<DOC> [110 Senate Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:41457.wais] S. Hrg. 110-438 THE STATE OF THE U.S. POSTAL SERVICE ONE YEAR AFTER REFORM ======================================================================= HEARING before the FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, FEDERAL SERVICES, AND INTERNATIONAL SECURITY SUBCOMMITTEE of the COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED TENTH CONGRESS SECOND SESSION __________ MARCH 5, 2008 __________ Available via http://www.gpoaccess.gov/congress/index.html Printed for the use of the Committee on Homeland Security and Governmental Affairs U.S. GOVERNMENT PRINTING OFFICE 41-457 PDF WASHINGTON DC: 2008 --------------------------------------------------------------------- For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512ÿ091800 Fax: (202) 512ÿ092104 Mail: Stop IDCC, Washington, DC 20402ÿ090001 COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS JOSEPH I. LIEBERMAN, Connecticut, Chairman CARL LEVIN, Michigan SUSAN M. COLLINS, Maine DANIEL K. AKAKA, Hawaii TED STEVENS, Alaska THOMAS R. CARPER, Delaware GEORGE V. VOINOVICH, Ohio MARK L. PRYOR, Arkansas NORM COLEMAN, Minnesota MARY L. LANDRIEU, Louisiana TOM COBURN, Oklahoma BARACK OBAMA, Illinois PETE V. DOMENICI, New Mexico CLAIRE McCASKILL, Missouri JOHN WARNER, Virginia JON TESTER, Montana JOHN E. SUNUNU, New Hampshire Michael L. Alexander, Staff Director Brandon L. Milhorn, Minority Staff Director and Chief Counsel Trina Driessnack Tyrer, Chief Clerk FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, FEDERAL SERVICES, AND INTERNATIONAL SECURITY SUBCOMMITTEE THOMAS R. CARPER, Delaware, Chairman CARL LEVIN, Michigan TOM COBURN, Oklahoma DANIEL K. AKAKA, Hawaii TED STEVENS, Alaska BARACK OBAMA, Illinois GEORGE V. VOINOVICH, Ohio CLAIRE McCASKILL, Missouri PETE V. DOMENICI, New Mexico JON TESTER, Montana JOHN E. SUNUNU, New Hampshire John Kilvington, Staff Director Katy French, Minority Staff Director Monisha Smith, Chief Clerk C O N T E N T S ------ Opening statements: Page Senator Carper............................................... 1 Senator Akaka................................................ 3 WITNESSES Wednesday, March 5, 2008 Hon. John E. Potter, Postmaster General, and Chief Executive Officer, U.S. Postal Service................................... 4 Hon. Dan G. Blair, Chairman, Postal Regulatory Commission........ 7 Alphabetical List of Witnesses Blair, Hon. Dan G.: Testimony.................................................... 7 Prepared statement........................................... 40 Potter, Hon. John E.: Testimony.................................................... 4 Prepared statement........................................... 27 APPENDIX Questions and Responses submitted for the Record from: Mr. Potter................................................... 45 Mr. Blair.................................................... 50 THE STATE OF THE U.S. POSTAL SERVICE ONE YEAR AFTER REFORM ---------- WEDNESDAY, MARCH 5, 2008 U.S. Senate, Subcommittee on Federal Financial Management, Government Information, Federal Services, and International Security, of the Committee on Homeland Security and Governmental Affairs, Washington, DC. The Subcommittee met, pursuant to notice, at 2:38 p.m., in Room SD-342, Dirksen Senate Office Building, Hon. Thomas R. Carper, Chairman of the Subcommittee, presiding. Present: Senators Carper and Akaka. OPENING STATEMENT OF SENATOR CARPER Senator Carper. The Subcommittee will come to order please. I want to welcome our guests. It is nice to see both of you. We thank you for making time on your schedules to be here with us today for this oversight hearing. I am delighted to be here with my friend, Senator Akaka, and I am going to make an opening statement and yield to him for one, and then I do not think Senator Coburn is going to be able to join us. Others of our group may wander in and out and we welcome them if they do. But we are delighted that you are here. We look forward to an informative hearing. My thanks, as well, for all the work that both of you and the folks that you represent, that you lead are doing, in moving swiftly to implement the postal reform which we worked on and negotiated. I see some people in the audience who worked here with us to try to make it the law of the land. Now, we always said if we ever get it enacted, we are going to make sure that we have appropriate oversight hearings to see how we are doing, what is working well and what is not. So this is part of the process. This is, I think, an interesting time in a lot of ways for us in this country but an interesting time for those of us who have had and continue to have an interest in postal issues. The Postal Accountability and Enhancement Act (PAEA) has been the law of the land for more than a year now and we are starting to see some results and some benefits, I think, as well. The Postal Service is set to change prices this spring using the streamlined cap based rate system called for in the Act. It is my hope that the Postal Service can use this new rate system in the coming years to offer customers some level of predictability and to be more competitive in the advertising and the mailing markets in which they compete. We also have a new set of service standards, as we know, for most postal products that I hope will make the Postal Service more relevant and more valuable to their customers now than has maybe been the case in other days. Customers have a lot of communications options. We want to make sure that this is a valued one for them. These developments, coupled with what appears to be an even stronger effort underway under the rate cap system to control costs, should have us celebrating, I think. But these are difficult times for the Postal Service as they are for many in our country, not only families but businesses too. During the last fiscal year, the Postal Service reported losses of about $5 billion and, as we know, this was largely due to a one-time accounting charge related to several provisions in the Postal Reform Bill related to the disposition of the Postal Service's pension payments, as I recall. However, this year, if everything remains unchanged, and we know they are not going to remain unchanged, but if they were to remain unchanged and we were going on autopilot, something that the Postal Service is not doing, the Postal Service could suffer losses, approaching $2 billion. I know that planned cost cutting and also the revenue that would be earned from the May price increase will bring in, will bring that number down. But the projected losses can tell us a lot about the current state of our economy. They can also, unfortunately, probably tell us a lot about the Postal Service's customer base. The slow down in the housing and the credit markets has hurt some pretty big Postal Service customers and that has hurt them badly. I hope that some of that lost business will start coming back in the months ahead but we can never know if some of the mail volume that has been lost due to the economic downturn might never come back. We hope that it will but we do not know. As General Potter will point out, a lot of businesses that have counted on the Postal Service to communicate with customers are now encouraging their customers to move online, in some cases incentivizing them to move online. It seems that postal customers who would rather not pay postage now have more options available to them, maybe even more than they had during the last major economic downturn that occurred when I first arrived in the Senate just a little more than 7 years ago. So it is important that the Postal Service make full use of the tools available to it through postal reform. I have been pleased with what I have seen so far but there is plenty of work ahead for all of us. We look forward to hearing from our witnesses today about some of the challenges and some of the opportunities that are out there. We also would like to hear how Congress can work with the Postal Service and with the Postal Regulatory Commission to weather the current storm and maybe find a few new ways for revenue and cost-cutting opportunities. Senator Akaka, welcome. We are glad you are here. OPENING STATEMENT OF SENATOR AKAKA Senator Akaka. Thank you very much, Mr. Chairman. I want to thank you for holding this hearing, and I want to also extend my warmest aloha and welcome to Postmaster General Potter and also Mr. Blair. Right now is an exciting time in the postal community. Over the past year both the Postal Service and Postal Regulatory Commission (PRC) have been working tirelessly to implement provisions that we passed in the Postal Accountability and Enhancement Act now a little over a year ago. Perhaps the most apparent change has been the first rate filing under the new inflation cap. This process, I am sure Mr. Blair and General Potter will agree, has greatly streamlined the rate increase process ensuring predictable increases that we hope will not cause undue rate shock. I want to commend Mr. Blair and the PRC for issuing the new rate regulations in such a timely fashion, ensuring the Postal Service could quickly take advantage of the new flexibilities. Importantly this new system provides more flexibility for the Postal Service and a check by the PRC on new rate increases, the first of which was recently submitted. Now more than ever there is the need to look to the future and watch the economic winds to ensure that increases under the cap are fair and that there is enough unused rate authority banked up for future needs should they arise. The Postal Service's latest financial information showed that even