[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




 
    THE PRICE IS RIGHT, OR IS IT? AN EXAMINATION OF USPS WORKSHARE 
          DISCOUNTS AND PRODUCTS THAT DO NOT COVER THEIR COSTS

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

                                HEARING

                               before the

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

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 12, 2010

                               __________

                           Serial No. 111-76

                               __________

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


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



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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                   EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania      DARRELL E. ISSA, California
CAROLYN B. MALONEY, New York         DAN BURTON, Indiana
ELIJAH E. CUMMINGS, Maryland         JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio             MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts       JOHN J. DUNCAN, Jr., Tennessee
WM. LACY CLAY, Missouri              MICHAEL R. TURNER, Ohio
DIANE E. WATSON, California          LYNN A. WESTMORELAND, Georgia
STEPHEN F. LYNCH, Massachusetts      PATRICK T. McHENRY, North Carolina
JIM COOPER, Tennessee                BRIAN P. BILBRAY, California
GERALD E. CONNOLLY, Virginia         JIM JORDAN, Ohio
MIKE QUIGLEY, Illinois               JEFF FLAKE, Arizona
MARCY KAPTUR, Ohio                   JEFF FORTENBERRY, Nebraska
ELEANOR HOLMES NORTON, District of   JASON CHAFFETZ, Utah
    Columbia                         AARON SCHOCK, Illinois
PATRICK J. KENNEDY, Rhode Island     BLAINE LUETKEMEYER, Missouri
DANNY K. DAVIS, Illinois             ANH ``JOSEPH'' CAO, Louisiana
CHRIS VAN HOLLEN, Maryland
HENRY CUELLAR, Texas
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
PETER WELCH, Vermont
BILL FOSTER, Illinois
JACKIE SPEIER, California
STEVE DRIEHAUS, Ohio
JUDY CHU, California

                      Ron Stroman, Staff Director
                Michael McCarthy, Deputy Staff Director
                      Carla Hultberg, Chief Clerk
                  Larry Brady, Minority Staff Director

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

               STEPHEN F. LYNCH, Massachusetts, Chairman
ELEANOR HOLMES NORTON, District of   JASON CHAFFETZ, Utah
    Columbia                         MARK E. SOUDER, Indiana
DANNY K. DAVIS, Illinois             BRIAN P. BILBRAY, California
ELIJAH E. CUMMINGS, Maryland         ANH ``JOSEPH'' CAO, Louisiana
DENNIS J. KUCINICH, Ohio
WM. LACY CLAY, Missouri
GERALD E. CONNOLLY, Virginia
                     William Miles, Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 12, 2010.....................................     1
Statement of:
    Burrus, William, president, American Postal Workers Union, 
      AFL-CIO; Lawrence G. Buc, president, SLS Consulting, Inc.; 
      Michael Riley, professor, University of Maryland University 
      College; James R. O'Brien, vice president for distribution 
      and postal affairs, Time Inc.; and Hamilton Davison, 
      executive director, American Catalog Mailers Association...    47
        Buc, Lawrence G..........................................    70
        Burrus, William..........................................    47
        Davison, Hamilton........................................   100
        O'Brien, James R.........................................    92
        Riley, Michael...........................................    82
    Robinson, Maura, vice president of pricing, U.S. Postal 
      Service; and John Waller, director of Office of 
      Accountability and Compliance, Postal Regulatory Commission    10
        Robinson, Maura..........................................    10
        Waller, John.............................................    20
Letters, statements, etc., submitted for the record by:
    Buc, Lawrence G., president, SLS Consulting, Inc., prepared 
      statement of...............................................    72
    Burrus, William, president, American Postal Workers Union, 
      AFL-CIO, prepared statement of.............................    50
    Connolly, Hon. Gerald E., a Representative in Congress from 
      the State of Virginia, prepared statement of...............     9
    Davison, Hamilton, executive director, American Catalog 
      Mailers Association, prepared statement of.................   102
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio, prepared statement of...................   118
    Lynch, Hon. Stephen F., a Representative in Congress from the 
      State of Massachusetts:
        Prepared statement of....................................     4
        Prepared statement of the National Newspaper Association.    32
    O'Brien, James R., vice president for distribution and postal 
      affairs, Time Inc., prepared statement of..................    94
    Riley, Michael, professor, University of Maryland University 
      College, prepared statement of.............................    84
    Robinson, Maura, vice president of pricing, U.S. Postal 
      Service, prepared statement of.............................    13
    Waller, John, director of Office of Accountability and 
      Compliance, Postal Regulatory Commission, prepared 
      statement of...............................................    22


    THE PRICE IS RIGHT, OR IS IT? AN EXAMINATION OF USPS WORKSHARE 
          DISCOUNTS AND PRODUCTS THAT DO NOT COVER THEIR COSTS

                              ----------                              


                        WEDNESDAY, MAY 12, 2010

                  House of Representatives,
Subcommittee on Federal Workforce, Postal Service, 
                      and the District of Columbia,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 3:01 p.m., in 
room 2154, Rayburn House Office Building, Hon. Stephen F. Lynch 
(chairman of the subcommittee) presiding.
    Present: Representatives Lynch, Norton, Cummings, Kucinich, 
Clay, Connolly, Chaffetz, and Bilbray.
    Staff present: Jill Crissman, professional staff; Aisha 
Elkheshin, clerk/legislative assistant; Williams Miles, staff 
director; Rob Sidman, detailee; Dan Zeidman, deputy clerk/
legislative assistant; Howie Denis, minority senior Counsel; 
and Alex Cooper, minority professional staff member.
    Mr. Lynch. Good afternoon. The subcommittee on Federal 
Workforce, Postal Service, and the District of Columbia hearing 
will now come to order. I apologize for the brief delay. We had 
some roll calls on the floor. But I would like to welcome our 
ranking member, Mr. Chaffetz, and members of the subcommittee, 
all hearing witnesses and those in attendance.
    In light of the financial difficulties confronting the 
Postal Service, we have called today's hearing to explore the 
current economic impact on various workshare discounts, and to 
examine whether these pricing structures correctly incentivize 
mailers. The hearing will also investigate the issues related 
to products that do not currently cover their costs. The chair, 
the ranking member, and the subcommittee members will each have 
5 minutes to make opening statements, and all Members will have 
3 days to submit statements for the record.
    Again, welcome.
    As you are undoubtedly aware, the Postal Service continues 
to confront a dire financial situation. While the Postal 
Service has recently revealed some good news, that it is doing 
better than previously anticipated by some $1.2 billion, the 
organization is still on track to lose approximately $7 billion 
by the end of this year. And this will be on top of a 
cumulative loss of nearly $12 billion over the previous 3 
fiscal years.
    Much of the Postal Service's recent financial difficulties 
can be attributed to the rise of electronic communication and 
the corresponding dramatic decline in mail volume, as well as 
the nationwide economic downturn, and in some ways statutorily 
imposed prefunding of future retiree health benefit 
obligations.
    One of the most important tools that the Postal Service 
currently has to deal with its financial difficulties is its 
enhanced pricing flexibility as provided by the Postal 
Accountability and Enhancement Act. However, utilization of 
this flexibility has not been an easy matter, as the Postal 
Service and others have noted. In the given market environment, 
increasing rates must be justified, balanced and reasonable, 
since such changes could further accelerate the pace of mail 
volume declines.
    Recent reports and studies have identified several pricing 
areas that should be revisited and further explored as 
opportunities to generate more revenue. Today this subcommittee 
convenes to discuss pricing issues relating to workshare 
discounts and products that are currently considered as not 
covering their costs. First, with respect to workshare 
discounts, the Postal Regulatory Commission's fiscal year 2009 
ACD, their Annual Compliance Determination, found that 30 
workshare discounts exceeded their associated costs. According 
to the PRC, 17 of these discounts were justified, while the 
remaining 13 were not properly justified and should be 
realigned at the next general price adjustment. Toward that 
end, I look forward to hearing from today's witnesses on these 
particular discounts and other workshare-related topics, 
especially given that approximately 80 percent of all USPS mail 
is now workshared. With such a large portion of mail being 
workshared, it is crucial that workshare discounts be priced to 
maximize revenue and efficiency of the entire postal industry, 
especially during such bleak financial times.
    In addition to discussing aspects of worksharing, which is 
the amount of prep that is being done by mailers in advance of 
handing the mail off to the post office, and also workshare-
related discounts, today's hearing also touches on the subject 
of postal products deemed not to cover their actual costs. 
Highlighted by both the PRC's Annual Compliance Determination 
and the Government Accountability Office's April 12th report, 
the Postal Service lost, in the aggregate, approximately $1.7 
billion in fiscal year 2009 due to some 14 postal products that 
are not covering their costs of delivery. Although some of 
these products might be appropriately priced below cost for 
public policy reasons, many stakeholders have begun to call for 
more accurate pricing of these mailings, especially given the 
current financial status of the Postal Service. Toward that 
end, the subcommittee looks forward to an informative 
discussion exploring the Postal Service's pricing policies, 
approaches to data collection and utilization as it relates to 
products that have been found to fall short in covering their 
actual costs.
    Today's hearing will provide us an opportunity to hear from 
the Postal Service, the Postal Regulatory Commission, our 
mailers, affected unions, and well-respected economists and 
scholars on these vital topics. It is my hope that the 
testimony and feedback we receive from today's witnesses will 
provide the committee with information on the value of these 
important programs in a post-Postal Accountability and 
Enhancement Act environment that incentivizes the Postal 
Service to make a profit and to alter its business model in 
order to meet the current and future challenges.
    Again, I thank you each of you for being with us this 
afternoon, and I look forward to your participation.
    [The prepared statement of Hon. Stephen F. Lynch follows:]

    [GRAPHIC] [TIFF OMITTED] T8349.001
    
    [GRAPHIC] [TIFF OMITTED] T8349.002
    
    Mr. Lynch. I now yield 5 minutes to the ranking member, Mr. 
Chaffetz, for an opening statement.
    Mr. Chaffetz. Thank you, Mr. Chairman. I appreciate holding 
the hearing, and to all the witnesses who are here today, I 
appreciate your patience in waiting for us after roll call 
votes, and I appreciate your testimony here today and taking 
the time and preparation for it.
    It's my understanding that the U.S. Postal Service is 
expecting to file an exigency rate case in July, and so this 
hearing's timing is significant.
    The world of worksharing discounts provided to businesses 
which perform duties that the Postal Service would have to 
otherwise perform and cost attribution of postal products is 
extremely challenging. On a basic level it is understood that 
worksharing discounts should only be as big as cost savings 
provided, and that the postal products should be covering their 
attributable costs. It is also equally understood, however, 
that the methodology for determining attributable costs is far 
from an exact science. Many of these money-losing products are 
not stand-alone pieces of mail, but are, in fact, responsible 
for a great deal of additional postal communication and 
consequently revenue. This is the danger of taking certain 
products in isolation.
    We must also bear in mind that products are only worth what 
the market is willing to pay. One cannot make the assumption 
that volume will stay the same as the price of the product is 
increased. This price sensitivity is something that we need to 
dive deeper into and must be studied very carefully. Hopefully 
this will be done leading up to the review of the rate case.
    Additionally, discussions of attributable costs are 
incomplete without a few facts regarding institutional costs, 
which are paramount in this case. Obviously, in every finance 
class there usually is spent time addressing the potential 
dangers of eliminating programs, outlets, or products that are 
not profitable. When these programs or products are 
discontinued, the institutional or fixed costs that were 
originally allocated to the shut-down program get redistributed 
to the remaining products, which makes products that were 
previously barely profitable suddenly notprofitable. I hope 
that the agencies understand this. This does not mean 
unprofitable programs can't be shut down, but it means you have 
to understand the total financial implication and not just the 
cost savings in that bubble.
    It also means that the U.S. Postal Service itself in this 
case must analyze its own efficiencies. While the U.S. Postal 
Service may be the most efficient postal system in the world, 
the truth is that there's no postal system like this anywhere 
in the world.
    This hearing could help establish some very basic building 
blocks for knowledge on these extraordinary complex issues. I 
would caution against jumping to conclusions over what we hear 
today. The world of rate setting and adjusting has massive 
implications for the trillion-dollar mailing and paper 
industries, and any congressional intervention must be done 
with great caution.
    With that, we look forward to this hearing, and, again, I 
appreciate the witnesses for their time and preparation today.
    With that, Mr. Chairman, I yield back.
    Mr. Lynch. I thank the gentleman.
    The Chair now recognizes the gentleman from Virginia, Mr. 
Connolly, for 5 minutes for an opening statement.
    Mr. Connolly. Thank you, Mr. Chairman. And thank you for 
your leadership in helping us to restructure the Postal Service 
and for conducting a thorough investigation of options for cost 
savings and revenue enhancement.
    This hearing will examine workshare discounts and posted 
pricing for certain products that do not cover the cost of 
delivery. The Postal Regulatory Commission has investigated the 
Postal Service's workshare program and found that 30 workshare 
discounts are actually costing as much as they save, meaning 
that the Postal Service could be reducing losses by adjusting 
those discounts. This represents an opportunity to achieve cost 
savings without service cuts.
    PRC also identified 61 workshare discounts that are 
profitable for the Postal Service. In other words, the 
discounts for these workshares are less expensive than the cost 
the Postal Service would otherwise incur by processing the mail 
itself.
    Though some have condemned the practice as well as the 
underlying statute that permits the Postal Service to earn 
profits on these workshares, it seems to me we ought not to 
necessarily be discouraging the Postal Service from seeking 
more opportunities like these to make a profit when it's losing 
so much money. There is no inherent virtue in creating a 
workshare discount that precisely matches the cost of the 
Postal Service processing the mail itself. In fact, it's 
conceivable that the Postal Service could earn a profit through 
less discounted workshares by setting a price that still saves 
cost for private sector partners participating in workshare.
    We should protect the Postal Service's ability to make 
profits on workshares, while supporting the PRC's oversight to 
ensure that the Postal Service is not losing money on 
workshares. Although the workshare program was intended to be 
temporary, if the Postal Service can use it to achieve 
efficiencies, it should not be curtailed or eliminated at this 
time.
    Pricing for periodicals and mail flats represent another 
opportunity to increase Postal Service revenue. In 2006, 
Congress imposed a price cap on all classes of mail, which is 
linked to the Consumer Price Index. We should consider 
revisiting that cap to allow the Postal Service to reduce 
losses associated with mailing magazines and mail flats on 
catalogs. With these two product categories alone losing over 
$1.2 billion in fiscal year 2009, we need to provide authority 
to adjust prices as part of a broader Postal Service 
restructure. It's unrealistic to expect the Postal Service to 
function like a business when Congress has imposed pricing 
restrictions that do not apply to private sector businesses and 
competition.
    Again, I want to thank you, Chairman Lynch, for your 
ongoing leadership to identify policy options for Postal 
Service restructuring. Based on today's hearing, I believe it's 
clear that the Postal Service should maintain its authority to 
make profits for workshares and to receive additional authority 
to adjust certain mail prices to avert losses for magazines and 
mail flats. And I look forward to the testimony.
    Mr. Lynch. I thank the gentleman.
    [The prepared statement of Hon. Gerald E. Connolly 
follows:]

