that code 
is there and we are able to use it. In the interim, we are 
going to have to have discussions with the Regulatory 
Commission about what it is that will satisfy the bridge 
between now and the time that we introduce this new system, and 
I would hope it will be some subset of that, but we will have 
to have those discussions. Our intent is to track the mail as 
required by law, but ultimately we want to give each user of 
the mail an opportunity to see what happens with their 
individual mail.
    My expectation is, once that comes to pass, there are going 
to be a lot of problems, because I am sure there are 
deficiencies in our system. One of the things that we have 
learned from using this, we have all the systems are in place. 
They have to be upsized so that we can do it, but we have done 
this already with several mailings. The beauty of this system 
is it will allow us to receive electronic manifests of mailing. 
Today, they are paper-based. We have to count mail on 
acceptance. In the future, we will be able to count it as we 
sort it. We will eliminate a lot of redundancy and work burden 
for the Postal Service as well as the mailers when it comes to 
acceptance. And we will be able to give people feedback on 
their mail.
    Today, we have a bar code that is simply a bar code. So if 
somebody has the wrong address, has a missing directional, we 
can't give them feedback. The beauty of the Intelligent Mail 
bar code is we will be able to give them feedback. My hope and 
my thinking is that it will improve the quality of mail. It 
will allow mailers to make changes that will improve their 
service experience as well as improve the efficiency of mail, 
because today, a lot of our cost is associated with mail that 
has a wrong address, missing directional, or an old bar code 
because somebody has moved, and this will speed up the process 
of, again, giving feedback to mailers, improving the quality of 
their mail base, taking what is largely a manual process today 
and automating that process.
    So there is a huge opportunity, a huge upside for improved 
service, improved efficiency with the Intelligent Mail bar code 
and improved value to customers. And I don't want this 
organization to get distracted by moving into a different 
direction. We are going to work with the Regulatory Commission 
to find a way to see whether or not we can use some elements of 
that to bridge ourselves to when this is ultimately required.
    Senator Carper. Thank you. When do you expect to go live 
nationwide with the intelligent bar code? Did you say early 
2009?
    Mr. Potter. January 2009 is what we have told mailers, that 
we want everyone who seeks a discount to put that code on the 
mail.
    Senator Carper. Good. Thank you very much.
    Chairman Blair, do you want to share a comment or two on 
what the General has just said? Then I am going to turn to our 
colleague, Senator Akaka, for whatever questions he might have.
    Mr. Potter. Thank you, Mr. Chairman. Intelligent Mail 
really does hold out a lot of good prospects for reporting on 
service. However, as the Postmaster General just said, it is 
going to be operational in 2009, so what do we do in the 
interim? Also, we need to identify what gaps there may be in 
which Intelligent Mail won't measure and make sure that we have 
some kind of system in place, whether it be seeding or 
something else, in which we can report service on that.
    Those two points were driven home, not only from our 
comments that we received according to our Notice of Public 
Inquiry, but also during the field hearings in which mailers 
expressed some concern as to what are we going to do in the 
interim and are they going to measure us. For instance, how are 
we going to treat local newspapers? Those are things that we 
will be working out over the period of consultation.
    But the bottom line on this is what gets measured is what 
gets reported, and it is vitally important that mailers have 
access to this information and the public have access to this 
information, because if you don't have access or if it is not 
publicly available, it doesn't do anyone any good.
    Senator Carper. Thank you for those comments.
    I am happy to welcome my friend and colleague, Senator 
Akaka, for whatever comments you might have and any questions 
you might have. Welcome, my friend.

               OPENING STATEMENT OF SENATOR AKAKA

    Senator Akaka. Thank you very much, Mr. Chairman. It is 
good to be here with you today. I would also like to add my 
welcome to the Postmaster General and also Chairman Blair.
    Service standards are an important piece of the Postal 
reform bill that we worked so hard to pass and an area that is 
important for both Postal consumers and for the mailing 
community.
    Currently, the Postal Service has vague standards that 
don't give customers or the mailing community any reliable 
measures to know when mail may arrive. In addition to the vague 
standards, there are no mechanisms in place now to reliably 
measure performance against service standards.
    With that, I would like to start out, Mr. Chairman, by 
asking a question about service standards in offshore States, 
such as my home State of Hawaii. Postmaster General, will the 
Postal Service be taking geography into account when developing 
these delivery standards? For example, is there potential that 
Hawaii or Alaska could have vastly different delivery standards 
than the mainland?
    Mr. Potter. Well, geography, Senator, is a very important 
element when it comes to the ability to deliver. In Alaska 
today, there are no overnight standards. It is basically a two-
day standard because of the difficulty of getting mail in from 
the bush and then turning it around and getting it back out.
    In terms of service from the Lower 48 to either Hawaii or 
Alaska, in both cases, we attempt to get the mail there within 
3 days. However, we do run into transportation issues. For 
example, in Hawaii, we have over the course of time had a lot 
of trouble getting lift out of the United States, the Lower 48 
out to Hawaii, and we work with everybody to try and figure out 
how we can best get the mail there, and we are very grateful, 
as an example, that UPS has stepped in and been very helpful in 
terms of us moving mail to Hawaii.
    So, yes, geography does count and available transportation 
is an issue, has been an issue, and unfortunately will continue 
to be an issue.
    Senator Akaka. In developing these standards, what do you 
think the Postal Service can do to balance the reality that 
Hawaii and Alaska are geographically far away from the mainland 
and your commitment to consistent universal service?
    Mr. Potter. Well, Senator, we have, again, the same 
standard. Our maximum standard is 3 days to anywhere in the 
United States, and as I said, there are some challenges in 
meeting that standard to Alaska and Hawaii, largely driven by 
transportation out of the Lower 48 as well as transportation 
between the islands and in particular between the cities and 
the bush in Alaska. Our experience has been that we are very 
effective in getting it there in 4 days, and some of the 
mailers have suggested to us that they would prefer that we 
lower our standards than move from 3-day to 4-day so it is more 
predictable to them.
    Right now, for example, in Hawaii, our 3-day service is 
about 77 percent, and so that will be one of the decision 
points that we will look to have the Commission help us with 
regarding what is a reasonable service expectation between the 
mainland and Hawaii and Alaska. But as of today, we hold 
ourselves accountable for a 3-day standard, and as I said, 
given the difficult logistics, we don't always make it.
    Mr. Blair. Senator Akaka.
    Senator Akaka. Mr. Blair.
    Mr. Blair. If I could just follow up on that, in our 
discussions with the mailing community at this point, we 
haven't had anyone urge us to relax any of the service 
standards for Alaska or Hawaii when it comes to First-Class 
Mail or mail transported by air. But when it is transported by 
boat, that does pose significant geographical and time 
problems, as well, and so we will be looking to working with 
the service on establishing or reestablishing what those 
standards are.
    I think this underscores, however, the need for good, 
accurate, timely information on how long it actually takes, 
because if it falls outside the standard for how long does it 
actually take, how far outside the standard is it, and those 
types of transparency and accountability issues are things that 
we hope to shed light on in our consultation and in reviewing 
the maintenance of the service standards in our annual reports, 
as well.