by using virtually all of its rate authority, it barely broke even. This further emphasizes the need to allow room for unanticipated future needs. As the economy slows and the mail use declines, the Postal Service needs to look at both revenues as well as expenses to balance the bottom line. I know that the Postal Service is already taking a hard look at expenses and implemented important reforms to save money. I applaud these efforts and encourage you to keep finding new opportunities for savings. That being said, I also want to emphasize the importance of continuing to foster a dedicated Federal workforce at the Postal Service to ensure the highest quality of workers and confidence for the public. Recently the Postal Service created a set of modern service standards which I hope will more accurately reflect the flow of the mail giving more transparency for postal customers. Now that the Postal Service has developed these standards, they should serve as a baseline for a constantly evolving effort to find opportunities for increased efficiencies. In many ways, the fruits of our labors in creating this postal reform are just beginning to show. There is still much work ahead but I am confident that under the leadership of General Potter and Mr. Blair we will continue to foster a stronger, more transparent Postal Service with a dedication of universal service to the American people. Thank you very much, Mr. Chairman. Senator Carper. You bet, Senator Akaka. Again thank you so much for being part of this today. Our witnesses are ones that are very familiar to this Subcommittee. I am not going to take a lot of time to introduce them but I would like to say a few things. Jack Potter is the Postmaster General, the chief executive officer of the U.S. Postal Service. He has served in his current positions since June 2001, arriving just after I got here so our terms have sort of coincided. He did not have to run for election but I think if he had he would have won. Before 2001, General Potter has served in a number of top leadership positions at the Postal Service. He first started with the Postal Service as a clerk, is that right? Mr. Potter. That is right. Senator Carper. In your native New York. Where in New York? Mr. Potter. The Bronx. Senator Carper. In the Bronx. In 1978 at the age of 12. [Laughter.] Is that a typo? Well, he was at least 12, maybe a bit older. Dan Blair is the first chairman of the Postal Regulatory Commission. And our State, Delaware was the first State to ratify the Constitution and for one whole week Delaware was the whole United States of America, and our State motto is ``It is good to be first'' so you, my friend, are in that tradition. But the first chairman of the Postal Regulatory Commission. He was named chairman in December 2006 just after being confirmed as a member of the old Postal Rate Commission. Prior to joining the Commission, Mr. Blair served as Deputy Director of the Office of Personnel Management. Before joining the Executive Branch in 2001, Mr. Blair worked for 17 years on Capitol Hill including some time for this Committee's former chairman, Senator Fred Thompson from Tennessee, and Mr. Blair just returns from leave where, on the campaign trail, he was the campaign manager for the presidential campaign of Fred Thompson, and let me welcome you back to your day job. [Laughter.] We welcome you both. Your full written statements will be made part of the record. Both of you have roughly 5 minutes but we are not going to run the clock on this. So if you need a little more time, just go ahead and take it, and we hope to have the opportunity to ask you some questions. Again, General, I like to call him General. General Potter, take it away and then we will kick it over to Mr. Blair. STATEMENT OF THE HON. JOHN E. POTTER,\1\ POSTMASTER GENERAL AND CHIEF EXECUTIVE OFFICER, U.S. POSTAL SERVICE Mr. Potter. Good afternoon, Chairman Carper, and my good friend, Senator Akaka. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Potter appears in the Appendix on page 27. --------------------------------------------------------------------------- I am pleased to report today on the Postal Service's first year of operation under the Postal Act of 2006. The new law created needed pricing flexibilities that will benefit the Nation by keeping mail a welcome, efficient, and cost-effective way to link every household and every business in America. But with a growing network that reaches 148 million homes and businesses every day, we are extremely sensitive to fluctuations in the economy and to changes in consumer preferences for hard copy or electronic communication. The new law, for all its benefits, does not exempt the Postal Service from these facts. Compounding the diversion of some mail to the internet, we have been hard hit by today's underperforming economy. The financial, credit, and housing sectors are key drivers of our business. The recessionary trend in these industries is reflected in declines in mail volume and revenue. By the end of the first quarter, mail volume was down 3 percent from a year earlier. First-Class Mail fell by almost one billion pieces and Standard Mail by some 750 million pieces. Less volume means higher overhead costs per piece of mail handled. Revenue was $525 million below plan in the first quarter and net income fell short by $183 million. We see no improvement this quarter. Facing this extremely difficult situation, the men and women of the U.S. Postal Service stepped up. They brought down spending, narrowing the revenue gap created by the sudden steep volume decline. Faced with a possible $2 billion budget shortfall this year, we are looking to grow revenue through aggressive pricing and sales and cutting additional costs on top of what we had already planned to reduce our cost by but not at the cost of service. Despite quarter one's financial challenges, our people delivered the strongest service in our history. On-time overnight delivery of First-Class Mail reached 96 percent: The first time we have ever done that in quarter one of a fiscal year. Two-day mail rose to a record 93 percent on-time, and 3- day mail matched our all-time high. So when you think about it, we have a lot going for us. For the third year in a row, we have been rated the most trusted government agency. Customer satisfaction is at an extremely strong 92 percent. Our brand is strong and our business is well positioned to rebound with the economy. But we cannot simply wait for the recovery or to cost-cut our way out in this situation we are in thinking that prosperity is just going to happen. We must also pursue an aggressive revenue growth strategy. On May 12, we are adjusting prices for our market dominant products, First-Class Mail, Standard Mail, periodicals and package services, using the law's new simplified pricing regulations which call for annual price changes. This can produce some $735 million in additional revenue this year alone. To close the remaining budget gap, (and we think that there is going to be, obviously, some cost-cutting) we need to focus on growing beyond, above and beyond what the rate change would bring us. So we are pursuing growth through an innovative price structure for our competitive products or shipping services. We will make these products--our package products--more attractive through incentives and enhanced features. The new prices will be announced shortly for a May 12 implementation. Senators our people are ready. They understand the challenge and they are ready to use every new tool that the new law provides in order to be successful. I am particularly gratified by the support of our unions. With their help, our employees are out talking up and selling our products. They are making sure customers understand the value of the mail and how it can work to help them in their personal lives and help their businesses. When we look at the new law, a lot has happened over the past year, and it is not just the Postal Service alone that has been active. Other agencies and the entire mailing community have made major contributions to the progress that has been made to implement the new law. There have been many subjects covered and my long testimony details some of them. But I would like to just list some of the things that have happened. We have changed the worker's compensation procedures called for in the new law. We put in new purchasing regulations. Data handling policies have been changed for legal activities. Our employee safety program has stepped up and we have issued the reports required. We are planning for international customs, the ones that were requested. We put that work behind us. We have done and made the changes necessary. We have put together a new classification schedule for mail. We have had assessments and appeals for non-profit mailings over the course of this year. Diversity management and purchasing contract reports have been given to the Congress. We have looked at, and with the Treasury, accounting for market dominant and competitive products and a report was issued to the Postal Regulatory Commission. The Postal Service and the mailing industry have stepped up on recycling, and we have issued a report on that. We have submitted our first annual compliance report and we are looking forward to the PRC's response on that. We are working with them to make sure it is even better the next time around. We are working feverishly to come into compliance with Sarbanes-Oxley. The Federal Trade Commission's findings are out and they show that the Postal Service is at a competitive disadvantage because of the burdens of being part of the government. The development of modern service