[GRAPHIC] [TIFF OMITTED] T8349.003

    Mr. Lynch. It is the custom before this committee that all 
witnesses to provide testimony shall be sworn. Could I ask you 
both to rise and raise your right hands.
    [Witnesses sworn.]
    Mr. Lynch. Let the record show that each of the witnesses 
has answered in the affirmative.
    I am going to now just offer a brief introduction of our 
witnesses.
    Ms. Maura Robinson was named vice president of pricing at 
the U.S. Postal Service in June 2008. In this role Ms. Robinson 
is responsible for the pricing of all postal and nonpostal 
products and services and for providing analytical support and 
evaluation of all contract pricing and new product initiatives.
    Mr. John Waller is a director of the Office of 
Accountability and Compliance of the Postal Regulatory 
Commission. Mr. Waller leads the Commission's analysis of 
Postal Service pricing proposals and oversees technical support 
for studies including measurement of the Postal Service's 
performance and impact assessment of major Postal Service 
network reorganizations.
    Each of you will have 5 minutes for an opening statement. 
When you see the light turn red, you should probably wrap up.
    Ms. Robinson, you're now recognized for 5 minutes.

 STATEMENTS OF MAURA ROBINSON, VICE PRESIDENT OF PRICING, U.S. 
    POSTAL SERVICE; AND JOHN WALLER, DIRECTOR OF OFFICE OF 
  ACCOUNTABILITY AND COMPLIANCE, POSTAL REGULATORY COMMISSION

                  STATEMENT OF MAURA ROBINSON

    Ms. Robinson. Good afternoon, Mr. Chairman and members of 
the subcommittee. Today I will discuss the Postal Service's 
approach to setting prices, the impact of the Postal 
Accountability----
    Mr. Lynch. Could you pull the mic closer?
    Mr. Connolly. We cannot hear you.
    Ms. Robinson. Today I will discuss the Postal Service's 
approach to setting prices, the impact of the Postal 
Accountability and Enhancement Act of 2006, and our workshare 
discount philosophy.
    The Postal Act of 2006 enabled the Postal Service to bring 
new products and services to market more quickly. The 
additional pricing flexibility helps us better manage our 
products and services and make them an even greater value in 
the marketplace.
    The new postal law provided different pricing rules for 
mailing and shipping services. Prices for mailing services may 
not exceed the rate of inflation based on the Consumer Price 
Index for the previous 12 months for any class of mail, while 
price changes for shipping services must produce sufficient 
revenue above a price floor that covers attributable costs for 
each competitive product.
    Last year the Postal Service announced that mailing service 
prices would not increase in 2010. Due to the severe economic 
recession and the electronic diversion of mail, volume has 
dropped drastically, and we were concerned that a price 
increase would further contribute to this decline. Instead, to 
generate additional revenue and stimulate mail growth, the 
Postal Service implemented pricing incentives, seasonal sales, 
and a flat rate shipping option. Overall our goal was to foster 
a long-term pricing strategy that promotes an efficient and 
cost-effective postal system, and to promote mail volume 
retention and growth through pricing and product innovations.
    We must use postal pricing as a tool to encourage customers 
to stay in the mail. The mail has great power to deliver 
customer value and has a demonstrated ability to help customers 
grow their business. After experiencing a year in which we lost 
an unprecedented 25 billion mail pieces, the Postal Service's 
current focus must be on retaining and growing volume. We know 
that our largest customers are increasingly more likely to mail 
less if postage prices increase.
    Among our financial challenges are products that fail to 
cover their attributable cost. This is clearly a cause for 
concern. No business can afford to lose on an ongoing basis 
billions of dollars on a few products. However, by the same 
token, no business can afford to take short-term actions that 
will create long-term irreparable damage to customers. 
Improving the financial contribution of money-losing products 
requires focus on both the revenues generated by the product 
through the prices charged as well as the cost of providing the 
product.
    Recently we announced that we intend to increase prices 
moderately in early 2011 using the exigent price change 
mechanism provided in the PAEA. However, as we move forward, we 
are working to strike a balance between addressing cost-
coverage issues and maintaining our customer base. There are no 
easy solutions. Prices for below-cost products will be 
increased to address the cost challenges; however, we intend to 
do so in a judicious and measured way to improve financial 
performance over time.
    The Postal Service has long offered its customers choices 
through its worksharing program. If a customer presorts and 
prebarcodes mail, transports it closer to its ultimate 
destination, or performs other functions that reduce the Postal 
Service's costs, they pay a lower price based on the cost the 
Postal Service does not incur.
    Workshared mail is among our most profitable mail. The cost 
coverage for workshared first-class mail letters was 291 
percent in fiscal year 2009, the highest for any product. For 
each dollar the Postal Service spends to process, transport, 
and deliver workshare first-class mail letters, we receive 
almost $3 in revenue.
    When a discount is discussed in pennies, it's easy to 
portray changes as minor; however, when you view those pennies 
in terms of the postage actually paid by our customers, a 
clearer view of the effects of changes in workshare discounts 
emerges. A 1-cent increase in prices translates to an average 
of $9 million in additional postage annually for each of our 
five largest customers. In an environment of tight budgets, 
cost cutting, and ample alternatives to the use of the mail, 
the potential effect of additional expenditures of this 
magnitude could be severe.
    A viable Postal Service can only exist if we offer prices 
and products that are good customer value. Over the last 30 
years, stamp prices have increased at about the rate of 
inflation and remain a true bargain in today's world. Our mail 
system cannot survive unless it remains affordable for 
everyone. If today's actions shortsightedly accelerate the pace 
of electronic diversion and the search for alternatives to the 
mail, it will be difficult to continue to provide the American 
people with the postal services that they need.
    In closing, during tough economic times we continue to 
achieve record-level cost reductions, maintain high service 
level, and attain successes with new initiatives for 
incremental revenue generation.
    I'd be pleased to answer any questions that you may have.
    Mr. Lynch. Thank you. Thank you, Ms. Robinson.
    [The prepared statement of Ms. Robinson follows:]

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    Mr. Lynch. Mr. Waller, you're now recognized for 5 minutes.

                    STATEMENT OF JOHN WALLER

    Mr. Waller. Thank you. Thank you for the opportunity to be 
here today.
    Appropriate pricing can sustain operations and provide 
postal services for the Nation. To help generate new revenue, 
the Commission has already approved 40 Service-proposed pricing 
initiatives this fiscal year, while providing the transparency 
and review required by law. This builds on the long tradition 
of the Commission working with the Postal Service and mailing 
community to develop workshare discounts that over the years 
have increased volume, revenue, and, most importantly, net 
revenue.
    That experience was incorporated into current law when 
worksharing discounts were defined as being provided to mailers 
for the presorting, prebarcoding, handling, or transportation 
of mail, as further defined by the Postal Regulatory 
Commission. When mailers perform one or more of these functions 
prior to mailing, the Service can avoid certain transportation 
and mail processing costs. If workshare discounts equal avoided 
costs, then other mailers are not disadvantaged, and the 
Service retains the same unit contribution to institutional 
costs.
    But when discounts exceed avoided costs, contribution can 
be lost, and a mailer has price incentives to perform postal 
functions that the Service can perform at a lower cost. The 
PAEA explicitly requires the Commission to ensure that this 
does not occur unless certain specified exceptional 
circumstances exist.
    The difficult computational task is to identify the cost of 
handling mail that is similar except for being workshared. As 
an example, consider a first-class letter mailing that 
satisfies automation requirements and is presorted to the five-
digit ZIP code level. The average Postal Service unit cost for 
processing and delivering this mail is 8.7 cents. However, 
without presorting and other workshare requirements, the cost 
is 18.2. The 9.5 difference is the avoided cost.
    Methodologies for determining avoided costs have been 
developed over the years and continue to be refined through 
public hearings, with input from the Postal Service and other 
interested parties. Current avoided costs are determined each 
fiscal year as part of the Annual Compliance Determination 
process to ensure timely detection of discounts that are too 
large and need to be realigned.
    As noted by the chairman, for fiscal year 2009, the 
Commission found that 13 worksharing discounts exceeded avoided 
costs and were not justified by the Service, with exceptions 
outlined in the PAEA. The Commission has determined that the 
best time or most appropriate time to realign these 13 
questionable discounts is the upcoming exigent rate case.
    Last year the Service had a loss of $3.8 billion with $1.7 
billion due to 14 market-dominant products that did not cover 
their attributable costs and contribute to the institutional 
costs; $1.5 billion came from periodicals, standard mail flats, 
and standard mail nonflat machinables and parcels. All of these 
products involved flats for which the Postal Service has a 
longstanding cost-control problem.
    Standard mail flats were given less-than-average increases 
for the last 2 years, and there has been a rapid increase in 
losses from that product, with a near tripling in 2009. While 
this pricing strategy has been given an opportunity to succeed, 
the Commission has cautioned against continued less-than-
average increases for loss-making products without a plan for 
how net revenue is helped over the long run. First-class and 
bound printed matter flats do cover attributable costs, so the 
standard flat mail losses are not an unsolvable problem.
    Standard mail nonflat machinables and parcels received 
significant price increases of 16.4 percent last May and 9.7 
percent the year before, well above the average, but more work 
is needed to fully align revenue and costs.
    Periodical has not covered its attributable costs since 
1997. The Commission and the Postal Service have a study 
underway to find out what some of the chronic costs and revenue 
imbalance causes are. It should be completed this year and sent 
to the Congress for consideration.
    The Commission has emphasized that financial difficulties 
to the Service is a multifaceted problem, not just a matter of 
piece--of the prices, but of operating costs, legacy costs, 
business model and a changing mail market. As solutions are 
sought, the Commission is responsible for providing 
transparency on revenue and costs.
    Thank you.
    Mr. Lynch. I thank the gentleman.
    [The prepared statement of Mr. Waller follows:]

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    Mr. Lynch. Let me just--I will yield myself 5 minutes for 
questions, but before I do, why don't we do this: Before I move 
to questions and begin my time, I would like to ask unanimous 
consent that the statement from the National Newspaper 
Association, which highlights their concerns over postal 
pricing for in-county newspapers, be included for the record.
    Hearing no objection, so ordered.
    [The information referred to follows:]

