<DOC> [108 Senate Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:93479.wais] S. Hrg. 108-508 POSTAL REFORM: SUSTAINING THE NINE MILLION JOBS IN THE $900 BILLION MAILING INDUSTRY ======================================================================= HEARINGS before the COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED EIGHTH CONGRESS SECOND SESSION __________ MARCH 9 AND 11, 2004 __________ Printed for the use of the Committee on Governmental Affairs U.S. GOVERNMENT PRINTING OFFICE 93-479 WASHINGTON : DC ____________________________________________________________________________ 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) 512ÿ092250 Mail: Stop SSOP, Washington, DC 20402ÿ090001 COMMITTEE ON GOVERNMENTAL AFFAIRS SUSAN M. COLLINS, Maine, Chairman TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii ARLEN SPECTER, Pennsylvania RICHARD J. DURBIN, Illinois ROBERT F. BENNETT, Utah THOMAS R. CARPER, Delaware PETER G. FITZGERALD, Illinois MARK DAYTON, Minnesota JOHN E. SUNUNU, New Hampshire FRANK LAUTENBERG, New Jersey RICHARD C. SHELBY, Alabama MARK PRYOR, Arkansas Michael D. Bopp, Staff Director and Chief Counsel Ann C. Fisher, Deputy Staff Director Joyce A. Rechtschaffen, Minority Staff Director and Counsel Susan E. Propper, Minority Counsel Amy B. Newhouse, Chief Clerk C O N T E N T S ------ Opening statements: Page Senator Collins.............................................. 1, 33 Senator Durbin............................................... 5 Senator Carper............................................... 6, 39 Senator Voinovich............................................ 36 Senator Stevens.............................................. 47 Prepared statement: Senator Lautenberg........................................... 67 WITNESSES Tuesday, March 9, 2004 Ann S. Moore, Chairman and Chief Executive Officer, Time Inc..... 3 Mark Angelson, Chairman, President, and Chief Executive Officer, RR Donnelley................................................... 6 Christopher W. Bradley, President and Chief Executive Officer, Cuddledown, Inc................................................ 17 Max Heath, Vice President, Landmark Community Newspapers, Inc., on behalf of the National Newspaper Association................ 19 William J. Ihle, Senior Vice President, Corporate Relations, Bear Creek Corporation.............................................. 22 Shelley Dreifuss, Director, Office of the Consumer Advocate, Postal Rate Commission......................................... 24 Thursday, March 11, 2004 Michael L. Eskew, Chairman and Chief Executive Officer, United Parcel Service................................................. 34 Frederick W. Smith, Chairman, President, and Chief Executive Officer, FedEx Corporation..................................... 37 Gary M. Mulloy, Chairman and Chief Executive Officer, ADVO, Inc.. 48 Gary B. Pruitt, Chairman, President, and Chief Executive Officer, The McClatchy Company, on behalf of the Newspaper Association of America..................................................... 51 H. Robert Wientzen, President and Chief Executive Officer, Direct Marketing Association.......................................... 54 Alphabetical List of Witnesses Angelson, Mark: Testimony.................................................... 6 Prepared Statement........................................... 75 Bradley, Christopher W.: Testimony.................................................... 17 Prepared Statement........................................... 81 Dreifuss, Shelley: Testimony.................................................... 24 Prepared Statement........................................... 107 Eskew, Michael L.: Testimony.................................................... 34 Prepared Statement........................................... 129 Heath, Max: Testimony.................................................... 19 Prepared Statement with an attachment........................ 85 Ihle, William J.: Testimony.................................................... 22 Prepared Statement........................................... 97 Moore, Ann S.: Testimony.................................................... 3 Prepared Statement........................................... 69 Mulloy, Gary M.: Testimony.................................................... 48 Prepared Statement........................................... 161 Pruitt, Gary B.: Testimony.................................................... 51 Prepared Statement........................................... 169 Smith, Frederick W.: Testimony.................................................... 37 Prepared Statement........................................... 138 Wientzen, H. Robert: Testimony.................................................... 54 Prepared Statement........................................... 183 APPENDIX James N. Andersen, President and CEO, The Instant Web Companies, prepared statement............................................. 192 American Forest & Paper Association, prepared statement.......... 198 Christopher McCormack, President and CEO, LL Bean, prepared statement...................................................... 202 POSTAL REFORM: SUSTAINING THE NINE MILLION JOBS IN THE $900 BILLION MAILING INDUSTRY ---------- TUESDAY, MARCH 9, 2004 U.S. Senate, Committee on Governmental Affairs, Washington, DC. The Committee met, pursuant to notice, at 10:04 a.m., in room SD-342, Dirksen Senate Office Building, Hon. Susan M. Collins, Chairman of the Committee, presiding. Present: Senators Collins, Durbin, and Carper. OPENING STATEMENT OF CHAIRMAN COLLINS Chairman Collins. Good morning. The Committee will please come to order. Today marks the fifth in a series of hearings that the Committee is holding to review the recommendations made by the Presidential Commission on the Postal Service. Under the effective leadership of Co-Chairmen Harry Pierce and James Johnson, the Commission put together a comprehensive report on an extremely complex issue, identifying the operational, structural, and financial challenges facing the U.S. Postal Service. The Commission's recommendations are designed to help this 225-year-old Postal Service remain viable over the long term. So much depends upon the Postal Service's continued viability. The Postal Service itself has more than 730,000 career employees. Less well known is the fact that it is also the linchpin of a $900 billion mailing industry that employs nine million Americans in fields as diverse as direct mailing, printing, catalog production, publishing, and paper manufacturing. The health of the Postal Service is essential to thousands of companies and the millions that they employ. One of the greatest challenges facing the Postal Service is the decrease in mail volume as business communications, bills, and payments move more and more to the Internet. The Postal Service has faced declining volumes of First Class Mail for each of the past 4 years. This is highly significant, given the fact that First Class Mail accounts for 48 percent of total mail volume and the revenue it generates pays for more than two-thirds of the Postal Service's institutional costs. At our first hearing last September, the Committee heard from President's Commission on the U.S. Postal Service Co-Chair Jim Johnson. Mr. Johnson made the very important point that the Postal Service's short-term fiscal health is illusory and that Congress must not ignore the fundamental reality that the Postal Service, as an institution, is in serious jeopardy. The Presidential Commission presented its assessment of this crisis in frank terms, concluding, ``An incremental approach to the Postal Service reform will yield too little too late, given the enterprise's bleak fiscal outlook, the depth of current debt and unfunded obligations, the downward trend of First Class Mail volumes, and the limited potential of its legacy postal network that was built for a bygone era.'' This is a very strong statement and it is one that challenges both the Postal Service and the Congress to embrace far-reaching reforms. At the Committee's second hearing in November, we heard from the Postmaster General and the Comptroller General. The Postmaster General described transformation efforts already underway at the Postal Service, many of which are consistent with the Commission's recommendations. He also testified, however, that legislation was required in order to accomplish many of the other recommendations. In his testimony, Comptroller General David Walker of the General Accounting Office shared the Commission's concerns about the Postal Service's $92 billion in unfunded liabilities and other obligations. He pointed to the need for, ``fundamental reforms to minimize the risk of a significant taxpayer bailout or dramatic postal rate increases.'' In fact, since April 2001, the Postal Service has been listed on the General Accounting Office's high-risk list. More recently, the Committee heard from representatives of the four largest postal unions, the Postmaster and Supervisor Associations, the former Director of the Federal Mediation and Conciliation Service, plus two experts on the issue of postal pay comparability. The Commission's workforce-related recommendations were discussed at length during those hearings. Today, we will focus not only on the workforce and financial recommendations, but also on the Postal Service's monopoly and mission, the rate setting process, and corporate governance issues. Among these recommendations are proposals to grant a new Postal Regulatory Board the authority to refine the scope of the monopoly and also to issue standards defining the scope of the universal service application. I would note that it is my judgment that many of those issues are best reserved to Congress rather than being vested in a new regulatory board. The Postal Regulatory Board would also be granted the authority to transfer the existing rate setting process into an incentive-based rate ceiling system. As a Senator representing a largely rural State whose citizens depend heavily on the Postal Service, I very much appreciate the Postal Commission's strong endorsement of the basic features of universal service--affordable rates, frequent delivery, and convenient community access to retail postal services. It is important to me that Mainers living near our borders in Northern or Western Maine or on islands or in our many small rural communities have the same access to the Postal Service as the people in our large cities. If the Postal Service were no longer to provide universal service and deliver mail to every customer, the affordable communications link upon which many Americans rely would be jeopardized. Many commercial enterprises, indeed, most of them, would find it uneconomical if not impossible to deliver mail and packages to rural Americans at the rates charged by the Postal Service. We must save and strengthen this vital institution upon which so many Americans rely for communication and for their jobs. The Postal Service has reached a critical juncture. It is time for action, both by the Postal Service itself and by Congress. Senator Carper and I have committed to working together with many other Members of this Committee to draft a bipartisan postal reform bill. Now, given the history of previous attempts at legislative reforms, I know that this will be a daunting challenge. It is not coincidence that the last reform was done more than 30 years ago. But it is essential if we are to preserve the Postal Service into the 21st Century that we seize the opportunity presented by the Commission's excellent work. I welcome our witnesses today who are from the mailing community. We will hear a variety of views and insights on the recommendations of the Presidential Commission and I am pleased to welcome our first panel of witnesses today. Ann Moore is the Chairman and the Chief Executive Officer of Time Inc. In this position, Ms. Moore oversees all of the businesses of Time Inc., which is the world's leading magazine company and a leading direct marketer of music and videos. Her work at Time, Inc. has earned her numerous awards and honors, including her appearance on Fortune magazine's list of the 50 most powerful women in American business. Mark Angelson is the Chief Executive Officer of RR Donnelley. I would note that he has held that position for all of 9 days, but we are very pleased that he could be with us today. Mr. Angelson assumed his new position when RR Donnelley and Moore-Wallace Corporation combined, creating the new RR Donnelley, which is the largest printer in North America. Prior to this position, Mr. Angelson was the Chief Executive Officer of Moore-Wallace, Incorporated, the third-largest printing company in North America and was the principal architect of the merger. We are very pleased to welcome both of you here today. We know you are both extremely busy individuals and I think it demonstrates just how important postal reform is that both of you, as CEOs of major corporations, would take the time to be here today. Ms. Moore, we will start with your testimony. TESTIMONY OF ANN S. MOORE,\1\ CHAIRMAN AND CHIEF EXECUTIVE OFFICER, TIME INC. Ms. Moore. Thank you very much, Chairman Collins, for this opportunity to discuss the crucial issue of reforming the U.S. Postal Service. As you said, I am Ann Moore, the Chairman and CEO of Time Inc. We are the world's largest magazine publisher with 134 magazines, including Time, People, and Sports Illustrated. --------------------------------------------------------------------------- \1\ The prepared statement of Ms. Moore appears in the Appendix on page 69. --------------------------------------------------------------------------- I have been involved in postal reform for a long time. I actually volunteered to work on this back when I was President of People magazine because there is no issue that is more crucial to the magazine business and to magazine readers than the future viability of the Postal System. The great majority of our readers depend upon the postal system to deliver their magazines, so we need to work together to ensure that this can continue over the long term. It affects everyone, from the mom who reads Parenting to the sports fan who reads Sports Illustrated. The core value of the Post Office has always been reliable, affordable delivery of the mail to every American home and business. We know that Congress wants to maintain this goal and we have this wonderful opportunity to pass a meaningful, comprehensive reform bill and we are committed very much to getting this done. The current Postal Service business model is not sustainable, as we all know, in a climate of expanding addresses and declining mail volume, and we applaud the efforts of Jack Potter to reduce Postal Service costs. But reducing costs alone won't solve the problem. Broad and sweeping reform is required. President Bush and the Treasury deserve thanks for creating the Presidential Commission to help address these issues and we completely support the report's five core principles. We also support the Commission's recommendations on revisions to the collective bargaining process. Negotiators on both sides must know that today's system of binding arbitration does not always provide an optimal solution and we feel that mediation arbitration might bring parties closer to an equitable resolution while protecting the interests