    Mr. Potter. If I could, Senator, one of the factors that 
has to be considered is cost. We can look to create the best 
measurement system in the world and measure Aunt Minnie's mail, 
and we can build the best service by buying planes and flying 
them into Alaska and Hawaii and other places, but at the end of 
the day, we are trying to operate under a rate cap, and so 
there is always this balance between what is an effective 
service and what is, I guess, a pricey service.
    So you have to find a balance there, and the notion of 
finding that happy medium is one that I think is going to take 
us several years to work out. But this notion that somehow 
because we are now going to create standards that snap your 
fingers and we are going to do it and do it without some cost, 
once we start to measure these things, I am not going to be 
surprised that we have problems. We are going to work very hard 
to fix those problems, but I think if we create expectations 
that are too high, we will do what Great Britain did, and what 
Great Britain did was they created very high expectations and 
then for the first 6 or 7 years, all they did was talk about 
how bad the Postal Service was.
    Well, I have to tell you that we are in competitive 
environments for every type of mail that we deliver and the 
worst thing that could happen to us is that we spend more time 
focused on defending ourselves than on fixing what is broken 
and that we hurt our brand by bringing too much negativity to 
the table. So there is a need for balance here. That is not to 
say our goal isn't to provide the best service we possibly can 
to everybody and do it as quickly as we can, but we can't lose 
sight of the fact that we are now operating under a rate cap 
that we didn't have before and it is going to be a learning 
experience in terms of how we do that.
    Senator Akaka. General Potter, at a hearing last week, the 
American Postal Workers Union advanced the idea of mandating 
collective bargaining on contracting out instead of opposing 
outright the contracting out of deliveries. Does the Postal 
Service believe that bargaining over contracting should be on 
the table?
    Mr. Potter. Senator, there is a provision in our contract 
that deals with contracting out. That provision was negotiated 
in, so obviously the people who preceded me believed that there 
was a need to bargain when it came to contracting out. That 
provision calls for the sharing of information between 
management and the unions, and any time we share information is 
an opportunity for the parties to get together and work on 
issues.
    So I personally don't see the need for any legislation. It 
is part of the collective bargaining process. I think I would 
recommend that you encourage the parties to work through the 
process. This is an issue that has come up recently and it has 
come up because there is a group of people whose work has not 
been contracted out in the past while others have, and there is 
a process. There is a collective bargaining process.
    The Postal Service's challenge going forward, to pick and 
choose, to put constraints on the system, I think is 
problematic for us. I think the negotiated settlement that we 
have at the NALC shows that the parties can get together, can 
work through things that will help make the Postal Service more 
productive, that will drive revenue, and that, bottom line, 
will serve the American public.
    I think I would really caution you to allow the collective 
bargaining process to do its job and challenge us as a mailing 
community, challenge us as the Postal Service management, and 
the unions to make this system work. The law was not passed 
because the system is some kind of panacea. There was a change 
in the law because everyone recognized that there were 
challenges going forward. And I would caution you to push back 
on the parties to have the system, have us work together to 
improve the system and let us use the mechanism and our 
employees. The collective bargaining process, the contracts 
that we have with each union, that is the place to work out the 
issues between management and labor.
    Senator Akaka. Thank you very much, Mr. Chairman.
    Senator Carper. Senator Akaka, thank you so much, and I 
hope we have time to come back just a little bit later to the 
contracting out issue, which dominated, as you probably know, 
most of our hearing last week, but we will see if time permits 
that.
    We have been joined by Dr. Coburn fresh from the floor and 
we welcome you here and you are recognized for as much time as 
you wish.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. Thank you, Mr. Chairman. Thanks for having 
this hearing. I ask unanimous consent that my opening statement 
be made a part of the record.
    [The prepared statement of Senator Coburn follows:] ??
    Senator Carper. Without objection.
    Senator Coburn. I apologize to our panelists for not being 
here. I was on the floor. I thank each of you for your service.
    I want to get down to the contracting issues just for a 
second. In your opinion, is the security of the mail in any way 
jeopardized by using contracted services?
    Mr. Potter. No. From a Postal Service standpoint, no, it is 
not. There have been issues raised about the background checks 
that we do on some employees versus what we do with 
contractors. With the exception of drug screening, the 
background checks have been similar for both. We have now 
updated our rules and we have updated our contracts so drug 
screening is a requirement for contractors.
    At a House hearing that I had recently, the Inspector 
General for the United States Postal Service was asked, what is 
the experience with contract employees versus the Postal 
Service employees, and in terms of investigations, it is 
basically the same. And in my opinion, as I said, human beings 
are human beings. There are good and bad amongst us at every 
level with the organization, of the social stratosphere. Just 
because you make a little less money doesn't mean that you are 
more prone to be a thief or a terrorist or any other of the 
wild allegations that are made against somebody who happens to 
make a little less than others. So our experience has been that 
they are the same.
    The Postal Service contracts for some $14 billion in goods 
and services and those people have been reliable over the years 
and done a fabulous job. So, again, I don't see the risk as has 
been described by others.
    Senator Coburn. Mr. Blair, any comments on that?
    Mr. Blair. That is really largely outside the purview of 
the Regulatory Commission, so not at this time.
    Senator Coburn. Mr. Potter, what would happen to you if 
Congress stepped in and shut down your ability to contract out?
    Mr. Potter. Well, as I said earlier, we contract for some 
$14 billion in goods and services. If they shut us down 
completely, we would probably be hampered from moving the mail 
because all the mail that flies is done on contract planes. 
Most of the trucks moving around the country is highway 
contractors. When it comes to delivery, we have some 7,000 
routes that are done by contract employees.
    If you just looked at the cost of moving from contract 
delivery and brought that in-house as part of a law, over the 
course of a 10-year period, the cost would be over $1 billion. 
So there would be a cost associated with the change and, in 
some cases, I don't know how we would have to buy our own fleet 
of planes. There are just some things that have been done for 
years. It would be impractical.
    I think the notion of, and where the Postal Service has 
evolved to looking at the least-cost alternative, whether it is 
outsourcing or use of our employees, is one that has worked and 
one that needs to continue to evolve.
    Senator Coburn. You all have contracted for a long time, 
correct?
    Mr. Potter. Since 1785, we have--at the behest of 
Congress----
    Senator Coburn. So why all of a sudden is this a big issue 
now?
    Mr. Potter. It is a big issue because, Senator, there is a 
group of employees that had not been touched in the past and 
that was city delivery employees, and for the first time, the 
Postal Service began to look at areas that were traditionally 
served by city carriers and looked at a contracting alternative 
for them. That is, I think, what created the big stir in the 
recent months.
    Senator Coburn. Is it true that the average difference 
between a contract employee and a Postal Service employee is 
$17 an hour?