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    Mr. Lynch. All right. Just so this doesn't get too 
technical, I want to, first of all, try to offer a little bit 
of an explanation to the folks who are unfamiliar with this 
process about workshare. Workshare simply refers to the portion 
of work that mailers conduct when they bring their mail--before 
they bring their mail to the post office, and that can involve 
presorting. If a mailer has a lot of mail, and they bring it to 
the post office and it's presorted, it can be barcoded, it can 
be bundled in ZIP codes and actually transported privately to 
the Postal Service rather than picked up so that private 
mailers are doing a lot of work that the Postal Service might 
have otherwise done, and that's what we call workshare. And the 
idea of these discounts is really trying to determine what the 
value of that presorting, bundling, delivery, barcoding, the 
things that they have done for the Postal Service to make the 
delivery more efficient. And so we try to give them a discount 
that exactly matches the service that they have provided.
    The problem begins when on the one hand sometimes we 
overcompensate the mailers. We give them more of a discount 
than the value of the services that they provided, which ends 
up in a boon or a windfall, some say, to the mailers and an 
inefficiency or a lack of valuing of the service provided by 
postal employees. On the other hand, sometimes we shortchange 
our mailers, and we don't give them enough of a discount, and 
in that instance you actually have an antitrust problem or a 
situation where the Postal Service is actually retaining 
revenue or taking advantage of the mailers.
    So that's where we have these differences. And hopefully 
that's a little bit clearer than just using terms like 
``workshare'' and ``cost avoidance'' and other things like 
that.
    Let me ask you, during the Postal Service's March 2, 2010, 
announcement of its new business plan, the post office stated 
that their goal was to have all products covering their costs. 
Now, we have several general categories of mail that actually 
cost more to deliver than what we charge, and so those products 
do not meet the cost of delivery based on the rates that we 
charge. How do you plan to meet your goal of having all 
products covering their cost by 2020 based on the situation we 
have right now?
    Ms. Robinson.
    Ms. Robinson. As I've indicated, there are problems with 
some of our products that do not recover our costs, and that's 
not a situation that is sustainable for any organization. The 
Postal Service is looking at all alternatives to grow mail 
volume, to increase our revenue from those products, and to 
operate with those products as efficiently as possible. More 
practically we're going to be addressing the pricing issues 
through, in part, an exigent price increase which will be filed 
later this year in which we intend to have a moderate price 
increase that will in part address the cost challenges within 
products such as standard mail, flats, and periodicals.
    Mr. Lynch. OK. Let me interrupt there. So we have flats, 
which you've got magazines and catalogs, things like that, that 
are not currently paying for themselves. We're subsidizing the 
delivery of those products. They're awkward, but large; they're 
odd sizes. Then give me another area where we are mispricing.
    Ms. Robinson. The three largest categories where you're not 
covering costs would be periodicals, magazines and newspapers.
    Mr. Lynch. Right.
    Ms. Robinson. Standard mail flats, which is typically 
catalogs and other large paper-size pieces of advertising mail, 
and standard mail parcels, which are lightweight parcels 
weighing under----
    Mr. Lynch. How are we going to bring those up to a category 
where they pay for themselves?
    Ms. Robinson. We're looking at increasing the product 
prices over time. We are going to be doing it in a measured way 
over approximately a 10-year horizon.
    Mr. Lynch. All right.
    Ms. Robinson. However, we do need to address the customers' 
concerns that we don't severely damage their businesses by 
price increases that are too large.
    Mr. Lynch. Let me ask you--and my time is running out. You 
say in your testimony that through this exigent pricing or 
emergency pricing adjustment that we're going to do in 2011 
that you're going to institute a, ``moderate increase.'' Give 
me a hint on what you mean by ``moderate.'' Is there a 
percentage that you can attach to that or something that I 
would be able to divine what the cost might be as opposed to 
being moderate?
    Ms. Robinson. The Postal Service's Board of Governors is 
going to make that decision, and we're looking at balancing the 
impact on our customers versus the Postal Service's need for 
additional revenue and to address the cost challenges.
    Mr. Lynch. Do you have a moderate range? Can you give me a 
range of between what and what, what that might cost, or are 
you afraid of scaring people?
    Ms. Robinson. That's a decision that's going to be made by 
the Postal Service's Board of Governors, and they've not made 
that decision yet.
    Mr. Lynch. OK. I've used up all my time.
    The chair now recognizes the gentleman from Utah Mr. 
Chaffetz for 5 minutes.
    Mr. Chaffetz. Thank you, Mr. Chairman.
    Ms. Robinson, you say in your testimony here, if I'm 
reading it right--at least on page 5 of the copy that I have 
here, it says: ``Workshare mail is profitable. There are many 
myths about worksharing, including an oft-cited observation 
that if discounts are greater than avoided costs, then it must 
be profitable. Nothing could be further from the truth. Despite 
the sometimes vocal rhetoric, workshare mail is among the most 
profitable mail for the Postal Service to handle.''
    So you cited three areas where you say it's not profitable, 
and yet in your testimony you also say it's very profitable. 
What are those areas where maybe we're not giving enough 
discount? You cited three where we're maybe going the opposite 
direction, but what are we overcharging for?
    Ms. Robinson. Well, I'm not sure I would characterize it as 
overcharging. For example, in workshared first-class mail 
letters, typical pieces, bills, statements, correspondence you 
would receive from other businesses, the cost coverage----
    Mr. Chaffetz. But we're not giving them enough discount; is 
that what we're saying? Because as the chairman pointed out, 
there are some legal implications for not passing it along, and 
if you're citing things that are saying, well, these are 
unprofitable, but the overall category is very profitable, what 
are those areas, specific items, that you're not giving enough 
discount for?
    Ms. Robinson. I would not characterize it as not giving 
enough discount. The discounts are greater--greater than the 
avoided cost, which is one factor to consider. We're also 
evaluating the net contribution of, for example, first-class 
mail letters, which is very high, and the potential effect on 
customers if we reduce the discounts, effectively increase the 
prices for those customers. Categories such as standard mail 
flats, which are some--a fairly workshared category, do have 
fundamental cost challenges that we're addressing for 
operational----
    Mr. Chaffetz. Are there specific categories, specific 
pieces of mail that we're not giving enough of a workshare 
discount to?
    Ms. Robinson. I think there are specific categories of mail 
where we need to very seriously consider the effects of----
    Mr. Chaffetz. You can't name any right off the top of your 
head right now? Because you've named some that you felt like--
you know, periodicals and that sort of thing.
    Ms. Robinson. I think the first-class mail is a category 
where we have high profits. It's a very profitable source of 
mail for the Postal Service. I would not characterize the 
discounts----
    Mr. Chaffetz. And you won't be seeking a rate increase in 
those categories, correct?
    Ms. Robinson. No. When we look at increasing prices through 
the exigent price mechanism, we will be looking at increasing 
prices for all mail.
    Mr. Chaffetz. Even if it's in that most profitable area?
    Ms. Robinson. Yes. First-class mail is contributing about 
70 percent of the contribution to the institutional costs of 
the Postal Services. Given the Postal Service's financial 
condition, we can't afford not to increase the price of that 
mail as well as the prices of other categories.
    Mr. Chaffetz. If the volume had stayed the same, would we 
be having the same discussion, or is it directly related to 
volume?
    Ms. Robinson. It is in part related to volume and to the 
pressures in the industries in which our first-class mailers do 
business, but given the financial pressures on the Postal 
Service, we believe that we----
    Mr. Chaffetz. But I'm saying those financial pressures, if 
the volume had remained the same--and I understand and 
appreciate that we've taken a precipitous dip. If they had 
stayed the same, would we be having the same discussion? Would 
there need to be this discussion happening?
    Ms. Robinson. I think if the volume had remained the same, 
the financial circumstances facing the Postal Service would 
obviously be substantially----
    Mr. Chaffetz. Would we still be upside down, do you think, 
or in the red?
    Ms. Robinson. If the volume had remained the same, there 
are some pressures on the Postal Service financially associated 
with retiree health benefits and some other fundamental issues, 
with at least the secular decline associated with electronic 
diversion. If the volume remained the same, I think the Postal 
Service would be moving forward on a typical schedule for price 
increases under the price cap.
    Mr. Chaffetz. One of the things, Mr. Chairman, that I still 
struggle with is clearly in your testimony and just the basic 
economics, you say raising prices will reduce volume.
    Ms. Robinson. Yes.
    Mr. Chaffetz. But you also say at the same time one of the 
biggest challenges or opportunities, if you will, for the 
Postal Service is to increase volume. And that's where there's 
a disconnect that I just worry about, the accounting of how we 
try to go and institute. It's the basic question. It's the 
multibillion-dollar question. I realize how difficult it is to 
come to the conclusion.
    Mr. Waller, I've only got seconds here, but is there 
anything you would like to address in the questions I asked? 
I'm sorry I didn't----
    Mr. Waller. Yes. In the ACD, if you look in chapter 7, 
there's a list of all the products that are either above or 
below or equal to avoided costs.
    Mr. Chaffetz. And is there anything in that list that you 
think arises above and beyond what the legal prescription is 
for----
    Mr. Waller. Well, there are those that are greater than 100 
percent, and that's the legal prescription that is in the PAEA.
    Mr. Chaffetz. But there are some that are in excess of 100 
percent.
    Mr. Waller. Yes, there are. There were the 14 that we 
identified, and they are--yes, and there are some big volumes 
there, too.
    Mr. Chaffetz. Thank you.
    Mr. Chairman, I just ask unanimous consent to enter into 
the record a Congressional Research Service report entitled, 
``Postage Subsidies for Periodicals, History and Recent 
Developments,'' dated January 22, 2009, and I would like to add 
that to the record.
    Mr. Lynch. Without objection, so ordered.
    Mr. Chaffetz. I yield back the balance of my time. Thank 
you.
    Mr. Lynch. The chair recognizes the gentleman from 
Virginia, Mr. Connolly, for 5 minutes.
    Mr. Connolly. Thank you, Mr. Chairman.
    We just had a discussion about the fact that the pricing of 
certain items, magazines, catalogs, might raise antitrust 
issues. Making a profit rather than taking a big loss might 
raise antitrust issues. Has that issue ever been adjudicated?
    Ms. Robinson. Not to my knowledge.
    Mr. Waller. And I think the area of concern is in the 
worksharing discounts. If it's equal to 100 percent, you're 
sort of neutral on the--whether the Postal Service does it or 
competitors.
    Now, a lot of businesses have come into existence like 
consolidators, and they do--they make their money by doing 
the--getting lots of mailers' mail together and doing it 
cheaper than the Postal Service, sharing that with the mailer, 
and they depend upon a fair discount in order to stay in 
existence. So I think that's where some of the charges you 
set--a competitive world has been set up in mail processing and 
if that gets restricted. Now, the Commission has not been 
involved in any decisions on that I'm aware of and----
    Mr. Connolly. It just seems to me that when we're losing $7 
or $8 billion a year of taxpayer money, frankly revisiting some 
of those assumptions and some of those nice things to do for 
competition might be in order, because our first obligation 
isn't to private sector competition; while we welcome that, it 
is to the taxpayers who are ending up helping to subsidize----
    Ms. Robinson. I'd just like to----
    Mr. Connolly [continuing]. These losses.
    Ms. Robinson. I'd just like to point out that the Postal 
Service does not receive taxpayer dollars. Our revenue comes 
from the postage that our customers pay.
    Mr. Connolly. All right. Those customers are our 
constituents, and they are still subsidizing those losses. 
Otherwise, you wouldn't periodically, when we have hearings 
like that, be bringing those losses to our attention and the 
need for urgent action.
    Your testimony, Ms. Robinson, notes three products--
periodicals, mail flats, and standard mail parcels--fell short 
of covering their cost by $1.4 billion last year. The PRC's 
most recent Annual Compliance Determination cautioned against 
less-than-average price increases for loss-making products 
without a plan for increasing net revenue in the long run. Does 
the Postal Service currently have a long-term plan to ensure 
that those products increase in that revenue?
    Ms. Robinson. Yes. The Postal Service is developing a long-
term plan to address those issues. We are going to be 
increasing the prices of the products that are not covering 
their costs in a measured way to address the issue, while 
maintaining the--limiting the effect on the customer base.
    Mr. Connolly. So you're working on a long-term plan.
    Ms. Robinson. We are developing a long-term plan that will 
include a price increase using the exigent price mechanism that 
will be filed with the Postal Regulatory Commission later this 
year.
    Mr. Connolly. Any idea when we might expect to see that 
long-term plan?
    Ms. Robinson. That will be up to the decision of the Board 
of Governors. We should be seeing it relatively shortly.
    Mr. Connolly. Relatively shortly. OK.
    The chairman talked about the workshare discounts, and 
again, the PRC in its Annual Compliance Determination found 
that 30 of those workshare discounts exceeded their avoided 
costs, 17 of them justified under statutory exceptions, 13 not 
justified. How do we intend to go about correcting those 13?
    Ms. Robinson. The Postal Service believes it justified the 
workshare discounts that exceeded avoided costs largely based 
on the potential effect of the efficiency of the Postal 
Service----
    Mr. Connolly. I'm sorry, Ms. Robinson. I cannot hear you.
    Ms. Robinson. I'm sorry. The Postal Service believes it 
justified those discounts based on the efficiency exception 
within the statute. Reducing those discounts, effectively 
increasing the prices for those products, would cause a 
reduction in volume that we are concerned would substantially 
reduce the volume to our system and hamper the efficiency of 
the system. So we believe we've addressed the issues 
surrounding those discounts.
    Mr. Connolly. Thank you.
    Mr. Waller, I'm going to run out of time, so let me ask 
quickly, in general how often ought rate adjustments be made to 
realign avoided costs with the workshare discounts?
    Mr. Waller. Well, they're on--we're on sort of a yearly 
cycle now because that's the way the costs come together. Very 
expensive to find out what each product costs, what each 
activity costs, and there are a lot of surveys and things that 
go on. So we're sort of tied into an annual cycle, and that 
probably is appropriate because you will catch it before it 
goes on too long.
    Last year the--at the beginning of the year, there were a 
lot of the discounts that were exactly equal to 100 percent. 
Actual mail-processing costs dropped, and therefore the 
discounts were too large then. It was caught this year, and the 
adjustments can be made in this next rate case.
    Mr. Connolly. Thank you, Mr. Chairman.
    Mr. Lynch. Thank you.
    The chair now recognizes the gentleman from Maryland, Mr. 
Cummings, for 5 minutes.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    First of all, thank you all for being here today, and I 
just want to--Dr. Riley, whom we're going to hear from in the 
next panel, says that--in his testimony, he says that ``in the 
1990's, management began to view the primary customer of the 
post office as the larger mailer instead of the individual 
customer. These representatives focus on obtaining discounts 
for their clients, the large mailers, and/or converting first-
class mail to less expensive categories of mail.''
    I wanted to give you all a chance to respond to that. What 
do you think of that? Do you agree with him?
    Ms. Robinson. During the 1990's, we did see a substantial 
growth in commercial mail in what would be considered to be the 
workshared categories. That was in part in response to 
incentives that the Postal Service put forward through the 
workshare discount program. That mail helped to drive the 
automation program in the Postal Service that kept costs low 
for all customers, including the individual household customer. 
So there's been a large expansion of the efficiency of the 
Postal Service that has been in part enabled by the existence 
of very high-quality, clean mail that efficiently runs in 
operations that helps to keep the total cost of processing mail 
down.
    The Postal Service looks at the typical household mailer as 
very important to us. That's our fundamental customer base, and 
we're very interested in preserving the mail for the typical 
household customer, and in part we need to do that by 
preserving the financial stability of the Postal Service and 
managing our pricing and product structures for commercial 
customers so they stay in the mail, to enable the typical 
household customer to continue to be able to have a viable 
Postal Service for the future.
    Mr. Cummings. Mr. Waller, do you have a response to that?
    Mr. Waller. Yes. The importance of having the discount 
equal avoided cost is that it doesn't put the burden of the 
discount on the small mailer--on the individual mailer. No 
other mailer has to pick up that extra institutional cost that 
might be given away by having a discount larger than the 
avoided cost. I think that's why it got put in the act, so that 
the Commission should ensure that doesn't occur. That's the way 
to protect not only the small single-piece mailer, but all the 
other mailers in the system, too.
    Mr. Cummings. Mr. Waller, you testified that the Postal 
Service has had longstanding cost-control problems with the 
handling of mail flats, is that right?
    Mr. Waller. Yes.
    Mr. Cummings. And would you give me a little bit more 
explanation on that?
    Mr. Waller. Well, the reason I say ``longstanding'' is back 
when I was first kind of with the Commission in 2000, the--it 
was tracking the costs, and periodicals were still going up at 