of the employees and the Postal Service. However, it is also crucial that a rational rate cap system be put in place by Congress. The dramatic rate increases we have seen are simply not acceptable. As a result of rate increases in recent years, postage expenses have become our single biggest line item at Time Inc. This often surprises people, but this year, we will spend more than $500 million on postage. We actually spend more on postage than we do on paper or printing. We spend more on postage than any other company in America, so we are acutely aware that postage costs have been going up at a rate that far exceeds the rate of inflation. These statistics are documented in our written testimony. In 2001 and 2002, we experienced three rate increases within an 18-month period. If you go back to 1986, magazine postage costs have gone up by 220 percent. This is nearly double the rate of inflation. From our own experience, we know that these rising postal costs drive mail volume out of the system, which compounds the problem. That is why Congress needs to institute a rational rate cap system. Today's rate system fails to provide the Postal Service with strong incentives to hold down costs, too. It also fails to provide mailers with predictable rates. Give us predictable rates and we will give the Postal System more volume, from our current magazines to all the new ones I would really like to launch. We have a lot of creative ideas on the drawing board, magazines that consumers tell us they want, but if I cannot predict the future costs of mail and the long-term costs of a new launch, the risk of building a new magazine is too great. I don't need to tell you that ventures like new magazines create jobs at Time Inc. and beyond. While I have 15,000 employees at Time Inc., you could count all the suppliers that depend upon us, from the paper mills in Maine to the printers to the mail houses. There are many jobs at stake. So for all of these reasons, it is crucial that rates be capped to an inflation benchmark. Now, of course, rate caps must not be met at the expense of good service, so any reform bill must also include service measurement systems and delivery standards for all classes of mail. In addition, rates need to be based upon cost and include the proper incentives for mailer work sharing. This concept provides the Postal Service and the mailing community an incentive to seek the lowest possible cost and the highest quality service. Before I conclude, I want to comment on last year's CSRS legislation. This bill provided much needed relief for the mailing industry. Thank you for getting it passed. That said, the bill has two problem items that need to be addressed. First, the bill's escrow provision will force mailers to pay an additional $4 billion to the Postal Service in 2006. This item alone will add another 5.4 percent increase to postage rates. Second, the CSRS bill also shifted $27 billion in military retirement costs from the Treasury to the Postal Service. Since approximately 90 percent of these costs date back to before the establishment of the Postal Service in 1971, these military costs are not really the responsibility of the people who rely on the Post Office. So in summary, Time Inc. believes that the issues challenging the Postal Service are urgent and demand action by Congress and the Postal Service. We need three things: Predictable rate increases that do not exceed the rate of inflation, resolution of the CSRS escrow and retirement issues, and service standards for all classes of mail. I am personally committed to working with you and all interested parties to help implement urgently needed Postal reform. Thank you again, Madam Chairman, for this opportunity to share the views of Time Inc. with this Committee. Chairman Collins. Thank you for your testimony. Before hearing from Mr. Angelson, I would like to give my two colleagues a chance for any brief opening comments that they might want to make. Senator Durbin. OPENING STATEMENT OF SENATOR DURBIN Senator Durbin. Thanks a lot, Madam Chairman, and I will take your advice to make it brief. I want to welcome both of our witnesses, Ms. Moore as well as Mr. Angelson. Of course, he is with RR Donnelley, which is a major employer in Chicago, a city that I am honored to represent, new to the job a few days, and happy to have you here. Ms. Moore indicated that Time Inc. is one of the largest customers of the Postal Service, and I know that RR Donnelley is the company that is the largest private user of the U.S. Postal Service. I think that is why this particular hearing is so important, so we can understand not only the reform of the Postal Service, on which the Chair has been our leader, but also its impact on private business and how we can try to develop some synergies and try to make it more efficient. So I thank both of the witnesses for coming. Particularly, Mr. Angelson, thank you for the great work that RR Donnelley does in the Chicagoland area, all around the United States, and the world. Thank you, Madam Chairman. Chairman Collins. Thank you. Senator Carper. OPENING STATEMENT OF SENATOR CARPER Senator Carper. Just a quick note to say welcome. Thank you very much for making time out of your day and week to join us and to share your testimony with us. We are attempting to undertake here something that hasn't been undertaken for over three decades, and that is to try to figure out what our Postal Service should look like going forward. As we attempt to design and develop and build a consensus around the Postal Service in the 21st Century, your input is welcome. I just want to say to the Chairman, this is not the last but one of many in a very helpful series of hearings that enable us to learn and hopefully will bring us a step closer to consensus. We will find out just how successful we have been in that in a month or two, so thanks very much. Chairman Collins. Thank you. Mr. Angelson. TESTIMONY OF MARK ANGELSON,\1\ CHIEF EXECUTIVE OFFICER, RR DONNELLEY Mr. Angelson. Madam Chairman, thank you for inviting RR Donnelley to testify this morning and good morning to you. Thank you, Senator Durbin from the great State of Illinois, where we live and are headquartered. Senator Carper, from the great State of Delaware where we are incorporated, thank you for having us this morning. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Angelson appears in the Appendix on page 75. --------------------------------------------------------------------------- Chairman Collins. And so what are you doing for Maine? [Laughter.] Mr. Angelson. We are buying more paper than you can possibly imagine. Chairman Collins. I thought that might be the answer. [Laughter.] Senator Carper. I think that covers all the bases here. [Laughter.] Mr. Angelson. I am Mark Angelson, Chief Executive Officer of RR Donnelley. Thank you for the slack that I hope you will cut me for the fact that this is day nine on the job. Thank you very much. And while I have always known that a healthy, viable, and most important, affordable Postal Service is essential to our country and to our economy, when I found out 9 days ago that it costs our customers more to mail a catalog or a magazine than it does for us to manufacture it, I knew it was important that I be here with you and with our fine customer, Ms. Moore, this morning. As you may know, RR Donnelley is the largest commercial printer in North America and perhaps in the world. As a result, that makes us one of the largest, if not the largest, users of the U.S. Postal Service. In addition to being a printer, we also enter nearly nine billion pieces of printed material into the mail each year, including magazines, catalogs, direct mail, telephone bills, and other highly personalized statements on behalf of customers, customers like Ms. Moore, who sits beside me this morning. Our employees and our customers see, feel, and experience every single day the consequences of a Postal Service in bad need of reform. RR Donnelley fundamentally supports the recommendations of the President's Commission and we urge Congress to push ahead now with the necessary changes. If we continue to put off reform, we will no longer be in the advantageous position of passing thoughtful, comprehensive reform, but may, in fact, be in a position where we have to respond to a crisis. Change is essential to the health of the U.S. mailing industry as a whole. I know that you have heard these numbers before, but I find them so compelling that I feel impelled to say them again. This is a $900 billion industry which accounts for 9 percent of the gross domestic product and nine million jobs. Just a short word, if I may, about jobs. At a time when many manufacturing jobs are at high risk of moving abroad, I am as sure as I am that it will be dark tonight and light tomorrow morning that your local letter carrier's job will never move overseas. Reforming the Postal Service, therefore, is also an opportunity to strengthen a sector of American jobs that stay in America. This hearing today, therefore, is about much more than reforming the Postal Service. It is about the economy, it is about jobs, and it is about the future. The postal distribution system as it stands today is inefficient. The President's Commission recognized these inefficiencies and now recommends changes. I hope that you will agree with the Commission and with RR Donnelley and our fine customer that there is substantial potential for improvement here and that the time to do it is now. Any piece of legislation, though, that protects the status quo will not be sufficient and will not be acceptable under the circumstances. At its heart, the Postal Service must change. Respectfully, it must change to allow, to encourage, and better yet, to demand ongoing improvement. In doing so, the Postal Service can function more like a business to the benefit of everyone involved. When I say more like a business, let me hasten to add we are not talking about losing jobs for people. We are just talking about using common sense. With my limited time, I would like to focus on just three areas, work sharing, network optimization, and the civil service retirement issue. In today's world where technology is constantly changing to allow for new improvements, no company can do everything. As a result, we have all learned to focus on our core competencies and to rely on others and their expertise in order to maximize our performance. The Postal Service should do this, too. Delivering the mail to and from every address in the United States 6 days a week, otherwise known as universal service, is the USPS' core competency. It is simply what they do best. All of the rest, I suggest respectfully, should be left to those who can do it better, and this combination is what we call work sharing, as you know. Work sharing frees up the Postal Service to focus on its core competency while having others, such as RR Donnelley, focus on the non-core competencies. This highly effective combination drives down cost. In fact, according to the General Accounting Office, in 1999 alone, work sharing saved the USPS an estimated $15 to $17 billion. Yet, and this is a very important point, even though there is proof that this works, it is as difficult today to enter into a work sharing agreement with the Postal Service as ever before. It is simply not a widely accepted practice. Let me give an example. RR Donnelley and others recently reached an agreement with the USPS on co-palletization. The deal took 18 months to reach, and in the end, all we were granted was a 3-year trial. That same deal, if I were to try to make it with a typical private sector partner, would have taken 4 weeks, 6 weeks, or 8 weeks. We shouldn't have to work this hard to persuade our partner at the Postal Service to reach a result that benefits customers, that benefits the U.S. Treasury, the Postal Service, and, therefore, all users of the system. The second subject that I would like to address is network optimization. It is inconceivable to me that there have not been ongoing adjustments in the USPS network, but there haven't been. The Postal Service's current distribution network was established over 30 years ago and it has remained virtually unchanged ever since. That is astonishing when one thinks about the changes that have occurred in that same period, changes that have had a direct impact on how we use and how we would like to use the USPS. From major trends like population shifts to the invention of E-mail, the country is different now, but the USPS remains the same, and respectfully, I would urge you that that has to change. The USPS must be allowed and incentivized to keep pace with change. Facility locations, size, and transportation routes should be changing constantly to keep up with demand, to eliminate redundancy and overcapacity, and to achieve productivity gains. All successful businesses constantly adjust to changes in customer traffic, demographics, and other factors, especially service businesses like the USPS. Put simply, the USPS must be allowed constantly to realign its network to reflect current realities, free of emotion, and respectfully, Senators, free of politics. If changes of this nature are not an ongoing, unencumbered process, all the legislation in the world will not make the Postal Service run better, nor more smoothly, nor more efficiently. Work sharing coupled with network optimization makes it possible to achieve what we call the lowest total cost. This concept is at the core of what RR Donnelley and our fine customers hope to have from the USPS. And a final word on the civil service retirement problem. First, I ask respectfully that Congress consider removing the CSRS savings escrow requirements that were created last year. Doing this will free up approximately $73.3 billion that the Postal Service can use to pay down its debt to the U.S. Treasury and to hold postage rates steady, among other things. Second, there is no good reason for the Postal Service to bear the financial burden of the civil service military retirement benefits. No other Federal agency is required to do this. If the Treasury doesn't assume these costs, the result is simply that the costs will immediately be imbedded in the price of a stamp. In other words, mailers, not just RR Donnelley and Time Inc., but many small businesses and American families inappropriately will be paying these retirement costs. Let us not make the job of the Postal Service even more difficult by keeping this financial burden on its back, please. We have a chance right now, a real opportunity, to make the necessary changes to assure that the U.S. Postal Service and the mailing industry as a whole remain healthy and viable. Several more years of business as usual could bring us to a point of dangerous disrepair. I thank you for the honor and privilege of appearing before you this morning. Thank you very much. Chairman Collins. Thank you very much, Mr. Angelson. I am very pleased that you reiterated the startling statistics about the impact of the Postal Service on our Nation's economy and on some nine million jobs. One of the witnesses on our second panel, a catalog owner from Maine, was the one who first told me about that impact and I think most people are startled to realize that the Postal Service has such an economic impact. When I look at both of you, you really represent that impact. Time magazine buys paper from a mill in Bucksport, Maine. You print on that paper. The interrelationship between the paper manufacturers, the printers, the publishers, and the ability for you to buy lots of paper from a Maine mill depends directly on affordable, reliable, and predictable postal rates, and I think in the debate that we can't lose sight of the fact that if the Postal Service's rates soar or become completely unpredictable, that it is going to have a negative impact on both of your operations and on those paper mills back home in Maine. Could you comment, Ms. Moore, on the economic impact of unpredictable and high postal rates on Time magazine? Ms. Moore. Whenever we have had an unpredictable postage increase, we first scramble to do everything we can within our own business formula. That might mean reducing the size of the magazine. We have had wonderful paper suppliers who have done a miraculous job of lowering the weight of paper. The technology improvements out of the paper industry have been really just fabulous. But those things we can do internally to our physical products only can go so far. With three price increases, we really had to scramble to cut back on mailings, on volume. It prevents us from launching new magazines, and then ultimately, we have to pass that price on to our reader, and it has not been a welcome increase over the last 3 years. Chairman Collins. Mr. Angelson. Mr. Angelson. I would add very briefly, Madam Chairman, that when Time Inc.