    Mr. Potter. On an hourly basis, yes. And again, it is--one 
of the things we look at is what is the cost per delivery, and 
so--because I was asked in the House, well, what is the 
difference, and I said it depends, and it does depend on the 
situation. So if you look at our average cost for city 
delivery, it is $215 delivered to a city delivery address. It 
is $164 to deliver to a rural, if we have our rural carriers 
doing it. And contract delivery is $106. So there is quite a 
bit of difference in terms of cost when it comes to what type 
of delivery is chosen.
    Senator Coburn. Senator Akaka was talking about standards. 
It is pretty hard for me to figure out why we haven't had 
measured performance standards against your standard in the 
past. Talk to me about that and explain it because I don't know 
any other business that is operating out there that sets a 
standard and then refuses to measure itself against the 
standard. Explain that to me.
    Mr. Potter. Well, we have standards for Express Mail. We 
have a network that says if you deposit it, we are going to get 
it there overnight. We measure that. We offer that measurement 
as part of our guarantee.
    Priority Mail, we have standards and we have measurements. 
In the past, we have used outside concerns to measure that. But 
since that time, we have moved to using delivery confirmation 
because people put codes on their mail and then we tell them, 
we report back to them when it is delivered. It made no sense 
to use an outside party to do a sampling system when we had 
people actually putting codes on mail and so we use that now as 
our measurement system.
    When it came to First-Class Mail, which is our premium 
product, that class of mail is measured. We use IBM. They do a 
sampling system where they deposit mail in collection boxes and 
they have reporters who come back and tell us when that mail is 
delivered. So we have standards there and we have measurement 
systems.
    For other classes of mail, to be quite honest with you, in 
my opinion, the reason we haven't done it is because those 
other classes of mail initially were to take advantage of 
capacities that existed in our mailstream. So advertising 
mail--initially, all we had was First-Class Mail. In the 1970s, 
we started to put advertising mail in. It was a deferred 
product. There was no service guarantee. There were service 
expectations. And so because of that, over time, we never put 
in measurement systems. Now, our customers have put in systems 
where they measure when it is deposited and when it comes back 
to them, and we have put in a confirm system that allows people 
to track--put a code on their mail and track the mail through 
our system as a service measure.
    But it is largely because of the way other classes of mail 
came into being that they weren't measured, and so now, today, 
Standard Mail or advertising mail is our largest volume of mail 
and the Postal Service is not opposed, as I said earlier, to 
the introduction of service standards. We are by law. We are 
intending to have a three-digit matrix for depositing any of 
these classes of mail anywhere and there will be a service 
standard and we intend to move to a measurement system, and our 
measurement system ultimately will track every piece of mail 
that has the potential to do that and aggregate that data. That 
is where we are headed.
    Senator Coburn. Is that going to be transparent? In other 
words, are you all going to publish that data?
    Mr. Potter. We are going to publish that data. It is going 
to be so transparent, again, that every mailer can look at 
their own experience and they can use that to work with 
management to fix service problems that they have. Again, but 
that is subject to review by the Commission and agreement by 
the Commission.
    Senator Coburn. When I say transparent, website searchable 
and accessible?
    Mr. Blair. Exactly, Dr. Coburn. That is exactly what we are 
looking for, and I think it highlights the new environment in 
which the Postal Service will be operating in. When you apply a 
rate cap as a way of adjusting rates, there may be a temptation 
on the part of the regulated entity to either cut service or 
shift costs to customers in order to operate within that cap. 
That is why you want to strengthen the regulator, which the 
reform legislation did. Analyzing these costs and numbers are 
part of the reporting requirements. It will be part of our 
annual report. It will be part of the complaint process.
    I think it is important to understand that Congress chose a 
CPI rate cap that over the last 37 years, has pretty much 
tracked or fallen below the CPI the rate changes a little bit. 
So the index that Congress has chosen was very carefully 
chosen. There were other indexes that had been proposed in past 
reform bills that were much more stringent. A number of times 
when you go to a price cap regimen like there is a productivity 
factor that is then taken away from that index, as well. There 
was no productivity factor reduction in the legislation. So CPI 
really tracks the Postal Service's costs over the last 3 
decades.
    That said, the Commission is going to be very vigilant in 
reporting on the service standards and that is why our 
consultations are so important. I think what the Postmaster 
General said today is reflective of the consultation so far. 
The idea that it is transparent, the granularity, I think, is 
most important to allow mailers an idea of the level of 
services that they are receiving.
    Cost is important, but I also think it is important--and it 
is a balancing factor and I think that there are ways that we 
can do it that the service standards and measures can be 
established in such a way that mailers have that transparency, 
and that is something the Commission is committed to.
    Senator Coburn. Thank you very much. Thank you, Mr. 
Chairman. I have a Judiciary markup I have to go to.
    Senator Carper. Dr. Coburn, we are glad you are here and 
thank you for your participation today and in a lot of other 
areas that we are working on.
    I have more questions to ask, but I am not going to delay 
you here. What I would like to do is submit those for the 
record. Senator Akaka, is that all right with you, because we 
have another panel we want to hear from and Dr. Coburn tells me 
we are still probably going to vote before 12 o'clock.
    I want to thank you both for being here and thank you for 
your testimony, thank you for straightforward answers. We look 
forward to following up with some questions and would 
appreciate your timely response to those. Thank you very much.
    Mr. Blair. Thank you, Mr. Chairman.
    Senator Carper. Thank you.
    And with that, I am going to invite our second panel of 
witnesses to come forward, and as they come forward, I am going 
to go ahead and begin introductions of them.
    Jody Berenblatt is the Senior Vice President of Postal 
Policy at the Bank of America. Ms. Berenblatt has worked on 
Postal policy issues for more than 25 years at the Bank of 
America and elsewhere and serves in a number of leadership 
positions in the mailing industry.
    Joining her is Anthony Conway. He is the Executive Director 
of the Alliance of Nonprofit Mailers. Before joining the 
Alliance, he served for 34 years at the Postal Service. That is 
quite a record.
    Bob McLean is the Executive Director of the Mailers 
Council. He has served in that position for the past decade. 
Prior to joining the Council, he worked for the National 
Association of Postal Supervisors at the Postal Service. 
Welcome.
    And James West joins us from Williams-Sonoma, where he 
works as Director for Postal and Government Affairs. He began 
with Williams-Sonoma in 1975 as a mail order manager and has 
been with the company working on Postal issues ever since. My 
thanks to the Direct Marketing Association for recommending him 
and his expertise to us for this hearing today.
    To our panelists, it is good to see you all. Thanks for 
coming, for preparing for this hearing, and we will recognize 
you all for about 5 minutes. I will ask you to keep your 
comments pretty close to that so that we can have a chance to 
ask you some questions and make the vote that is scheduled here 
for about 30 or 40 minutes from now.
    Jody Berenblatt, welcome. We are happy that you have come. 
Thank you. You are recognized at this time. For each of our 
witnesses, your entire statement will be part of the record and 
you are welcome to summarize as you see fit. Thank you.