that time, and they were mainly flats. So the Commission said, 
Postal Service, send over some witness, explain what's going 
on. And basically what was happening was that the automation or 
mechanical processing equipment wasn't really helping that 
much. A lot was still being manually sorted, and the promise 
was, well, we've got a new system coming, the AFSM-100. It did 
help a lot, but still those costs seemed to spiral out with too 
much manual sorting and too--too expensive handling costs on 
the flats.
    Now the answer is supposedly in the FSS, but we'll have to 
see the flats sequencing system, if that actually produces any 
savings. It just has maintained itself as the high cost of 
handling flats. It hasn't gotten a handle on it yet.
    Mr. Cummings. Now, you also state that due to the continual 
changes in the postal operations, it's necessary to 
periodically review how workshare costs are developed. And who 
conducts those reviews?
    Mr. Waller. The Commission does. The--we have order--or 
procedures for what data the Postal Service is to provide so we 
can track those costs. And as I said a moment ago, what 
happened in 2009, some of those avoided costs, the Postal 
Service found a way to perform them in a less expensive way. So 
the costs avoided were less, so, therefore, the discounts 
should be dropped and appropriately adjusted. And it's on that 
ground that you have to continually look at that, because if 
suddenly something becomes operational, some magical way of 
processing, you want to build that in as costs are less now, 
less give, less discounts.
    Mr. Cummings. I see my time is up. Thank you, Mr. Chairman.
    Mr. Lynch. I thank the gentleman.
    The chair now recognizes the distinguished gentleman from 
Missouri, Mr. Clay, for 5 minutes.
    Mr. Clay. Thank you, Mr. Chairman, and thank you for 
conducting this hearing.
    Ms. Robinson, we recently held hearings in this committee 
regarding the Postal Service's uncertain financial future. In 
your opinion, how much do issues with workshare discounts 
factor into the Service's financial woes? Any contributing 
factors?
    Ms. Robinson. Clearly you need to evaluate all pricing in 
relation to the Postal Service's financial position. I'd like 
to observe for the majority of first-class mail workshare, 
which is most of the workshare mail, we are actually making 5 
cents more per piece for that mail than we do on single-piece 
mail. This is highly profitable mail, and continuing that 
workshare program is very important for the Postal Service. 
Some categories that are cost-challenged, such as standard mail 
flats, are very heavily workshared. We're looking at addressing 
those issues over time.
    Mr. Clay. OK. It has been reported that the Postal Service 
predicts the rate increase being proposed through the exigent 
circumstances appeal is moderate. Can you elaborate on this 
assessment?
    Ms. Robinson. The Postal Service's Governors are evaluating 
the current situation, and are going to be making a decision on 
the size of the increase. That will be announced in the near 
future. At the moment we do believe the circumstances facing 
the Postal Service meet the exigent conditions. They are 
extraordinary. These are really dramatically challenging 
financial times for our customers.
    Mr. Clay. So do you think there will be a rate increase and 
it will make up for the difference?
    Ms. Robinson. As we announced on March 2nd, we are planning 
a rate increase in early 2011.
    Mr. Clay. OK. In July 2009, the Postal Service filed a 
request with the PRC to alter their revenue analyst method. Can 
you explain what this methodology has to do with workshare 
costs and the Postal Service's financial viability?
    Ms. Robinson. The revenue--I'm sorry?
    Mr. Clay. It's called the--they filed a request with the 
PRC to alter their revenue analysis methods. You're not 
familiar with that?
    Ms. Robinson. I'm----
    Mr. Clay. OK. Well, I will go on to the next question, 
then.
    Mr. Waller, can you respond to that?
    Mr. Waller. Oh, well, last year we talked about how you 
have to relook at these costs all the time. The Postal Service 
last year filed 30 different requests for modification, the way 
costs are calculated. Twenty-nine of those, in fact, were 
approved. One was denied. But--so that's an ongoing process. 
But they came in through the year, some of them in July, some 
of them earlier and later.
    Mr. Clay. OK. A question for either one, and both of you 
can tackle it if you would like. How much do products which do 
not cover their attributable costs factor into the financial 
hardships of the Postal Service? How much of that adds to your 
deficit?
    Ms. Robinson. In fiscal year 2009, the products that did 
not recover their costs cumulatively lost $1.7 billion.
    Mr. Clay. And the overall loss to the Postal Service was 
how much?
    Ms. Robinson. About $3.8 billion.
    Mr. Clay. OK. So it was almost a half or----
    Ms. Robinson. Yes.
    Mr. Clay. Or over a half.
    Go ahead.
    Ms. Robinson. Pardon me?
    Mr. Waller. No. I agree with that. And not only did they 
not cover their costs, then they did not create an extra 
contribution to the institutional cost, which is part of the 
act, too. They're supposed to make a reasonable contribution to 
institutional costs. So those products actually had a larger 
impact.
    Mr. Clay. OK. How can workshare issues be addressed overall 
to ensure that the Postal Service gets maximum productivity? 
How do we address that, Mr. Waller?
    Ms. Robinson. When we look at our customers, we need to 
look at what they're using the mail to do. We're talking a lot 
in terms of discounts, price differences between different 
categories of mail. In reality our customers pay prices. They 
pay dollars out of their pocket to mail, to accomplish their 
business objectives. As we look at improving the financial 
condition of the Postal Service, we need to keep the mail 
affordable for those customers.
    We need to weigh the efficiency concerns around workshare 
discounts. We need to weigh the fact that our customers have a 
lot of alternatives to the mail. The number of electronic 
possibilities for sending a bill, a statement, the information 
that would be in a newspaper or magazine is growing, and we 
need to consider that as we price our products.
    Mr. Clay. Thank you.
    Thank you, Mr. Chairman. I yield back.
    Mr. Lynch. Thank you.
    Let me ask you in light of the gentleman's question, the 
$1.7 billion delta here in terms of products that do not 
support the cost of delivery; so we're losing money on certain 
aspects. I know that Congress, very early after the 
establishment of the Postal Service at the very birth of our 
country, made some conscious policy decisions back then that 
newspapers and periodicals, because they had an informative 
dimension to them that served the public purpose--this was back 
in the day when they did not have radio, they didn't have TV, 
they didn't have 25 news stations, they didn't have the 
Internet. Congress made a decision back then as public policy 
that we needed to subsidize newspapers and periodicals because 
that's how the populace was informed. That was the decision 200 
years ago.
    Today you can click around, and it's just nonstop news on 
every single channel. You've got the Internet, all kinds of 
blogs and Web sites and radio. You've got an abundance of 
sources for informing the electorate, our citizenry.
    In light of that change in technology and in our daily 
lives, are we still justified in granting discounts to 
newspapers and periodicals, the cost of which is borne by 
others who are paying the freight for those periodicals and 
newspapers? Do you think as a policy decision it remains 
justified?
    Ms. Robinson. Over the history of the Postal Service, 
Congress has made a number of decisions that have promoted the 
editorial content within magazines and newspapers. For example, 
the periodical prices right now for mailing editorial content 
are much lower than for the advertising portion of the mail. In 
the early to mid-1990's, a decision was made by Congress that 
periodicals should no longer be directly subsidized through 
appropriations, and that those--that product should cover its 
costs through the prices paid. However, the public policy goals 
of promoting the dissemination of information and news has been 
maintained through the pricing structure of periodicals.
    Mr. Lynch. OK. I understand that. What I was asking you is 
in light of the fact that we now have the Internet, we have 
radio, we have TV that we didn't have when we adopted that 
policy, can it still be justified given the fact that other 
ratepayers, other mailers, other customers of the Postal 
Service are subsidizing newspapers?
    Ms. Robinson. The role of periodicals in American society 
is really one that is one of disseminating information. I think 
there's a lot of value of that to the American people. When we 
survey customers, folks that receive the mail, they get a lot 
of value and use out of the mail from finding that periodical 
that they requested in their mailbox. The periodical is one of 
the few things that people actually pay to receive. That value 
in the mailbox is important for the Postal Service to keep our 
customers interested in valuing the mail that they receive.
    Mr. Lynch. I understand that. I guess we're not really 
getting at the question, though. There are a lot of good things 
that are out there for people that are provided by the private 
sector without subsidy. They actually pay for stuff, and they 
pay full price for that item, for that information, for the 
Internet, radio, TV, and--but this is a special category that 
we set out early on at the birth of this country that we were 
going to subsidize through the Postal Service, the 
dissemination of periodicals and newspapers, and I'm just 
asking you as a public policy position whether that is still 
justifiable given the fact that there's all kinds of other 
sources of information out there that are available to the 
public that serve this purpose and are not subsidized by the 
Postal Service.
    Ms. Robinson. The Postal Service is looking at adjusting 
periodicals prices so they do cover their costs. We're 
concerned about the potential effect on the periodicals 
industry. We did that all in one step. At the end of the day, 
there is a public policy decision that is framed and discussed 
in the terms that Congress has established for periodicals 
pricing, which it does recognize in law the fact that the 
educational, scientific and informational value of the mail is 
important and needs to be considered within the prices we 
charge for periodicals mailing.
    Mr. Lynch. Thank you.
    Mr. Waller.
    Mr. Waller. Well, it's in the law, and the Commission is 
focused on, you know, following the law, and considering that 
it's always been--those factors have been there, I think that's 
a policy decision that Congress needs to address more than 
someone like the Commission.
    But in some of our hearings we have had very lively debates 
about this issue that you are talking about right now where the 
various mailers, in fact, came to--with a complaint to the 
Commission that the--a few years ago that the pricing of 
periodicals was not appropriate given all the changes that 
you've----
    Mr. Lynch. Look, in a perfect world I guess if we were 
making boatloads of money at the post office, we probably 
wouldn't be having this hearing, but I'm worried about the 
pension benefits, the health care benefits for these workers, 
and just trying to stabilize this system. And here is this 
somewhat of a luxury--I know we've always done it this way, but 
times have changed enormously, and the justification and the 
underpinnings for our policy have certainly eroded over time 
with the abundance of medium.
    Mr. Waller. The Commission, back the last time that we set 
rates before the PAEA came into effect, made some fairly 
dramatic increases in--or changes in the pricing structure to 
get what was perceived as maybe a fairer sharing of the burden 
of the periodicals costs among all the mailers there. It was 
sort of trying to address things are changing, maybe the 
pricing structure does need to change, and some were put into 
effect. They did have some negative impacts, and the Commission 
was criticized very heavily for some of those decisions.
    So I'd say the policy reasons are very alive out there for 
continuing this. The American public does seem to still want 
the special treatment for this, at least several of the groups 
that participate in this industry.
    Mr. Lynch. OK. I've overstayed my time.
    The chair now recognizes the gentleman from Utah, Mr. 
Chaffetz, for 5 minutes.
    Mr. Chaffetz. Thank you, Mr. Chairman.
    Talking about nonprofit mailers if I could for a second, 
very similar to what the chairman was talking about, give me a 
sense of the size and scope and the subsidies that really the 
American people are making for nonprofit mailers.
    Ms. Robinson. Nonprofit standard mailers typically pay 60 
percent of the average revenue per piece of a--a commercial 
mailing that would be similar. There are also discounts 
associated with periodicals mailed, about a 5 percent discount. 
So there are preferences granted by statute for that mail.
    Mr. Chaffetz. And either of you, what is the total subsidy 
that's coming from the American people? And isn't there an 
appropriation that actually is there to cover that cost, or 
does that just go to the bottom line?
    Mr. Waller. That's for the blind----
    Ms. Robinson. Yeah. The only congressional appropriations 
that we receive associated with providing mail is for free mail 
for the blind and overseas voters.
    Mr. Waller. About half of that loss in standard mail that 
we were talking about, standard flats, can be traced to the 
nonprofits.
    Mr. Chaffetz. Dollarwise what would that be----
    Mr. Waller. Dollarwise. Dollarwise.
    Mr. Chaffetz. What would be that dollar amount?
    Mr. Waller. About $300 and some thousand--$300 million.
    Mr. Chaffetz. $300 million.
    Mr. Waller. I was looking for the exact number here. The 
loss per piece on standard mail flats that are the commercial 
is 4.7 cents. It's 22.4 cents for the nonprofit mail. So it's 
taking a big hit, and even though they're a smaller percent of 
the volume, it comes out almost equal, $311 million or 
something like that, or approximately that. We did put that 
number in the----
    Mr. Chaffetz. When is the last time we did an analysis of 
what would happen if we, you know, got rid of the subsidy or 
adjusted the subsidy or however you want to frame it, but 
when's the last time that's been reviewed? I'm new to this so I 
need some help being pointed in the right direction to where 
specifically that is and when--when is the last time we 
actually revisited that particular portion of it.
    Ms. Robinson. We did an analysis that was presented to the 
FTC. I believe it was 2007 or 2008. The cumulative----
    Mr. Chaffetz. Whatever it is, could you provide that to us?
    Ms. Robinson. We can provide that for the record.
    Mr. Chaffetz. I know it is hard right off the top of your 
head. And it actually kind of scares me that you actually know 
that right off the top of your head.
    Ms. Robinson. Yeah. Basically the cumulative value of the 
nonprofit mail subsidies and the periodicals together was about 
$1\1/2\ billion.
    Mr. Chaffetz. OK. And of that, the nonprofit was--OK.
    Ms. Robinson. I believe it was about half and half, so I 
don't remember the exact numbers.
    Mr. Waller. I was talk talking about the flats. It was $311 
million.
    Mr. Chaffetz. OK. A significant enough number that I would, 
Mr. Chairman, urge that we revisit and think that through as 
well, because it is a huge, huge number. And there are many tax 
benefits that are offered for being a nonprofit, but the 
American people have to subsidize that. However you want to 
frame that, I think it is worthy of diving into and 
rediscussing at some point.
    I yield back. I know we've got another panel that's 
waiting, so thank you for the additional time.
    Mr. Lynch. I thank the gentleman and I welcome his 
questions. And I agree there are nonprofits and there are 
nonprofits. And maybe we should look and see the amount of 
benefit that is actually derived to the public for each and 
every one.
    Let me ask in closing, I know we talked about this exigent 
rate case that's coming up in 2011, do we have a timeframe on 
that? And when should we--I know you've got a delicate balance 
here because of the potential shock value or shock impact of 
that rating decision on a very fragile system here. So do you 
have at least a timeframe in mind?
    Ms. Robinson. Yeah, we would be looking at changing prices 
to the exigent mechanism early in 2011. Under the statute, the 
Commission has 90 days to evaluate our request once that's 
filed. And we intend to leave an appropriate amount of time for 
our customers to actually implement that change. So we're 
looking at about 6 months lead time.
    Mr. Lynch. OK, thank you.
    Mr. Waller. And the Commission is committed to getting that 
in 90 days, as required.
    Mr. Lynch. OK, well, that's great. I want to thank you 
both. I think you've suffered enough. Ms. Robinson, Mr. Waller, 
thank you for your testimony, for helping the committee with 
its work. Have a good day.
    Could we ask the second panel to take their seats? Thank 
you.
    Thank you and welcome to our second panel. Before we move 
to questioning, as you know, the custom for this committee is 
to have all witnesses sworn who are about to offer testimony. 
May I please ask you all to rise and raise your right hands?
    [Witnesses sworn.]
    Mr. Lynch. Let the record show that each of the witnesses 
has responded in the affirmative. I will now offer a brief 
introduction of each of our panelists on our second panel.
    Mr. William Burrus, is president of the American Postal 
Workers Union. Mr. Burrus is also a member of the executive 
committee of the Union Network International, a global 
federation of unions that represent postal and other service 
workers.
    Mr. Lawrence Buc is the president of SLS Consulting, Inc. 
SLS is a Washington, DC, Consulting firm that specializes in 
postal economics and environmental analysis. Mr. Buc 
participated in rate classification and complaint cases 
regarding the Postal Service for 35 years.
    Dr. Richard Riley, is a professional--excuse me--is a 
professor in the MBA and executive programs at the University 
of Maryland University college where he teaches finance, 
economics and accounting to MBA candidates and executive MBA 
candidates. Previously Dr. Riley served as chief financial 
officer of the U.S. Postal Service from 1993 to 1998.
    Mr. James O'Brien, is vice president of distribution and 
postal affairs at Time Inc. and has been with Time since 1978. 
He is currently the chairman of Mailers Council and a member of 
the Magazine Publishers of America, Government Affairs, and 
Postal Committees.
    Hamilton Davison has been executive director of American 
Catalog Mailers Association since its founding in April 2007. 
Mr. Davison's involvement in postal affairs began in 1992 with 
his service on the Greeting Card Association Postal Affairs 
Committee. Welcome all.
    As you know, each of you will be given 5 minutes for an 
opening statement. The lights will indicate green at the 
beginning, yellow as you proceed, as you're getting toward the 
end, and then red when you should wrap up.
    President Burrus, you're recognized for 5 minutes for an 
opening statement.