standards as you referred to, Senator Carper, have been done and we really are happy that we got so much input from the mailing community as well as the PRC. And we are in the process now of working through and will meet the schedule to put new service measurement systems in place, again working with the PRC and, as we referred to earlier in my testimony, we are implementing the new pricing regulations. I want to thank Chairman Dan Blair and the entire Postal Regulatory Commission for their efforts to move as quickly as they did to issue the new pricing regulations. The fact that they were so far ahead of schedule really was very instrumental in terms of us being able to put together a plan for this fiscal year so that we can strive to break even this year. All these important tasks require community cooperation and I am grateful for everyone's assistance. We are also changing how we speak about our business, to make it clearer for customers. We are not talking about rates anymore. We are talking about prices. It is not negotiated service agreements because when you go to a customer, they do not know what that is. But they do understand contract pricing. Market dominant products--that does not mean anything in the real world so we are calling that mail, mailing services. And competitive products, people do not know what a competitive product is but they know that shipping services are packages, and so when we talk in the marketplace, that is the language we use. We are entering a period of profound change, and through the new postal law, you have provided us with a new ability to navigate the change. I am grateful for your continuing support of a sound and financially independent Postal Service that can serve our Nation long into the future. Thank you for giving me the opportunity to make some remarks and I will be happy to answer any questions that you might have. Senator Carper. Fair enough. Thanks so much, General Potter. Mr. Blair, you are recognized, again for 5 minutes or so. If you take a little bit longer, that is OK. I do not know if there is anyone here you want to introduce but if there is, feel free. STATEMENT OF THE HON. DAN G. BLAIR,\1\ CHAIRMAN, POSTAL REGULATORY COMMISSION Mr. Blair. Thank you, Chairman Carper. I appreciate that. Senator Akaka, thank you for your kind words. They are most appreciated. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Blair appears in the Appendix on page 40. --------------------------------------------------------------------------- Thank you for this opportunity to appear today with an update on the activities of the Postal Regulatory Commission. I am pleased to be here with Postmaster General Potter and greatly appreciate his kind words for the work of the Commission this past year. My written testimony gives a complete agenda of our activities, and I am pleased to summarize my statement. I ask that my written testimony be submitted for the record as well. Senator Carper. It will be unless Senator Akaka objects. Do you? Senator Akaka. No. Senator Carper. No objection for a change. All right. That is good. Mr. Blair. Thank you, sir. This has been a very busy year for us at the Commission. Standing up the regulatory framework 8 months ahead of schedule, consulting with the Postal Service on the development of modern service standards, completing one last final rate case under the old regulatory regime topped the list of those activities. It was a fulfilling year, but we cannot rest on our accomplishments since this upcoming year presents us with equal, if not greater, challenges. Our agenda this year includes further consultation on service standard goals and performance measurement systems. Last week, I had the chance before the House Subcommittee, to compliment the Postmaster General and his team at the USPS, headed up by Deputy Postmaster General Pat Donahoe, for their work with us on the development of the service standards and our continuing consultation. I would like to do that again. The PRC's efforts in this area added value, and I am pleased that many of our suggestions over the past few months were incorporated in the final service standards. Our monthly meetings have proved to be an excellent conduit for consultations and communication in other issue areas as well. This open and ongoing dialogue helps make our system work better, and I look forward to continuing the practice. Currently we are undertaking two new PAEA reviews. First we are reviewing the data provided by the Postal Service as part of its annual compliance report, and we are reviewing the rate adjustment filing under the new regulatory framework submitted by the Postal Service on February 11. While we are in the mid-stages of an evolving process, I am hopeful that this less litigious environment, brought about by the PAEA, continues to produce a better exchange of information between the Commission and the Service. With the experience we have gained in the review of the first annual data submission by the Service, the Commission will shortly propose rules to tighten up the process. The first annual report has identified areas for data collection, special studies and cost models that need updating. We are also working on the Universal Service Obligations Study which was mandated by the Postal Accountability and Enhancement Act. We plan to solicit views from the Postal Service, other Federal agencies, the postal community, and the general public on their expectations of universal postal service. Given the scope of the study, we are supporting our Commission work through a competitively awarded contract with George Mason University's School of Public Policy. We expect to engage in broad public outreach as well as conduct several field hearings to gauge the mailing public's needs and perceptions. We plan a very comprehensive and well documented report. As I mentioned in my written statement, we believe our congressionally mandated report will have the benefit of the findings and recommendations of the separate report being prepared by the Postal Service through the National Academies of Science, and I want to thank Postmaster General Potter for his assistance in this area. I am also pleased to report that the Commission has formally released its first strategic and operational plan, detailing the agency's vision and goals over the next 5 years. The plan outlines the strategies and activities that the Commission will use to help ensure transparency and accountability of the Postal Service and to foster a vital and efficient universal mail system. By emphasizing the operational work that must be accomplished over the next 5 years, the Commission can evaluate its progress and performance on the strategic goals outlined in the plan. To conclude, Mr. Chairman, those are several of our front- burner issues. An additional priority is to see the successful confirmation of a new commissioner to fill our one vacancy. We have pending the notices of rate adjustment under the new rules as well as Commission action on the Postal Service's compliance data. Therefore, a full complement of commissioners to take action on these two new important aspects of Commission authority would be very beneficial. I am pleased to report that last week President Bush nominated Nanci Langley, sitting in back of me, to fill this seat. Many of you may know Ms. Langley from her long-time work for Senator Akaka on this Subcommittee. She is currently the Commission's Director of Public Affairs and Government Relations. I hope the Committee can take swift action in forwarding her nomination to the full Senate. My written testimony goes into further detail, and I am pleased to answer any of your questions. Thank you. Senator Carper. Thank you very much, Mr. Chairman. When Nanci Langley worked for Senator Akaka, I oftentimes would observe her lips moving when he spoke, and I just noticed that she has your back. I could just barely see her lips move when you spoke, too. That is a trait that served her well when she was here in the Senate and now for the Commission. And if you watch carefully, you will probably see John Kilvington, his lips move when I speak too. [Laughter.] I want to go back, at least to start off, to our Postmaster General. You mentioned some measures of performance and they were not financial in nature but they dealt with, I think, 1- day mail, 2-day mail. Just go over those again. I thought those were impressive. Mr. Potter. Those numbers were from our first quarter which runs from October 1 to December 31. Generally it is a somewhat difficult delivery time for us because we have holiday volumes as well as we start to get the effects of winter weather, and so we are very proud of the fact that, in the first quarter, our First-Class overnight service performance reached an all- time high of 96 percent for that quarter. It is the first time we have ever done it. Our 2-day service was at 93 percent, and that again is a record performance at any time, and 3-day we matched our all- time high of 88 percent in that quarter. So, we look at the opportunity to or the challenge of, cutting costs and we do not do that independent of service. We do not and try not to, as best we can, risk service. So our efforts, I think, prove well. We saved over $350 million off of our plan in the first quarter, but we did it with an eye toward getting the mail out and being more efficient at moving the mail and moving it correctly the first time. So as your quality improves, your handlings go down and your service goes up so we are very proud of the results and Pat Donahoe and his entire crew, the Deputy Postmaster General COO, and all the people in the field, deserve a lot