   TESTIMONY OF JODY BERENBLATT,\1\ SENIOR VICE PRESIDENT OF 
                POSTAL STRATEGY, BANK OF AMERICA

    Ms. Berenblatt. Thank you very much. I appreciate the 
opportunity to provide comments at today's hearing. I would 
also like to thank Senators Carper and Collins, along with the 
other Members and Subcommittee staff for their leadership in 
shepherding the enactment of the Postal Accountability and 
Enhancement Act late last year. Properly implemented, it offers 
the opportunity for sounder finances for the Postal Service, a 
more streamlined regulatory system, and a more reliable and 
economical service.
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    \1\ The prepared statement of Ms. Berenblatt with attachments 
appears in the Appendix on page 50.
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    Bank of America is headquartered in Charlotte, North 
Carolina. We provide a full range of financial products and 
services to individual customers, small and middle-market 
businesses, local and State governments, and large 
corporations. We are the 12th largest firm on the Fortune 500 
list for 2006. We are also the No. 1 overall Small Business 
Administration lender and the No. 1 SBA lender to minority-
owned small businesses.
    Bank of America uses the mail for operations and marketing 
to both our existing and prospective customers. In 2006, we 
mailed roughly 1.4 billion pieces of First-Class Mail and 1.9 
billion pieces of Standard Mail, 3.3 billion pieces of mail is 
a lot of mail. The mail delivery system is very important to 
us. Also, financial institutions are subject to regulatory 
constraints on the timing of our customer communications, so we 
must plan our production and entry schedules to avoid both 
early and late delivery. Reliable and timely service is equally 
important to our customers.
    We support the new law's objective of achieving service 
performance that is both cost effective and consistent with 
best business practices. Current service performance is 
inconsistent nationally, and, therefore, improved service 
standards and measurements to enhance performance is very 
important.
    For example, while current service standards require all 
domestic First-Class Mail to be delivered in 3 days or less, it 
often is not. Standard Mail, likewise, requires improvements to 
standards and measurements to enhance U.S. Postal Service 
performance. I include more on this topic in my written 
testimony.
    The Postal Service's existing service standards for First-
Class Mail and Standard Mail, if consistently met, are an 
excellent starting point. Future changes to the standards need 
to balance between service quality and cost, and incorporate 
mailer needs. Any change in the service standards should be 
publicly announced well before the effective date of the change 
to allow mailers adequate time to make necessary adjustments. 
Timely and consistent communication facilitates a good 
partnership between the Postal Service and its customers.
    Major changes in service quality need to be linked to the 
index-based rate cap established by Congress. The cap will be 
meaningless if the Postal Service is permitted to satisfy it by 
reducing the quality of service offered. In fact, Postcomm, the 
U.K. regulator for Royal Mail, does adjust the price cap to 
reflect service degradation.
    Developing an effective system for performance measurement 
is as important as the standards. What is measured is attended 
to. Credible public data on service performance provides the 
necessary information for Postal Service managers to prevent 
and eliminate service problems. This is a more effective 
incentive for change than fines or penalties.
    To accomplish these purposes, however, data on actual 
performance must be detailed, geographically disaggregated, 
accurate, reliable, and current. The Postal Service should 
provide web-based access to performance data at a high level of 
granularity. Allowing mailers to access raw data is much less 
costly than requiring the Postal Service to develop and 
distribute detailed measurement data reports. More importantly, 
it facilitates communication and discussion, which leads to 
improved performance.
    Now I will talk a little bit about the special concerns of 
the remittance industry. Detailed performance data is 
especially important for businesses that receive remittance 
mail. Remittance mail contains checks, either big or small. 
Notwithstanding electronic bill payment, remittance mail 
totaled over nine billion pieces of mail in fiscal year 2006 
for the Postal Service and it represents over 20 percent of 
total First-Class single-piece mail volume. On an average day, 
it accounts for $20 billion of commerce in transit.
    Bill payers often believe the payment processor is 
responsible for any delays in payment posting that cause late 
fees. Regardless of whether the payment processor caused the 
delay or not, such delay requires us to accommodate the bill 
payers and make customer satisfaction adjustments to their 
accounts.
    The remittance industry needs a reporting system that 
provides transparency about the extent of lateness. We 
recommend a system that not only discloses the average days to 
deliver, but also shows the cumulative percentage of delivery 
by post-entry day.
    Next, I would alert you to a promising related development. 
On February 7, 2007, Bank of America and the Postal Service 
jointly requested approval from the Postal Regulatory 
Commission for a proposed Negotiated Service Agreement. This is 
precedent setting. Among other things, it will commit Bank of 
America to using Intelligent Mail bar codes on all 3.3 billion 
pieces of letter mail. Intelligent Mail bar codes provides 
additional security over older generation PostNet bar codes. It 
improves operational efficiencies for the Postal Service, and 
Bank of America, and improves customer service. We look forward 
to jump starting the large-scale use of Intelligent Mail bar 
codes.
    Senator Carper. Alright. As usual, you are right on the 
money. Thank you very much.
    Mr. Conway, you are recognized. Again, your entire 
statement will be made part of the record.

TESTIMONY OF ANTHONY W. CONWAY,\1\ EXECUTIVE DIRECTOR, ALLIANCE 
                      OF NONPROFIT MAILERS

    Mr. Conway. Thank you, Mr. Chairman. Before I begin, I 
would like to acknowledge three members of the Board of 
Directors for the Alliance who are here with me today, Steve 
Johnsen, Laura Grafeld, and Steve Smith.
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    \1\ The prepared statement of Mr. Conway appears in the Appendix on 
page 103.
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    Senator Carper. Steve Johnson is also the Administrator for 
the Environmental Protection Agency. I am not sure how he 
balances all of his obligations, but that is impressive.
    Mr. Conway. He is quite busy.
    Senator Carper. He must be. You must have cloned him, too. 
[Laughter.]
    You are recognized at this time. Thank you.
    Mr. Conway. Thank you, sir. Thank you for inviting me here 
today. The Alliance is a coalition of nonprofit organizations 
that is dedicated to the preservation of affordable postage 
rates and dependable mail service. Established in 1980, the 
Alliance is comprised of over 300 nonprofit organizations and 
commercial service providers that have an interest in nonprofit 
mailing issues. Our members include many of the Nation's best 
known charitable, religious, educational, scientific, and other 
nonprofit organizations.
    Consistent, predictable, and measurable delivery of mail is 
critical to the mission of nonprofit organizations. Like most 
businesses that use Standard Mail to solicit actions from the 
public, nonprofit mailers have learned that the response rate 
to a mail campaign depends on delivery within a predictable 
window of time. This is particularly true for campaigns that 
are coordinated with follow-up campaigns or seasonal events. 
The same is true of nonprofit publications. The timeliness and 
predictability of mail delivery not only affects the timeliness 
of our members' publications for the readers, but is also 
critical to the effectiveness of advertisers' campaigns.
    The Alliance recently surveyed our members about service 
issues and received reports of unevenness in service. Here are 
some of the comments from some of our members in the nonprofit 
community. We offer them not in a spirit of criticism, but to 
illustrate the importance of reliable and predictable service 
to mailers.
    Boston University reports that letter-shaped nonprofit 
Standard Mail can take 5 to 20 days for delivery.