   STATEMENTS OF WILLIAM BURRUS, PRESIDENT, AMERICAN POSTAL 
    WORKERS UNION, AFL-CIO; LAWRENCE G. BUC, PRESIDENT, SLS 
   CONSULTING, INC.; MICHAEL RILEY, PROFESSOR, UNIVERSITY OF 
 MARYLAND UNIVERSITY COLLEGE; JAMES R. O'BRIEN, VICE PRESIDENT 
 FOR DISTRIBUTION AND POSTAL AFFAIRS, TIME INC.; AND HAMILTON 
     DAVISON, EXECUTIVE DIRECTOR, AMERICAN CATALOG MAILERS 
                          ASSOCIATION

                  STATEMENT OF WILLIAM BURRUS

    Mr. Burrus. Thank you Mr. Chairman, Chairman Lynch, Ranking 
Member Chaffetz and members of the subcommittee. Thank you for 
providing the opportunity to testify on behalf of the more than 
250,000 members that we are privileged to represent. We are 
proud to work for the Postal Service, the largest and most 
efficient postal system in the world.
    I ask my written remarks be entered into the record, 
please.
    Mr. Lynch. Without objection.
    Mr. Burrus. I begin by thanking you for scheduling a 
hearing on the subject, Workshare Discounts. This is a topic of 
great interest to our union and we appreciate the opportunity 
to share our views. The law that requires the Postal Service to 
provide universal service at uniform rates is absolute. There 
are no exceptions for large or small mailers or for great or 
short distances between senders and receivers. This universal 
service obligation justifies the Postal Service monopoly and 
restricts competitors who would attempt to skim the profitable 
segments while leaving the poor, the handicapped, and those 
living in rural communities to fend for themselves.
    Unfortunately, the Postal Service in concert with major 
mailers has implemented discounts that violate the standard of 
universal service at uniform rates. This is not only illegal, 
it is also self-defeating, depriving the Postal Service of the 
revenue to maintain the Nation's mail network.
    Workshare discounts were introduced in the 1970's, but as 
early as 1990 the Postal Service acknowledged that the relative 
value of presort is declining. Today workshare discounts 
artificially reduce the mailing costs of favored customers at 
the expense of individual citizens' small businesses.
    The law stipulates that workshare discounts may not exceed 
postal costs avoided. However, the PRC has repeatedly found the 
discounts exceed this standard. Most recently, they found that 
30 types of workshare discounts exceeded the postal cost 
avoided. When discounts exceed the standard, the result is that 
individuals in small businesses contribute a larger share of 
the institutional cost, and, contrary to sound economic 
principles, as postal efficiency has increased, workshare 
discounts have also increased from 7.6 percent of the postage 
rate in 1976 to 23.9 percent in 2009. This is a Ponzi-like 
scheme that Bernie Madoff would be proud of.
    The Postal Service begins with a monopoly power to set 
rates, then diverts volume, resulting in a self-induced 
exaggeration per-piece cost to set the discounts. At the same 
time, discount-funded private mail processing plants are open, 
while more efficient postal processing centers are 
consolidated. The results benefit major mailers, while making 
the Postal Service less efficient and more expensive.
    In response to reduced mail volume and the crushing burden 
of prefunding future retiree health care liabilities, some have 
opined that postal workers must make wage and benefit 
concessions to fund this transfer of revenue and productivity.
    For the record, I have challenged the Post Master General 
to set employee compensation at a rate that is lower than the 
discounts offered to major mailers. Simply put, pay postal 
employees at the cost of the awarded rate. He has not responded 
to date, and I don't expect him to.
    APW has long asserted that postage discounts in their 
current form are indefensible and illegal. So now the Postal 
Service and major mailers are attempting to change the 
standards, and we urge Congress to reject any such change.
    Regarding the excessive workshare discounts, the burning 
question is, why? Why would the Postal Service forego billions 
of dollars per year in revenues, particularly when they are 
projecting a $7 billion loss? When it is suffering from reduced 
volume, the unachieved payment schedule for future health-care 
liabilities, and the cultural shift in communications I ask, 
why? One anticipated answer is volume. However, history shows 
that rate increases equal to or below the rate of inflation 
have only a marginal effect on volume. The record shows that 
volume has declined by more than 30 percent at a time when 
postage rates, when adjusted for inflation, are at their lowest 
level in 50 years. A graph attached to my testimony shows that 
even as discounts have increased, volume has declined.
    Workshare discounts and other give-away programs have 
peaked at the same time that mail volume has plummeted. If 
rates indeed drive volume, we would expect the opposite to be 
true. So given the data, why would the Postal Service set 
discounts above the legal standard?
    A defense that cries out for review is the assumption that 
if not for the illegal rates, volume would have declined even 
further. Such a defense shifts the burden of proof to the 
unknown, the impossible to prove, and evades the requirement of 
the law.
    The American public is entitled to know why the cost 
avoided and uniform rate standards have been breached. I 
respectfully ask that Congress provide the answer.
    Thank you for the opportunity to testify and I will be 
pleased to answer any questions you may have.
    Mr. Lynch. Thank you, sir.
    [The prepared statement of Mr. Burrus follows:]

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    Mr. Lynch. Mr. Buc, you are now recognized for 5 minutes 
for an opening statement.