--when postage rates go up and Time Inc., and others mail less, we print less and the impact on jobs that we are trying to avoid is, in fact, compounded in the other direction. Chairman Collins. Thank you. Some of the most controversial recommendations made by the Commission have to do with the Postal Service's workforce. Now, I don't support personally all of those recommendations, but I do believe that we cannot ignore the workforce issues given that 75 percent of the Postal Service's costs are directly related to its workforce. You have both stressed in your statement the need to deal with the escrow account and the military pension issues, which I completely agree with. Senator Carper and my bill last year did not have the escrow account in it. That was added on the House side and I, for one, am committed to reversing that provision. But those are only two of the issues that affect the workforce. Ms. Moore, if we are going to be serious about tackling postal reform, can we ignore those workforce recommendations? Ms. Moore. It is not possible to have meaningful postal reform without addressing the labor issues, and I view labor, however, as a key partner in reform. We have to do everything in our power to address their concerns, but when you have labor representing almost 80 percent of the costs, they have got to be willing to do their share to provide for the future of the Postal Service. That number, by the way, is astounding. I did go back to my own company because I believe I am a labor-intensive industry. I buy paper from your State and I use his presses, so I have a labor-intensive business. I only employ people, talented writers and reporters, but labor only represents 35 percent of my cost base. So that 75 to 80 percent cannot be ignored, and I think I saw a quote from Senator Durbin recently which I think says it all, and that was that we all should be willing to give a little to pass meaningful reform. Chairman Collins. Mr. Angelson. Mr. Angelson. Thank you, Madam Chairman. I would add that we are talking about predictions for adding 1.7 million addresses in the United States every year going out for 10 years, as far as we can see at this point. During that period of time, there will be natural attrition in the workforce of the U.S. Postal Service and we think that those are two statistics that, when worked together, will allow us to address this difficult issue in partnership, if you will, with our colleagues on the labor side so that we can get this done without inappropriately breaking anyone's rice bowl, if you will. So we think, yes, it needs to be addressed, the labor issue, but we think it can be addressed in a way that suits the needs of all the constituencies. Chairman Collins. You raise a very important point. Addressing the workforce issues does not mean laying off thousands of postal workers. In fact, 47 percent of the current workforce will be eligible for retirement within the next 10 years. So there is an opportunity to right-size the force without resorting to widespread layoffs. But there are obviously many other issues involving workers' compensation, the collective bargaining system, where I think we can make some reforms that will be beneficial to the workforce as well as in holding rates down. Senator Durbin. Senator Durbin. Thank you, Madam Chairman. Illinois is a wonderful State and it is pretty flat. As you travel downstate, where my home is, cornfields and soybean fields in every direction as far as the eye can see. About 100 miles south of Chicago on Interstate 55, the old Route 66, there appears a mountain range. It startles you. You can't imagine, what is this all about? Well, it is because within a quarter mile of the interstate is a landfill and the landfill is huge, and I look at it every time I go by and it is growing. Maybe someday we will have a ski resort there, I don't know. It is not likely, but possible. But it points to a real serious issue which I would like to address for a moment here because I can't think of two more important witnesses. Most of that bulk in that landfill is paper, and it strikes me as odd that in this conversation about looking to the future, which the reform of the Postal Service is all about, there is very little conversation about paper other than making certain that you do business in Maine, which is important to our Chairman. [Laughter.] Senator Durbin. A few years ago, I had a notion that perhaps we should encourage the use of more recycled fiber and perhaps even offer incentives in postal rates for those who would have a certain percentage of their product in recycled fiber and a concomitant penalty for those that didn't, creating an incentive that some of the catalogs and magazines that I receive would have at least some recycled fiber content. I couldn't have ever anticipated the firestorm of opposition to that wildly radical idea. Everybody was against it, everybody, the unions, the Postal Service, those who print the magazines and those who write them. Everybody thought this was a completely irresponsible notion. I am going to revisit that for a moment here, because I can't think of two better witnesses. Ms. Moore, of all the publications out of Time Inc., what would you say is the percentage of recycled fiber and paper that you use in your publications? Ms. Moore. I don't know the percentage. I know that we certainly have been very aware of the whole environmental issue. We have done wonderful work, actually, with our paper suppliers on the subject of chemicals and working hard to get recycled. I know that currently, 100 percent of our newsstand unsold copies are recycled and we are working right now on a recycle pilot project, I think in Boston, the City of Boston. So it is something--I get this question at the annual meeting every year. It is something that we have been very aware of and that we are working hard on. But currently, we don't have a high percentage of recycled fiber in our current printing plants. I think a lot of the work done in the last couple years by the paper industry to lower the weight of our paper has done a lot of good in keeping that landfill down. Senator Durbin. Is it beyond the realm of possibility that some percentage of your publications would be recycled fiber? I understand that perhaps the covers and some of the features and the color pages and such, maybe recycled fiber isn't always appropriate. But is it beyond the realm of possibility to say that a certain percentage of your publication would be recycled fiber? Ms. Moore. To make that mandatory? At the moment, it is not economically viable. Senator Durbin. It is too expensive? Recycled fiber is too expensive? Ms. Moore. Yes, sir. Senator Durbin. Dramatically? I mean, is it marginal or---- Ms. Moore. Dramatically. Senator Durbin [continuing]. Dramatically more expensive. Of course, you don't have to factor in the cost of the landfill nor the impact on what that means to a community which becomes a social cost which a lot of places around the world have decided is an important part of the equation. Mr. Angelson, I know you are new to the job and I don't want to put you on the spot, but could you comment on that issue? Mr. Angelson. I can speak personally and I can speak a little bit on behalf of RR Donnelley and would ask that we be allowed to respond more formally in due course. Senator I agree with you that our children and our grandchildren and their grandchildren need to live on this planet and I applaud the spirit which moves you in the direction in which you are moving. We at RR Donnelley have long recycled the scrap paper that comes off the cutting, etc., as we prepare our products for our customers. To a very significant extent, though, our customers do the paper buying, if you will, and we do the printing on it. I would be grateful, in light of my 8 or 9 days on the job, if you will let me duck on this one. Senator Durbin. I want to revisit it, and I hope I can find some common ground with our Chairman. I know this is a delicate issue for her and it is an important industry in her State, but I know she is also sensitive to the environment that we live in and I thank her for her leadership and I thank you both for your testimony. Thanks, Madam Chairman. Chairman Collins. Thank you. Senator Carper. Senator Carper. It is kind of ironic that my colleague, Senator Durbin, raised that issue, because last night when I brought my boys home from the Troop 67 Scout meeting, we did our recycling. We recycle twice a week. It is picked up at our curb in front of our house in Wilmington, Delaware, by a firm that we actually pay to pick it up because we don't have curbside recycling. I am proud to report I think we now may actually recycle more than we put out in our trash can once a week, which is no small achievement. I certainly share his interest in recycling and that is not the reason for our hearing today. One of the things that I learned, I learned as a Governor when we were trying to reduce the amount of land that we had to set aside for landfills, one of the things that I learned is that in order to make recycling pay, we have to find folks who are willing to buy the recycled products. I would just ask Mr. Angelson, you are new in your job. Ms. Moore, you are not so new. I would ask that you take to heart the comments that Senator Durbin made. Those are ones that I share, as well. In terms of what in the magazines might lend itself to being recycled, maybe not the cover, maybe not the pages inside. But you know those little inserts, like those little postcards you have to mail? Those really get in the way, and-- -- [Laughter.] Ms. Moore. Senator Carper, all insert cards are 100 percent recycled paper, you will be happy to know. Senator Carper. I should have guessed. I will feel more kindly toward those postcards in the future, armed with that knowledge. Mr. Angelson, have you testified previously before a Congressional Committee? Mr. Angelson. I have not, Senator. Senator Carper. What was it like? Mr. Angelson. It feels just like home. I have three intelligent, I hope, and active and interested daughters and it feels like the dinner table, so---- Senator Carper. That is good. I think you did a nice job, and Ms. Moore, you certainly did, as well. I knew you would. Ms. Moore, would you go back and just share with us those three points? You closed your testimony with three points. I just want to revisit those for a moment, if we could. Ms. Moore. What are the three things that are kind of ``must haves'' in the reform bill? We would like you to resolve the escrow provision in military retirement. We would really like you to implement, Congress to implement, a CPI cap for rate increases. And finally, we really would like service standards for all mail classes. It is not enough just to have the low-cost provider. We need reliable service standards for all classes of mail. Senator Carper. We have had some discussion here amongst ourselves and with the Commission appointed by the President as to who might be responsible for establishing those service standards and what kind of reward or punishment might be meted out for failure of the ability to meet those service standards. Would either of you care to give us some advice on those points? Ms. Moore. Well, I think you want to implement--I think you want to follow best practices as you do in the business community. You want to first start with cost-based rates. Please make us pay for what we use. If I am inefficient in giving you a direct mail piece that can't be scanned, you should punish me with higher rates for that piece of mail. You can incent the users of the Post Office to help drive costs out. And I also think you want to do things like pay for performance. You should incent the management of the Postal System to be rewarded for running a low-cost, affordable service. Mr. Angelson. I would agree with Ms. Moore, Senator. I would add that it is very important that in maintaining universal service, that Congress reserve to itself ultimately the right to regulate that monopoly for the benefit of all American citizens with the idea of having corporate governance in place for the Postal Service, which, as you know, if it were a Fortune 500 company, based on 2003 statistics, it would be number 11 in the Fortune 500. Governing it like a business, subject, of course, to reserving the right of Congress to maintain its most fundamental oversight, we think would be a very good thing. Senator Carper. With respect to governance, let us talk just a little bit about the makeup of the Board of Governors. As you know, there is no requirement in the law that they have to have background experience consistent with the work that the Postal Service does. I think they serve fairly long terms, I want to say maybe 9-year terms. I believe for the most part they are selected by the President, nominated by the President, confirmed by the Senate. The Commission has made some recommendations in this area. Several people would be appointed, nominated by the President, confirmed by the Senate. The rest would be independent Board members. There would be a requirement that these folks would have to generally have some experience that is consistent with the nature of the work of the Postal Service does. And rather than serving maybe 9-year terms, they would serve much shorter terms. Now, each of you have experience with corporate boards of your own and I just ask you to reflect on your own experience. Think about what we are contemplating with regards to the structuring of the Postal Service Board and tell us how you think we ought to proceed. Ms. Moore. I was absolutely thrilled with the President's Commission and how you could attract two bipartisan chairs as experienced as Mr. Johnson and Mr. Pierce, and I wonder why you couldn't attract the same kind of experienced talent to the Postal Board, because here it has an enormous impact on the economy, on jobs, and I see no reason why you shouldn't