    Consumers Union reports they occasionally must notify 
Postal officials about a mail problem. Consumers Union 
generally finds the Postal staff to be responsive and 
attentive, but resolutions or explanations are often elusive.
    Easter Seals, headquartered in Chicago, Illinois, reports 
that service problems in Chicago result in significant delivery 
delays for their February and March mailings of the 
organization's signature Easter Seals. With the delivery 
delays, response rates and revenues were down almost 30 percent 
this year.
    The Elks Lodge Number 46, Milwaukee, Wisconsin--the Lodge 
mails about 500 copies of its monthly newsletter. The Lodge 
formerly sent the newsletter by nonprofit Standard Mail, but as 
delivery performances deteriorated in recent years, the Lodge 
was forced to switch to First-Class Mail in order to receive 
acceptable service performance.
    Marian Helpers Center, Stockbridge, Massachusetts, reports 
that despite the time sensitivity of its direct mail campaigns, 
the organization cannot project an in-home delivery date. The 
seed pieces from a given mailing can arrive up to 2 weeks 
apart, even to residences in the same town.
    The Marist Brothers, Chicago, Illinois--the organization 
reports that it experienced delivery times of more than 6 weeks 
for standard nonprofit mail. In other instances, delivery can 
take only 6 days.
    Pepperdine University of Malibu, California, reports that 
delivery times for mailings of nonprofit Standard Mail to 
addresses in the L.A. area have ranged from 1 day to a full 
month. The unpredictability of nonprofit Standard Mail delivery 
times has caused many departments to use First-Class Mail more 
often.
    Word and Way is a biweekly newspaper published by the 
Missouri Baptist Convention, entered in Columbia, Missouri, on 
Tuesday and Wednesday in order to achieve delivery by Thursday. 
Subscribers often report, however, they don't receive the paper 
until the following week. With individual Baptist churches 
printing specific information about upcoming weekend events on 
the back page of Word and Way, delayed delivery results in 
subscribers missing events.
    These illustrations of service problems at multiple 
locations throughout the United States underscore the 
importance of establishing a more current and granular measure 
of actual service performance than is now available to mailers. 
Data should be broken down by three-digit ZIP code pairs or at 
least the ones carrying sizeable amounts of volume. Frequent 
reporting of service performance data by geographic region will 
not only help nonprofits plan their mailings, but will also 
allow them to work with the Postal Service to resolve service 
performance issues.
    Thanks again for inviting me here today and I will be 
pleased to answer any of your questions.
    Senator Carper. Thank you for sharing those vignettes with 
us today, Mr. Conway.
    Mr. Conway. Thanks.
    Senator Carper. Mr. McLean, you are recognized. Welcome. 
Thank you for joining us.

 TESTIMONY OF ROBERT E. McLEAN,\1\ EXECUTIVE DIRECTOR, MAILERS 
                            COUNCIL

    Mr. McLean. Good morning, Mr. Chairman. The Mailers Council 
is the largest group of mailers and mailing associations in the 
Nation. We represent for-profit and nonprofit mailers, large 
and small, that use the Postal Service to deliver 
correspondence, publications, parcels, greeting cards, 
advertising, and payments. Collectively, the Council accounts 
for approximately 70 percent of the Nation's mail volume.
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    \1\ The prepared statement of Mr. McLean appears in the Appendix on 
page 110.
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    The Mailers Council believes that the Postal Service can be 
operated more efficiently, supports efforts aimed at containing 
Postal costs, and has the ultimate objective of lower Postal 
rates without compromising service. We welcome this opportunity 
to testify on the creation of delivery service standards and 
performance measurement systems. These were issues of singular 
importance to mailers who lobbied for their inclusion in the 
Postal Accountability and Enhancement Act, the Postal reform 
bill signed into law last December with a lot of help from you, 
Mr. Chairman. Whatever differences mailers may have had on the 
other sections of this bill, our members were and are unified 
in their support for standards and a meaningful performance 
measurement system.
    There are several reasons why we are so interested in new 
delivery standards. For many mail classes, the Postal Service 
has delivery guidelines, not standards, and its measurement 
systems fail to measure the types of mail that comprises most 
of the volume it delivers.
    Although Title 39 directs the Postal Service to operate 
like a business, in this area, the Postal Service is doing 
quite the opposite. Private sector companies would not conceive 
of functioning without standards for one fundamental reason. 
Setting standards and measuring the organization's success in 
achieving them makes the organization better. Only by measuring 
performance can an organization identify where problems exist 
and then correct them and reward managers for their 
improvements.
    We believe that creating new delivery service standards and 
performance measurement systems can be done in a way that will 
satisfy mailers for four reasons.
    First, because of the improvements in technology found at 
every mail processing facility, much of the data needed to 
determine delivery performance already exists.
    Second, data collection for delivery measurement and 
classes that affect the largest mailers can be developed 
without large new expenses.
    Third, any additional costs would be an insignificant 
portion of the Postal budget.
    And fourth, mailers will dedicate their time to working 
with the Postal Service to design these processes because they 
will help management improve its efficiency and hold down 
postage rates.
    As for the features we expect to see in new delivery 
standards, they must be realistic and reliable. The Postal 
Service must avoid lowering existing service standards. We also 
need new and more complete reporting of delivery performance. 
Mailers are interested in the speed and consistency of 
delivery, so we need a system that will tell us if the Postal 
Service is achieving both goals. New delivery performance 
reports must be timely, and as my two colleagues have already 
mentioned, detailed by geographic location.
    The Mailers Council opposes the concept of fining the 
Postal Service should it fail to meet delivery standards. 
Because the Postal Service receives 100 percent of its revenue 
from mailers, the imposition of a fine would actually be a fine 
on mailers.
    The Postal Service's Board of Governors must encourage 
creation of new executive compensation systems that reflect 
management's ability to meet these standards. These systems 
must offer greater compensation where consistent, on-time 
delivery is met.
    You also asked us to comment on closing and consolidating 
Postal facilities. In its efforts to improve delivery 
performance and in response to ongoing changes in mail volume 
and compensation, the Postal Service will need to consider 
consolidating some facilities. We will support the Postal 
Service in realigning its mail processing and delivery network. 
We recognize that closing a Postal facility is difficult 
because it affects the lives of many individuals. However, 
right-sizing the Postal network is an essential step to keeping 
down the cost of postage. Therefore, we hope Members of 
Congress, including Members of this Subcommittee, will support 
such decisions that are essential to improving Postal 
efficiency.
    Where consolidations have been handled successfully, Postal 
managers communicated with mailers, employees, and the public 
served early and often. They also allowed sufficient time to 
plan related delivery and transportation changes. Where such 
consolidations were handled poorly, Postal managers moved too 
quickly and failed to sufficiently discuss the implications 
with its customers and employees.
    The Mailers Council members have spoken with senior Postal 
officials, including Postmaster General Jack Potter, about how 
network realignment will be handled in the future. As a result, 
we are confident that mailers will be brought into the process 
earlier and that field managers will receive the timing 
resources needed to manage such difficult yet necessary 
changes, and it is our hope that we will be meeting with Mr. 
