[Senate Hearing 110-438]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-438
 
                  THE STATE OF THE U.S. POSTAL SERVICE
                         ONE YEAR AFTER REFORM

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

                                HEARING

                               before the

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

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 5, 2008

                               __________

       Available via http://www.gpoaccess.gov/congress/index.html

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


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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

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

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


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

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

                    John Kilvington, Staff Director
                  Katy French, Minority Staff Director
                       Monisha Smith, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Carper...............................................     1
    Senator Akaka................................................     3

                               WITNESSES
                        Wednesday, March 5, 2008

Hon. John E. Potter, Postmaster General, and Chief Executive 
  Officer, U.S. Postal Service...................................     4
Hon. Dan G. Blair, Chairman, Postal Regulatory Commission........     7

                     Alphabetical List of Witnesses

Blair, Hon. Dan G.:
    Testimony....................................................     7
    Prepared statement...........................................    40
Potter, Hon. John E.:
    Testimony....................................................     4
    Prepared statement...........................................    27

                                APPENDIX

Questions and Responses submitted for the Record from:
    Mr. Potter...................................................    45
    Mr. Blair....................................................    50


       THE STATE OF THE U.S. POSTAL SERVICE ONE YEAR AFTER REFORM

                              ----------                              


                        WEDNESDAY, MARCH 5, 2008

                                 U.S. Senate,      
        Subcommittee on Federal Financial Management,      
              Government Information, Federal Services,    
                              and International Security,  
                  of the Committee on Homeland Security and
                                              Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:38 p.m., in 
Room SD-342, Dirksen Senate Office Building, Hon. Thomas R. 
Carper, Chairman of the Subcommittee, presiding.
    Present: Senators Carper and Akaka.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. The Subcommittee will come to order please. 
I want to welcome our guests. It is nice to see both of you. We 
thank you for making time on your schedules to be here with us 
today for this oversight hearing.
    I am delighted to be here with my friend, Senator Akaka, 
and I am going to make an opening statement and yield to him 
for one, and then I do not think Senator Coburn is going to be 
able to join us. Others of our group may wander in and out and 
we welcome them if they do. But we are delighted that you are 
here. We look forward to an informative hearing.
    My thanks, as well, for all the work that both of you and 
the folks that you represent, that you lead are doing, in 
moving swiftly to implement the postal reform which we worked 
on and negotiated. I see some people in the audience who worked 
here with us to try to make it the law of the land.
    Now, we always said if we ever get it enacted, we are going 
to make sure that we have appropriate oversight hearings to see 
how we are doing, what is working well and what is not. So this 
is part of the process.
    This is, I think, an interesting time in a lot of ways for 
us in this country but an interesting time for those of us who 
have had and continue to have an interest in postal issues. The 
Postal Accountability and Enhancement Act (PAEA) has been the 
law of the land for more than a year now and we are starting to 
see some results and some benefits, I think, as well.
    The Postal Service is set to change prices this spring 
using the streamlined cap based rate system called for in the 
Act. It is my hope that the Postal Service can use this new 
rate system in the coming years to offer customers some level 
of predictability and to be more competitive in the advertising 
and the mailing markets in which they compete.
    We also have a new set of service standards, as we know, 
for most postal products that I hope will make the Postal 
Service more relevant and more valuable to their customers now 
than has maybe been the case in other days. Customers have a 
lot of communications options. We want to make sure that this 
is a valued one for them.
    These developments, coupled with what appears to be an even 
stronger effort underway under the rate cap system to control 
costs, should have us celebrating, I think. But these are 
difficult times for the Postal Service as they are for many in 
our country, not only families but businesses too.
    During the last fiscal year, the Postal Service reported 
losses of about $5 billion and, as we know, this was largely 
due to a one-time accounting charge related to several 
provisions in the Postal Reform Bill related to the disposition 
of the Postal Service's pension payments, as I recall.
    However, this year, if everything remains unchanged, and we 
know they are not going to remain unchanged, but if they were 
to remain unchanged and we were going on autopilot, something 
that the Postal Service is not doing, the Postal Service could 
suffer losses, approaching $2 billion.
    I know that planned cost cutting and also the revenue that 
would be earned from the May price increase will bring in, will 
bring that number down. But the projected losses can tell us a 
lot about the current state of our economy. They can also, 
unfortunately, probably tell us a lot about the Postal 
Service's customer base.
    The slow down in the housing and the credit markets has 
hurt some pretty big Postal Service customers and that has hurt 
them badly. I hope that some of that lost business will start 
coming back in the months ahead but we can never know if some 
of the mail volume that has been lost due to the economic 
downturn might never come back. We hope that it will but we do 
not know.
    As General Potter will point out, a lot of businesses that 
have counted on the Postal Service to communicate with 
customers are now encouraging their customers to move online, 
in some cases incentivizing them to move online.
    It seems that postal customers who would rather not pay 
postage now have more options available to them, maybe even 
more than they had during the last major economic downturn that 
occurred when I first arrived in the Senate just a little more 
than 7 years ago.
    So it is important that the Postal Service make full use of 
the tools available to it through postal reform. I have been 
pleased with what I have seen so far but there is plenty of 
work ahead for all of us.
    We look forward to hearing from our witnesses today about 
some of the challenges and some of the opportunities that are 
out there. We also would like to hear how Congress can work 
with the Postal Service and with the Postal Regulatory 
Commission to weather the current storm and maybe find a few 
new ways for revenue and cost-cutting opportunities.
    Senator Akaka, welcome. We are glad you are here.