of credit for what they were able to do. Senator Carper. My congratulations to all of you. You mentioned the legislation called for some changes in worker's comp. Would you just talk about how that is being implemented? How that is going? Mr. Potter. Well, it is a matter of a small change in terms of a waiting period for worker's comp when somebody was injured and so it was a matter of just a quick change in our procedures and that has been accomplished. Now there is a 3-day waiting period before you can begin receiving worker's comp and we implemented that within a couple of months of the new law being signed into law by the President. Senator Carper. How is that being received? How is it working? Mr. Potter. For the most part I have not heard anything about it. I know when it was put in place, there were people who were concerned about it. But it really has not surfaced as an issue since it has been implemented. Senator Carper. In your testimony you mentioned the word ``recycling.'' And my ears picked it up immediately. Senator Olympia Snowe and I are the co-chairs of the recycling caucus in the U.S. Senate. Most of you probably did not know there is a recycling caucus but there is, and Olympia and I are the co- chairs. But you said that the Postal Service is doing a better job on recycling. Just give us a little bit more information on that. Mr. Potter. Well, from a number of fronts. First of all, we obviously have waste inside the Postal Service and we have made it a goal of ours to increase the amount of mail and paper that we recycle and other wastes that the Postal Service recycles. Senator Carper. So you admit that you are recycling mail, is that it? Mr. Potter. Mail that is undeliverable as addressed we recycle. Senator Carper. That will be the lead in all the news stories. Postmaster General admits to recycling mail. Mr. Potter. Well, we do. If it is undeliverable as addressed, we would rather put it into a recycling program than to put it into a landfill. Senator Carper. I understand. Mr. Potter. We also have people who come into our lobbies, P.O. boxes, and receive mail, and we provided them an opportunity to read it and recycle it right there as opposed to putting it into waste baskets for them and they use them for whatever and we recycle the paper that is put into those recycling bins now. We also recycle a lot of industrial materials that we use, batteries, oils, and other things that we try to find the best home for. Another area that we are very proud of is our new boxes for Priority and Express Mail. We reduced the numbers and types of boxes we had and we work with an organization called Cradle to Cradle and got their certification to make those boxes environmentally friendly and to make sure that they did not do damage to the environment should they wind up in a landfill. We would prefer that people recycle them but it was a great exercise because we learned. That when you deal with something as simple as a cardboard box with a little printing on it, it was amazing to see how many suppliers we had to go to in order to get that box to be as environmentally friendly as we could. It was not just the provider of ink. It was the supplier to our ink supplier. It was the paper suppliers. The chemicals that are used in paper, and so we have come a long way. We are learning quite a bit. We are doing our part to try and keep the environment friendly and reduce any harm that we might bring to the environment. Senator Carper. Good. Let me stay on that theme for just a moment. I will ask one more question and then hand it over to Senator Akaka. With respect to the issue of the greening of the Postal Service, would you talk to us a little bit about what you see ahead in terms of the vehicles, the kinds of vehicles that you acquire, purchase, lease, and how you might do something that is positive with respect to our environment? Mr. Potter. Well, today we have the largest alternate fuel vehicle fleet of any organization in America. But we have been somewhat constrained by the law in terms of what types of vehicles we could purchase that would satisfy the environmental requirements for Federal agencies. Since the last time we had a hearing, and I am grateful to the Senate, a law has been passed that has increased the flexibility that the Postal Service has in terms of future buys of engines for our vehicles, whether it is replacement engines or for new vehicles that will meet the Federal requirements. So we are anxious to begin to study the use of hybrids vehicles for our trucks and our lighter weight vehicles and we are in the process of looking at all sorts of different energy sources. In fact, we hosted at one of our vehicle maintenance facilities right here in the Washington DC area, the President, Secretary of Energy, and we had our trucks along side of FedEx, UPS, and DHL vehicles because everyone in the delivery business is looking to the future and looking to try and make the changes that will help the environment going forward. So I appreciate the new law that was passed and the flexibility that the Postal Service has been given when it comes to future vehicle purchases. Senator Carper. I am glad you are taking advantage of that flexibility and look forward to hearing more of what is to come. Senator Akaka. Senator Akaka. Thank you very much, Mr. Chairman. General Potter, I want to commend you and the Postal Service for the gains you have made in the past year. It has been done with the help of everybody in the Postal Service and I am glad to hear your testimony this morning about how you have come along. As you know, the Postal Service must begin Sarbanes-Oxley style financial reporting by fiscal year 2010 which is about in 2 years. I have been a strong advocate of increased transparency in financial accounting, and I sort of felt tickled when you mentioned the words ``competitive product'' as making it more transparent to the public so that they understand what you are trying to do there. How far along is the Postal Service in implementing both the policy and technical changes in order to prepare for the Sarbanes-Oxley reporting? Mr. Potter. Well, the most obvious thing to people who look at our financial results is the fact that we are now in compliance with SEC-like reporting on a quarterly basis. In addition to that, we have made extensive efforts internally to make sure that we are putting in place the types of controls that are necessary to meet the requirements of the Sarbanes- Oxley Act. We are working closely with our auditor, Ernst and Young, and we brought Deloitte and Touche in as our consultant that is looking at, again, both of those well known audit or accounting firms are helping us with the implementation. So, Senator, I would say we are well along. It is, as you are probably aware, a very exhaustive effort. The Board of Governors of the Postal Service have really stepped up and have taken the lead to make sure that we are in compliance and they are very aware of their role, and it is a much more difficult task for a board under Sarbanes-Oxley than they had previously done. So I am really grateful for the work that they have done and so everybody is involved and are working hard to make sure that we put into place the type of controls that will create the kind of surety that I need to have in order to sign those documents every quarter, that they are sound and that our reports are accurate and the goal of transparency is one that we embrace. Senator Akaka. Mr. Blair, as you stated in your testimony, the Postal Reform Bill requires that by December of this year, the PRC issue a report on the current state of the Postal Service's universal service obligation and recommend necessary reforms. This issue is especially important to rural and isolated areas such as Hawaii who depend on universal service. Has the PRC made progress on this report and what outside stakeholders do you plan to work with in conducting your assessment and developing recommendations? Mr. Blair. Thank you, Senator Akaka, for the question. I am happy to answer that. We have made progress on this. Early this year we have entered into an agreement with George Mason University, School of Public Policy to help conduct this report. We plan on gaging the opinion of a broad range of stakeholders, seeking their input. Other plans on the Commission's agenda include possible field hearings in order to go outside the Beltway. We have established a good precedent with that. Last year we had field hearings on the development of our new regulatory system and service standards so we would like to build upon that past progress. Hopefully field hearings will aid the Commission as it decides what our recommendations will be. The law also requires us to consult with the Postal Service on this. At our last monthly meeting, it was raised. I know our staffs have been meeting on this, and I want to again thank General Potter for his cooperation. It is important that we receive the best information available before we move forward and make any recommendations to the Congress. I know the Postal Service has engaged the National Academies of Science, a very prestigious body, to look into some of the similar issues. To Mr. Potter's credit, he has granted us the ability to have the benefit of that report before we make our recommendations. I see it as a very broad ranging and a full-bodied report. I look forward to engaging stakeholders. We are still in the formulative plan of how we are engaging in outreach. For instance, on my agenda tomorrow is to talk about the field hearings and potential locations. We may be holding some other kind of stakeholder input as well, on our