                  STATEMENT OF LAWRENCE G. BUC

    Mr. Buc. Chairman Lynch, Ranking Member Chaffetz and other 
subcommittee members, I appreciate the opportunity to testify 
this afternoon. My name is Lawrence Buc. I'm the president of 
SLS Consulting, Inc. I've been analyzing Postal Service costs 
for 35 years. I'm testifying today on behalf of the Magazine 
Publishers of America, the Direct Marketing Association, the 
Alliance of Nonprofit Mailers, the Association for Postal 
Commerce, the Parcel Shippers Association, the National Postal 
Policy Council, and National Association of Presort Mailers.
    My prepared testimony makes three important points. First 
the Nation, the Postal Service, mailers and consumers, all 
benefit from combined total cost of preparing, transporting, 
sorting and delivering mail.
    Second, correctly priced work-sharing gets us there. It's 
the only way to get lowest combined cost. And it also induces 
large mail volumes.
    Third, setting work-sharing discounts at the right level is 
complex. I'll now address each of these points in turn.
    First, total lowest mailing cost and large mail volumes 
benefit the Nation and all members of the mailing community. 
The Postal Service may have a monopoly on the mailbox, but it 
does not have a monopoly on overall forms of communication. 
Cost and prices matter to businesses, not profit entities and 
government organizations as they make decisions regarding the 
best channel to use for communicating with customers, 
prospective customers, donors and constituents. That's why it 
is important to achieve the lowest total mailing cost.
    My second point is that work-sharing gets us lowest 
combined cost and large mail volumes. With work-sharing 
correctly priced, work will be performed by those who can 
perform it at least cost. In many cases this will be postal 
employees. Work-sharing discounts are correctly priced when 
they equal the cost the Postal Service avoids by the work-
sharing activity. That sends the pricing signal that it incents 
efficient behavior and results in whoever can do the work at 
least cost actually doing that work.
    If discounts are less than costs avoided, the Postal 
Service performs work that others could perform at less cost. 
And if discounts are more than costs avoided, others do the 
work that the Postal Service could perform for less. Both of 
these unnecessarily increase costs. Work-sharing results in far 
more mail, both through lower prices and by stimulating the 
overall use of mail.
    According to econometric analysis, Dr. Edward Pearsall, a 
consultant to the Postal Regulatory Commission, work-sharing is 
responsible for half of all mail. In other words, there is 
twice as much mail today as there would be without work-
sharing. Without work-sharing, according to Dr. Pearsall, there 
would be closer to 85 billion pieces of mail, with 169 billion 
pieces projected for this year. Think about the Postal 
Service's financial situation with only 85 billion pieces of 
mail. Actually it's almost unthinkable.
    It's important to realize also that the Postal Service has 
large fixed costs that are not affected by changes in mail 
volume. More mail lets these fixed costs be spread over more 
mail volume, and that results in lower prices for all mail. And 
incidentally, work-sharing mail is more profitable than other 
mail. For example, Postal Service data show that with first 
class letters, work-shared prices--work-shared pieces 
contribute almost a nickel more to Postal Service profitability 
than do single-piece letters.
    My third and final point is that estimating costs, costs 
avoided and setting work-sharing discounts at the right level 
is complex. The Postal Service processing, transportation, and 
delivery systems are large and complex. Consequently, 
estimating costs and cost avoidances is also complex. My 
testimony--my written testimony provides several examples.
    Under the 1970 Postal Reorganization Act and continued with 
the new Postal Reform Act of 2006, final responsibility for 
postal costing and prices was delegated to the Postal Service 
and the Postal Regulatory Commission. There have been and there 
always will continue to be differences as to whether the PRC 
and the Postal Service are getting it exactly right. But 
generally they are doing a very good job. Not in every single 
case and not in every single detail. You certainly wouldn't 
expect perfection in a system this large and this complicated. 
In general, they have done very well.
    Thank you and I will be glad to answer any questions.
    Mr. Lynch. Thank you, Mr. Buc.
    [The prepared statement of Mr. Buc follows:]

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    Mr. Lynch. Dr. Riley, you are now recognized for 5 minutes.

                   STATEMENT OF MICHAEL RILEY

    Mr. Riley. Thank you for letting me testify before you. I 
am here because I care about the Postal Service as an 
institution. I care about the people and I care about the 
customers and I don't like the way things are going. The Postal 
Service is dying from self-inflicted wounds because it has 
discounts that have gone crazy, and they need to be scaled 
back.
    Vice President Robinson testified that the Postal Service 
would never do anything to harm its customers or any segment of 
its customers. And to that I say: Well, stop with the Saturday 
delivery plan, do not end Saturday delivery, keep the thing 
going.
    And while I've got your attention, I would like to make two 
more proposals to you. I think the law needs to be changed, the 
retiree health-care provision in the 2006 act needs to be 
changed to put the Postal Service on the same position as any 
other major company in this country and ought to be structured 
like a mutual insurance company or mutual savings and loan, so 
that people realize it needs to earn a profit to provide the 
capital for new products, for new buildings, for expanded 
service, for converting the fleet to hybrid vehicles instead of 
the old-fashioned 1995 long-life vehicles still out there.
    I'm going to give you a little background. In 1994, in 
spring, I sat before this committee with Chairman Bill Clay, 
and I'm going to show you a graph as to what it was like. Then 
the worst-ever year of the Postal Service happened in 1993, and 
I joined Marvin Runyon in August, with 6 weeks to go in that 
year. In the spring of 1994 I sat before Congressman Clay, and 
I walked up to him today and said, You know, I testified before 
your father back in 1994 and he was very----
    Mr. Lynch. The Honorable Mr. Clay is here today. I just 
want to acknowledge that.
    Mr. Riley. And he let me go for a bit, and said his father 
died in 1976. I apologize to you for mistaking one for the 
other.
    I'm going to tell you one more story. Back here a 
Congressman named Steny Hoyer, who was rising in the House of 
Representatives, told Marvin Runyon he was full of beans when 
Marvin said, I've got the place turned around. He said, I'll 
eat crow if you can turn this place around. And I was at the 
ceremony where Congressman Hoyer came to the Postal Service and 
cut the first piece of cake in a giant crow cake. He made a 
wonderful speech.
    The Postal Service had 4 years of billion-dollar profits, 
and it did it because it focused on the individual as the 
recipient. We had a balance score-card strategy focusing on the 
customer, the employee, and the finances of the Postal Service. 
We had an incentive system that backed it up.
    And Marvin Runyon--this chart goes only to the third 
quarter of 1998, because that's when Marvin Runyon stepped down 
as Post Master General and when I stepped down as CFO. This is 
the chart I showed the board of Governors at my last meeting as 
CFO. At the time, the major mailers were saying the Postal 
Service is earning too much money, way too much money. Profits 
are excessive. And new management promised to solve that 
problem, and solve it they did. They managed to get almost 
nonstop billion-dollar losses, with the exception of 3 years, 
thanks to the work of a guy named Bill Tayman, who was able to 
get the government to realize they were overcharging the Postal 
Service for CSRS retiree costs.
    The Postal Service has excess discounts. Congressman 
Connolly summed up my position exactly when he said that when 
you have a way to save money, you save it equally; you save it 
so the Postal Service gets some of the benefit and so the 
mailer gets some of the benefit.
    Vice President Robinson said, Well, gee we have this 
percentage markup, and as I tell my MBA students, you can't 
spend percentage, you can only spend cash. And because focusing 
on the wrong things--and the Postal Service has--it has a 
strategy that focuses on the representatives of the major 
mailers as customers, it focuses on productivity, and frankly 
productivity is applied as service. If you cut one person up 
behind the window and have an hour line wait, that means your 
productivity goes up. But it sure doesn't mean the customers 
like you any better.
    I for one used to be an avid postal customer. I got cured 
from having bad problems with the Postal Service in the last 2 
years. The Postal Service needs to put the service back and 
focus back on the individual customer and not on just the 
discounts and who can justify the biggest share for their 
person.
    When we were having record profits for 4 years, we didn't 
have to have a price increase. And that benefited the major 
mailers. And I would argue that today the Postal Service has 
driven away its customers.
    I was showing one of the Representatives earlier today in 
the room, the Annual Report of the Post Master General of 1872. 
The Postal Service has been crying the sky has been falling 
because of the electronic version for 1882. Back in 1993, we 
had a report that said the Postal Service was losing huge 
market share every year to e-mail. My kids got their first 
computer in 1983, but in 1872 the Post Master General 
complained that with the recent advances in mystic Casini's fax 
machine, the Postal Service is going to be completely 
threatened with going out of business. 1872. It took 100 years 
for the fax to come in. When it finally did, it was gone in 20.
    And I've used my time, Mr. Chairman. Thank you. I would 
ask, in summary, make them scale back the discounts, change the 
law to help on the retiree costs and the profits, and do not 
let them go to 5-day-a-week delivery.
    Mr. Lynch. Thank you.
    [The prepared statement of Mr. Riley follows:]

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    Mr. Lynch. Mr. O'Brien you're now recognized for 5 minutes.

                   STATEMENT OF JAMES O'BRIEN

    Mr. O'Brien. Mr. Chairman, my name is Jim O'Brien. I'm the 
vice president of distribution and postal affairs for Time 
Inc., the largest magazine publisher in the United States. I'm 
testifying today on behalf of Time Inc. and the Magazine 
Publishers of America, the industry trade association for 
consumer magazines.
    About 90 percent of printed magazines in this country are 
delivered to their readers via the Postal Service. Time Inc. 
and the MPA care greatly about the Postal Service, its 
financial situation, its future viability and its effectiveness 
in controlling the costs of periodicals class.
    We have been longtime partners with the Postal Service in 
examining postal and mailer operations to improve efficiency, 
streamline mail processing, and reduce costs.
    In 1998, I participated in a joint USPS Periodicals Mailers 
Task Force. We visited 17 postal facilities at all hours of the 
day and night to see every step in the processing of 
periodicals mail. Following our 1998 joint task force, the 
Postal Service issued a strategic improvement guide for flat 
processing. A main focus of the guide was to reduce the manual 
processing of periodic mail. To do our part, Time Inc. and MPA 
members had made significant investments in an ongoing effort 
to identify and implement ways to minimize the work required 
for the Postal Service to process and deliver our magazines.
    I brought with me today a carrier route bundle of Time 
magazine. Bundles like this are trucked by Time Inc. from our 
printing plants to USPS facilities that are located very close 
to the subscriber's zip code. This bundle remains intact 
throughout the process until it is opened by the letter 
carrier. This is the most efficient product that we can deliver 
to the Postal Service. The Postal Service and the Postal 
Regulatory Commission agree that preparing mail in carrier 
route bundles saves the Postal Service money.
    In 1989, 29 percent of periodicals mail was sorted to the 
carrier route. In 2009, carrier route sorted mail grew to more 
than 55 percent. However, despite the industry's successful 
efforts to improve efficiency and reduce cost for the Postal 
Service, periodicals costs, as measured by the Commission, 
continue to outpace inflation.
    Why hasn't the Postal Service been able to take advantage 
of the industry's cost-cutting efforts and its own investments 
and equipment to improve automation? I have learned from many 
years of analyzing postal operations and cost that the key 
problem facing the Postal Service and the major reason for the 
continuing increase in periodicals cost is excess capacity. In 
my experience, excess capacity often leads to manual 
processing, despite the availability of automation. And manual 
processing leads to increased costs.
    The strategic improvement guide for processing was crystal-
clear on this point. The report states, ``The inability to 
capture and process bar-coded flats through automation results 
in a significant cost differential. In fiscal year 1997 we 
failed to automate over 6 billion bar-coded flats.''
    Mr. Chairman, I visited a postal facility just 3 weeks ago 
and observed an operation that the USPS refers to as a ``bull 
pen,'' which is an entirely manual operation. Saw that 3 weeks 
ago. After spending billions of dollars on automation, the USPS 
continues today to manually process periodicals mail. This 
manually processed--this manual processing isn't requested or 
desired by periodicals mailers, it is the result of choices 
made within the Postal Service. Yet the Postal Service 
attributes these costs to the periodicals class.
    In analyzing costs, the Postal Service assumes that all 
costs are incurred efficiently and that all worker time and 
other resources spent on processing a particular class of mail 
are needed by and of benefit to that mail. Charging periodicals 
for the extra costs of manual processing that periodicals 
publishers did not request and do not need is unjust and 
unreasonable.
    The bottom line is while the magazine industry has provided 
the USPS with more cost-effective mail, periodicals unit costs 
as measured by the Commission have risen since 1986 by more 
than 300 percent, 107 percent above inflation. Between fiscal 
year 2006, the year in which the PIAA was enacted, and fiscal 
year 2009, the CPI increased by 9.8 percent. Periodicals unit 
costs as reported by the Postal Service increased by 24 
percent.
    Something is clearly wrong with the cost attribution 
process in the manual processing of periodicals mail. 
Periodicals mailers should not be asked to shoulder the burden 
of cost they did not cause. Thank you.
    Mr. Lynch. Thank you, Mr. O'Brien.
    [The prepared statement of Mr. O'Brien follows:]

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    Mr. Lynch. Mr. Davison.