               OPENING STATEMENT OF SENATOR AKAKA

    Senator Akaka. Thank you very much, Mr. Chairman. I want to 
thank you for holding this hearing, and I want to also extend 
my warmest aloha and welcome to Postmaster General Potter and 
also Mr. Blair.
    Right now is an exciting time in the postal community. Over 
the past year both the Postal Service and Postal Regulatory 
Commission (PRC) have been working tirelessly to implement 
provisions that we passed in the Postal Accountability and 
Enhancement Act now a little over a year ago.
    Perhaps the most apparent change has been the first rate 
filing under the new inflation cap. This process, I am sure Mr. 
Blair and General Potter will agree, has greatly streamlined 
the rate increase process ensuring predictable increases that 
we hope will not cause undue rate shock.
    I want to commend Mr. Blair and the PRC for issuing the new 
rate regulations in such a timely fashion, ensuring the Postal 
Service could quickly take advantage of the new flexibilities. 
Importantly this new system provides more flexibility for the 
Postal Service and a check by the PRC on new rate increases, 
the first of which was recently submitted.
    Now more than ever there is the need to look to the future 
and watch the economic winds to ensure that increases under the 
cap are fair and that there is enough unused rate authority 
banked up for future needs should they arise.
    The Postal Service's latest financial information showed 
that even by using virtually all of its rate authority, it 
barely broke even. This further emphasizes the need to allow 
room for unanticipated future needs. As the economy slows and 
the mail use declines, the Postal Service needs to look at both 
revenues as well as expenses to balance the bottom line.
    I know that the Postal Service is already taking a hard 
look at expenses and implemented important reforms to save 
money. I applaud these efforts and encourage you to keep 
finding new opportunities for savings.
    That being said, I also want to emphasize the importance of 
continuing to foster a dedicated Federal workforce at the 
Postal Service to ensure the highest quality of workers and 
confidence for the public.
    Recently the Postal Service created a set of modern service 
standards which I hope will more accurately reflect the flow of 
the mail giving more transparency for postal customers.
    Now that the Postal Service has developed these standards, 
they should serve as a baseline for a constantly evolving 
effort to find opportunities for increased efficiencies. In 
many ways, the fruits of our labors in creating this postal 
reform are just beginning to show. There is still much work 
ahead but I am confident that under the leadership of General 
Potter and Mr. Blair we will continue to foster a stronger, 
more transparent Postal Service with a dedication of universal 
service to the American people.
    Thank you very much, Mr. Chairman.
    Senator Carper. You bet, Senator Akaka. Again thank you so 
much for being part of this today.
    Our witnesses are ones that are very familiar to this 
Subcommittee. I am not going to take a lot of time to introduce 
them but I would like to say a few things.
    Jack Potter is the Postmaster General, the chief executive 
officer of the U.S. Postal Service. He has served in his 
current positions since June 2001, arriving just after I got 
here so our terms have sort of coincided. He did not have to 
run for election but I think if he had he would have won. 
Before 2001, General Potter has served in a number of top 
leadership positions at the Postal Service. He first started 
with the Postal Service as a clerk, is that right?
    Mr. Potter. That is right.
    Senator Carper. In your native New York. Where in New York?
    Mr. Potter. The Bronx.
    Senator Carper. In the Bronx. In 1978 at the age of 12. 
[Laughter.]
    Is that a typo? Well, he was at least 12, maybe a bit 
older.
    Dan Blair is the first chairman of the Postal Regulatory 
Commission. And our State, Delaware was the first State to 
ratify the Constitution and for one whole week Delaware was the 
whole United States of America, and our State motto is ``It is 
good to be first'' so you, my friend, are in that tradition.
    But the first chairman of the Postal Regulatory Commission. 
He was named chairman in December 2006 just after being 
confirmed as a member of the old Postal Rate Commission. Prior 
to joining the Commission, Mr. Blair served as Deputy Director 
of the Office of Personnel Management. Before joining the 
Executive Branch in 2001, Mr. Blair worked for 17 years on 
Capitol Hill including some time for this Committee's former 
chairman, Senator Fred Thompson from Tennessee, and Mr. Blair 
just returns from leave where, on the campaign trail, he was 
the campaign manager for the presidential campaign of Fred 
Thompson, and let me welcome you back to your day job. 
[Laughter.]
    We welcome you both. Your full written statements will be 
made part of the record. Both of you have roughly 5 minutes but 
we are not going to run the clock on this. So if you need a 
little more time, just go ahead and take it, and we hope to 
have the opportunity to ask you some questions.
    Again, General, I like to call him General. General Potter, 
take it away and then we will kick it over to Mr. Blair.

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

    Mr. Potter. Good afternoon, Chairman Carper, and my good 
friend, Senator Akaka.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Potter appears in the Appendix on 
page 27.
---------------------------------------------------------------------------
    I am pleased to report today on the Postal Service's first 
year of operation under the Postal Act of 2006.
    The new law created needed pricing flexibilities that will 
benefit the Nation by keeping mail a welcome, efficient, and 
cost-effective way to link every household and every business 
in America. But with a growing network that reaches 148 million 
homes and businesses every day, we are extremely sensitive to 
fluctuations in the economy and to changes in consumer 
preferences for hard copy or electronic communication. The new 
law, for all its benefits, does not exempt the Postal Service 
from these facts. Compounding the diversion of some mail to the 
internet, we have been hard hit by today's underperforming 
economy. The financial, credit, and housing sectors are key 
drivers of our business. The recessionary trend in these 
industries is reflected in declines in mail volume and revenue.
    By the end of the first quarter, mail volume was down 3 
percent from a year earlier. First-Class Mail fell by almost 
one billion pieces and Standard Mail by some 750 million 
pieces. Less volume means higher overhead costs per piece of 
mail handled.
    Revenue was $525 million below plan in the first quarter 
and net income fell short by $183 million. We see no 
improvement this quarter. Facing this extremely difficult 
situation, the men and women of the U.S. Postal Service stepped 
up. They brought down spending, narrowing the revenue gap 
created by the sudden steep volume decline.
    Faced with a possible $2 billion budget shortfall this 
year, we are looking to grow revenue through aggressive pricing 
and sales and cutting additional costs on top of what we had 
already planned to reduce our cost by but not at the cost of 
service.
    Despite quarter one's financial challenges, our people 
delivered the strongest service in our history. On-time 
overnight delivery of First-Class Mail reached 96 percent: The 
first time we have ever done that in quarter one of a fiscal 
year. Two-day mail rose to a record 93 percent on-time, and 3-
day mail matched our all-time high. So when you think about it, 
we have a lot going for us.
    For the third year in a row, we have been rated the most 
trusted government agency. Customer satisfaction is at an 
extremely strong 92 percent. Our brand is strong and our 
business is well positioned to rebound with the economy. But we 
cannot simply wait for the recovery or to cost-cut our way out 
in this situation we are in thinking that prosperity is just 
going to happen. We must also pursue an aggressive revenue 
growth strategy.
    On May 12, we are adjusting prices for our market dominant 
products, First-Class Mail, Standard Mail, periodicals and 
package services, using the law's new simplified pricing 
regulations which call for annual price changes. This can 
produce some $735 million in additional revenue this year 
alone. To close the remaining budget gap, (and we think that 
there is going to be, obviously, some cost-cutting) we need to 
focus on growing beyond, above and beyond what the rate change 
would bring us.
    So we are pursuing growth through an innovative price 
structure for our competitive products or shipping services. We 
will make these products--our package products--more attractive 
through incentives and enhanced features. The new prices will 
be announced shortly for a May 12 implementation.
    Senators our people are ready. They understand the 
challenge and they are ready to use every new tool that the new 
law provides in order to be successful.
    I am particularly gratified by the support of our unions. 
With their help, our employees are out talking up and selling 
our products. They are making sure customers understand the 
value of the mail and how it can work to help them in their 
personal lives and help their businesses.
    When we look at the new law, a lot has happened over the 
past year, and it is not just the Postal Service alone that has 
been active. Other agencies and the entire mailing community 
have made major contributions to the progress that has been 
made to implement the new law.
    There have been many subjects covered and my long testimony 
details some of them. But I would like to just list some of the 
things that have happened.
    We have changed the worker's compensation procedures called 
for in the new law. We put in new purchasing regulations. Data 
handling policies have been changed for legal activities. Our 
employee safety program has stepped up and we have issued the 
reports required. We are planning for international customs, 
the ones that were requested. We put that work behind us. We 
have done and made the changes necessary. We have put together 
a new classification schedule for mail. We have had assessments 
and appeals for non-profit mailings over the course of this 
year. Diversity management and purchasing contract reports have 
been given to the Congress.
    We have looked at, and with the Treasury, accounting for 
market dominant and competitive products and a report was 
issued to the Postal Regulatory Commission. The Postal Service 
and the mailing industry have stepped up on recycling, and we 
have issued a report on that.
    We have submitted our first annual compliance report and we 
are looking forward to the PRC's response on that. We are 
working with them to make sure it is even better the next time 
around.
    We are working feverishly to come into compliance with 
Sarbanes-Oxley. The Federal Trade Commission's findings are out 
and they show that the Postal Service is at a competitive 
disadvantage because of the burdens of being part of the 
government.
    The development of modern service standards as you referred 
to, Senator Carper, have been done and we really are happy that 
we got so much input from the mailing community as well as the 
PRC. And we are in the process now of working through and will 
meet the schedule to put new service measurement systems in 
place, again working with the PRC and, as we referred to 
earlier in my testimony, we are implementing the new pricing 
regulations.
    I want to thank Chairman Dan Blair and the entire Postal 
Regulatory Commission for their efforts to move as quickly as 
they did to issue the new pricing regulations. The fact that 
they were so far ahead of schedule really was very instrumental 
in terms of us being able to put together a plan for this 
fiscal year so that we can strive to break even this year. All 
these important tasks require community cooperation and I am 
grateful for everyone's assistance.
    We are also changing how we speak about our business, to 
make it clearer for customers. We are not talking about rates 
anymore. We are talking about prices. It is not negotiated 
service agreements because when you go to a customer, they do 
not know what that is. But they do understand contract pricing.
    Market dominant products--that does not mean anything in 
the real world so we are calling that mail, mailing services. 
And competitive products, people do not know what a competitive 
product is but they know that shipping services are packages, 
and so when we talk in the marketplace, that is the language we 
use.
    We are entering a period of profound change, and through 
the new postal law, you have provided us with a new ability to 
navigate the change. I am grateful for your continuing support 
of a sound and financially independent Postal Service that can 
serve our Nation long into the future.
    Thank you for giving me the opportunity to make some 
remarks and I will be happy to answer any questions that you 
might have.
    Senator Carper. Fair enough. Thanks so much, General 
Potter.
    Mr. Blair, you are recognized, again for 5 minutes or so. 
If you take a little bit longer, that is OK. I do not know if 
there is anyone here you want to introduce but if there is, 
feel free.