recruit to the Postal Board this same thing we would do in manning a Fortune 500 board. I think there are a lot of able people with experience who would be willing to serve a limited term to get the job done in the future. That has not been done in the past, and I see no reason why you couldn't call on a lot of able people in the business community to fill some of those seats. Mr. Angelson. Senator, I agree completely with Ms. Moore's remarks. In manning or womanning a private company board, we have had great success in choosing people--and again, these aren't the people who are going to actually be on the ground executing the decisions. These are people who follow the adage that when one has a symphony orchestra, one needs 100 people and there is somebody to play the triangle and somebody to play the drums and somebody to play the French horn, etc. We find that a broad cross-section of views from people with a broad and diverse cross-section of backgrounds most help in doing this. It is a business, Senator, as you know, the Postal Service, and we think it ought to be run like a business, again, subject to preserving jobs where we can do so. Senator Carper. I realize my time has run out. Could I just ask one other quick one? Chairman Collins. Certainly. Senator Carper. It relates to the line of questioning on the board. Do you recall what your board members are paid, just roughly, or your directors' fees? I presume that is public knowledge. Ms. Moore. I would say, typically--I think there is a broad range--I would say typically a board member of a Fortune 500 probably makes around $50,000 a year, often paid in stock, not in cash. That is a guess, but I think that is what I recall. I am on the nominating committee of a Fortune 500 company. Mr. Angelson. I think that Ms. Moore's guess is very close to right. There is--in governance, and you might not have this advantage when you put together a governance body for the Postal Service, because paying them in stock is something that I am not sure would induce them to necessarily perform to their utmost. I would have said, if we were in an all-cash compensation system, that something around $50,000 would probably be right. Ms. Moore. But I would also add to that that I think you could probably, because of the importance of this, most sitting CEOs don't sit on the boards of companies any more for the compensation. It is a lot of hard work and it is vital to the health of our businesses. I think it would not be money that would attract us to the board, but helping the Postal Service stay strong. Senator Carper. Amen. Thank you. Thanks, Madam Chairman. Chairman Collins. Thank you, Senator. Ms. Moore, you indicated that one of your top three priorities is the establishment of an inflation-linked rate cap for the Postal Service. Under the Commission's recommendation for such a cap, the Postal Service would have the ability to set rates below that cap. That leads me to ask you two questions. One, do you have any concern that the Postal Service would immediately jump to the cap, and second, should there be some sort of after-the- fact review of the rate structure to make sure that the Postal Service is not taking undue advantage of that latitude? I understand the need to have more flexibility, more predictability, and to get away from the current adversarial process, which can take as long as 18 months. But there are also risks with just allowing the Postal Service to set its own rates without review. Could you comment further on that? Ms. Moore. Well, it is one of the reasons I would love Congress to set the inflationary cap guidelines. I could live with the Post Office having such a system and having the flexibility to raise rates up to that cap because it gives me predictability. I could budget for up to inflation every year or what the cap is. I think that what you want to counter with is a pay for performance. Remember, we want to incent the management of the Post Office to run a low-cost efficient business. Not only does it take 18 months whenever the current system requires a rate hearing, but I have to tell you, I spend almost $1 million in providing reports every time there is a rate increase. The sheer waste of the current system is just intolerable. So I think we would all be very happy to live with a rate cap system. I don't fear that the management would automatically go to the top cap if we incented them properly to run the Post Office as a business. Chairman Collins. Thank you. Mr. Angelson, do you have anything you would like to add? Mr. Angelson. I would support Ms. Moore's comments yet again. For us, it is about stability and predictability. Chairman Collins. I want to thank you both very much for your testimony. We look forward to working with you. Senator Carper. Madam Chairman, could I ask just one last question? Chairman Collins. Certainly. Senator Carper. Mr. Angelson, I think it was you who spoke about how difficult it is to get the Postal Service to enter into a work sharing agreement. Would you just go back and briefly revisit that for us and maybe tell us what you think causes that difficulty and whether you believe that we ought to be doing something legislatively to make it easier to do work sharing? Mr. Angelson. Senator, it is about bureaucracy and it is about, if I may, concern about or fear of change. It is about entrenched ways of doing things. And yes, we would welcome any contribution that this Committee and ultimately the Congress of the United States could make to easing the way toward making the U.S. Postal Service a more business-like partner. Senator Carper. Thanks very much. My thanks to both of you. Mr. Angelson. Thank you. Ms. Moore. Thank you. Chairman Collins. Thank you. I want to thank both of our witnesses. Your testimony was extremely helpful and we look forward to working with you as we go forward and as Senator Carper and I draft our bill, so we would welcome any future advice that you might have for us. Thank you. Ms. Moore. Thank you. Mr. Angelson. Thank you very much. Chairman Collins. I would now like to call forth our second panel of witnesses. Chris Bradley is the President and Chief Executive Officer of Cuddledown, Inc., a manufacturer and catalog retailer of fine home furnishings based in Portland, Maine. Mr. Bradley also serves as the Vice President of the New England Mail Order Association of America. Max Heath is the Vice President of Circulation, Postal and Acquisitions for Landmark Community Newspapers, Inc., of Shelbyville, Kentucky. Landmark Community Newspapers has 53 weekly and daily newspapers in 13 States and Mr. Heath is in his 18th year as Chair of the Postal Committee of the National Newspaper Association. William Ihle is the Senior Vice President of Corporate Relations for the Bear Creek Corporation of Medford, Oregon. Bear Creek owns the well-known catalogers Harry & David and Jackson & Perkins. Mr. Ihle supervises all public relations, community relations, and government relations for the family of companies in this country and overseas. And finally we are going to be pleased to hear from Shelley Dreifuss, who is the Director of the Postal Rate Commission's Office of Consumer Advocate. She was appointed to this position in April 2002 and has 25 years of litigation experience representing consumer issues in the Office of Consumer Advocate. I would note that her primary duties are the protection of consumer and small business interests in rate and classification cases before the Postal Rate Commission. Mr. Bradley, we are going to start with you, not only because you are my constituent---- [Laughter.] But also because you were the first person to educate me on the broader economic impact of the Postal Service. You organized a meeting of some 22 businesses in Maine, ranging from printers to paper manufacturers to LL Bean and everything in between and it really was an eye-opener for me about the link between affordable, reliable postal rates and the jobs that we have in our State and nationwide. So thank you for that education and I am pleased to ask you to proceed with your testimony. TESTIMONY OF CHRISTOPHER W. BRADLEY,\1\ PRESIDENT AND CHIEF EXECUTIVE OFFICER, CUDDLEDOWN, INC. Mr. Bradley. Thank you, Chairman Collins. Cuddledown is a small company located in Portland, Maine. We manufacture down comforters and pillows with most of our marketing done through a catalog we mail throughout the United States. We currently have 86 employees. Over the past 15 years, we have grown our sales from less than $1 million to more than $20 million. The engine for this growth has been our catalog and the U.S. Postal Service has been an essential partner in getting our message to our customers. I am here before you representing a small business that is dependent on a functional and affordable Postal Service. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Bradley appears in the Appendix on page 81. --------------------------------------------------------------------------- Cuddledown prints and mails more than ten million catalogs each year. Our annual postage bill is roughly $3 million, but the impact of our business extends beyond that. We print our catalog in Mississippi and we use about 2,000 tons of paper each year, also manufactured in this country. The total value last year of our payroll, FICA tax, workers' compensation insurance, life insurance, long-term disability insurance, short-term disability insurance, health insurance contribution, and 401(k) contribution was $3 million. And like so many mail order companies, Cuddledown is located in a rural part of the country where good jobs are highly valued. Mail order and the Internet allows small companies to spring up all over the country to grow, create jobs, be successful, and to realize the American dream. But the future of this dream now depends on the legislation this Committee crafts to reform the Postal Service. Without substantial reform, it is expected that we will once again see rate increases far in excess of inflation. The last rate increase in June 2002 raised standard mail an average of 8 percent. For Cuddledown, that meant an increase in our postage bill of $240,000. That is eight good jobs at $30,000 per job that we would need to cut just to stay even. Given the weak economy and the job cuts that we have already seen, to cope with declining sales, large increases in postal rates will result in small business failures in my industry. Reform is clearly needed and the President's Commission has outlined the reforms that need to be put in place. In reading the Commission's report and published comments from other involved parties, it seems clear to me that reform would include the following: Elimination of the escrow account for overpayments into the Federal Civil Service Retirement Fund; shifting the obligation to pay for military service retirement from the Postal Service to the Treasury Department; giving the Postal Service the ability to open and close processing plants and post offices to meet their business demands; and enabling the Postal Service to use pricing and other services as tools to grow their business. In my opinion, this last point will be the most important in the long run. You must give the Postal Service the flexibility it needs to compete in the current world. The biggest current threat to the Postal Service is the shift from physical to electronic mail delivery. First class and standard mail are under attack and mail volumes are projected to decline in future years. The Postal Service must grow the volume of mail, and the only way to do that is to be competitive in today's business world. The current structure of the Postal Service represents the competitive forces of the era when man first set foot on the moon. The structure has been successful for 30 years, but the world has changed and the Postal Service must change to survive. So what does it mean to be flexible and competitive in today's world? I can think of one example that dramatically illustrates how the Postal Service is stuck in another era and how they can change to increase their mail volume. Cuddledown buys goods and services from hundreds of suppliers, yet the only supplier that does not extend us open credit terms is the U.S. Postal Service. Trade credit is the lubrication that keeps the business world running and growing. The Postal Service needs to compete in the modern business world, and yet their terms are cash in advance as if their customer had no other choice. This policy is straight out of the 1960's, at a time when EZ-PASS was science fiction and trying to use your BankAmericard at the grocery store would have been met with polite refusals, at best. Cuddledown mails catalogs 18 times each year. The postage is removed electronically from our corporate checking account on Friday. The catalogs begin to move on Monday and begin arriving in our customers' homes the following Monday. Our average catalog is delivered 12 days after payment has been made. The only competitive part of this process is the electronic debit to our bank account, and that is ironic because it saves us the postage cost of mailing our check. [Laughter.] UPS, FedEx, and Parcel Direct all give us open terms. Our printer, color separator, photographers, and models all give us trade credit. When we buy down or fabric to make our down comforters, we have standard payment terms. When we sell our comforters, pillows, and sheets to other retail stores, we extend them standard credit terms. I can even think of a guy from China who sells us down-filled booties. We meet with him in Germany. He has never been to Maine, much less visited us at our factory, and yet he is willing to give us trade credit. Trade credit is reasonable, it is controllable, and it is expected in today's world, yet the Postal Service still requires their customers to pay in advance. So why should you give the Postal Service the ability to extend normal trade credit? Because they could use it to grow their volume. Paying in advance and waiting 12 days for your first results is a roadblock for any business and especially a small business. Cash flow is critical for a business, and many decisions, especially the question of how many pieces to mail, revolve around the impact on cash flow. If commercial mailers could match the timing of their postage payments with the delivery of their mail, they could mail more volume and they would. Would trade credit result in significant bad debt expense for the Postal Service? I don't think so. The last supplier that a mailer would fail to pay would be the Postal Service because they would cut off its source of cash. It would be like failing to pay your phone bill. It is just not done by a mail order company. The Postal Service could easily control their expense and the marginal cost of mail delivery is low, so the risk of bad debt is low. The risk is low, the reward is great, and the very survival of the Postal Service depends on new ideas that will reverse its declining mail volume. Extending trade credit is just one idea that will help the Postal Service compete and thrive in today's world. There are probably many others out there, and the important thing is that new legislation is passed that will enable the Postal Service to take advantage of the opportunities that are available to it. The business climate in the United States requires constant creativity and innovation just to survive. The legislation that formed the Postal Service in 1960 served it well for many years, but now that same structure is a threat to its very survival. Electronic communication has irreversibly changed the postal world and it is up to Congress to create new structure that will allow the Postal Service to serve its mission for the next 30 years. Thank you. I appreciate being invited today and having the time to talk. Chairman Collins. Thank you. Mr. Heath. TESTIMONY OF MAX HEATH,\1\ VICE PRESIDENT, LANDMARK COMMUNITY NEWSPAPERS, INC., ON BEHALF OF THE NATIONAL NEWSPAPER ASSOCIATION Mr. Heath. Thank you, Madam Chairman and Members of the Committee. My name is Max Heath. If I may, I will speak briefly today and submit a longer statement for your record. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Heath with an attachment appears in the Appendix on page 85. --------------------------------------------------------------------------- Chairman Collins. Without objection. Mr. Heath. I am Chairman of the National Newspaper Association's Postal Committee and I am a Vice President of Landmark Community Newspapers, Inc., a private company operated out of Shelbyville, Kentucky. As the Chairman said, we own 53 small newspapers, 34 related shoppers, about 25 related specialty publications, and 19 printing plants which both print on newsprint and mail publications for other people, including our own newspapers, and these are all across the country. I also serve as one of two NNA representatives on the Mailers Technical Advisory Committee formed by the Postmaster General about 35 years ago now, I believe, and have been on that since 1989. NNA supports postal reform and has worked for the past decade to help craft legislation that will provide the Postal Service with new tools to remain viable in this century while protecting the interest of small newspapers. NNA has about 2,500 member newspapers in America. I bring greetings from many of the publishers in your State, including, Madam Chairman, the publisher of the Ellsworth American, Alan Baker, who you know well, who is a member of NNA's Board of Directors and who is a firm supporter of NNA's excellent relationship with the Postal Service. Also in Senator Carper's State we have Tom Bradley, the President of the Chesapeake Newspaper that operates in Maryland and Delaware, former NNA President. I would also like to insert here a point about the recycled content on the record, since that was brought up earlier, if I may. Newspapers are about 60 percent users of recycled newsprint and all the mills that we operate now include post- consumer content in that fiber that we buy. One thing we have learned as the States have tried to put in local laws to govern the use of this is that you can't recycle forever. You always have to have some new fiber coming in because the fiber does wear out, so there is not such a thing as 100 percent newsprint recycled. The typical member of NNA is a family-owned weekly of about 3,000 to 7,000 circulation. Almost all of these depend upon periodical mail for their primary circulation and often use standard mail to deliver advertising to non-subscribers To illustrate, my company in 2003 spent $3 million in standard mail postage, $2 million in periodical postage, and only four- tenths of a million in first class postage for our total of $5.4 million postage bill. The membership of NNA also includes a number of small dailies, most of which are under 10,000 circulation and many of which are heavy mail users. In fact, we even have small dailies that continue to depend upon the Postal Service for the primary delivery of each daily issue. I have consulted with some of those States, such as Michigan and other places. I have provided postal consulting services through my NNA hat and in my Landmark position for nearly 20 years now and have also visited and seen newspapers in other countries. What is remarkable to me is the wide diversity and importance of the community press in America, compared to some other countries where there are one or two major national newspapers and possibly some smaller dailies. I think the critical element in this country for the hometown newspaper has been the Postal Service. Because of it, just about every county seat has its own newspaper and some of them have two or more even. Our Nation depends upon those papers to deliver information on local government and politics, including many of your local newspaper columns, and community activities. Even in an Internet age, we think there is no viable substitute for these newspapers. Community newspapers are continuing to grow in this country in total circulation even as metro papers, large State papers are on somewhat of a decline in the last 10 or 15 years. Congress ensured that we would have a thriving community press in the 19th Century when it developed postal rates that were designed precisely to give the new frontier its own local newspapers. The large New York dailies were mailing heavily into the developing South and West and Congress sought to provide that a local publisher could successfully compete by providing favorable rates. Because those favorable rates had to ratchet up to cover the full direct and indirect cost of delivery in 1970, our publishers have experienced dramatic rate shock. Even with the largest of work sharing discounts available now, our within- county rates have gone up more than 850 percent since postal reorganization, and at the basic level rate, there is a more than 2,000 percent increase. In 1993, Congress put a ceiling on the contribution of our postage to the Postal Service's overhead cost, pegging it to the outside county periodicals rate. In the past few years, we have exceeded the ceiling. For example, in the 2002 Postal Service cost and revenue reports, we contributed 102.2 percent of our cost while outside county mail contributed 90.6 percent. The report demonstrates that our mail is not inefficient or unprofitable to the Postal Service. It does show a small profit. But it does require some extra work on our part and on the part of you and the Postal Service to ensure that we remain viable. Because our costs are so small and our mail is such a small part of the domestic mail stream, we sometimes become lost in the shuffle. So that brings me to my first request of the Committee. As your work continues, we hope you will make sure that our newspaper mail remains a distinct class within the mail stream and is not swallowed up by larger, more costly mail class. My second request addresses the Postal Service's need for more flexibility in managing its business. We agree with the need to provide the Postmaster General more management control. This includes more flexibility in dealing with labor and capturing automation savings. We have a concern with the recent trend toward negotiated service agreements, however. While we do not oppose them outright, we think they should be based upon work sharing partnerships, and if they are, we think niche classifications are a far preferred tool, something that can be enjoyed by a wider class of mailers and not just one large company. We have consistently stated through postal reform discussions that NSAs that are crafted primarily upon volume- based incentives are unwise and are unfair in particular to small mailers. Even though NSAs may be extended to other mailers that are similarly situated, a small mailer may find a massive NSA competitor in his market and be unable to qualify for precisely the same sort of NSA. Therefore, we have urged the Postal Service and the Postal Rate Commission to require these NSAs to be sufficiently specific in their details and sufficiently open ended that a small mailer could request to perform the portions of the larger NSA that it is able to do and to earn proportionately similar discounts. We will make the same request of this Committee as it drafts legislation. We believe that if you leave this portion out of postal reform, the eventual NSAs may force small volume mailers out of the mail stream or even out of business, and the Postal Service will be the net loser due to the law of unintended consequences. There are a number of recommendations of the President's Commission with which we heartily agree. We certainly agree that continued reform of the Postal Service's Civil Service Retirement System contributions is needed. We supported passage of P.L. 108-18. We appreciate your work on that. We were dismayed by the addition of a burden for military pensions, like you have heard from many others. We can find no justification for this burden. No other government agency bears it and no private corporation, of course, has to contribute to military pensions. Although the Postal Service is a hybrid of government and private, one would certainly assume that its obligations in this area would be similar to one of those two, and in this case, it is like neither one. We strongly urge that the escrow of payments in 2006 be ended and a plan worked out for using the savings of lower CSRS payments. We are also agreed that the Postal Service should be permitted to right-size its network. It may be surprising to some to hear me, the champion of small rural newspapers, agree that closing some postal facilities may be necessary. Yet I think it is time to give the Postmaster General the ability to decide how many facilities he needs. There are some situations where very small post offices and even processing plants will still be needed for universal service. I think he understands that and that his strategic changes will be sensitive to the many needs of communities. No one likes to lose jobs or facilities in their areas, and certainly not newspapers. But I think we all recognize that some change is going to be needed to keep the Postal Service viable, and I am willing to give the Postmaster General a chance to make some adjustments. If service standards are established and observed, I think he has the right to figure out how to achieve them. If he guesses wrong, Congress always has the ability to step in, and we will certainly be there letting him know at the quarterly meetings. In the end, Madam Chairman, I think we all are going to have to make some adjustments to keep the Postal Service viable. We appreciate the work that you and your Committee are doing and we look forward to assisting you as you develop this legislation to provide America with a sound Postal Service in the 21st Century. Chairman Collins. Thank you, Mr. Heath. Mr. Ihle. TESTIMONY OF WILLIAM J. IHLE,\1\ SENIOR VICE PRESIDENT, CORPORATE RELATIONS, BEAR CREEK CORPORATION Mr. Ihle. Thank you, Chairman Collins and Members of the Committee for providing the leadership that we so desperately need to reform the U.S. Postal Service. I am Bill Ihle and a Senior Vice President of Corporate Relations. I am here today on behalf of our companies owned by Bear Creek Corporation, Harry & David and Jackson & Perkins. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Ihle appears in the Appendix on page 97. --------------------------------------------------------------------------- Bear Creek is an active supporter of the Postal Service. Our CEO is an active member of the Direct Marketing Association and appreciated the invitation to be here today. However, she is planning Christmas already for Harry & David and was unable to make it, so I am here in her stead. Our Senior Vice President and General Manager of Customer Operations is Vice President of the Parcel Shippers Association and we are active in other industry associations. Harry & David is recognized as America's largest shipper of gourmet foods, fruits, fine chocolates, and baked goods. Hopefully you have enjoyed our Fruit of the Month Club. Maybe a Royal Riviera pear or the always wonderful ``Moose Munch.'' At this time of year, it is particularly popular. Jackson & Perkins is the Nation's largest garden and rose company outside of Bakersfield, California. We grow 9.8 million roses, and I might say also, 3 years ago, Harry & David and Jackson & Perkins received the U.S. Conference of Mayors awards for small companies for their recycling efforts, something we are quite proud of. We employ more than 2,000 people year-round and 8,000 additional employees in cities such as Medford, Oregon, and in Newark, Ohio. We have call centers there. We have our distribution centers there. We have warehouses, and we have our executive offices. We use all classes of mail to communicate with our customers, but our success ultimately depends on accurate, on- time, affordable package delivery, and the U.S. Postal Service is our primary resource for this task. Frankly, our companies would likely perish without affordable U.S. Postal Service that offers universal service and stands ready to deliver our packages to every city, every village, every hamlet, and yes, that includes Caribou, Maine. We agree with the President's Commission that the service models will not work in the future and we agree with many of its recommendations. We are pleased that the bills your Committee and the House Committee has considered before, S. 1285 and H.R. 4970, are consistent with those recommendations and we believe that they would largely get the job done. We must emphasize how important it is that both bills confirm the mission of the Postal Service, the physical delivery of letters, printed matter, and packages, and we hope a lot of Harry & David packages along the way. We believe that both bills will also support the principles the administration says should govern reform, best government practices, transparencies, flexibility, accountability, and self- financing. Consistent with those principles, we think that there are more specific criteria that reform should guarantee-- continuance of universal service; greater flexibility in the Postal Service's ability to fix prices and services; the deregulation of competitive products, such as parcel post, Priority Mail, Express Mail, so that the market will govern the prices and services; right-sizing the Postal Service infrastructure, redefining the regulatory regime to ensure that the Postal Service is performing its mission and that it ensures transparent operation, financial controls, and the fair and equitable rate structure; adequate compensation for postal employees at all levels in order to attract top-level employees and to give them the proper incentives; and end escrow of the CSRS savings and correct the military service credit situation. I would like to address two of these principles more specifically, the core service and increased competition for package delivery. We agree with the President's Commission that the Postal Service continue as a public service with a universal service obligation that package delivery should continue to be the core function of the U.S. Postal Service. For more than a century, package delivery has been an essential and integral part of what the Postal Service does. The fact that private sector companies have been successful in the parcel delivery business in no way alters the necessity of keeping the Postal Service in that business to ensure that there will be competition. We could not support any reform that would cut the Postal Service from the package delivery business because we believe that would end the universal service that our companies have come to depend upon. I repeat, of particular importance to us is 6-day affordable, universal, reliable