Potter between now and December on this issue.
    Mr. Chairman, thank you again for this opportunity to 
present our views on these important issues. I will gladly 
answer any questions you may have.
    Senator Carper. Mr. McLean, thank you very much.
    With that, I am going to turn to Mr. West and ask him for 
his statement at this time. Thank you.

TESTIMONY OF JAMES WEST,\1\ DIRECTOR OF POSTAL AND LEGISLATIVE 
                 AFFAIRS, WILLIAMS-SONOMA, INC.

    Mr. West. Thank you, Mr. Chairman, and thank you for the 
opportunity to present testimony on the implementation of the 
new regulations as required by the Postal Accountability and 
Enhancement Act. We highly commend the Subcommittee on this 
continuing attention and interest in this legislation and the 
Postal Service in general. In addition to this hearing, I have 
submitted written testimony that I request be entered into the 
official record.
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    \1\ The prepared statement of Mr. West appears in the Appendix on 
page 114.
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    My company, Williams-Sonoma, is a nationwide retailer of 
home furnishings and was founded in 1956. When we first started 
mailing catalogs 35 years ago, we were doing about $4 million 
in annual sales and had just one store in San Francisco. Since 
then, we have grown to annual sales of approximately $4 billion 
and become an internationally-known brand with 585 stores in 
the United States and Canada and employing approximately 45,000 
associates.
    We have achieved this growth in large part by using 
catalogs as our exclusive advertising vehicle, and our 
strategic partnership with the Postal Service is an essential 
part of the execution of our marketing strategy. This year, we 
will mail approximately 390 million catalogs, making us one of 
the largest catalog mailers in the United States. Our annual 
postage expense is approximately $140 million and the Postal 
Service is our largest single vendor.
    Our growth and continued success depends largely on the 
continued ability of the Postal Service to provide effective 
and cost-efficient mail delivery. Essential to making this 
happen, we believe that the Postal Service must focus on three 
key areas: Customer service, management of its operating 
infrastructure, and service standards and measurement.
    First, the Postal Service must become a customer-centric 
organization by being responsive to its customers' changing 
needs. Our own response to our customers' needs, as well as 
maintaining the highest level of customer service, has been the 
key reason for the success of Williams-Sonoma. We listen and 
make every effort to understand and anticipate what our 
customers will need next. The Postal Service now has the tools 
to do the same and must begin to put its customers' changing 
needs ahead of its own.
    Second, the requirements that are placed on the Postal 
Service by both commercial and private mailers are changing 
faster than ever before. As such, the Postal Service must be 
allowed greater flexibility to change and modify its own 
operating network and services. Without the ability to manage 
its infrastructure free of the influence of outside bodies, it 
cannot be expected to fully control the costs which have a 
direct impact on its ability to continue to offer efficient and 
cost-effective services and products.
    Third, in order for any business to know how well it is 
doing, it must have effective measurements by which to judge 
its performance, and we believe that measurement of performance 
provides a direction for improvement. The service standards 
that the Postal Service are now required to put in place must 
be fair, accurate, and achievable. The measurement of 
performance against these standards must be timely and 
actionable to the extent that it can consistently maintain and 
improve the service performance that is realized by its 
customers. The performance evaluation of this process should 
not be focused on penalty, but rather be designed to encourage 
and reward improvement.
    The Postal Service has a long and admirable history. It has 
grown to become the largest postal service in the world. Both 
private and commercial mailers have contributed and benefited 
from this growth. But as its customers' needs are changing, so 
must the culture and the operating focus of the Postal Service. 
The greatest promise of PAEA is it encourages the Postal 
Service to evolve into a truly customer-oriented organization. 
It raises the standards and provides the tools to meet this 
challenge. We hope that the Postal Service fully realizes the 
opportunity it is presented.
    Thank you, Mr. Chairman. I appreciate the opportunity to be 
here and I will look forward to any questions.
    Senator Carper. Mr. West, thank you, and my special thanks 
to each of the witnesses for coming in within their 5-minute 
time line.
    Ms. Berenblatt, you mentioned in your testimony that the 
Bank of America is currently working with the Postal Service on 
something that we call a Negotiated Service Agreement, and what 
I would ask you to do is just take a minute, if you will, and 
discuss how an agreement like the one you all negotiated can 
benefit your company, your bank, and others.
    Ms. Berenblatt. The negotiated deal that we have is the 
first proposed for the entire basis of the deal to be ``cost-
based,'' as opposed to previous negotiated service agreements 
that were entirely based on volume and then some operational 
requirements. This is very unique partly because of the ``cost-
based'' approach and then partly because of the Intelligent 
Mail roll-out. So in addition to the Intelligent Mail roll-out, 
we will be using basically every tool the Postal Service has to 
improve its network in the future. There are several other 
operational requirements.
    This will benefit the Postal Service, Bank of America, and 
our customers because we will now have visibility as to the 
status of the mail piece in the mail stream at all times. As 
General Potter has acknowledged, we expect to see some things 
that need to be attended to and we intend to be good partners 
in making improvements with the Postal Service.
    For the balance of the community, it offers the opportunity 
and the possibility that in the future the Postal Service will 
operate similar to private businesses in crafting appropriate 
proposals for each individual customer and the Postal Service, 
without harming the balance of the community. Our learnings, 
the test bed from this Intelligent Mail experiment, will 
benefit all of the other mailers and the users of the system. 
By us going first and understanding where the problems are and 
how we can resolve them will clear the path for the balance of 
the system.
    Senator Carper. You said by going First-Class, is that what 
you said?
    Ms. Berenblatt. It is not only helpful by going First-
Class, but also by having 3.3 billion pieces of mail and 
enabling an ongoing dialogue between the two very large 
organizations on very complex aspects of those various 
mailings. So we will be testing their systems not only through 
the Intelligent Mail piece, but also in terms of the dialogue.
    Senator Carper. Will any of those mailings emanate from 
Wilmington, Delaware?
    Ms. Berenblatt. Yes. A significant amount of volume will be 
emanating from Delaware. We have both production facilities for 
First-Class Mail, and our acquisition mail personnel are 
headquartered in Wilmington. They also use outsource providers 
throughout the United States.
    Senator Carper. Every State has a slogan. In Delaware, our 
State slogan for the last several years, at least, has been 
``It's Good Being First,'' and in one more way, it looks like 
we may be the first. We will see. There are some things you 
don't want to be first in.
    Ms. Berenblatt. This will be a good one.
    Senator Carper. But do you think there is a need to do 
something to make these negotiated agreements a little easier 
to reach?
    Ms. Berenblatt. Most certainly. The process involved with 
the previous negotiated service agreements were lengthy and 
costly, and there was a significant amount of uncertainty in 
the process. Our experience has been perhaps less lengthy than 
others, but still the same amount of uncertainty and a 
significant amount of cost. We are hoping that under the new 
law, these deals would be able to be made between the customer 
and the Postal Service without any interference from parties 
that are not stakeholders in that deal.
    Senator Carper. Alright. Thank you.