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

    Mr. Blair. Thank you, Chairman Carper. I appreciate that. 
Senator Akaka, thank you for your kind words. They are most 
appreciated.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Blair appears in the Appendix on 
page 40.
---------------------------------------------------------------------------
    Thank you for this opportunity to appear today with an 
update on the activities of the Postal Regulatory Commission. I 
am pleased to be here with Postmaster General Potter and 
greatly appreciate his kind words for the work of the 
Commission this past year.
    My written testimony gives a complete agenda of our 
activities, and I am pleased to summarize my statement. I ask 
that my written testimony be submitted for the record as well.
    Senator Carper. It will be unless Senator Akaka objects. Do 
you?
    Senator Akaka. No.
    Senator Carper. No objection for a change. All right. That 
is good.
    Mr. Blair. Thank you, sir. This has been a very busy year 
for us at the Commission. Standing up the regulatory framework 
8 months ahead of schedule, consulting with the Postal Service 
on the development of modern service standards, completing one 
last final rate case under the old regulatory regime topped the 
list of those activities.
    It was a fulfilling year, but we cannot rest on our 
accomplishments since this upcoming year presents us with 
equal, if not greater, challenges. Our agenda this year 
includes further consultation on service standard goals and 
performance measurement systems.
    Last week, I had the chance before the House Subcommittee, 
to compliment the Postmaster General and his team at the USPS, 
headed up by Deputy Postmaster General Pat Donahoe, for their 
work with us on the development of the service standards and 
our continuing consultation. I would like to do that again.
    The PRC's efforts in this area added value, and I am 
pleased that many of our suggestions over the past few months 
were incorporated in the final service standards.
    Our monthly meetings have proved to be an excellent conduit 
for consultations and communication in other issue areas as 
well. This open and ongoing dialogue helps make our system work 
better, and I look forward to continuing the practice.
    Currently we are undertaking two new PAEA reviews. First we 
are reviewing the data provided by the Postal Service as part 
of its annual compliance report, and we are reviewing the rate 
adjustment filing under the new regulatory framework submitted 
by the Postal Service on February 11.
    While we are in the mid-stages of an evolving process, I am 
hopeful that this less litigious environment, brought about by 
the PAEA, continues to produce a better exchange of information 
between the Commission and the Service. With the experience we 
have gained in the review of the first annual data submission 
by the Service, the Commission will shortly propose rules to 
tighten up the process. The first annual report has identified 
areas for data collection, special studies and cost models that 
need updating.
    We are also working on the Universal Service Obligations 
Study which was mandated by the Postal Accountability and 
Enhancement Act. We plan to solicit views from the Postal 
Service, other Federal agencies, the postal community, and the 
general public on their expectations of universal postal 
service.
    Given the scope of the study, we are supporting our 
Commission work through a competitively awarded contract with 
George Mason University's School of Public Policy. We expect to 
engage in broad public outreach as well as conduct several 
field hearings to gauge the mailing public's needs and 
perceptions. We plan a very comprehensive and well documented 
report.
    As I mentioned in my written statement, we believe our 
congressionally mandated report will have the benefit of the 
findings and recommendations of the separate report being 
prepared by the Postal Service through the National Academies 
of Science, and I want to thank Postmaster General Potter for 
his assistance in this area.
    I am also pleased to report that the Commission has 
formally released its first strategic and operational plan, 
detailing the agency's vision and goals over the next 5 years. 
The plan outlines the strategies and activities that the 
Commission will use to help ensure transparency and 
accountability of the Postal Service and to foster a vital and 
efficient universal mail system. By emphasizing the operational 
work that must be accomplished over the next 5 years, the 
Commission can evaluate its progress and performance on the 
strategic goals outlined in the plan.
    To conclude, Mr. Chairman, those are several of our front-
burner issues. An additional priority is to see the successful 
confirmation of a new commissioner to fill our one vacancy. We 
have pending the notices of rate adjustment under the new rules 
as well as Commission action on the Postal Service's compliance 
data. Therefore, a full complement of commissioners to take 
action on these two new important aspects of Commission 
authority would be very beneficial.
    I am pleased to report that last week President Bush 
nominated Nanci Langley, sitting in back of me, to fill this 
seat. Many of you may know Ms. Langley from her long-time work 
for Senator Akaka on this Subcommittee. She is currently the 
Commission's Director of Public Affairs and Government 
Relations. I hope the Committee can take swift action in 
forwarding her nomination to the full Senate.
    My written testimony goes into further detail, and I am 
pleased to answer any of your questions. Thank you.
    Senator Carper. Thank you very much, Mr. Chairman. When 
Nanci Langley worked for Senator Akaka, I oftentimes would 
observe her lips moving when he spoke, and I just noticed that 
she has your back. I could just barely see her lips move when 
you spoke, too. That is a trait that served her well when she 
was here in the Senate and now for the Commission.
    And if you watch carefully, you will probably see John 
Kilvington, his lips move when I speak too. [Laughter.]
    I want to go back, at least to start off, to our Postmaster 
General. You mentioned some measures of performance and they 
were not financial in nature but they dealt with, I think, 1-
day mail, 2-day mail. Just go over those again. I thought those 
were impressive.
    Mr. Potter. Those numbers were from our first quarter which 
runs from October 1 to December 31. Generally it is a somewhat 
difficult delivery time for us because we have holiday volumes 
as well as we start to get the effects of winter weather, and 
so we are very proud of the fact that, in the first quarter, 
our First-Class overnight service performance reached an all-
time high of 96 percent for that quarter. It is the first time 
we have ever done it.
    Our 2-day service was at 93 percent, and that again is a 
record performance at any time, and 3-day we matched our all-
time high of 88 percent in that quarter.
    So, we look at the opportunity to or the challenge of, 
cutting costs and we do not do that independent of service. We 
do not and try not to, as best we can, risk service. So our 
efforts, I think, prove well.
    We saved over $350 million off of our plan in the first 
quarter, but we did it with an eye toward getting the mail out 
and being more efficient at moving the mail and moving it 
correctly the first time.
    So as your quality improves, your handlings go down and 
your service goes up so we are very proud of the results and 
Pat Donahoe and his entire crew, the Deputy Postmaster General 
COO, and all the people in the field, deserve a lot of credit 
for what they were able to do.
    Senator Carper. My congratulations to all of you.
    You mentioned the legislation called for some changes in 
worker's comp. Would you just talk about how that is being 
implemented? How that is going?
    Mr. Potter. Well, it is a matter of a small change in terms 
of a waiting period for worker's comp when somebody was injured 
and so it was a matter of just a quick change in our procedures 
and that has been accomplished. Now there is a 3-day waiting 
period before you can begin receiving worker's comp and we 
implemented that within a couple of months of the new law being 
signed into law by the President.
    Senator Carper. How is that being received? How is it 
working?
    Mr. Potter. For the most part I have not heard anything 
about it. I know when it was put in place, there were people 
who were concerned about it. But it really has not surfaced as 
an issue since it has been implemented.
    Senator Carper. In your testimony you mentioned the word 
``recycling.'' And my ears picked it up immediately. Senator 
Olympia Snowe and I are the co-chairs of the recycling caucus 
in the U.S. Senate. Most of you probably did not know there is 
a recycling caucus but there is, and Olympia and I are the co-
chairs.
    But you said that the Postal Service is doing a better job 
on recycling. Just give us a little bit more information on 
that.
    Mr. Potter. Well, from a number of fronts. First of all, we 
obviously have waste inside the Postal Service and we have made 
it a goal of ours to increase the amount of mail and paper that 
we recycle and other wastes that the Postal Service recycles.
    Senator Carper. So you admit that you are recycling mail, 
is that it?
    Mr. Potter. Mail that is undeliverable as addressed we 
recycle.
    Senator Carper. That will be the lead in all the news 