contract, or will be gauging public opinion on that. We have a 360-degree front on this in reaching out to as many possible people in order to really generate good public opinion so we can make some thoughtful, substantive recommendations to the Congress. Senator Akaka. You mentioned that you will be using contractors. What role would these contractors have? Mr. Blair. These contractors will be playing an advisory role, and I appreciate that question too because we have heard that some people view this as a one contractor study. This is the Commission study and the Commission will be making these recommendations. We will be looking at the in-put that the contractor provides. We have an excellent project manager from George Mason. Her name is Dr. Christine Pommerening, and she is going to be tapping into many of the most formative minds in the postal field in the country. But the recommendations and the input that they provide to us will help us. But at the end of the day, these will be the Commission's recommendations. So I appreciate your allowing me to put that on the record as well. Senator Akaka. Thank you. Thank very much. General Potter, currently about a dozen States are looking at legislation to create so-called do-not-mail registries requiring that the Postal Service do not deliver certain kinds of commercial mail to residents. Does the Postal Service believe that States have the authority to implement rules affecting the mail and would you challenge any such rules? Mr. Potter. Senator, we are analyzing that very question, and I do not have a definitive answer for you on whether or not States have that authority. But I will tell you that we are working hard to inform people about the role that mail plans in the economy, both as an employer of millions of Americans as well as a generator of sales and fortunately so far no legislation at the State level has passed and I think once people look at the issue in its entirety the case against that type of legislation is pretty compelling, and so particularly given the state of current economy, I would hesitate to recommend anything that could hurt any State's economy. Senator Akaka. Yes. Well, I understand in closing there are 11 States looking into this, and Hawaii is, I think, one of them. But I just wanted your thoughts on that. Thank you very much, Mr. Chairman. Senator Carper. Thank you, Senator Akaka. As you know, Mr. Blair, there have been some questions for awhile about the fairness of the work sharing discounts that the Postal Service offers to mailers who do some of the processing of their mail themselves before turning it over to the Postal Service. One or two of the postal unions have argued that a number of these discounts are excessive and actually hurt the Postal Service rather than making it more efficient. There is a provision in the Postal Reform Bill that seeks to ensure that work sharing discounts make more sense. What role do you plan to have the Postal Regulatory Commission take in examining discounts to ensure that they are appropriate and fair? Mr. Blair. Our new rules are cognizant of that special provision within the PAEA. What we are requiring is that a notice of rate adjustment, such as that recently filed by the Postal Service, include a schedule of workshare discounts and also a separate justification of any discounts that exceed the avoided cost. The legislation specifically prohibits, except for some exceptions, workshare discounts that would exceed the cost that the USPS could avoid in doing the work itself. Last week we asked the Postal Service to respond to an information request to explain several workshare discounts that appeared to exceed the 100 percent pass-through level. The Postal Service responded to that request last night. We are examining that but we are very aware of that provision and intend to follow it to meet the intent of the legislation. Senator Carper. When you look at the postal reform legislation that we worked on and enacted over a year ago and you look at the provisions that are proving to be positive and especially beneficial, what might be several of those? And you alluded to this at least in part in your responses. If you had to do it over again or if we had to do it over again, 1 year into this experiment, 1 year into this test drive, what would you suggest we maybe would have done differently? Mr. Blair, why don't you go ahead and take it and then we will ask the Postmaster General to respond? So a little of each, what things are especially positive in the legislation, and if we had to do it over again, what would you suggest we do differently? Mr. Blair. I think the legislation fundamentally shifted the focus of the relationship between the Postal Service and the regulator. Before it was almost adversarial and the new legislation removed the excessive, lengthy litigation that took place during the rate case. I think that is a positive aspect. It allowed for a more modern rate making procedure to be implemented, and it also required continuing dialog between the regulator and the regulated entity. I think that is vitally important. I think that over the course of the past year that has worked very well and I am very pleased with that. I think we saw with the last rate case all the flaws and blemishes that that system brought with it. Congress was very wise in passing the legislation when it did. Moreover, I know the community backed us up when we said we wanted to get these regulations out sooner rather than later. The Postal Service was a partner in this procedure, which worked incredibly well too. Regarding what changes might take place in the future, we are only a year into this, and I want to see how well the legislation works. The Commission probably had at least three dozen action items that it had to accomplish. Some had timeframes. Some did not. We have been focusing primarily on the ones with timeframes. But one of the timeframes is that we have to come up with several studies over the course of the next few years. One is the universal service obligation. One is a 5-year review. One is a 10-year review. I think we will be in a better position to answer your question in a year or two or three. But so far the system is working, and I think it is working better than most people expected. Maybe that is from a biased view point. It is hard for me to separate myself from the Commission, and the two view points tend to be one and the same. But from my perspective, it is working better than I had hoped or had expected. Senator Carper. Thank you. General Potter, what do you think is working especially well and a couple of items that you want to flag for us to follow for the future? Mr. Potter. Well, I think there are a couple elements of the law that helped us immediately and that is obviously the pricing flexibility that we have in terms of, first of all, the frequency of adjustments and the speed to make adjustments so we are able to change our mailing services prices on an annual basis. I think the rate cap is going to be helpful because it will keep people in the mail and it is going to create a dynamic ??? that forces the Postal Service to step up to efficiency as well as give people predictability about their rates going forward. So as you said earlier, people have choices about whether or not they are going to use the mail as their channel or electronic or some other means to send messages and advertisements. So the fact, there is predictability going forward, I think it is very valuable. In terms of what I think going forward would be helpful to the Postal Service, I think that, if anything, there is not enough flexibility in the law. When I look at the list of products that are on the market dominant side of the aisle, I think there are probably too many, and things, for example, like---- Senator Carper. When you say market dominant, does that mean shipping services? Mr. Potter. No. Market dominant is mail but it goes beyond mail. It has things like P.O. boxes, money orders, basically anything other than Priority, Express Mail, or international mail, largely our package businesses, is put on the market dominant side of law, and so there are things there that I think need to be re-evaluated. There are some package services that are on the market dominant side of the law that really should be on the competitive side and allow us to compete. I think that there are a lot of restrictions around what we can sell and not sell, and when I look around the world and look at other posts, they have the same challenges that we do when it comes to diversion of hard copy product to electronic medium. And they look at their assets and have been able to get from their governments the flexibility to use those assets to generate revenue to support the universal service obligation that Mr. Blair just spoke about that he is doing a study on. So when you look at the posts around the world, many of them are using their retail outlets as banks. They do not necessarily own the bank but they provide banking transactions for banks in their countries or in some cases they own the bank. That type of flexibility is something, I think, that we need to explore because we do have these assets. We are very restricted today in terms of what we can do with those assets. I believe going forward that in order to continue to provide access to mail through those brick and mortar structures that we have, we have to figure out how to generate revenue, other revenue in that location, whether that is services that we provide, and our clerks provide, or leasing out the space so that it generates revenue to contribute to the maintenance of an access point for America. Senator