                 STATEMENT OF HAMILTON DAVISON

    Mr. Davison. Thank you, Chairman Lynch. Thank you for your 
invitation to testify today. I represent the American Catalog 
Mailers Association. Half of America buys from catalogs, and 
for those who do buy from catalogs, when it arrives, it's 
arrival is something that's exciting and helps keep mail 
interesting and relevant to all--to the recipient.
    Catalogs also provide significant social benefit delivering 
goods and services to the infirm, handicapped, elderly, and 
rural Americans, none of which can access stores easily. 
Catalogs are also eco-friendly. They may be America's biggest 
carpool. They save countless hours of driving and fuel and 
congestion on the road and are particularly helpful to single 
parent--time-starved single-parent families as well as dual-
income households.
    In 2006 Congress modified the ratemaking cost, but the cost 
accounting approach has not been modernized. The one that is in 
use today is a result of 36 years of intense litigation, and as 
far as I'm aware, has no parallel in any gap regulation or 
private industry standard cost system that is in widespread 
use.
    Time doesn't permit me to delve deeply here, but I would 
say that the setting of prices and allocation of costs is an 
extremely complicated area that is properly placed with USPS 
management, with the review and concurrence of its regulator.
    The USPS is a high-fixed-cost system that is operating 
below its available capacity, and as more volume leaves the 
system, the remaining fixed-cost base has to be spread over 
fewer and fewer pieces. Using a nonstandard justification to 
push prices up just further perpetuates that downward spiral. 
In fact, standard flats--the standard flats mail category was 
covering its costs until 2007 when there was an enormous 
increase in postage costs that drove a lot of catalogs to 
reduce their circulation. And further increases in this 
environment would be counterproductive and serve only to divert 
more catalogs out of the mail, put more companies at risk, and 
undermine the entire system.
    I think there's some useful concepts in private industry. 
For almost every company there are products that the 
profitability of those products vary, and yet customers buy 
across many different categories. Companies regularly look at 
the sales in each customer's segment and try to understand the 
segment's profitability.
    Applying this to catalogs, we mail in standard mail flats, 
but we also mail an almost equal proportion in carrier route, 
which generates a net contribution to the USPS.
    We also, however, originate mail and standard mail letters, 
and standard mail postcards. We send profitable first class 
mail and we also spend almost as much on partial shipments as 
we do on sending catalogs, of which USPS is a relatively small 
market share there, and that provides an additional growth 
opportunity.
    I think the key to the future survival of the Postal 
Service is to understand their total customer segment 
contribution. As illustrated above, taking decisions on a 
single product category can lead to changes in volume in other 
categories from that same customer segment. The goal must be 
increasing the total contribution from each market segment by 
optimizing the price and volume relationship.
    The greatest segment contribution is not always achieved by 
the highest price per piece. Sometimes a lower price which 
generates a maximum volume is one that is more profitable and 
sustainable. This is especially true in a volume-sensitive 
system with excess capacity.
    A customer-segmented approach also allows USPS to manage 
the content of the mail stream, the amount of highly valued 
mail from the recipient's point of view.
    With all the communications alternatives available today, 
it is critical to keep Americans engaged and interested in the 
mail. Managing the content does just that. Perhaps ironically 
just when the USPS is automating the flats mail stream, there 
are developments that threaten the amount of flats being 
processed. The USPS expects to dramatically reduce its cost to 
process flats with this equipment, but this will only occur if 
we do not drive flats out of the system before the automation 
comes on line.
    So to summarize, the unique postal accounting system 
developed through years of litigation may not accurately 
reflect postal cost and certainly does not capture the market 
behavior of customer groups. The infrastructure of the USPS is 
hard to reduce and the system needs to retain and grow volume. 
The catalog industry, which is a significant demographic tail 
wind behind it, is a great segment for the USPS managers to be 
focusing on for long-term growth.
    As catalog postage goes up, catalog volumes are going down. 
Since 1997 inflation has risen 37 percent, but catalog postage 
has gone up 58 percent, fundamentally altering the economics of 
cataloging, both reducing mail volumes and industry employment. 
In fact, the entire catalog supply chain remains severely 
strained from these large postal rate increases.
    Thank you for the opportunity to testify, I will be happy 
to answer questions.
    Mr. Lynch. Thank you, sir.
    [The prepared statement of Mr. Davison follows:]