stories. Postmaster General admits to recycling mail.
    Mr. Potter. Well, we do. If it is undeliverable as 
addressed, we would rather put it into a recycling program than 
to put it into a landfill.
    Senator Carper. I understand.
    Mr. Potter. We also have people who come into our lobbies, 
P.O. boxes, and receive mail, and we provided them an 
opportunity to read it and recycle it right there as opposed to 
putting it into waste baskets for them and they use them for 
whatever and we recycle the paper that is put into those 
recycling bins now.
    We also recycle a lot of industrial materials that we use, 
batteries, oils, and other things that we try to find the best 
home for.
    Another area that we are very proud of is our new boxes for 
Priority and Express Mail. We reduced the numbers and types of 
boxes we had and we work with an organization called Cradle to 
Cradle and got their certification to make those boxes 
environmentally friendly and to make sure that they did not do 
damage to the environment should they wind up in a landfill.
    We would prefer that people recycle them but it was a great 
exercise because we learned. That when you deal with something 
as simple as a cardboard box with a little printing on it, it 
was amazing to see how many suppliers we had to go to in order 
to get that box to be as environmentally friendly as we could. 
It was not just the provider of ink. It was the supplier to our 
ink supplier. It was the paper suppliers. The chemicals that 
are used in paper, and so we have come a long way. We are 
learning quite a bit. We are doing our part to try and keep the 
environment friendly and reduce any harm that we might bring to 
the environment.
    Senator Carper. Good. Let me stay on that theme for just a 
moment. I will ask one more question and then hand it over to 
Senator Akaka.
    With respect to the issue of the greening of the Postal 
Service, would you talk to us a little bit about what you see 
ahead in terms of the vehicles, the kinds of vehicles that you 
acquire, purchase, lease, and how you might do something that 
is positive with respect to our environment?
    Mr. Potter. Well, today we have the largest alternate fuel 
vehicle fleet of any organization in America. But we have been 
somewhat constrained by the law in terms of what types of 
vehicles we could purchase that would satisfy the environmental 
requirements for Federal agencies.
    Since the last time we had a hearing, and I am grateful to 
the Senate, a law has been passed that has increased the 
flexibility that the Postal Service has in terms of future buys 
of engines for our vehicles, whether it is replacement engines 
or for new vehicles that will meet the Federal requirements.
    So we are anxious to begin to study the use of hybrids 
vehicles for our trucks and our lighter weight vehicles and we 
are in the process of looking at all sorts of different energy 
sources.
    In fact, we hosted at one of our vehicle maintenance 
facilities right here in the Washington DC area, the President, 
Secretary of Energy, and we had our trucks along side of FedEx, 
UPS, and DHL vehicles because everyone in the delivery business 
is looking to the future and looking to try and make the 
changes that will help the environment going forward.
    So I appreciate the new law that was passed and the 
flexibility that the Postal Service has been given when it 
comes to future vehicle purchases.
    Senator Carper. I am glad you are taking advantage of that 
flexibility and look forward to hearing more of what is to 
come.
    Senator Akaka.
    Senator Akaka. Thank you very much, Mr. Chairman.
    General Potter, I want to commend you and the Postal 
Service for the gains you have made in the past year. It has 
been done with the help of everybody in the Postal Service and 
I am glad to hear your testimony this morning about how you 
have come along.
    As you know, the Postal Service must begin Sarbanes-Oxley 
style financial reporting by fiscal year 2010 which is about in 
2 years. I have been a strong advocate of increased 
transparency in financial accounting, and I sort of felt 
tickled when you mentioned the words ``competitive product'' as 
making it more transparent to the public so that they 
understand what you are trying to do there.
    How far along is the Postal Service in implementing both 
the policy and technical changes in order to prepare for the 
Sarbanes-Oxley reporting?
    Mr. Potter. Well, the most obvious thing to people who look 
at our financial results is the fact that we are now in 
compliance with SEC-like reporting on a quarterly basis. In 
addition to that, we have made extensive efforts internally to 
make sure that we are putting in place the types of controls 
that are necessary to meet the requirements of the Sarbanes-
Oxley Act. We are working closely with our auditor, Ernst and 
Young, and we brought Deloitte and Touche in as our consultant 
that is looking at, again, both of those well known audit or 
accounting firms are helping us with the implementation.
    So, Senator, I would say we are well along. It is, as you 
are probably aware, a very exhaustive effort. The Board of 
Governors of the Postal Service have really stepped up and have 
taken the lead to make sure that we are in compliance and they 
are very aware of their role, and it is a much more difficult 
task for a board under Sarbanes-Oxley than they had previously 
done.
    So I am really grateful for the work that they have done 
and so everybody is involved and are working hard to make sure 
that we put into place the type of controls that will create 
the kind of surety that I need to have in order to sign those 
documents every quarter, that they are sound and that our 
reports are accurate and the goal of transparency is one that 
we embrace.
    Senator Akaka. Mr. Blair, as you stated in your testimony, 
the Postal Reform Bill requires that by December of this year, 
the PRC issue a report on the current state of the Postal 
Service's universal service obligation and recommend necessary 
reforms.
    This issue is especially important to rural and isolated 
areas such as Hawaii who depend on universal service.
    Has the PRC made progress on this report and what outside 
stakeholders do you plan to work with in conducting your 
assessment and developing recommendations?
    Mr. Blair. Thank you, Senator Akaka, for the question. I am 
happy to answer that.
    We have made progress on this. Early this year we have 
entered into an agreement with George Mason University, School 
of Public Policy to help conduct this report.
    We plan on gaging the opinion of a broad range of 
stakeholders, seeking their input. Other plans on the 
Commission's agenda include possible field hearings in order to 
go outside the Beltway. We have established a good precedent 
with that.
    Last year we had field hearings on the development of our 
new regulatory system and service standards so we would like to 
build upon that past progress. Hopefully field hearings will 
aid the Commission as it decides what our recommendations will 
be.
    The law also requires us to consult with the Postal Service 
on this. At our last monthly meeting, it was raised. I know our 
staffs have been meeting on this, and I want to again thank 
General Potter for his cooperation.
    It is important that we receive the best information 
available before we move forward and make any recommendations 
to the Congress. I know the Postal Service has engaged the 
National Academies of Science, a very prestigious body, to look 
into some of the similar issues. To Mr. Potter's credit, he has 
granted us the ability to have the benefit of that report 
before we make our recommendations.
    I see it as a very broad ranging and a full-bodied report. 
I look forward to engaging stakeholders. We are still in the 
formulative plan of how we are engaging in outreach. For 
instance, on my agenda tomorrow is to talk about the field 
hearings and potential locations.
    We may be holding some other kind of stakeholder input as 
well, on our contract, or will be gauging public opinion on 
that. We have a 360-degree front on this in reaching out to as 
many possible people in order to really generate good public 
opinion so we can make some thoughtful, substantive 
recommendations to the Congress.
    Senator Akaka. You mentioned that you will be using 
contractors. What role would these contractors have?
    Mr. Blair. These contractors will be playing an advisory 
role, and I appreciate that question too because we have heard 
that some people view this as a one contractor study. This is 
the Commission study and the Commission will be making these 
recommendations. We will be looking at the in-put that the 
contractor provides. We have an excellent project manager from 
George Mason. Her name is Dr. Christine Pommerening, and she is 
going to be tapping into many of the most formative minds in 
the postal field in the country. But the recommendations and 
the input that they provide to us will help us. But at the end 
of the day, these will be the Commission's recommendations. So 
I appreciate your allowing me to put that on the record as 
well.
    Senator Akaka. Thank you. Thank very much.
    General Potter, currently about a dozen States are looking 
at legislation to create so-called do-not-mail registries 
requiring that the Postal Service do not deliver certain kinds 
of commercial mail to residents.
    Does the Postal Service believe that States have the 
authority to implement rules affecting the mail and would you 