Carper. I am going to yield to Senator Akaka. When we come back, I want to explore with you some of the things that the Postal Service is doing in this first year since the enactment of the legislation, and as our economy has slowed, what you are doing to try to shore up revenues and also what you are doing to take costs out of the system. Senator Akaka. Senator Akaka. Thank very much, Mr. Chairman. General Potter, as you well know, the Postal Service offers a wide variety of products and services to businesses and individuals that often are competitive with your private sector counterparts such as UPS and FedEx. Here on the Hill, we receive press releases and briefings regarding these services. The Postal Service's competitors spend billions on marketing and advertising their services. I am concerned that the Postal Service may not be marketing as aggressively as the competition. What kind of commitment does the Postal Service have to building its so-called brand and what can be done to better promote its competitive products? Mr. Potter. Well, that is a great question, and I can talk for probably 20 minutes about what we are planning to do. First, let me say that we do advertise. We spend just under $100 million a year on advertizing. We have not been as aggressive on advertising our competitive products because until we had the new regulations that my good friend, Mr. Blair, put in place, we did not really have pricing flexibility, and in the marketplace when you cannot go out to people who mail any kind of significant volume with an offer, an ability to negotiate, you are really hamstrung. So our efforts in the past couple of years have really focused on consumers and offering them access and small businesses access to the Postal Service. So we have, now consumers and small businesses have the opportunity to go online to pay for postage. Our carriers go by their door everyday. In the course of their rounds, they can tell us that they have a package to be picked up and so we offer that pickup service as they go by those deliveries. So the notion of getting online, paying for packages and providing pickup is something that really has helped our business grow. We also built with Priority Mail: We created a flat rate box and again using the pricing freedoms that we have had, we just created a larger flat rate box, and it was largely as a result of inquiries from military families because it became very popular to use that box to send, I guess, messages, goods, reminders of home to our troops, and so we created a larger flat rate box that we would not have been able to go to market with as quickly as we did if it were not for the new law. In fact, I just came from the House where we had an effort that was put on by the House caucus that is a part of the America Supports You program, and the Department of Defense has this America Supports You where we demonstrated that we have a new box that is co-branded and we provide a discount to military families. So they have $2 off on that box that is going overseas. So we are making strides. I just described in my testimony that we are going to change rates in May for our competitive or package products. At that time, we are going to go out and we are going to offer different prices, a different price for retail than if you go online and buy services. We are going to, for the first time ever, offer volume discounts for our Express Mail, Priority Mail, and our ground packages. At that point, we are going to launch a major campaign because, again, we will have the flexibility to do it. We are working with the Postal Regulatory Commission and staff, as Mr. Blair said, in a cooperative way. We are now exploring how we can do contracts with businesses so we will have published prices that we are going to get the Board of Governor's approval on so I am not at liberty to say what they are. But once we have their approval, we intend to file that with the Commission such that we will be able to raise those rates in May and we will have a full campaign on that. We are probably very unusual in that we are positioned to have a campaign like no other in the sense that people do advertising to move awareness of products and services up. Well, we have 800,000 people who work for us. So our first campaign is to make them aware of our products. I am really proud of the efforts that our unions are putting forth. We have met with them. They agree that they are going to have to encourage their people to make sure that customers who come into our lobbies are informed about our products, that the carriers on the streets are there making people aware of the products and services that we have, and the new pricing schedules that we are going to put in place. We are going to have an all-out blitz too. We are going to hit a button and 700,000 of our best customers are going to get information on this. We are going to use every channel that we have. We have nine million Americans that walk into our lobbies everyday. We will have lobby posters. The bottom line is with the new flexibility we have and when we first have an opportunity to use it, that is when we are going to go out in a very structured way, using all of our resources with the help of all of our employees to let America know that the Postal Service has great products to offer. They have good prices, competitive prices, and so that will be kind of the launch of our effort to grow the package business. Again you want to sell it when you have something to offer. You do not sell it in advance of that. So again you will see a very coordinated effort to go after this. Senator Akaka. Thank you. I am glad you are moving on that. Mr. Blair, last year before this Committee I asked you about PRC's involvement in creating modern service standards for the Postal Service. The Reform Act required the Postal Service develop these standards in consultation with the PRC. Now that these standards have been issued, what is the PRC's assessment of the overall process and the level of consultation? Mr. Blair. Senator, I think the process worked relatively well. It brought our two sides to the table to discuss a wide variety and a wide range of issues. We did not always agree. They did not always accept our proposals. But at the end of the day, I believe that our input produced results and a better product in terms of the standards. We argued hard for greater granularity in their reporting, that it be done by district and that it be done by quarter. Our proposals were the final work product that the Postal Service put out. I think the consultations produced a good product and we are continuing those consultations. The law also requires that we consult on the development of goals to meet those standards because without goals the standards themselves become de facto goals. We are in that process. We also have to consult with them on the rationalization of their network, and we look forward to discussing that with them at the upcoming consultations as well. We are also in the process of reviewing a proposal by the Postal Service on the measurement system that is going to be used. The law granted the Commission the authority to allow the Postal Service to use an internal measurement system. We thought it was in the best interest of the Postal Service and the mailing community, and we are reviewing a proposal that they have put forth based on the intelligent mail barcode at this time. So I think overall the consultations have been a positive influence on both organizations. It has led to greater dialog between the regulator and the regulated entity. While there may be tension from time to time between the two bodies, I think that is intended by the statute and I think that is healthy. I certainly do not think an adversarial relationship is good, and I am proud to say that I do not think we have one. I think that these consultations have morphed into something bigger and it is a good way of communicating between the two bodies. Senator Akaka. Thank you very much for that. I have one more question. General Potter, the Postal Service offers a wide variety of extra services for different classes of mail such as registered mail and delivery conformation. However, there are over half a dozen forms depending on the specific services you want. For example, if you want to send registered mail with a return receipt, you have to fill out two separate forms. Some of the competitors offer similar services in a much easier manner by using a single form. Are there any efforts underway to make the various mail services more user friendly in order to keep up with your competitors? Mr. Potter. Yes, Senator, there are. The intelligent mail barcode that Mr. Blair just spoke of is our effort to put one barcode on our mail that would have all the information embedded in it that today are covered in multiple barcodes and multiple requests. So this barcode will identify the sender, and the destination. It will identify any special service that is requested along with that letter or package that will be put into the mail. So, yes, we are working on it and we know we have an opportunity to improve and we have people that have been tasked to do that, and there is a lot of communication between the Postal Service and its customer base, and looking to make sure that, as we do this, we recognize that major changes will not only occur within the Postal Service's system but in customer systems as well. So we are trying to figure out how to make this transition to an environment you describe in a way that works for all. Senator Akaka. Thank you so much for your responses. I really appreciate what you are doing and am happy to