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    Mr. Lynch. I now yield myself 5 minutes.
    President Burrus, I know that in my early days on this 
committee, you've been an energetic advocate of, I guess, 
right-pricing the costs of these items that don't necessarily 
cover their actual delivery costs. And you've pointed out 
that's a real flaw in the current system. And if I read your 
testimony correctly, it states that first class single-piece 
mail makes a larger contribution to the overall institutional 
costs than its workshared counterpart. And I just wanted to 
hear your views on whether or not you can explain that, why 
that is occurring.
    And No. 2, is it right to try to assign at least the 
attributable cost of each piece of mail that goes through the 
system or, as Mr. Davison has sort of insinuated or argued, 
that you should look at the carriers' costs across various 
products.
    Mr. Burrus. The problem with--my mic is on isn't it?
    Mr. Lynch. It is, yeah.
    Mr. Burrus. The problem with the attributable cost is 
that--and I've heard several witnesses respond to questions 
regarding it--is it takes the resulting contribution, the 
discounted rate, and from that they assign it attributable 
cost. APW's argument is it's a discounted rate, it is too 
steep, that the discounted rate should be higher than it is, 
then the attributable cost goes up, setting aside for a moment 
the percentages between nonattributable and attributable.
    But if the mailer is paying for the piece, then the 
contribution to the attributable, the institutional cost is 
increased. Our argument is that the discount is set too high. 
They are paying--postage rates are too low.
    It is really disturbing to me to hear witness after witness 
talk about the success of the program, and the Postal Service 
is projecting a $7 billion loss.
    Now, how can you forego--forgive over $1 billion a year in 
discounted rates and lose $7 billion? It just defies logic. It 
is like we're living in a different land; there are different 
economics that apply to the Postal Service that don't apply in 
the supermarket or someplace else in our society.
    The real assault on the U.S. Postal Service and its work 
force is when you set a discount at the cost avoided, and you 
take mailer out of the system, the mail that's lost--that is 
left, that is avoided, is more expensive. We have to have a 
network that serves the Aunt Minnies of the world, the single 
piece. Now if we have a major business in the community, then 
the volume is high and Aunt Minnie's mail is incorporated, 
integrated with all other mail, so the cost is reduced. Once 
you take all the other mail out of the system and presort it, 
apply workshare discount, you leave Aunt Minnie's mail, 
singular, like the flats that were mentioned, you leave only 
the most difficult mail in the system and the cost 
automatically goes up. And that is the standard they use to 
determine the cost avoided, what they leave the U.S. Postal 
Service.
    This entire workshare-discounted program has turned the 
rate structure of the Postal Service on its head. It is not 
generating volume consistent with the work that is performed 
because they are charging deflated costs for the same work.
    I attached to my testimony two examples, of two letters, 
one where the rate paid was 42 cents, the other 34 cents, an 8-
cent difference for that letter, and the indicia on the 
envelope were exactly the same; meaning they were handled the 
exact same by the U.S. Postal Service, including delivery.
    The Postal Service cannot exist if they are setting up a 
companion system in the private sector to perform the exact 
same purpose, the same functions. They will spin off sufficient 
revenue that cannot exist long term.
    Mr. Lynch. Thank you. I know my time has just about 
expired. The chair recognizes the gentlelady from the District 
of Columbia, Ms. Eleanor Holmes Norton, for 5 minutes.
    Ms. Norton. Thank you, Mr. Chairman. I thank you for yet 
another hearing on what I must say is a failing, if not 
obsolete, model known as the U.S. Postal Service. And I think 
your hearings on various aspects will lead us to where Postal 
Service isn't--certainly isn't leading us to where I think some 
hard decisions have to be made.
    For me, I must say this is a straight mathematical, if not 
arithmetical, exercise. If there are savings, if they are worth 
it, then there is a discount; if not, it's not. And I don't see 
why it is more complicated than that, especially considering 
the urgencies surrounding the financial conditions of the 
Postal Service, albeit with slight improvements that really 
don't matter because the model is failing in any case.
    Work-sharing is like the rest of the post office. It may 
have made some sense long ago when it was instituted, when 
automation was not the way in which the Postal Service 
operated, with less and less manpower of its own. But if the 
whole point is to modernize the service, if you get a model 
that works, I don't know why we would stick to this part of the 
model unless it can justify itself.
    I'm sorry I was not here to hear the testimony. I don't 
know if anyone has tried to justify the model. I was presiding 
in the Committee of the Whole on the floor, but I would be very 
interested to hear what justifications for the model exists in 
dollars and cents frankly, count it out. I mean, you know, 
there are harder--harder issues to figure out in the Postal 
Service that do not lend themselves to the same kind of 
numerical equation that I think could be done here.
    What most concerned me is, is there a cost to individuals 
in small businesses? That simply cannot be tolerated. And there 
is some testimony, as I look through the testimony, that 
indicates that may be the case.
    Look, if we all want to use this model, we're all going to 
have to do something very different from what's been done 
before. Eighty percent, or something like 70 or 80 percent of 
the American people in polls say, OK, eliminate Saturday 
delivery. Saturday delivery is a fairly recent phenomenon of 
recent decades, but I'm not sure what it will take to get that 
change, if that change is to occur.
    But the notion that we're sitting with the same model we've 
been having hearings about, I must tell you is very troubling 
to me, which is why I am pleased the chairman has chosen this 
aspect to consider here today.
    The fact that--I was not aware until this hearing that 
work-sharing was almost all that occurs in the Postal Service 
these days. It has taken over the Postal Service; 80 percent of 
the mail is work-shared. So little has changed about the Postal 
Service.
    Mr. Chairman, I haven't been here long enough to ask truly 
intelligent questions. I simply want to go on record as saying 
I think the Postal Service has to be pressed much harder not to 
do what it's been doing, saving here and there around the 
edges. We're delaying the inevitable. It's just too late to do 
that. We have simply got to fish or cut bait. This model 
doesn't work.
    I don't know if enough people, Mr. Burrus, are going to 
retire in order to help the situation involving personnel. I 
don't know if they will make decisions about work-sharing. I 
don't know if they are going to quickly get to a recommendation 
on 5 or 5\1/2\-day mail. All I know is it's going much too 
slowly to save the Postal Service. And above all, I want to 
urge greater efficiency, as it were, on the part of the Postal 
Service in getting themselves a brand new model and coming 
before this committee to share it with us.
    Thank you very much, Mr. Chairman.
    Mr. Lynch. I thank the gentlelady.
    Mr. Buc, let me ask you, the Postal Regulatory Commission's 
most recent annual compliance determination revealed that, I 
think, 30 workshare discounts exceeded their--their avoided 
costs; seventeen of them were justified under statutory 
exceptions, but 13 were not justified.
    Have you had an opportunity to review that, you know, 
those--at least the cases that were brought forward? And do you 
think that the PRC's determination was justified or do you take 
exception to that?
    Mr. Buc. I haven't reviewed each and every one of them in 
great detail. The PR--the Postal Regulatory Commission is the 
umpire in this world that calls the balls and strikes. We may 
argue with him occasionally, but most of us defer to them in 
judgments like this. Again, my testimony is that, in general, 
discounts should be equal to costs avoided. I don't believe 
that they should be less. I also do believe, in general, that 
they should be more.
    Mr. Lynch. How do we--well, they found--they found 
differences here that we had departed from the ideal of 
matching the discount to the attributable cost. And so now they 
are struggling, as you heard at the previous panel, struggling 
to meet the goal of aligning the cost with the charges. And I 
know that you're concerned about that.
    Do you have any suggestions as to how they might align 
those costs without causing undue damage, or perhaps less 
damage, than otherwise might through this exigent rate case?
    Mr. Buc. It's a very, very hard question. You ask many 
people the same question. In the long run, it can't be the case 
that all products sell below their cost. You simply can't do 
that in the long run.
    But in a situation where costs are above price, there are 
actually two possibilities to get things lined up. One 
possibility is that you can reduce costs to be where the prices 
are. Mr. O'Brien has spoken about the flats world, where 
perhaps some things could go on that would take care of that. 
The other possibility is that you would raise prices to cover 
some of those costs. And the Postal Service needs to be careful 
that it doesn't drive volume away. As you all know, in the 
world today, mailers have lots of alternatives.
    Ms. Robinson testified the choice is not between work-
sharing and not work-sharing for many mailers. It is between 
mailing at all and not mailing. So the Postal Service has a 
really tough problem. If I had the solution, I would actually 
give it to them.
    Mr. Lynch. Thank you. Part of this, we're confronting this 
in a very difficult time. A rising tide lifts all boats, and in 
this case the tide has gone out and so every sharp rock, every 
shoal is now exposed, and so we're trying to meet that 
challenge. It is a very difficult situation. And I understand 
for every reaction we take care to try to--to try to align 
costs with--align charges with the costs that those deliveries 
incur, we risk losing that volume of mail, which is 
exacerbating the situation. So we're between a rock and a hard 
place here. And we're trying to, I think, manage the current 
situation with the idea that if volume picks up, if we gain a 
fair amount of the market share and the volume that we've lost, 
that we can live to fight another day. I'm just trying to find 
out from the mailing community what that looks like. What can 
we sustain going forward without causing us greater harm?
    Mr. Buc. We actually have some optimism about some of the 
volume coming back in standard mail, marketing mail. Through 
the recession the Postal Service has actually kept its market 
share and increased its market share a little bit. So as the 
economy recovers, we're very optimistic that there will be more 
marketing mail.
    In first class mail, the prospects are not quite as 
optimistic. It turns out that historically every time the 
Postal Service has granted a new work-sharing discount, people 
have found new ways to use mail. And I do believe that's been 
responsible for much of the growth of postal volume over the 
years. There are some opportunities for additional work-sharing 
discounts that the Postal Service might think about availing 
itself of.
    Mr. Lynch. Thank you.
    Ms. Eleanor Holmes Norton, you're recognized for 5 minutes.
    Ms. Norton. No. No further questions, Mr. Chairman.
    Mr. Lynch. Thank you.
    Dr. Riley, you went a little bit afield from your original 
testimony, but it was interesting nonetheless. I know you got 
away from the pricing question and spoke a little bit about the 
5-day delivery question. And my own concern is this: that if we 
somehow eliminated Saturdays, then I actually think it puts us 
in a more difficult financial situation with the Postal 
Service. We would lose not only the Saturday delivery and that 
revenue, but I also think that customers may say, well, if 
they've got mail that's going out on Thursday, or--you know, or 
Friday, they'll say, Well, you know, the post office--not the 
post office--but there will be no delivery on Saturday and 
Sunday. If there is a holiday on Monday, maybe I ought to call 
USPS or FedEx or someone else, so there will be a migration of 
mail volume that is currently relied upon by the Postal Service 
to sustain its operations so that, at the end of the day, it's 
a self-inflicted wound. It doesn't make the Postal Service 
stronger, it actually may make it weaker, and considerably so.
    I'd just like to hear what your thoughts are. I know you've 
talked about that in your original testimony, but I would like 
to hear your thoughts on that.
    Mr. Riley. I think--am I on--I think you're precisely 
right. Congresswoman Norton talked about the business model 
being broken, and the business model is broken because people 
chose to break it. Saturday delivery, I think the Postal 
Service says that 71 percent of the people say they don't care, 
which means 29 percent of the people do care. Why do you want 
to anger 29 percent of your customers and drive them away, to 
finally give up and say, you know, I've had it, I'm going 
electronic. It makes no business sense.
    I can't think of one service organization in this country 
that looks to prosper by cutting back on its service. If you go 
to the FedEx Kinkos in Herndon, VA, which I did to get the 
charts printed up so you could see them, you'll discover they 
are open 24 hours a day, 7 days a week.
    Service businesses are in business to provide service, and 
the Postal Service has gotten away from that. In general terms, 
the Postal Service raised the price of a first class stamp 37 
percent since 1998. Over that time, inflation has only gone up 
33 percent. It has gotten rid of 20 percent of the work force 
and it is sill losing money. It should be coining money and it 
is not, because it is driving customers away for some of the 
smaller self-inflicting wounds.
    And Chairman Lynch, you're exactly right; this would be a 
huge self-inflicting wound. And I believe the Postal Service 
will not recover if it is allowed to proceed with that. Not 
that I feel passionately, you see. I have devoted most of my 
life to the Postal Service.
    Mr. Lynch. I still have some time left.
    Mr. Riley. Sorry.
    Mr. Lynch. What about the idea--I know a lot of e-mail is 
just person to person, so that's probably not as big an impact 
on the Postal Service, because they weren't necessarily writing 
letters to each other, and that wasn't volume that was 
eliminated. But I do know that it is quite common now, even 
myself paying bills by mail--excuse me, by the Internet and on 
line, and there is a huge volume of mailers disappearing.
    And so I think it is irrefutable that we're going to a new 
model here. And I don't know, you know, you're much more 
familiar with this in your teachings and in your studies than I 
am, but at least the anecdotal evidence I see is fairly 
powerful.
    Mr. Riley. I converted last summer to paying bills 
electronically because I couldn't get my mail sent to where I 
was. And that's because I was going to be in different spots in 
the country at different times. And I was willing to pay $15 a 
week for Snowbird mail to put it all in a priority mailbox and 
send it to me. It would only go to one address, and I could 
only choose one at a time and I had to specify the dates in 
advance.
    In a world where I can go online to every one of my credit 
cards and change my bill once a month with a password-protected 
device, I can't get my mail sent to where I'm at. So my 
solution was to pay my bills on line.
    The Postal Service--if everybody in this country knew about 
Snowbird mail--and there are 38 million retired people in 
this--38 million people over 65. And if that's--if just 5 
million of them were to use 10 weeks of Snowbird mail, that 
would add $750 million in revenue and the cost would stay the 
same, because the Postal Service is already forwarding most of 
that mail piece by piece anyway. It's more efficient to put it 
in a box and send it out.
    So there are a lot of good things the Postal Service could 
do to change the business model to take into account what's 
going on in this era. My daughter has been paying her bills on 
line forever, worried about identity theft and thinking about 
moving back. Does anybody ever advertise the Postal Inspection 
Service and say that mail fraud is still a crime and 96 percent 
of the people charged with mail fraud get convicted? Try 
getting somebody convicted for mail fraud over the Internet.
    I think there's a great business model that could happen 
that is being ignored. I think your instincts are right on.
    Mr. Burrus. Mr. Chairman, I think there is a misconception 
that postal volume is driven by personal communications. A lot 
of personal communications has migrated through electronics, 
Internet, Tweeters, telephone and other. That is a very small 
percent of total volume. Postal Service volume is driven by 
commercial mail. I get more mail today, even with the decline, 
major decline of volume. I get more mail in a month than my 
father received in his entire lifetime. So there is no 
connection between growth of volume. In 2006, the Internet did 
not go on vacation; we reached our highest point of hard-copy 
communications in this country, in the world, in 2006.
    Mail is tied to commerce. As the economy grows, mail volume 
will grow. This side show of individuals sending birthday cards 
on the Net, certainly we would like to have all the mail, we 
would like every message to be converted to hard copy, but we 
can grow without it. The Postal Service is an advertising 
company. They have to understand and appreciate the fact that 
they have to grow. Their growth will be in commercial mail, 
letter mail, not in parcels. It will be in letter mail.
    And if they fail to capture a growing market in letter 
mail, they can't exist in niche services.
    Mr. Lynch. Thank you. I think the truth is somewhere in 
between here, that all this mail is not going to go away. I 
think a lot of mail is going to come back with the economy and 
advertising.
    I also know there are technologies out there. I know--I 
think it is Sweden or Finland, where you can go on line and 
actually see your mail before it's delivered, and click on it 
if you want it delivered and, I guess, dispose of it if you 
don't want it delivered. And I think as that greater sort of 
interaction with the customer becomes more commonplace, I think 
we have to recognize that technology will be out there. So 
we're trying to provide--we're trying to reconstruct a system 
and modernize it so that it stays current and that we don't 
fall behind. You don't become the buggy-whip of the next 
century.
    We have the same problem here in Congress. We got rid of 
the powdered wigs, but that's about it. We're still operating 
the same way we did back in the 1700's and we're trying to keep 
up with modern industries that are running circles around us.
    Mr. O'Brien, I think it was you, in October 2007--it is 
terrible to come here and testify, because we can always throw 
your testimony in front of you at a later date--but you 
testified before the subcommittee in favor of a recently 
redesigned rate structure to better align rates and costs for 
periodicals. Now several years after that rate structure has 
been in effect, do you think that the newer rate structure has 
been a success?
    Mr. O'Brien. Yes, the rate structure actually has caused a 
great deal of change. As I said in my testimony today, we used 
to only produce 29 percent--the periodicals volume came in 
carrier route bundles, the most efficient bundle we can give 
them. Today that's over 55 percent. Without that rate 
structure, we would not have incented that change. And that 
just improves the process.
    So the other thing that you should know is this carrier 
route bundle, the pass-through of cost savings is 71\1/2\ 
percent. So this is not one of those underwater products that 
you've asked about earlier today. So if the Postal Service 
saves a dollar, 71\1/2\ cents is what the incentive would be 
for the mailers. So this is a good deal for the Postal Service.
    Mr. Lynch. All right. In your testimony before, at least 
part of it, you described the inefficiency with periodicals in 
that they were manually processed as something that was 
undesired and unnecessary on the part of the mailer. Can you 
flesh that out a little bit for me?
    Mr. O'Brien. Sure. Basically the Postal Service has spent 
billions of dollars on automation. And when you automate a 
process, you sometimes wind up with excess capacity and you 
need to have that excess capacity utilized in some way; 
otherwise people are standing around. And so what happens is 
things get created, like these bull pens, which are basically 
hampers that are all lined up in a circle, and people come and 
take bundles and throw them in these hampers designated to 
various zip codes in an area.
    And so that manual processing exists today. I saw it 3 
weeks ago. I see it in every SCF that I go into, Section Center 
Facility that I go into, it exists today. After spending 
billions of dollars on machinery, they have to find a way to 
capture those savings and not do manual processing of mail 
today. I mean, it's a complete--complete waste of time and it 
exacerbates the cost for periodicals mailers. We just can't 
have that happen.
    Mr. Lynch. I'm trying to get these straight in my mind. Is 
that flat sequencing system? Is that----
    Mr. O'Brien. It's not even that. There's--there are 
machines today that will sort bundles and just like this, and 
so instead of sorting the bundles on the machine, they're 
sorted by hand, and that's just insane. The machines exist 
today, but the Postal Service segregates periodicals out, puts 
us on manual processing.
    And the way that they track costs is something called the 
IOCS, which is an in-office cost system, and the way it works 
is like this: It stopped the music. So they stopped the music 
and say, what are you holding? I'm holding--I'm holding 
periodicals. I'm charged to periodicals. Mr. Riley's holding a 
catalog. He gets charged to catalogs. Well, if you automate a 
process, and you put manual labor on a certain class of mail, 
when you stop the music, more bodies are holding magazines, and 
we are attributed with the costs. It's not right.
    Mr. Lynch. OK. Thank you.
    Mr. Davison, I did recall in your testimony you didn't 
really discuss this, you talked around it, but the flats 
sequencing system and its potential effects on improving the 
costing of catalogs. Do you think this FSS, this flats 
sequencing system, has promise to address some of the concerns 
that you raised in your testimony?
    Mr. Davison. I think it has the potential to lower the cost 
of processing catalogs and magazines, and we only have nine 
machines out today, and they haven't even been fully accepted; 
so that's a little bit of an unwritten story still. But I have, 
as Mr. O'Brien describes, also been in facilities and seen the 
inefficiency in the processing of flat mail, and we very much 
need something that will automate that and allow it to be 
handled more efficiently. I mean, as was said by, I believe, 
Mr. Waller, the costs in this category have been very high and 
out of control. We've had a 58 percent increase in postage in a 
34 percent inflation period. So we're much higher than 
inflation. It's just not sustainable from our perspective. So 
we've got to--we've got to go after the cost side.
    Mr. Lynch. Where are we in that process? You said there are 
nine locations that have these, and where are we going, as far 
as you know, with full implementation? Has this been stalled, 
or why is it not more widespread?
    Mr. Davison. I can't--I can't answer the question for the 
Postal Service. I know they're working very aggressively on it. 
I know they've been working with us and others in looking how 
they can get mail to the front of the machine most effectively 
and induct it into the machine automatically. They've 
propagated a number of changes to the regulations to allow some 
of those things to occur.
    It's my understanding that they're still completely 
committed to it, and at the same time you do have flats volumes 
that are dropping. So it's a little bit of a moving target. 
Where do you put the machines, and what is the cost 
justification of them when you have so much volume leaving the 
system? It's--we're doing things to ourself in our pricing 
that's driving volume out rather than keep the volume in and 
lower the cost basis through automation, which seems to be a 
much more sensible approach.
    Mr. Lynch. Let me put a question out there for Mr. Buc and 
Mr. O'Brien and Mr. Davison. The pending rate case there, the 
exigent rate case that they plan to introduce in 2011, what are 
your major concerns with--they've indicated a moderate 
increase. Do you have any sense of what that means? I mean, we 
tried to elicit from the earlier panel what that might actually 
constitute, but you might have a better idea.
    Mr. Buc. As you know, the Postal Service says that its 
Board of Governors speak for them; so I wouldn't want to speak 
for their Board of Governors. But the rumors on the street, 
and, of course, there are rumors on the street, is that 
moderate means under 10 percent and perhaps well under 10 
percent. If you go read the trade press, you'll see that the 
trade press is reporting 5 percent for products that are 
covering their costs, 8 percent, 7 percent, 9 percent for 
products that are--I mean, that's all over the trade press. So 
that's not my number; that's trade press numbers.
    Mr. Lynch. Is that what you're hearing, Mr. O'Brien and Mr. 
Davison?
    Mr. O'Brien. Yes. I think that's--that's very accurate. But 
the one point I'd like to make on that is they're talking about 
a higher-than-average increase for periodicals class and 
standard mail, which is the catalogrs. And the point that I'd 
like to make is before you do that, make sure that you get the 
costs right. You know, people don't object to covering their 
costs, but they just want to make sure that the costs are 
right. Everyone should cover their costs for sure, but just 
make sure that your costs are right before you arbitrarily 
increase someone's rates.
    Mr. Lynch. Right.
    Mr. Davison. And I'd--I'd just add to that you have to 
consider where we are right now. We've just come through a very 
terrible recession, and the whole system is strained. There's 
just not a lot of ability to absorb large increases, and we are 
in a zero or near zero inflationary environment, and this is a 
time when jobs are very important. There's a lot on the line 
here.
    Mr. Lynch. I appreciate it, and we spoke to that earlier 
about the fragile nature of the Postal Service, so we don't 
want to introduce any unnecessary shock, but we certainly do 
want to bring those products up to a point where they're closer 
to covering their entire cost. I mean, you can bring it up 
gradually over time hopefully, but I understand the 
vulnerability is heightened right now.
    Mr. Davison. When I ran a retail business, we would have 
products that weren't making the average markup, but we would 
use those to get people in the store and buy other products. 
And almost every business I'm familiar with has a variability 
between products of the profitability, and I would respectfully 
suggest we shouldn't look at the product profitability, we 
should look at the customer segment profitability and figure 
out how customers are using the service and what incents them 
to buy so that we can continue to add value in that 
relationship and develop new products based on our keen 
understanding of their unique needs that aren't being fulfilled 
today. And I kind of concur with Dr. Riley on that point. To 
the extent that you understand customer behavior, you can 
deliver products that they don't even know they need based on 
that understanding.
    Mr. Lynch. OK. Well, I want to thank you all for your 
willingness to come to the committee today and help us with our 
work.
    I'm going to leave the record open for 5 legislative days 
for Members to submit questions, if they have any, for you or 
for the first panel.
    And with that I will declare this hearing adjourned. Thank 
you.
    [Whereupon, at 5:10 p.m., the subcommittee was adjourned.]
    [The prepared statement of Hon. Dennis J. Kucinich and 
additional information submitted for the hearing record 
follow:]

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