challenge any such rules?
    Mr. Potter. Senator, we are analyzing that very question, 
and I do not have a definitive answer for you on whether or not 
States have that authority. But I will tell you that we are 
working hard to inform people about the role that mail plans in 
the economy, both as an employer of millions of Americans as 
well as a generator of sales and fortunately so far no 
legislation at the State level has passed and I think once 
people look at the issue in its entirety the case against that 
type of legislation is pretty compelling, and so particularly 
given the state of current economy, I would hesitate to 
recommend anything that could hurt any State's economy.
    Senator Akaka. Yes. Well, I understand in closing there are 
11 States looking into this, and Hawaii is, I think, one of 
them. But I just wanted your thoughts on that. Thank you very 
much, Mr. Chairman.
    Senator Carper. Thank you, Senator Akaka.
    As you know, Mr. Blair, there have been some questions for 
awhile about the fairness of the work sharing discounts that 
the Postal Service offers to mailers who do some of the 
processing of their mail themselves before turning it over to 
the Postal Service.
    One or two of the postal unions have argued that a number 
of these discounts are excessive and actually hurt the Postal 
Service rather than making it more efficient.
    There is a provision in the Postal Reform Bill that seeks 
to ensure that work sharing discounts make more sense. What 
role do you plan to have the Postal Regulatory Commission take 
in examining discounts to ensure that they are appropriate and 
fair?
    Mr. Blair. Our new rules are cognizant of that special 
provision within the PAEA. What we are requiring is that a 
notice of rate adjustment, such as that recently filed by the 
Postal Service, include a schedule of workshare discounts and 
also a separate justification of any discounts that exceed the 
avoided cost.
    The legislation specifically prohibits, except for some 
exceptions, workshare discounts that would exceed the cost that 
the USPS could avoid in doing the work itself.
    Last week we asked the Postal Service to respond to an 
information request to explain several workshare discounts that 
appeared to exceed the 100 percent pass-through level. The 
Postal Service responded to that request last night. We are 
examining that but we are very aware of that provision and 
intend to follow it to meet the intent of the legislation.
    Senator Carper. When you look at the postal reform 
legislation that we worked on and enacted over a year ago and 
you look at the provisions that are proving to be positive and 
especially beneficial, what might be several of those? And you 
alluded to this at least in part in your responses.
    If you had to do it over again or if we had to do it over 
again, 1 year into this experiment, 1 year into this test 
drive, what would you suggest we maybe would have done 
differently?
    Mr. Blair, why don't you go ahead and take it and then we 
will ask the Postmaster General to respond? So a little of 
each, what things are especially positive in the legislation, 
and if we had to do it over again, what would you suggest we do 
differently?
    Mr. Blair. I think the legislation fundamentally shifted 
the focus of the relationship between the Postal Service and 
the regulator. Before it was almost adversarial and the new 
legislation removed the excessive, lengthy litigation that took 
place during the rate case. I think that is a positive aspect. 
It allowed for a more modern rate making procedure to be 
implemented, and it also required continuing dialog between the 
regulator and the regulated entity.
    I think that is vitally important. I think that over the 
course of the past year that has worked very well and I am very 
pleased with that.
    I think we saw with the last rate case all the flaws and 
blemishes that that system brought with it. Congress was very 
wise in passing the legislation when it did.
    Moreover, I know the community backed us up when we said we 
wanted to get these regulations out sooner rather than later. 
The Postal Service was a partner in this procedure, which 
worked incredibly well too.
    Regarding what changes might take place in the future, we 
are only a year into this, and I want to see how well the 
legislation works. The Commission probably had at least three 
dozen action items that it had to accomplish. Some had 
timeframes. Some did not. We have been focusing primarily on 
the ones with timeframes.
    But one of the timeframes is that we have to come up with 
several studies over the course of the next few years. One is 
the universal service obligation. One is a 5-year review. One 
is a 10-year review.
    I think we will be in a better position to answer your 
question in a year or two or three. But so far the system is 
working, and I think it is working better than most people 
expected.
    Maybe that is from a biased view point. It is hard for me 
to separate myself from the Commission, and the two view points 
tend to be one and the same. But from my perspective, it is 
working better than I had hoped or had expected.
    Senator Carper. Thank you. General Potter, what do you 
think is working especially well and a couple of items that you 
want to flag for us to follow for the future?
    Mr. Potter. Well, I think there are a couple elements of 
the law that helped us immediately and that is obviously the 
pricing flexibility that we have in terms of, first of all, the 
frequency of adjustments and the speed to make adjustments so 
we are able to change our mailing services prices on an annual 
basis.
    I think the rate cap is going to be helpful because it will 
keep people in the mail and it is going to create a dynamic ??? 
that forces the Postal Service to step up to efficiency as well 
as give people predictability about their rates going forward.
    So as you said earlier, people have choices about whether 
or not they are going to use the mail as their channel or 
electronic or some other means to send messages and 
advertisements. So the fact, there is predictability going 
forward, I think it is very valuable.
    In terms of what I think going forward would be helpful to 
the Postal Service, I think that, if anything, there is not 
enough flexibility in the law. When I look at the list of 
products that are on the market dominant side of the aisle, I 
think there are probably too many, and things, for example, 
like----
    Senator Carper. When you say market dominant, does that 
mean shipping services?
    Mr. Potter. No. Market dominant is mail but it goes beyond 
mail. It has things like P.O. boxes, money orders, basically 
anything other than Priority, Express Mail, or international 
mail, largely our package businesses, is put on the market 
dominant side of law, and so there are things there that I 
think need to be re-evaluated. There are some package services 
that are on the market dominant side of the law that really 
should be on the competitive side and allow us to compete.
    I think that there are a lot of restrictions around what we 
can sell and not sell, and when I look around the world and 
look at other posts, they have the same challenges that we do 
when it comes to diversion of hard copy product to electronic 
medium.
    And they look at their assets and have been able to get 
from their governments the flexibility to use those assets to 
generate revenue to support the universal service obligation 
that Mr. Blair just spoke about that he is doing a study on.
    So when you look at the posts around the world, many of 
them are using their retail outlets as banks. They do not 
necessarily own the bank but they provide banking transactions 
for banks in their countries or in some cases they own the 
bank.
    That type of flexibility is something, I think, that we 
need to explore because we do have these assets. We are very 
restricted today in terms of what we can do with those assets. 
I believe going forward that in order to continue to provide 
access to mail through those brick and mortar structures that 
we have, we have to figure out how to generate revenue, other 
revenue in that location, whether that is services that we 
provide, and our clerks provide, or leasing out the space so 
that it generates revenue to contribute to the maintenance of 
an access point for America.
    Senator Carper. I am going to yield to Senator Akaka. When 
we come back, I want to explore with you some of the things 
that the Postal Service is doing in this first year since the 
enactment of the legislation, and as our economy has slowed, 
what you are doing to try to shore up revenues and also what 
you are doing to take costs out of the system.
    Senator Akaka.
    Senator Akaka. Thank very much, Mr. Chairman.
    General Potter, as you well know, the Postal Service offers 
a wide variety of products and services to businesses and 
individuals that often are competitive with your private sector 
counterparts such as UPS and FedEx.
    Here on the Hill, we receive press releases and briefings 
regarding these services. The Postal Service's competitors 
spend billions on marketing and advertising their services. I 
am concerned that the Postal Service may not be marketing as 
aggressively as the competition.
    What kind of commitment does the Postal Service have to 
building its so-called brand and what can be done to better 
promote its competitive products?
    Mr. Potter. Well, that is a great question, and I can talk 