    Several of you said a fair amount in your testimony about 
what you would like for the Postal Service to do with the 
service standards that they are developing. What is it that you 
would like to see them not do?
    Mr. West. Mr. Chairman, if I may, I want to be sure that 
they do not establish standards that are so lenient that they 
can consistently exceed the delivery goal. Early delivery has 
as much negative impact on my company's operations as does late 
delivery. We need to have accurate and fair, but very accurate 
standards that give us accurate guidance in order to enter our 
mail into the Postal stream to be delivered to our customers as 
close as possible to the day that we need them to receive it.
    Senator Carper. Alright. Thank you.
    Mr. McLean. We also share your beliefs on that, but we also 
stress that we do not want to see the Postal Service use this 
as an opportunity to diminish existing service standards. We 
also don't want to see broad national averages that would fail 
to reveal problems in delivery that are very specific to an 
individual, Postal area or Postal district.
    One of the problems that we have today is isolating service 
difficulties to specific Postal facilities. Our reports to the 
Postal Service are sometimes treated as anecdotal, the 
experience of an individual mailer. The reports that would come 
from new delivery standards, we hope would help identify where 
there are broad systemic delivery problems that cut across 
every class of mail coming from a particular geographic area.
    Senator Carper. Mr. Conway, same question, if you would.
    Mr. Conway. Yes, sir. Our perspective is that the standards 
themselves are less important than the measurement systems.
    Senator Carper. Say that again. The standards themselves 
are less important than----
    Mr. Conway. The standards themselves are less important 
than the establishment of measurement systems.
    Senator Carper. OK.
    Mr. Conway. The measurement systems will give the picture, 
hopefully, of what reality is and that will allow our members 
to plan around that reality, and that will also help, I think, 
the focus to improve the service within that particular class 
of mail.
    In terms of what we don't want to happen, or perhaps what 
we don't want the Postal Service to do, is to hold off 
establishing measurement systems until the Intelligent Mail bar 
code system is fully operational throughout all classes of 
mail.
    Senator Carper. Alright. Thank you.
    Ms. Berenblatt, did you want to comment on this, as well? 
Again, the question was, what is it you would like to see the 
Postal Service not do in this regard.
    Ms. Berenblatt. Frist, I wouldn't want them to sacrifice 
service for cost, as we have heard discussed earlier.
    And second, I would like them to not gear themselves to 
actually meet the standards or meet the law but work to exceed 
and improve at all times.
    Senator Carper. Alright. Thank you. And a related follow-up 
to this is what mistakes do you think are being made--and some 
of you actually spoke to this a little bit, but I will ask it 
nonetheless--what mistakes do you think are being made or could 
be made that would make the service standards less effective or 
fail at making Postal products more relevant and valuable. Some 
of you have spoken to this already, but does anybody want to 
take a shot at that? Mr. Conway.
    Mr. Conway. Yes, sir. I did mention some mistakes that have 
occurred amongst our members, and again, I think it is owing to 
a lot of factors, not the least of which is, as General Potter 
said earlier, First-Class Mail and the Preferred Mail products 
in the Postal system are the ones that have been focused on for 
years. The advent of Standard Mail, as Mr. Potter said, 
occurred in the early 1970s as a filler product. So 
historically, there has not been the focus on that type of mail 
and other types of mail that are called non-preferred mail in 
the Postal system.
    So I think it is a rebalancing of focus. Standard Mail now 
represents the largest mail volume percentage in the Postal 
system. It is the biggest growth product in the Postal system. 
I think it is something that deserves greater focus, as well as 
other products, too.
    Senator Carper. Alright. Thank you.
    What problem does the fact that the Postal Service does not 
have a performance measurement system in place for most of its 
products cause for your businesses or for your members' 
operations? And also, how can these problems best be addressed? 
Mr. McLean.
    Mr. McLean. Well, as Mr. West said, knowing the timeliness 
of delivery is as important as the speed of delivery in some 
situations. Being too soon is oftentimes, as he said, as 
difficult as being too late.
    Senator Carper. I think the same about trains departing----
    Mr. McLean. Exactly.
    Senator Carper [continuing]. On their schedule. If I get 
there for a 7:15 train and they left a minute early, it doesn't 
do me any good.
    Mr. McLean. So I think that one of the things that we are 
hoping for is to have a better understanding so that we can 
plan our mailings better. We can work cooperatively with the 
Postal Service if we have a genuine and accurate understanding 
of the delivery standards that are involved. If we know that it 
is going to take 3 days, we will plan accordingly. But without 
the consistency of delivery that we are expecting standards to 
provide, oftentimes, our mail campaigns are unsuccessful, or 
you have periodicals that are typically delivered on a Tuesday 
showing up on a Thursday, which will generate hundreds of phone 
calls to a magazine from customers who want to know why their 
magazine is not arriving consistently and who shortly 
thereafter will wind up not subscribing to that publication.
    So retaining customers is essential to having this kind of 
information so that we can plan accordingly to ensure that mail 
is delivered when customers not only want the mail, but expect 
the mail.
    Mr. West. Mr. Chairman----
    Senator Carper. Mr. West.
    Mr. West [continuing]. I would like to add that what we 
would really like to see is, and I mentioned timely reporting 
in my testimony. What I meant is information that we can react 
to in time to affect the mailing, and this goes to the 
granularity of the performance measurement. If we know where 
the Postal system is experiencing a backup or issues with 
delivery, we can react if we have enough time to do so. If we 
need an additional day in the Postal system, we can plan for 
that if we know in a timely manner.
    Currently, that is, for the most part, unavailable. If we 
see issues in the Southeast, for example, we know the issue is 
there, but the post office comes back to us saying, well, 
exactly where is the issue? We will go out and try to see what 
we can do about it. But that does not allow us time to react in 
a timely manner and satisfy our customers' expectations.
    Senator Carper. Alright. Any thoughts, Mr. Conway?
    Mr. Conway. Yes, sir. Well, predictability and a good 
measurement system are key in the nonprofit mailing stream, 
both for Standard Mail, nonprofit Standard Mail, as well as 
periodicals. Whether it's as I mentioned, Word and Way, church 
bulletins that are obviously related to weekend events, or 
fundraising campaigns by nonprofit organizations, whether they 
be a small local nonprofit organization or a big nationwide 
organization, a measurement system will give those mailers an 
understanding of what to expect and what the predictability is 
so they can plan around that. Now, they don't know what to 
expect. It is a wide spectrum of unpredictability. By having a 
system and having expectations and knowing what the reality is, 
you can plan around that. So it is going to be extremely 
helpful to have this system in place.
    Senator Carper. Ms. Berenblatt.
    Mr. Blair. The absence of a system has often previously 
been referred to as the black box, where you give the Postal 
Service a piece of mail and you just hope it comes out and gets 
delivered ultimately.
    In the case of Bank of America, as in all of the other 
participants here today, consistency and reliability is key for 
us to be able to maintain a dialogue with our customers and to 
meet their expectations and exceed their expectations where it 
is possible to do so. The Postal Service can't actually 
properly manage its own system in the absence of a measurement 
system, and most importantly, the Postal Service and its 
customers, such as Bank of America, can't engage in dialogue 
for improvement without a system. So we very much look forward 
to doing that with the Postal Service in developing our 
partnership for the benefit of our mutual customers.