hear those responses. Thank you very much. Senator Carper. Senator Akaka, thank you very much for being a part of putting the legislation together and for making sure we are appropriately exercising our oversight. I indicated before Senator Akaka began his questions that I want to come back and just revisit a couple of issues. This will be brief. But, General Potter, you just talked to us about some of the things that you are doing collectively at the Postal Service, given dropping revenues, some things that you are doing to avoid a $2 billion operating deficit this year. I know one of those is going for the one-cent increase in First-Class postage which kicks in in May. I think you said that is worth maybe $700 million in this fiscal year? Mr. Potter. Yes, it is. So we are making a price adjustment in May that will be conformed to the rate cap obligations. Senator Carper. Do you do any modeling, I presume in your projections, to figure out what kind of drop-off, if we raise prices, usually there is some drop-off in demand. Any idea? I realize it is what, 2 or 2.5 percent? It is not all that much. Is there any correlation there? Mr. Potter. Yes. Because it is at the rate of inflation, we do not expect the type of drop-off that we saw last year when we had rates that rose above the rate of inflation. So it is kind of a nominal thing. There will be some drop- off but elasticities will not kick in since it is just at or even now running slightly below the rate of inflation because inflation has continued to move along and we used a January look-back. So we expect a slight drop-off but not much. In addition to that, I described some of the things that we are going to do and the effort that we are going to make to increase the amount of packages that we have in the system and make sure that people understand the value of not only the package services that the Postal Service provides as well as the value of hard copy versus other choices that they have in the marketplace. We are looking to try to figure out to make it easier to use, to Senator Akaka's point, not only to use our forms and get around forms and simplify them but also to make access to the mail easier. So oftentimes people who are trying to do small advertising campaigns find that the process of dealing with the Postal Service and suppliers, whether that is printer or a list provider, is complicated. So we are looking to try and find solutions that will work for those folks as well. And as we said earlier, our projection for volume is down. So the first thing you do when you have projection of volume below planned is you go back and you adjust the plan's use of resources. So as volume diminishes, your need for work hours to process that mail diminishes as well. We are also in the process of mapping all of our operations. So looking at the entire value chain throughout our entire system each time something is handled and any time it is handled, we are asking the question of ourselves now is what is the value added by that touch. So as an example, one of the things that we have historically done is as mail is brought into our plants, we weigh it. And we now have enough mail that the bulk of our mail moves from the dock--it used to move to a scale and then right onto a machine that counted the mail. It continues to move onto machines that count the mail, and so we are now eliminating weighing of mail. It may sound like something trivial but in the Postal Service, given our size, our scale, scope, it is $100 million worth of costs that can be eliminated. So those kinds of things that we are taking a good, hard look at to determine whether or not they add value. And in addition to that, we have a program that looks at productivity and measures productivity across the country, establishes goals for people that are consistent with the top quartile of the country. If one section of the country can get a high level of productivity at one plant, we would like everyone to replicate that and we provide training materials to folks and establish goals. So it is a continuous improvement-like program and it is paying big dividends for us. So to make a long story short, we are looking at making a price adjustment. We are looking at selling our products and doing it a little more aggressively than we have in the past and we are looking at all our costs to determine, first of all, are there things that we do today that just are not adding value, and second, the things that we do do can we do it better and incent people to do it and train folks to do it? Senator Carper. Mr. Blair, anything you want to add or take away from that list for us from your own perspective? I realize this is not part of your responsibilities but---- Mr. Blair. Well, not at this point. Senator Carper. OK. Fair enough. General Potter, one of the things that was very important to the postal customers that we met with when we were crafting our postal reform legislation was predictability and that was especially important for business mailers. They wanted to have a much better sense of when prices would go up and by how much. And you have spoken to this indirectly at least. How you think our new approach, your new approach, to pricing is better? Do you believe it is better than it was in the past with respect to predictability for businesses? And what kind of feedback are you hearing? Mr. Potter. Well, I believe it certainly is better and I think that the fact that they now know that we are going to make price adjustments every May. Those price adjustments are capped at the rate of inflation for mailing services. I think that helps them in terms of their own budgeting. It also helps with investments. There are a lot of folks who had some concerns about where the mail, where the Postal Service was going in terms of prices, long-term and were afraid of increases much above the rate of inflation. And so the fact that they now can look forward and pretty much predict that they are going to get annual adjustments at or about the rate of inflation enables them, with some surety, to look at what returns they might have on investments that they make in equipment or investments that they might make in longer term game plans around advertising or channel use, in terms of developing relationships with customers. So the bottom line is I think it has helped businesses and that is the feedback I have been getting. Senator Carper. But after the most recent postal pricing changes went into effect, we heard, and I guess you did too, some complaints from certain groups of mailers such as low circulation magazines and some of the catalogs about the fairness of the new prices. Many believe that the final prices worked out after months of negotiation and testimony before the Postal Regulatory Commission may have gone a little too far at least in their minds. I understand that the new prices even had a negative impact or may have had a negative impact on volume at the end of the day. What, if anything, Mr. Potter, are you all doing in the planned May pricing changes or in future moves, to address the issues mailers had with the last set of changes? Mr. Potter. Let me address specifically the two concerns that you mentioned. One was the catalog mailers, and so our pricing, the prices that we set forth and are being evaluated now by the PRC are lower for catalogs and that is a reflection of our concern about hitting them once again. So their rates are below the rate of inflation, the ones that we have proposed. When it comes to magazines and periodicals, we basically did an across-the-board rate change. We have proposed an across-the-board change. That reflects the fact that there was great complexity in the periodical rate change the last year. As you know, we had to delay the implementation because there was quite a bit of programming that needed to take place because of the changes that were made ultimately in the rates. So, we basically did an across-the-board rate change again and in deference to the community, so as not to burden them once again with complexity. We are and do take into account, the different industries and where they are going. I believe that the new law gives us flexibility that will enable us to respond to the needs of the industry and the opportunity to incent different mailers to mail. So I think we are just beginning to scratch the surface on what we can do under the new law on the mailing side of the house and we are cognizant of the concerns that were raised with the last rate change and we think our proposed rates reflect and are sensitive to those needs. Senator Carper. Mr. Blair, do you want to add anything to that please? Mr. Blair. What I wanted to say was, especially under the old system, anytime you had an increase in rates, a decrease in volume was naturally expected. The economic slowdown compounded that situation that you referred to. The decision in the last rate case was based on 2005 data which was based upon data that was produced months, if not years, earlier. Maybe more rosy economic scenarios were envisioned. However, it came out in 2006, and I think the rate increase, compounded with an economic slowdown, hit some mailers particularly hard. Regarding the catalogs and flat rates recommendations, it was a zero-sum game. Had catalog rates not gone up, which was an attempt to address an allocation of institutional burden between mailers within the same class, it would have caused letter rates to go up. It was that bubble. If you pushed it down here, it went up there. We have seen it in the comments before the Commission on this new rate adjustment, that some do not think that flat rates again should have gone up further