for probably 20 minutes about what we are planning to do.
    First, let me say that we do advertise. We spend just under 
$100 million a year on advertizing. We have not been as 
aggressive on advertising our competitive products because 
until we had the new regulations that my good friend, Mr. 
Blair, put in place, we did not really have pricing 
flexibility, and in the marketplace when you cannot go out to 
people who mail any kind of significant volume with an offer, 
an ability to negotiate, you are really hamstrung.
    So our efforts in the past couple of years have really 
focused on consumers and offering them access and small 
businesses access to the Postal Service. So we have, now 
consumers and small businesses have the opportunity to go 
online to pay for postage. Our carriers go by their door 
everyday. In the course of their rounds, they can tell us that 
they have a package to be picked up and so we offer that pickup 
service as they go by those deliveries.
    So the notion of getting online, paying for packages and 
providing pickup is something that really has helped our 
business grow.
    We also built with Priority Mail: We created a flat rate 
box and again using the pricing freedoms that we have had, we 
just created a larger flat rate box, and it was largely as a 
result of inquiries from military families because it became 
very popular to use that box to send, I guess, messages, goods, 
reminders of home to our troops, and so we created a larger 
flat rate box that we would not have been able to go to market 
with as quickly as we did if it were not for the new law.
    In fact, I just came from the House where we had an effort 
that was put on by the House caucus that is a part of the 
America Supports You program, and the Department of Defense has 
this America Supports You where we demonstrated that we have a 
new box that is co-branded and we provide a discount to 
military families. So they have $2 off on that box that is 
going overseas.
    So we are making strides. I just described in my testimony 
that we are going to change rates in May for our competitive or 
package products. At that time, we are going to go out and we 
are going to offer different prices, a different price for 
retail than if you go online and buy services.
    We are going to, for the first time ever, offer volume 
discounts for our Express Mail, Priority Mail, and our ground 
packages. At that point, we are going to launch a major 
campaign because, again, we will have the flexibility to do it. 
We are working with the Postal Regulatory Commission and staff, 
as Mr. Blair said, in a cooperative way.
    We are now exploring how we can do contracts with 
businesses so we will have published prices that we are going 
to get the Board of Governor's approval on so I am not at 
liberty to say what they are. But once we have their approval, 
we intend to file that with the Commission such that we will be 
able to raise those rates in May and we will have a full 
campaign on that.
    We are probably very unusual in that we are positioned to 
have a campaign like no other in the sense that people do 
advertising to move awareness of products and services up. 
Well, we have 800,000 people who work for us. So our first 
campaign is to make them aware of our products.
    I am really proud of the efforts that our unions are 
putting forth. We have met with them. They agree that they are 
going to have to encourage their people to make sure that 
customers who come into our lobbies are informed about our 
products, that the carriers on the streets are there making 
people aware of the products and services that we have, and the 
new pricing schedules that we are going to put in place. We are 
going to have an all-out blitz too. We are going to hit a 
button and 700,000 of our best customers are going to get 
information on this. We are going to use every channel that we 
have.
    We have nine million Americans that walk into our lobbies 
everyday. We will have lobby posters. The bottom line is with 
the new flexibility we have and when we first have an 
opportunity to use it, that is when we are going to go out in a 
very structured way, using all of our resources with the help 
of all of our employees to let America know that the Postal 
Service has great products to offer. They have good prices, 
competitive prices, and so that will be kind of the launch of 
our effort to grow the package business.
    Again you want to sell it when you have something to offer. 
You do not sell it in advance of that. So again you will see a 
very coordinated effort to go after this.
    Senator Akaka. Thank you. I am glad you are moving on that.
    Mr. Blair, last year before this Committee I asked you 
about PRC's involvement in creating modern service standards 
for the Postal Service. The Reform Act required the Postal 
Service develop these standards in consultation with the PRC.
    Now that these standards have been issued, what is the 
PRC's assessment of the overall process and the level of 
consultation?
    Mr. Blair. Senator, I think the process worked relatively 
well. It brought our two sides to the table to discuss a wide 
variety and a wide range of issues. We did not always agree. 
They did not always accept our proposals. But at the end of the 
day, I believe that our input produced results and a better 
product in terms of the standards.
    We argued hard for greater granularity in their reporting, 
that it be done by district and that it be done by quarter. Our 
proposals were the final work product that the Postal Service 
put out.
    I think the consultations produced a good product and we 
are continuing those consultations. The law also requires that 
we consult on the development of goals to meet those standards 
because without goals the standards themselves become de facto 
goals. We are in that process.
    We also have to consult with them on the rationalization of 
their network, and we look forward to discussing that with them 
at the upcoming consultations as well.
    We are also in the process of reviewing a proposal by the 
Postal Service on the measurement system that is going to be 
used. The law granted the Commission the authority to allow the 
Postal Service to use an internal measurement system. We 
thought it was in the best interest of the Postal Service and 
the mailing community, and we are reviewing a proposal that 
they have put forth based on the intelligent mail barcode at 
this time.
    So I think overall the consultations have been a positive 
influence on both organizations. It has led to greater dialog 
between the regulator and the regulated entity. While there may 
be tension from time to time between the two bodies, I think 
that is intended by the statute and I think that is healthy. I 
certainly do not think an adversarial relationship is good, and 
I am proud to say that I do not think we have one. I think that 
these consultations have morphed into something bigger and it 
is a good way of communicating between the two bodies.
    Senator Akaka. Thank you very much for that. I have one 
more question.
    General Potter, the Postal Service offers a wide variety of 
extra services for different classes of mail such as registered 
mail and delivery conformation.
    However, there are over half a dozen forms depending on the 
specific services you want. For example, if you want to send 
registered mail with a return receipt, you have to fill out two 
separate forms. Some of the competitors offer similar services 
in a much easier manner by using a single form.
    Are there any efforts underway to make the various mail 
services more user friendly in order to keep up with your 
competitors?
    Mr. Potter. Yes, Senator, there are. The intelligent mail 
barcode that Mr. Blair just spoke of is our effort to put one 
barcode on our mail that would have all the information 
embedded in it that today are covered in multiple barcodes and 
multiple requests.
    So this barcode will identify the sender, and the 
destination. It will identify any special service that is 
requested along with that letter or package that will be put 
into the mail.
    So, yes, we are working on it and we know we have an 
opportunity to improve and we have people that have been tasked 
to do that, and there is a lot of communication between the 
Postal Service and its customer base, and looking to make sure 
that, as we do this, we recognize that major changes will not 
only occur within the Postal Service's system but in customer 
systems as well.
    So we are trying to figure out how to make this transition 
to an environment you describe in a way that works for all.
    Senator Akaka. Thank you so much for your responses. I 
really appreciate what you are doing and am happy to hear those 
responses. Thank you very much.
    Senator Carper. Senator Akaka, thank you very much for 
being a part of putting the legislation together and for making 
sure we are appropriately exercising our oversight.
    I indicated before Senator Akaka began his questions that I 
want to come back and just revisit a couple of issues. This 
will be brief.
    But, General Potter, you just talked to us about some of 
the things that you are doing collectively at the Postal 
Service, given dropping revenues, some things that you are 
doing to avoid a $2 billion operating deficit this year.
    I know one of those is going for the one-cent increase in 
First-Class postage which kicks in in May. I think you said 
that is worth maybe $700 million in this fiscal year?