    Senator Carper. Well said, a good note on which, I think, 
to close.
    I am reminded of something that Vince Lombardi, I believe 
it was Vince Lombardi used to say, legendary football coach for 
the Green Bay Packers. He used to say, unless you are keeping 
score, you are just practicing. So what we need to do is not 
just practice, but to keep score. And I have always found in my 
own life that the organizations I have been a part of, the 
things that we measure are the things that we do best, and that 
is probably the case in delivering mail.
    We are about to start our vote on the floor and I am going 
to ask each of our witnesses to take maybe no more than 60 
seconds for a closing thought that you might have to share with 
me, kind of reflecting back on this panel's presentations and 
some of the earlier comments from our first panel. But just 
take maybe a minute, no more than a minute apiece, if you have 
any closing thoughts. If you don't have anything further to 
add, that is quite alright, as well.
    Mr. West, I will let you have the first shot, if you would 
like.
    Mr. West. Thank you, Mr. Chairman. I would like to make a 
closing comment sort of in line with what Ms. Berenblatt said. 
The NSA process, which we are also examining right now, is a 
long and kind of arduous, expensive, and unpredictable process. 
Using that as an example, I would say that the post office has 
got to evolve into a much more customer-centric organization, 
and again to refer to the NSA, it is kind of backwards to the 
way my business and the private sector is used to doing 
business. The vendor comes to us with a proposal as opposed to 
us going to them. They are going to have to learn to start 
reaching out to their customers and be proactive in selling 
their--in looking to their needs and designing a program that 
is going to meet their requirements.
    Senator Carper. Thank you. Mr. McLean, any closing comment?
    Mr. McLean. Thank you, Mr. Chairman. There is a comment 
concerning a topic that both Postmaster General Potter and 
Chairman Blair both addressed, and that is the new rate setting 
process. Currently, the Postal Service's Board of Governors is 
contemplating whether to implement the next increase in postage 
rates under what we now affectionately call the old rules, the 
old lengthy, litigious rules, or set rates----
    Senator Carper. Not much affection.
    Mr. McLean. Yes, sir--set rates under the new system. It is 
obviously our preference that the next increase would be set 
under this new system. Mr. Blair has indicated that those rules 
will be published shortly and in place by October, thereby 
giving the Postal Service, we believe, adequate impetus to 
avoid filing a rate case and instead have a rate increase.
    We also hope that the Postal Service will, in its new 
process, allow mailers a published implementation period of at 
least 90 days between the time that a rate increase is 
announced and implemented so that mailers have as much time as 
they need, and as Postal managers need, to implement new rates.
    Senator Carper. Good. Thank you. Mr. Conway.
    Mr. Conway. Yes, sir. Nonprofits in this country are highly 
dependent on the U.S. Mail, have been for years and, I think, 
will be for a long time into the future. It is the lifeblood of 
the nonprofit community, both in terms of fundraising, reaching 
out to its supporters, its members, and as a communication 
tool. The advent of the Internet is impacting mail use in the 
financial services industry and it is changing a lot of what is 
done in this country, but the mail is still the go-to medium in 
this country for nonprofits in terms of communication and 
fundraising.
    So with that said, I want to thank you and your colleagues 
for passing the Postal reform legislation. We think it is going 
to go a long way towards helping solve many of the problems the 
Postal Service now faces and we look forward to continuing to 
work with you and your colleagues to making sure that is the 
case.
    Senator Carper. Good. Thank you, sir. Ms. Berenblatt, you 
get the last word in and then I will give the benediction.
    Ms. Berenblatt. OK. Well, rather than summarize, as my 
colleagues have done so well, I will add an additional idea----
    Senator Carper. Alright. Sure.
    Ms. Berenblatt [continuing]. And that is to point out to 
you that Accenture has done a study on high-performance in the 
postal industry, specifically looking at the E.U. countries as 
there has been liberalization of the posts there, and there 
have been three identified areas that need to be addressed in 
order to have a high-performing post. The first is a market 
focus and a strategy. The second is technical capabilities and 
improvement. And the third is a cultural change in the 
organization. I would point out that we need to support the 
Postal Service in all of these three areas so that it can grow 
and be successful.
    Senator Carper. Thank you. Well, folks, it is not every day 
that things work out this well, that you conclude your 
testimony and responses to our questions literally at the time 
that the bell sounds for us to go to the floor and start 
casting our votes.
    This has been a good hearing and I very much appreciate 
your being here, the time and the thought that has gone into 
the preparation of your testimony, and for the way you have 
presented it and responded to our questions.
    One of the things that Senator Collins and I indicated when 
we worked with our colleagues and a lot of you in passing 
Postal reform is that once we enacted the legislation, we 
weren't going to just ignore it. We are going to come back and 
perform our appropriate oversight role to see how we are doing, 
see what we have done well, and to see what could be done 
better to make sure that the Postal Service is doing its best 
to comply, the Commission led by Chairman Blair is doing its 
role, and to find out how we can help, what else the Congress 
needs to do to be of assistance.
    So this is, again, our third hearing for the year and we 
will hold more. I don't know that we will hold more in this 
calendar year, but we will certainly be following up. In the 
meantime, we would welcome continuing dialogue with you outside 
of the hearing forum.
    Let me just close by saying the service that the Postal 
Service provides as it enters this new regulatory system that 
we have established will go, we hope, a long way toward 
determining how successful the Postal Service will be in 
remaining relevant in the 21st Century. At least some of the 
customers that we have heard from here today, and offline, as 
well, have other options now, or they will. If not today, they 
will have them someplace down the road. So we need to make sure 
that the service standards that are set by the Postal Service 
in the coming months are strong and that they take into account 
the views expressed here today and in recent months by the 
mailing community to make sure that the performance of those 
standards are attempting to meeting those standards, that we 
measure it well and respond to those measurements.
    We also need to make sure that the Postal Service continues 
to take the steps that it needs in order to modernize its 
operations, and I was very much encouraged by some of what we 
heard from the Postmaster General today. I am excited about 
this prospect of Intelligent Mail bar coding and some other 
things, as well, some of the mechanization that he talked about 
with respect to more expeditious processing of some of the 
flats.
    This service standards exercise gives Postal managers, I 
think, the opportunity not necessarily to close a lot of 
processing centers and post offices, but to make sure that the 
system we now have is what it needs to be.
    I think we will keep our hearing record open for the next 2 
weeks. There may be some follow-up questions from my colleagues 
either who were here or who were unable to join us, and I would 
just ask those of you that are here that have been on this 
panel and our first panel just to respond to us as promptly and 
as fully as you can.
    Again, thank you very much for joining us on this occasion 
and for your working with us.
    With that having been said, this hearing is adjourned. 
Thank you.
    [Whereupon, at 11:58 a.m., the Subcommittee was adjourned.]

                            A P P E N D I X

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