in order to redress that issue. I think we are out of that paradigm in these rate adjustment cases. But it goes to show you that old habits die hard. I think the new system ensures that rates, at the class level, will not exceed the inflationary cap and that there will be predictability and stability in rates and that mailers will have a better sense of what those rate increases will be. I think what the Postmaster General just said about increases every May that is going to be worked into mailers business assumptions. I think that we will know now as to what those rate increases will likely be. Senator Carper. Thank you. I would like to ask each of you a question or two regarding negotiated service agreements and we will just start off, Mr. Blair, with you. You will recall that another provision in the Postal Reform Bill that we adopted codifies the Postal Service's authority to enter into negotiated service agreements with individual mailers. The Postal Service has entered into these kinds of agreements in the past, I believe, with varying degrees of success. None of the agreements, though, to my knowledge, have been a complete failure but I do not think that there have been a lot of them that have brought in substantial amounts of volume and revenue either. If I stand to be corrected, feel free to correct me. Mr. Blair, first of all, what is your understanding of the Postal Service's authority to enter into negotiated service agreements, and then to follow up, what is your assessment of the Postal Service's ability to negotiate quality agreements that can have a real impact on volume and a real impact on revenue and on the overall efficiency of the Postal Service? Mr. Blair. I think the new rules grant them a tremendous amount of new flexibility that was not there before. The legislation codified negotiated service agreements. It said that it either has to improve the net financial status of the Postal Service or improve operational efficiencies and cause no undue market harm from market dominant products. And in the competitive areas, you have to cover attributable costs. I think that gives the Postal Service tremendous flexibility in that area. I agree that the agreements have not been as successful as parties had hoped. I think that codifying this in statute bolsters the Postal Service's negotiating position because parties know what the Postal Service has to do in order to comply with the law. We would expect more NSAs to be coming down the pike. We have had some preliminary discussions about what they want to do in the competitive arena. We are heartened by that. We want to make sure that the agreements comport with the law. I think that you would want us to do no less. But I think that this is a new era, and I think we have to look at things a little bit differently. We certainly want to do that. We want to see them succeed. But we are mindful of our statutory duties. It is a balancing act, and we want to make sure that we walk that fine line. Senator Carper. Thank you. Just to close out on this particular topic, General Potter, what lessons have you and your team learned from some of your experiences with negotiated service agreements in the past, including, I guess, the recent experience with Bank of America where the quality of the data that you were using was called into question? Mr. Potter. Well, the one thing that I have learned is negotiated service agreements go back to the law. The market dominant or mail side of the house are extremely difficult. In a sense it is somewhat of a zero sum game, and I think under the old law, the litmus test for it was much more difficult because of the fact that you had everybody looking over each other's shoulder. The fact of the matter is I am very enthused about the types of discussions that we are having today. When it comes to competitive products, I think we have a real opportunity to grow the business and we have had some very constructive dialog with the PRC and I am anxious to move ahead with it. On the market dominant side of the house, we are a little more tenuous in terms of how we might do that. We are anxious to get ahead. We have further discussions planned with the Postal Regulatory Commission. We have began having dialog with our customer base. But under the old rules, it was very easy to throw a stone. I think we are going to have to change the mind set of folks to say, gee, it might make sense to charge somebody a lesser price if it is a matter of retaining business that makes some contribution to the bottom line. It might make sense to incent people to go into new markets to advertise. These are concepts that are foreign to our old way of doing business and are things that we are going to have to explore and do it in a very deliberate way in order to reassure the community that there are sound reasons to move ahead. That being said, I agreed with what Mr. Blair said, the new law, the litmus test, or the hurdle that you have to get over under the new law is quite lower than it was under the old law, and the process--thanks to the new regulations that they would have put out for rates in general and what we anticipate they will do with negotiated service agreements--will be much more expeditious and will provide the type of flexibility that I think the law intends. So I am very anxious about what we are going to do on the competitive side. We are going to call it contracts. Again, I said that early on, we are going to try to use that language so folks that we are dealing with understand it, and on the market dominant side, we are working hard to find a path and to communicate so that everybody understands what we do and how we do it. And the understanding is it is going to make of the whole better and not necessarily meet the requirements of the old law. Senator Carper. All right. Just one more time for my edification, just tell us again the new lingo for market dominant, for competitive. Mr. Potter. OK. Mail, or Market dominant products--First- Class Mail, periodicals, Standard Mail--it is now called mailing services. Competitive products--Express Mail, Priority Mail, international packages--we are now calling that shipping services. We are not going to use the word ``rate'' anymore. We are going to use the word ``price.'' We are going to move away from the term ``discount,'' and we are going to talk about incentives for people to mail. Those are the types of language that we want people to start thinking of us as. You are asking us and have told us that you want us to compete, to operate like a business and so we are going to move to talk like a business. Senator Carper. That is probably a good place to end this hearing on. I am glad to hear you are talking the talk. When I was governor of Delaware--I will close with this thought--I was governor of Delaware. About the mid 1990s we decided to launch welfare reform, and we decided to launch welfare reform as a country, and as it turned out, we ended up launching welfare reform where we limited the amount of time that people would be eligible for welfare benefits. Tried to offer them things that would make work pay more than welfare. And just by dumb luck, we launched welfare reform in the middle of the longest running economic expansion in history of the country. Enormous job creation was occurring, and it was not that welfare reform was easy but it was a whole lot easier than it would have been otherwise. It occurs to me that we have launched postal reform at the beginning here of an economic downturn and slow down when it makes a different transition all the more challenging. I am encouraged that, at this point in time, one year into this, you and the folks you lead are taking the right spirit into a brave new world, and I applaud that. I am encouraged by it. I realize we just have a year under our belts, a year under your belts, and we are going through a learning process and I am pleased to hear that some of the things we thought might work are for the most part working. Maybe some little better than expected and there are some other problems that may have emerged or some areas to keep an eye on or ones that we just need to watch a bit more. But that is pretty much what I had to say. Anybody else have a closing word? Mr. Blair, you looked like you might have something else you want to add. Mr. Blair. I would much rather be having this discussion today than a similar discussion where we are facing a very contentious old cost of service rate case under the old rules had postal reform not passed. So is it the best environment to implement a reform agenda? Maybe not, but I think it is better than not doing it at all, and so maybe you were prescient in forecasting that this was going to happen and that foresight is going to benefit the system as a whole. Senator Carper. I wish I were that smart. In any event we appreciate your being here. We appreciate the spirit that you bring to these challenges, and we look forward again to continuing this dialog both in a forum like this and in less structured forums as well. Our thanks on behalf of the Subcommittee to each of you and to your respective teams, to your colleagues. Thank you for testifying today and really for your commitment to making postal reform a success. The hearing record will remain open for, I think, 2 weeks for the submission of additional statements and some additional questions. To the extent that you receive those, I would just ask that you respond to them promptly if you will. And with that it is 4 o'clock. It is time for us to go vote so this has worked out very well. Thank you so much. The hearing is adjourned. 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