    Mr. Potter. Yes, it is. So we are making a price adjustment 
in May that will be conformed to the rate cap obligations.
    Senator Carper. Do you do any modeling, I presume in your 
projections, to figure out what kind of drop-off, if we raise 
prices, usually there is some drop-off in demand. Any idea? I 
realize it is what, 2 or 2.5 percent? It is not all that much. 
Is there any correlation there?
    Mr. Potter. Yes. Because it is at the rate of inflation, we 
do not expect the type of drop-off that we saw last year when 
we had rates that rose above the rate of inflation.
    So it is kind of a nominal thing. There will be some drop-
off but elasticities will not kick in since it is just at or 
even now running slightly below the rate of inflation because 
inflation has continued to move along and we used a January 
look-back. So we expect a slight drop-off but not much.
    In addition to that, I described some of the things that we 
are going to do and the effort that we are going to make to 
increase the amount of packages that we have in the system and 
make sure that people understand the value of not only the 
package services that the Postal Service provides as well as 
the value of hard copy versus other choices that they have in 
the marketplace.
    We are looking to try to figure out to make it easier to 
use, to Senator Akaka's point, not only to use our forms and 
get around forms and simplify them but also to make access to 
the mail easier.
    So oftentimes people who are trying to do small advertising 
campaigns find that the process of dealing with the Postal 
Service and suppliers, whether that is printer or a list 
provider, is complicated. So we are looking to try and find 
solutions that will work for those folks as well.
    And as we said earlier, our projection for volume is down. 
So the first thing you do when you have projection of volume 
below planned is you go back and you adjust the plan's use of 
resources. So as volume diminishes, your need for work hours to 
process that mail diminishes as well.
    We are also in the process of mapping all of our 
operations. So looking at the entire value chain throughout our 
entire system each time something is handled and any time it is 
handled, we are asking the question of ourselves now is what is 
the value added by that touch.
    So as an example, one of the things that we have 
historically done is as mail is brought into our plants, we 
weigh it. And we now have enough mail that the bulk of our mail 
moves from the dock--it used to move to a scale and then right 
onto a machine that counted the mail.
    It continues to move onto machines that count the mail, and 
so we are now eliminating weighing of mail. It may sound like 
something trivial but in the Postal Service, given our size, 
our scale, scope, it is $100 million worth of costs that can be 
eliminated. So those kinds of things that we are taking a good, 
hard look at to determine whether or not they add value.
    And in addition to that, we have a program that looks at 
productivity and measures productivity across the country, 
establishes goals for people that are consistent with the top 
quartile of the country.
    If one section of the country can get a high level of 
productivity at one plant, we would like everyone to replicate 
that and we provide training materials to folks and establish 
goals.
    So it is a continuous improvement-like program and it is 
paying big dividends for us. So to make a long story short, we 
are looking at making a price adjustment. We are looking at 
selling our products and doing it a little more aggressively 
than we have in the past and we are looking at all our costs to 
determine, first of all, are there things that we do today that 
just are not adding value, and second, the things that we do do 
can we do it better and incent people to do it and train folks 
to do it?
    Senator Carper. Mr. Blair, anything you want to add or take 
away from that list for us from your own perspective? I realize 
this is not part of your responsibilities but----
    Mr. Blair. Well, not at this point.
    Senator Carper. OK. Fair enough.
    General Potter, one of the things that was very important 
to the postal customers that we met with when we were crafting 
our postal reform legislation was predictability and that was 
especially important for business mailers. They wanted to have 
a much better sense of when prices would go up and by how much.
    And you have spoken to this indirectly at least. How you 
think our new approach, your new approach, to pricing is 
better? Do you believe it is better than it was in the past 
with respect to predictability for businesses? And what kind of 
feedback are you hearing?
    Mr. Potter. Well, I believe it certainly is better and I 
think that the fact that they now know that we are going to 
make price adjustments every May. Those price adjustments are 
capped at the rate of inflation for mailing services. I think 
that helps them in terms of their own budgeting.
    It also helps with investments. There are a lot of folks 
who had some concerns about where the mail, where the Postal 
Service was going in terms of prices, long-term and were afraid 
of increases much above the rate of inflation.
    And so the fact that they now can look forward and pretty 
much predict that they are going to get annual adjustments at 
or about the rate of inflation enables them, with some surety, 
to look at what returns they might have on investments that 
they make in equipment or investments that they might make in 
longer term game plans around advertising or channel use, in 
terms of developing relationships with customers.
    So the bottom line is I think it has helped businesses and 
that is the feedback I have been getting.
    Senator Carper. But after the most recent postal pricing 
changes went into effect, we heard, and I guess you did too, 
some complaints from certain groups of mailers such as low 
circulation magazines and some of the catalogs about the 
fairness of the new prices. Many believe that the final prices 
worked out after months of negotiation and testimony before the 
Postal Regulatory Commission may have gone a little too far at 
least in their minds. I understand that the new prices even had 
a negative impact or may have had a negative impact on volume 
at the end of the day.
    What, if anything, Mr. Potter, are you all doing in the 
planned May pricing changes or in future moves, to address the 
issues mailers had with the last set of changes?
    Mr. Potter. Let me address specifically the two concerns 
that you mentioned. One was the catalog mailers, and so our 
pricing, the prices that we set forth and are being evaluated 
now by the PRC are lower for catalogs and that is a reflection 
of our concern about hitting them once again. So their rates 
are below the rate of inflation, the ones that we have 
proposed.
    When it comes to magazines and periodicals, we basically 
did an across-the-board rate change. We have proposed an 
across-the-board change. That reflects the fact that there was 
great complexity in the periodical rate change the last year.
    As you know, we had to delay the implementation because 
there was quite a bit of programming that needed to take place 
because of the changes that were made ultimately in the rates. 
So, we basically did an across-the-board rate change again and 
in deference to the community, so as not to burden them once 
again with complexity.
    We are and do take into account, the different industries 
and where they are going. I believe that the new law gives us 
flexibility that will enable us to respond to the needs of the 
industry and the opportunity to incent different mailers to 
mail.
    So I think we are just beginning to scratch the surface on 
what we can do under the new law on the mailing side of the 
house and we are cognizant of the concerns that were raised 
with the last rate change and we think our proposed rates 
reflect and are sensitive to those needs.
    Senator Carper. Mr. Blair, do you want to add anything to 
that please?
    Mr. Blair. What I wanted to say was, especially under the 
old system, anytime you had an increase in rates, a decrease in 
volume was naturally expected. The economic slowdown compounded 
that situation that you referred to.
    The decision in the last rate case was based on 2005 data 
which was based upon data that was produced months, if not 
years, earlier. Maybe more rosy economic scenarios were 
envisioned. However, it came out in 2006, and I think the rate 
increase, compounded with an economic slowdown, hit some 
mailers particularly hard.
    Regarding the catalogs and flat rates recommendations, it 
was a zero-sum game. Had catalog rates not gone up, which was 
an attempt to address an allocation of institutional burden 
between mailers within the same class, it would have caused 
letter rates to go up.
    It was that bubble. If you pushed it down here, it went up 
there. We have seen it in the comments before the Commission on 
this new rate adjustment, that some do not think that flat 
rates again should have gone up further in order to redress 
that issue.
    I think we are out of that paradigm in these rate 
adjustment cases. But it goes to show you that old habits die 
hard. I think the new system ensures that rates, at the class 
level, will not exceed the inflationary cap and that there will 
be predictability and stability in rates and that mailers will 
have a better sense of what those rate increases will be. I 