package delivery service. There is no reason given the existence of competition for package delivery service to require the Postal Service to seek advance approval from regulators of its rates and practices as long as those rates and practices do not amount to unfair competition and cross-subsidy. Without the Postal Service, there simply would not be competition. Moreover, the Postal Service provides a unique service. Only the U.S. Postal Service provides truly universal parcel delivery service--post office boxes, A.P.O., F.P.O., Alaska, and Saturday delivery to just name a few examples. It does not impose a surcharge on residential delivery and does not compel the ordinary citizen to pay hefty charges or go to a franchisee in order to send a single package. In fact, the Postal Service's competitors hand packages over to the Postal Service for delivery that they find inconvenient, difficult, or too costly. The USPS does not do that. It is the carrier of last resort. It goes the final mile virtually every time. Naturally, we want as many competitors for our delivery service as possible. At the same time, we understand the need for a level playing field. It is not in our long-term interest for any of the vendors who provide our transportation service to have an unfair advantage over others because that will soon end in a recentralization and monopolization of that service. We are pleased that S. 1285 and H.R. 4970 protect against cross-subsidization and competitive products and strike the right balance. The Postal Service is living on borrowed time. Were it not for the efficiencies the current Postmaster General and his dedicated staff have been able to achieve and the one-time savings from the temporary fix of the CSRS, the Postal Service would already be in crisis. A few nay-sayers should not be allowed to stand in the way of the perseverance of this indisputable public service, a universal Postal Service. I thank you for your consideration and would welcome further questions on how our companies are so dependent upon the Postal Service and our further thoughts on how to reform the future of the postal companies. Chairman Collins. Thank you. Ms. Dreifuss. TESTIMONY OF SHELLEY DREIFUSS,\1\ DIRECTOR, OFFICE OF THE CONSUMER ADVOCATE, POSTAL RATE COMMISSION Ms. Dreifuss. Chairman Collins, thank you very much for allowing me to testify today on behalf of consumers and small businesses. It is an honor and privilege to share my views with you today. --------------------------------------------------------------------------- \1\ The prepared statement of Ms. Dreifuss appears in the Appendix on page 107. --------------------------------------------------------------------------- Postal legislation of 1970 explicitly provided for a representative to protect the interests of consumers and small businesses when postal rates were to be changed and new classes and services established. This continues to be a vital need today. I ask that you and your Committee explicitly provide for a Consumer Advocate in postal reform legislation that is presently under consideration. Mail to and from consumers and small businesses comprises the vast majority of the postal mail stream, approximately 80 percent of postal volume. Yet the individual usage of mail is relatively small on a per household basis. Individual mailers spend an average of $7 per month on postage. This amount is too small a percentage of a typical household budget to spur individual mailers to intervene in postal rate and classification proceedings. This holds true for small businesses, as well, those that spend a fairly small percentage of their budgets on postage. Without an independent Consumer Advocate to litigate on behalf of small volume mailers, the needs and concerns of small volume mailers will rarely come to the attention of a postal regulator. Large businesses, particularly those that regularly spend a sizeable percentage of their budgets on postage, find it in their economic interest to intervene on an individual company basis or as part of an association. They direct their energies and resources toward developing an evidentiary record that shows the effect of rate increases on their businesses. Without a consumer/small business advocate, the evidentiary record is unbalanced and incomplete. Evidence of the impact of rate increases on consumers and small businesses must also be brought to the attention of the postal regulator through the intercession of a Consumer Advocate. My office has represented consumer and small business interests for 34 years and has achieved a long string of victories on their behalf. I would like these protections and successes to be carried forward in the new era of postal legislative reform. The two main objectives of consumers and small business mailers are the same today as they were 34 years ago. They need high quality, reliable services at low prices. I must caution that the mechanisms that are intended to produce downward pressure on costs may have a corresponding tendency to produce downward pressure on service quality. For that reason, I endorse new mechanisms that will establish and maintain high levels of service performance at the same time costs are being controlled. A high level of postal services can be established by giving the Postal Regulatory Board the duty and power to establish service standards for every postal product and service. The consumer representative should be explicitly designated by statute to intervene in such proceedings. High quality postal services will be maintained by giving the Postal Regulatory Board the power to order the collection and reporting of detailed information on how well the Postal Service is meeting the service standards established by the Board. The Consumer Advocate should be given the power to file complaints when service falls below minimum standards. To protect consumers and small businesses from a disproportionate share of increases in postage, I ask this distinguished group to explicitly provide for a consumer representative in the baseline postage rate increase case that is planned to launch the new system of price controls. I also ask that the consumer representative be designated to participate in future postal rate and classification proceedings so that no changes can be made without specific consideration of consumer impact. Consumers and small businesses will be one of the major sources of funding for universal service. I do not think it advisable to shrink over time the base of mailers who fund universal service. I am concerned about a recommendation that would produce this situation by shrinking the postal monopoly. As the captive customer base shrinks, there will be fewer and fewer mailers contributing to the expenses of universal service and the fixed costs of the Postal Service. The prices that they pay will necessarily grow larger and larger over time because their share of fixed costs will grow larger. It is a mathematical law that cannot be escaped. Therefore, I recommend against a narrowing of the monopoly in proposed legislation. Again, many thanks for the great privilege of allowing me to testify this morning and I would be very happy to answer any questions you may have. Chairman Collins. Thank you for your testimony. Mr. Bradley, you mentioned in your testimony that the 8 percent rate increase that occurred in June 2002 meant for your company an increase in your postal bill of $240,000 and you equated that to being equal to eight good-paying jobs in Maine. Is there a particular problem for catalog companies when postal rates go up unexpectedly in view of your inability to adjust costs? In other words, I assume a catalog company sets the prices in advance. You are printing catalogs way in advance, and if you have to endure a postal rate increase in the interim, you can't adjust your prices to recover those costs. Is that part of the problem? Mr. Bradley. That is certainly part of the problem. The inability to adjust quickly is always inherent in the catalog industry because right now, we are working on the holidays and we are actually working on probably 2005 right now. We don't set our prices that far in advance, but we are very inflexible once we get close to a date. So it is very difficult to adjust. Also, we are not charging for the catalog. It is sent out free as a form of advertising. So we have to raise the prices of our products if we are going to cope with an increase in postage, and we are in competition with every other form of commerce in the United States. So for us to just increase prices because we have an increase of cost doesn't really work. I mentioned eight jobs just to give a benchmark of what that would mean. You are really looking at cutting costs too, all things being equal, so you try to raise a little bit, cut a little bit, and try to survive. In an environment like we had, when we had three postage increases in less than 2 years, I think more like 18 months, that was a very difficult time because your costs are going up and there is just really no way to pass that on effectively and efficiently and competitively to your customers. Chairman Collins. So if anything, the current system forces you to look at reducing jobs because if you are coping with three price increases from the Postal Service in an 18-month period, you cannot recoup those costs through adjustments in your product prices, both because catalogs may already be printed, but also because you are in a competitive market, is that correct? Mr. Bradley. Right. You can't raise the price of your products just because one of your costs has gone up unless that applies to everybody out in the retail world. Catalog and Internet, home shopping all combined, they are probably only about 15 percent of sales for our product categories in the United States. So you have got 85 percent of the sales occurring in retail stores and that is where your competition is. You have to pay attention to the competitive environment for pricing your product. Chairman Collins. Mr. Heath, many mailers have criticized the current 18-month rate setting process as being too adversarial, too expensive, too time consuming. We heard Ms. Moore from Time magazine say that she spends $1 million in intervening in the average rate proceeding. Consequently, the Commission and many other experts have recommended streamlining that whole process. Are you concerned that that would limit your ability as a stakeholder, as someone who is very affected by the outcome of the rate proceedings, if we move to the kind of system recommended by the Commission? Is there a trade-off for you that is worth it? Mr. Heath. I don't think we object to that because we don't have $1 million to spend, so we don't spend it, but $100,000 or so for our association to defend the situation. It is so drawn out and there are so many economic discovery issues that have to come up that if there could be ways to implement a shorter process and look at rate bands that are held below the cost of inflation, I think we supported some of those concepts and still will. So I think an abbreviated process is certainly in the interest of everybody in the mailing community and we don't have any objection to that. Chairman Collins. Mr. Ihle, do you agree with that? Mr. Ihle. Yes. When we went through the postal increase, it cost us $8 million last year, not last year but the year before last when it went through. That had to come from somewhere. The catalogs are already preprinted. Our big expense is, it is not so much shipping out the catalogs, it is the parcels. If you already have your rate structure set in the catalog and the pricing, then all of a sudden in the middle of the year you get $8 million, that can be the difference between a good year and not a good year. It is a horrible shock to come in the middle of the year. You think you are on track. You think the year is going to be good. Consumers are responding. And then all of a sudden you get a bill for $8 million. That is a tough run. Chairman Collins. Ms. Dreifuss, the current rate setting process is adversarial in nature. It is very expensive and it takes too long. But you raised an interesting point this morning and that is that your office is able to intervene in the process to make sure that voices that might not otherwise be heard--small businesses, individual consumers--are represented. If we give the Postal Service the authority to set its own rates within a cap, how would we ensure that the important voices of consumers and small companies are heard in the process? Ms. Dreifuss. One very important measure you could take would be to make sure that there is consumer representation in that baseline case that starts the price cap system. In that way, we would make sure in the baseline case that all first class rates, Priority Mail, Express Mail, special services, that they are set in the proper relation to everyone else's rates. Now, in the future, I think it is possible--no one would like to see this happen, but it may be possible even under a system of price caps that the Postal Service will sometimes even be unable to live within the price cap. I don't know if legislation will provide for still further increases, but certainly if there were to be such increases, I would very much like to have a consumer representative there to make sure that a disproportionate share isn't shifted onto the backs of the captive customer. Chairman Collins. So you see that baseline case that is going to be used to establish the cap as a way to ensure the involvement of your office on behalf of small businesses and individual consumers? Ms. Dreifuss. Indeed, and I would hope to the extent that there will be future rate, classification, and service proceedings, even under our new regime of postal activity, that there would also be a consumer representative in those proceedings, as well. Chairman Collins. Mr. Bradley, the General Accounting Office has criticized the Postal Service in many reports for not having transparency and accountability in its financial statements, that it is very difficult to figure out exactly what is going on, whether cross-subsidization is occurring, whether or not the Postal Service costs are fully accounted for. If we are going to give the Postal Service more authority to set its own rates, does that need to be accompanied by new requirements to ensure that there is transparency in the financial reporting of the Postal Service? Mr. Bradley. I am not a student of the Postal Service and certainly the accounting of the Postal Service, but it would seem that it would be essential that you would have transparency in looking at the financial performance and being able to segregate different classes of mail and evaluating the specific costs of those classes of mail and being able to attach rates based on that. I think it seems essential. Chairman Collins. Mr. Heath, do you have any comment on that? Mr. Heath. Well, we, too, like other associations and mailers, at times have had difficulty getting what we consider to be accurate information or sometimes information at all regarding the particular issues that we are trying to work with in a rate case. We cite in our testimony a problem that happened in the 1994 rate case where they came out with a 35 percent increase in in-county rates and when they got through refiguring their numbers, it was actually a negative 1.5 percent, so quite a big difference there. So