think what the Postmaster General just said about increases 
every May that is going to be worked into mailers business 
assumptions. I think that we will know now as to what those 
rate increases will likely be.
    Senator Carper. Thank you. I would like to ask each of you 
a question or two regarding negotiated service agreements and 
we will just start off, Mr. Blair, with you.
    You will recall that another provision in the Postal Reform 
Bill that we adopted codifies the Postal Service's authority to 
enter into negotiated service agreements with individual 
mailers.
    The Postal Service has entered into these kinds of 
agreements in the past, I believe, with varying degrees of 
success. None of the agreements, though, to my knowledge, have 
been a complete failure but I do not think that there have been 
a lot of them that have brought in substantial amounts of 
volume and revenue either. If I stand to be corrected, feel 
free to correct me.
    Mr. Blair, first of all, what is your understanding of the 
Postal Service's authority to enter into negotiated service 
agreements, and then to follow up, what is your assessment of 
the Postal Service's ability to negotiate quality agreements 
that can have a real impact on volume and a real impact on 
revenue and on the overall efficiency of the Postal Service?
    Mr. Blair. I think the new rules grant them a tremendous 
amount of new flexibility that was not there before. The 
legislation codified negotiated service agreements. It said 
that it either has to improve the net financial status of the 
Postal Service or improve operational efficiencies and cause no 
undue market harm from market dominant products.
    And in the competitive areas, you have to cover 
attributable costs. I think that gives the Postal Service 
tremendous flexibility in that area.
    I agree that the agreements have not been as successful as 
parties had hoped. I think that codifying this in statute 
bolsters the Postal Service's negotiating position because 
parties know what the Postal Service has to do in order to 
comply with the law.
    We would expect more NSAs to be coming down the pike. We 
have had some preliminary discussions about what they want to 
do in the competitive arena. We are heartened by that.
    We want to make sure that the agreements comport with the 
law. I think that you would want us to do no less. But I think 
that this is a new era, and I think we have to look at things a 
little bit differently. We certainly want to do that. We want 
to see them succeed.
    But we are mindful of our statutory duties. It is a 
balancing act, and we want to make sure that we walk that fine 
line.
    Senator Carper. Thank you. Just to close out on this 
particular topic, General Potter, what lessons have you and 
your team learned from some of your experiences with negotiated 
service agreements in the past, including, I guess, the recent 
experience with Bank of America where the quality of the data 
that you were using was called into question?
    Mr. Potter. Well, the one thing that I have learned is 
negotiated service agreements go back to the law. The market 
dominant or mail side of the house are extremely difficult.
    In a sense it is somewhat of a zero sum game, and I think 
under the old law, the litmus test for it was much more 
difficult because of the fact that you had everybody looking 
over each other's shoulder.
    The fact of the matter is I am very enthused about the 
types of discussions that we are having today. When it comes to 
competitive products, I think we have a real opportunity to 
grow the business and we have had some very constructive dialog 
with the PRC and I am anxious to move ahead with it.
    On the market dominant side of the house, we are a little 
more tenuous in terms of how we might do that. We are anxious 
to get ahead. We have further discussions planned with the 
Postal Regulatory Commission. We have began having dialog with 
our customer base.
    But under the old rules, it was very easy to throw a stone. 
I think we are going to have to change the mind set of folks to 
say, gee, it might make sense to charge somebody a lesser price 
if it is a matter of retaining business that makes some 
contribution to the bottom line.
    It might make sense to incent people to go into new markets 
to advertise. These are concepts that are foreign to our old 
way of doing business and are things that we are going to have 
to explore and do it in a very deliberate way in order to 
reassure the community that there are sound reasons to move 
ahead.
    That being said, I agreed with what Mr. Blair said, the new 
law, the litmus test, or the hurdle that you have to get over 
under the new law is quite lower than it was under the old law, 
and the process--thanks to the new regulations that they would 
have put out for rates in general and what we anticipate they 
will do with negotiated service agreements--will be much more 
expeditious and will provide the type of flexibility that I 
think the law intends.
    So I am very anxious about what we are going to do on the 
competitive side. We are going to call it contracts. Again, I 
said that early on, we are going to try to use that language so 
folks that we are dealing with understand it, and on the market 
dominant side, we are working hard to find a path and to 
communicate so that everybody understands what we do and how we 
do it. And the understanding is it is going to make of the 
whole better and not necessarily meet the requirements of the 
old law.
    Senator Carper. All right. Just one more time for my 
edification, just tell us again the new lingo for market 
dominant, for competitive.
    Mr. Potter. OK. Mail, or Market dominant products--First-
Class Mail, periodicals, Standard Mail--it is now called 
mailing services.
    Competitive products--Express Mail, Priority Mail, 
international packages--we are now calling that shipping 
services.
    We are not going to use the word ``rate'' anymore. We are 
going to use the word ``price.'' We are going to move away from 
the term ``discount,'' and we are going to talk about 
incentives for people to mail.
    Those are the types of language that we want people to 
start thinking of us as. You are asking us and have told us 
that you want us to compete, to operate like a business and so 
we are going to move to talk like a business.
    Senator Carper. That is probably a good place to end this 
hearing on. I am glad to hear you are talking the talk.
    When I was governor of Delaware--I will close with this 
thought--I was governor of Delaware. About the mid 1990s we 
decided to launch welfare reform, and we decided to launch 
welfare reform as a country, and as it turned out, we ended up 
launching welfare reform where we limited the amount of time 
that people would be eligible for welfare benefits. Tried to 
offer them things that would make work pay more than welfare.
    And just by dumb luck, we launched welfare reform in the 
middle of the longest running economic expansion in history of 
the country. Enormous job creation was occurring, and it was 
not that welfare reform was easy but it was a whole lot easier 
than it would have been otherwise.
    It occurs to me that we have launched postal reform at the 
beginning here of an economic downturn and slow down when it 
makes a different transition all the more challenging.
    I am encouraged that, at this point in time, one year into 
this, you and the folks you lead are taking the right spirit 
into a brave new world, and I applaud that. I am encouraged by 
it.
    I realize we just have a year under our belts, a year under 
your belts, and we are going through a learning process and I 
am pleased to hear that some of the things we thought might 
work are for the most part working. Maybe some little better 
than expected and there are some other problems that may have 
emerged or some areas to keep an eye on or ones that we just 
need to watch a bit more.
    But that is pretty much what I had to say.
    Anybody else have a closing word? Mr. Blair, you looked 
like you might have something else you want to add.
    Mr. Blair. I would much rather be having this discussion 
today than a similar discussion where we are facing a very 
contentious old cost of service rate case under the old rules 
had postal reform not passed.
    So is it the best environment to implement a reform agenda? 
Maybe not, but I think it is better than not doing it at all, 
and so maybe you were prescient in forecasting that this was 
going to happen and that foresight is going to benefit the 
system as a whole.
    Senator Carper. I wish I were that smart. In any event we 
appreciate your being here. We appreciate the spirit that you 
bring to these challenges, and we look forward again to 
continuing this dialog both in a forum like this and in less 
structured forums as well.
    Our thanks on behalf of the Subcommittee to each of you and 
to your respective teams, to your colleagues. Thank you for 
testifying today and really for your commitment to making 
postal reform a success.
    The hearing record will remain open for, I think, 2 weeks 
for the submission of additional statements and some additional 
questions. To the extent that you receive those, I would just 
ask that you respond to them promptly if you will.
    And with that it is 4 o'clock. It is time for us to go vote 
so this has worked out very well.
    Thank you so much.
    The hearing is adjourned.
    [Whereupon, at 4 p.m., the Subcommittee was adjourned.]


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