especially with measurement of in-county volume and in- county costs, being the small class it is, we have a lot of concern about some of those issues and certainly we support any efforts that could be made to have better data and have that better data more shared and more shared on a regular basis between rate cases, not just in discovery and having to beg and borrow and subpoena. But if subpoena power needs to be there, we support that. Chairman Collins. Mr. Ihle. Mr. Ihle. Transparency is essential, Senator. Chairman Collins. Ms. Dreifuss. Ms. Dreifuss. Chairman Collins, I think in order to make a greatly reduced rate case, a streamlined rate case work, it is absolutely essential that the Postal Regulatory Board have the power to require the Postal Service to collect and report the data that would be necessary to move forward quickly in the case. In that way, the public will be well informed about the Postal Service's costs, revenues, and volumes before the case ever begins. Chairman Collins. Thank you. Senator Carper. Senator Carper. Thanks very much. Ms. Dreifuss, I had to be in and out during your testimony. Could you just take maybe one minute and just summarize very briefly the heart of the thoughts that you would want me to take out of here that you have conveyed? Ms. Dreifuss. I am delighted, Senator, to do that. What I said was that consumers and small businesses spend a very small percentage of their budgets, of their household or business budgets, on postage. Very large businesses and in particular those large businesses whose budgets have a very sizeable percentage of postage as being one of their expense items--Time Inc., for example--I want to make a contrast here that large businesses or businesses that have a sizeable percentage of their budgets on postage do intervene in proceedings. It is in their economic interest to do so. However, by contrast, consumers and small businesses, with their small involvement in postage, don't. And that is why I think we need to have a Consumer Advocate. We have had one since 1970 and I would like to continue to see a Consumer Advocate in the future. Some of the other points were actually made in response to Chairman Collins' question just now, and that, I think, covers it pretty well. Senator Carper. Good. Thanks very much. Mr. Bradley, I think early in your comments you mentioned that the U.S. Postal Service was barred from extending trade credit to its customers. Did I hear you correctly? They are barred? Mr. Bradley. I am not aware of that policy being extended. The point that I was making is that out of all the vendors, hundreds of vendors that we deal with, and we are a fairly small company, they are the only one that has no ability or inclination to extend us simple payment terms, such as UPS, FedEx, Parcel Direct would do. They do the service and we pay really in conjunction with it being completed. Senator Carper. I would ask any of the other panelists or witnesses, are you aware of a legislative constraint that keeps the Postal Service from negotiating trade credit? No? Let the record show that a shaking of heads no, indicated no. Mr. Heath, where are you from? Mr. Heath. Kentucky. Senator Carper. Whereabouts? Mr. Heath. Shelbyville, just due east of Louisville. I am formerly from Campbellsville down south. Senator Carper. Do you know my mother? [Laughter.] Mr. Heath. Well, I could. Where is she from? Senator Carper. Actually, she lives right across the line from Huntington in a little town called Ashland. My sister is in a place just to the east of Lexington, a place called Winchester. Mr. Heath. Winchester, right, a beautiful little town. Senator Carper. Keep an eye on them for me, if you would. Mr. Heath. We will. [Laughter.] Senator Carper. I want to go back to something that you talked about, Mr. Heath. A couple of our witnesses have come before us and talked about negotiating service agreements. I believe you cautioned us about large volume customers being able to negotiate those kinds of agreements, but smaller volume customers not being able to. In the legislation that I introduced last year, I think it allows small mailers--relatively small mailers--whose business is largely local to apply for negotiated service agreements. We tried to make sure in that legislation that a small newspaper, whether it is in Dover or Ashland or some other place, could get a negotiated service agreement with the U.S. Postal Service if a large mailer that they were competing with in Dover or Ashland were able to get one. Would that be something we ought to try to include in our final bill? Mr. Heath. We are very sold on the concept of work sharing and our association was involved in some of the very early work sharing rates that went on in the early 1980's so that if you presort your mail to certain levels and if you walk sequence it to certain levels, you get better rates, if you enter it at the office of delivery, like many of our publications do, both for newspapers and advertising mail. So we don't quite understand why there can't be more niche classifications that broaden the concept of work sharing to more mailers. That is what we basically advocate and we sort of stick with that. I suppose that if there is a way that this similarly situated language that has been kicked around could actually work--we haven't seen it work just yet. We sort of believe in the concept, but we are not sure exactly how that is going to end up working in the final analysis. We just believe that if we do the same amount of work to get a piece of mail to an additional location than some competitor, or the same location as some competitor in some places, that we should have basically the same rates for it. We send out a lot of ad mail just like, for instance, Adville Systems does that serves our preprint customers going right down to the carrier route and we don't necessarily think, or, in fact, we don't think that just because they happen to enter so many billion pieces a year and we may enter a few hundred thousand, if we are doing the exact same level of work entered at that delivery office that we should have any less rate than they do. So that is why we feel the parity issue is very important. Senator Carper. All right. Good. Thanks. I would like just to talk a little bit or ask you to talk a little bit about universal service, and I ask you to keep your responses brief so everybody can have a shot at this. What do you believe universal service to be? Do you think it is fully defined in current law or adequately defined in current law? How do you envision universal service changing in coming years? So it is a three-part question. What do you believe universal service to be? Is it adequately defined in current law? How do you see it changing in coming years? I don't care who goes first. We could do it in alphabetical order, though. [Laughter.] Mr. Ihle. I will take it first. We believe that universal service has to include package delivery. It has to be able to go to not only big towns but small communities. It has to include Saturday delivery. As we saw this year, I believe Christmas Eve was on a Saturday this year. Being a cataloger, and I suspect you feel the same way, that cutoff period where you have to cut off the phone orders and the Internet orders, for us it was, I think, December 19. That window in between the 19th and the 25th, the 24th for Christmas Eve, is a huge delta for us. If we can have that Saturday delivery and it happens to fall in that period of time, that is a huge incentive for us. It has to include packages and it must include Saturday. Senator Carper. Thank you. Others, please? Mr. Heath. We, too, in the newspaper business still feel that 6-day delivery is important. Many of our members use Saturday for delivery of newspaper issues and shopping advertisement material. To us, universal delivery sort of increasingly seems to mean access to the full range of products and services that the Postal Service has. We are concerned, for instance, that the Postal Service had difficulty dealing with automation of our newspapers and we wanted to play, and we worked with a lot of work groups to play in that arena and make sure we are participating, and yet the machines too often are built maybe not to include the widest possible range of materials that need to go through them. So we can be part of this cost savings that needs to go on in automation. So to us, universal service means to not leave outside the best and most efficient part of the mail stream products that are very essential to local subscribers and to people all across the country, snowbirds and so forth. Many of our products go South for the winter and we have a lot of difficulty with that. So we are trying to view it a little bit as how accessible the whole system is and how much we want to be a part of the best, most efficient part of that mail stream. That is kind of an important issue for us. Senator Carper. Thank you, sir. Ms. Dreifuss. Ms. Dreifuss. I would be happy to go next. I think universal service means giving the public access to a Postal Service, a Governmental Postal Service, that will accept letters, packages, periodicals, and make delivery of those items to every home and business in the United States. I think it includes 6-day delivery. One point I want to stress that is often overlooked, everyone seems to accept that--and businesses in particular would like to have delivery made to every home and business in the United States. But I don't want anyone to forget that in States like Maine, and I am sure many parts of Delaware, it is necessary for consumers and small business people to have ready retail access to these services. So I do think that should be part of the definition. Senator Carper. OK. Thank you. Mr. Bradley, the last word. Mr. Bradley. Universal service, I think to me is similar to what Ms. Dreifuss said, access throughout the whole country. I see the Postal Service as being responsible for what is termed as the last mile, being able to go to every home and business in the country. I personally am not sold on 6-day delivery. I may buck the trend. I don't know what the Postal Service would---- Senator Carper. Do you want seven? [Laughter.] Mr. Bradley. No, I was thinking five, but I am not sure what they would do with the mail on that other day. Logistically, I don't see how you could avoid Saturday delivery. I think the mail would logistically have to move on that day. But I think that the Postal Service is in that unique position and has that unique responsibility of going that last mile and is responsible for that and work sharing with others, such as FedEx going and being dropped off to the Postal Service to be delivered that last mile, those are all very appropriate. Senator Carper. Good. Those are helpful responses and we appreciate each of them and we appreciate your being here. Thank you for contributing to our deliberations and we look forward to taking your thoughts into consideration when we try to mark this bill up. Thanks so much. Thank you, Madam Chairman. Chairman Collins. Thank you, Senator Carper. I want to end this morning by emphasizing a point that Mr. Ihle made, and that is that it is only the Postal Service that provides 6-day-a-week delivery of mail to every address at a uniform rate, what Mr. Bradley referred to as delivery to that last mile. I think as we craft a postal reform bill, we need to remember that. At our next hearing on Thursday, we will hear from two of the Postal Service's competitors, Federal Express and UPS, and I look forward to hearing their views on this issue, as well. I very much appreciate the testimony of all of our witnesses today. Your insights have been very valuable to us. You represent a real range of entities affected by the Postal Service. We are going to continue to work on this issue and we would welcome your advice and input as Senator Carper and I sit down at the end of these hearings to draft a bill. The hearing record will remain open for 15 days for the submission of any additional materials that our witnesses or others may have. This hearing is now adjourned. [Whereupon, at 11:54 a.m., the Committee was adjourned.] POSTAL REFORM: SUSTAINING THE 9 MILLION JOBS IN THE $900 BILLION MAILING INDUSTRY ---------- THURSDAY, MARCH 11, 2004 U.S. Senate, Committee on Governmental Affairs, Washington, DC. The Committee met, pursuant to notice, at 9:30 a.m., in room SD-342, Dirksen Senate Office Building, Hon. Susan M. Collins, Chairman of the Committee, presiding. Present: Senators Collins, Stevens, Voinovich, Carper, and Pryor. OPENING STATEMENT OF CHAIRMAN COLLINS Chairman Collins. The Committee will come to order. Good morning. Today marks the sixth in a series of hearings the Governmental Affairs Committee is holding to review the reforms recommended by the Presidential Commission on the Postal Service. On Tuesday, the Committee heard from representatives of the printing and magazine industries, small catalogue retailers, weekly and daily newspapers, and the Postal Rate Commission's Consumer Advocate. We discussed not only the Commission's workforce and financial recommendations, but also the Postal Service's mission and monopoly, the rate- setting process, and corporate governance issues. Today we will continue our focus on the mailing industry. As our witnesses well know, the Postal Service is the linchpin of a $900 billion mailing industry that employs 9 million Americans in fields as diverse as direct mailing, printing, publishing, catalogue production, and paper manufacturing. The health of the Postal Service, therefore, is essential to thousands of companies and the millions that they employ. It is vital that we in Congress, the Postal Service, and the mailing industry work together to save and strengthen this institution upon which so many Americans rely for communication and for their jobs. I welcome our witnesses today and look forward to hearing their views and insights on the recommendations of the Presidential Commission. I would now like to welcome our first panel of witnesses. Mike Eskew serves as the Chairman and Chief Executive Officer of UPS, the world's largest package delivery company. Under Mr. Eskew's direction, UPS is expanding its capabilities into new lines of business that complement the company's global package delivery operations. Prior to serving as Chairman and CEO, Mr. Eskew served as both Executive Vice President and Vice Chairman. He has served as a member of the UPS Board of Directors since 1998. Our second witness this morning is Fred Smith, who is the Chairman, President, and Chief Executive Officer of FedEx Corporation, a $23 billion global transportation and logistics company. Mr. Smith provides strategic direction for all FedEx Corporation operating companies, including FedEx Express, FedEx Ground, FedEx Freight, etc. He founded FedEx in 1971. Today the company serves over 214 countries and handles more than 5 million shipments each day. We are very pleased to welcome you to the Committee. We appreciate your both taking time to come in person, and, Mr. Eskew, we will ask that you begin. TESTIMONY OF MICHAEL L. ESKEW,\1\ CHAIRMAN AND CHIEF EXECUTIVE OFFICER, UNITED PARCEL SERVICE Mr. Eskew. Chairman Collins, good morning. I am Mike Eskew, Chairman and Chief Executive Officer of UPS, and I am pleased to be here today to testify on behalf of the men and women of UPS on this important issue of postal reform. I have a written statement that, with your permission, I would like to submit for the record. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Eskew appears in the Appendix on page 129. --------------------------------------------------------------------------- Chairman Collins. It will be entered. Mr. Eskew. And I will summarize that statement with just some brief comments this morning. Madam Chairman and Members of the Committee, I appreciate your efforts on this important issue. The Postal Service is an impressive organization and has some great things going for it: Inspired leadership from Jack Potter and his team, incredible dedication of the people in the field, and an infrastructure designed to deliver core mail services that are second to none. In the past, UPS and the Postal Service have been at odds with respect to postal reform. However, more recently both organizations have made great strides in trying to find common ground on a number of issues. Many of our team from several functions across UPS have gotten to know the Postal Service, and Postmaster General Potter and his team have gotten to know us. And these efforts have led to relationships that we hope will continue to grow. We think it is a credit to both organizations that we have been able to meet with some level of success by working together where it has been mutually beneficial. UPS is in an interesting position with respect to the Postal Service. On the one hand, we are large customer of theirs. We use the Postal Service as our primary means of communication with our employees, our shareholders, our customers, our vendors, and others. UPS is responsible for over $230 million annually in revenue to the Postal Service, and as I have said before, we are now working together with them on a number of fronts. And, on the other hand, we are perhaps one of the few companies in the Fortune 500 that has the Federal Government competing in our core market, the package delivery business. I believe there is a path to postal reform that will enable the Postal Service to continue to provide high-quality core mail services to everyone in America. This path should include provisions that ensure that the monopoly is not leveraged into the competitive marketplace. Indeed, the Bush Administration highlighted this concern when it issued its statement that any reform measure must ensure that the Postal Service ``operates appropriately in the competitive marketplace.'' The path to postal reform should focus on the following key areas: A clear focus on core mail services; a strong, effective regulator; cost control, cost management, proper cost allocation, along with financial transparency; and, to the extent that the Postal Service competes with the private sector, it should be on a level playing field. I will elaborate on those four. First, reform should focus on core mail services provided by the Postal Service: First-Class mail, standard mail, and periodicals. These services provide the Postal Service with 99 percent of its annual volume, 86 percent of its annual revenue, and covers 92 percent of the overhead cost of the organization. Competitive products do not represent the way out of financial troubles for the Postal Service. Electronic alternatives to hard-copy mail pose a far greater threat to the Postal Service than does competition from private delivery companies like ours. Second, because the Postal Service retains its statutory monopoly, the public is best served by a strong, effective regulator. Strong, up-front regulation is simply the price for going to market with a statutory monopoly. I want to point out, however, that I agree that the current rate-setting process is in need of improvement. I do not believe, however, that effective regulation and improvements to this process are mutually exclusive. Third, the Postal Service and the Postal Rate Commission should have the tools needed to establish and maintain the clear, transparent financial picture of the Postal Service. Additionally, the Postal Service should continue to enhance its focus on cost control and set up its efforts to proper cost allocation to its various products. Fourth, and finally, to the extent that the Postal Service competes with the private sector, it should be on a level playing field, and that the Postal Service should not leverage its monopoly network into the competitive free enterprise marketplace. Because core mail services cover nearly all of the overhead costs of the Postal Service, competitive products essentially get a free ride on the postal network. Neither UPS nor any other private company has the benefit of a statutory monopoly to cover the lion's share of its overhead cost. This clearly represents an advantage to the Postal Service. Additionally, the Postal Service enters the competitive marketplace with other benefits associated with its government status. It is exempt from many taxes and exempt from a number of laws that apply to the private sector. Just last month, the U.S. Supreme Court found in the case of U.S. Postal Service v. Flamingo Industries that the Postal Service is indeed part of the Federal Government and, therefore, it cannot be subject to antitrust laws. In its decision, the Court stated that the Postal Service has many powers more characteristic of government than of private enterprise, including its state- conferred monopoly on mail delivery. To be fair, the Postal Service also has its burdens placed on it as a result of its public mission that do not fall on private sector companies. This fact is recognized by the Supreme Court in the Flamingo case as well. These advantages and the burdens should be recognized and reconciled. I believe there is a path to reform that will accommodate the Postal Service, its employees, its customers, and its competitors. I look forward to working with you and your staff, Madam Chairman and Members of the Committee, to ensure the Postal Service remains strong and viable into the future. Thanks so much, and I will be happy to take your questions at the appropriate time. Chairman Collins. Thank you very much for your testimony. Before turning to Mr. Smith for his statement, I would like to call on my colleague, Senator Voinovich, to see if he has any opening statements he would like to make. OPENING STATEMENT OF SENATOR VOINOVICH Senator Voinovich. Thank you, Madam Chairman. It is a short statement. I want to thank you for continuing your thoughtful probe into the recommendations made by the Presidential Commission. I applaud your efforts to address this issue and for your commitment to finding solutions in a bipartisan manner. There is a bipartisan agreement that we need a strong, viable Postal Service. Whether it is delivering needed supplies to a business or a birthday card to someone's grandmother, the Postal Service exists to serve the needs of every American. Ohio is the home to significant urban areas, major U.S. cities, including Cleveland, Columbus, Cincinnati, Toledo, and Dayton. However, much of Ohio is rural, and for people who live in rural areas, the Postal Service provides a vital communication and economic link to the rest of Ohio, the Nation, and, for that matter, the world. I know that rural Ohioans were concerned that universal service, guaranteeing affordable rates and frequent delivery, could be scaled back. I am pleased that the Commission strongly endorsed continuing this long-standing mission. Ohio's business community has shared with me their support for postal reform including RR Donnelley, which maintains a large presence in Ohio, testified before this Committee on Tuesday, and the American Greetings, which is headquartered in Cleveland. But it is clear that the U.S. Postal Service faces serious challenges. While it is impressive that the Postal Service has reduced its level of indebtedness to the U.S. Treasury from $11 billion in 2002 to $7 billion today, this is still a significant amount. In addition, the Postal Service carries approximately $48 billion in unfunded retiree health benefits and about $6.5 billion for unfunded workers' compensation benefits. Furthermore, the Postal Service faces increased competition not just from commercial firms like the gentlemen who are here today and their companies, but also from rapidly expanding technologies such as e-commerce and online bill paying. In addition, we cannot ignore a new challenge facing the Postal Service, and that is the challenge of securing our Nation's mail. My colleagues and the entire congressional community know this reality all too well after the horrific anthrax attack in October 2001. We are still getting our mail 2 and 3 weeks late. I have to tell people to mail items to our regional offices because of the process that mail must go through here. This tragedy was even more personal to the postal community. I visited with postal employees in Toledo and Cleveland after the anthrax attack to talk with them about their fears and assure them that we would do what was necessary to protect them. That is another burden the Postal Service carries today, and I know we are working to try and make sure that they are working in a secure environment. Madam Chairman, I thank you for calling this hearing. I thank the witnesses for their testimony before the Committee today, and I look forward to continuing to hear the views from our witnesses today. Thank you. Chairman Collins. Thank you. Mr. Smith, would you proceed with your statement? TESTIMONY OF FREDERICK W. SMITH,\1\ CHAIRMAN, PRESIDENT, AND CHIEF EXECUTIVE OFFICER, FEDEX CORPORATION Mr. Smith. Thank you, Senator. I, too, have a written statement which we have submitted to you, and I am going to summarize it if that would be acceptable. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Smith appears in the Appendix on page 138. --------------------------------------------------------------------------- Chairman Collins. Without objection, all written statements will be submitted in full. Mr. Smith. Senator, on behalf of 245,000 members of the FedEx team, we appreciate very much the opportunity to give you our thoughts on this important issue. FedEx supports the modernization and the transformation of the U.S. Postal Service. We support S. 1285, which has been proposed by Senator Carper, with some recommended amendments. We urge further study in regard to developing a fundamental transformation plan for the Postal Service for the future to look at the pros and cons and the methods of turning the Postal Service into a corporation owned by the government or by private interests, and to determine the best method to unwind the monopoly that the Postal Service enjoys by the end of 2008, which is consistent with the European Union timetable, and in a manner most suitable for the Postal Service. Now, we are very familiar with the requirement to transform a business. FedEx itself has been dramatically transformed over the last few years from a largely domestic express transportation company to a major diversified transportation logistics and business service corporation. The Postal Service is likewise at the proverbial fork in the road. Its main income comes from letters, most of which will eventually disappear. And as Peter Drucker has noted, we are sort of like the 1820's, the same status in terms of the Information Revolution as the Industrial Revolution was at that time, so there is more change ahead. So the basic choice for the government is relatively clear. On the one hand, you can liquidate in an orderly manner or close down the USPS as technology encroaches upon its primary business. Or you can structure an entity that can compete. Now, FedEx favors allowing the USPS to compete because at the end of the day it is politically not feasible to simply ignore three-quarters of a million U.S. citizens employed by the Postal Service. And the management of such a decline and liquidation would be extremely difficult. One only has to look at the experience of Amtrak to see how difficult that truly is. But none of that detracts from the issue that the Postal Service needs fundamental transformation. I think it was best summed up by David Walker, the Comptroller General of the United States, when he stated that the ``incremental steps toward postal transformation cannot resolve the fundamental and systemic issues associated with the Service's current business model.'' The Presidential Commission recommended making USPS into a world-class business, but it should be obvious that the USPS must first become a business before it can hope to become world-class. A regulated government monopoly cannot become a world-class business. We at FedEx certainly could not have transformed ourselves into the entity that we are today had we had a board of political appointees, regulated prices and operations, and a monopoly. So serious study is needed of the pros, cons, and options for transforming the USPS into a corporation. Likewise, the USPS cannot learn to compete unless it is required to compete. A monopoly is dispiriting and enervating. A serious quantitative plan to phase out by the end of 2008 should now be developed, in our opinion. Postponing repeal beyond 2008 could delay EU reform to the detriment of U.S. express and direct marketing companies. And I would just point out in that regard, one of the serious concerns I know on the part of FedEx, and I suspect on the part of the United Parcel Service as well, are the European monopoly postal services who have been allowed to come into private industry and use those funds to help them compete against our operations. FedEx would recommend an increase in USPS management flexibility, much more flexibility in pricing of their competitive products, an end of salary caps for executives to ensure the best possible talent. We would like to see a ceiling on the scope of the postal monopoly, say 12.5 ounces or 6 times the stamp price, and divesting the USPS of the administration of that monopoly because it is fundamentally unfair. We favor firewalls, which is the term that Congressman McHugh used over on the House side, to prevent unfair competition, a separation of USPS accounts into non-competitive and competitive, a required allocation of a reasonable level of overhead cost to competitive products, an end of key legal privileges for competitive products, such as the antitrust exemption, an assumed Federal income tax on USPS competitive product revenues. We recommend strengthening the Postal Rate Commission, giving it subpoena power, extension of jurisdiction to international mail, annual oversight of rates, and increased enforcement powers. We recommend allowing the Treasury and USPS to create a government corporation to handle the back office, transportation, and sorting in a truly businesslike manner. Such operations should be nonpolitical and performance based, and a government-owned corporation working only for the USPS would not pose competitive issues. The monopoly reforms need to be refined in minor respects, authorizing the Postal Rate Commission to adopt regulations clarifying the scope of the postal monopoly, and exempting outbound bulk international mail from the monopoly. You should consider authorizing, in our opinion, the Postal Rate Commission to phase in access to mailboxes in a controlled manner that does not hurt the USPS or households. And we think that you should adopt basic common-sense guidelines for international postal policy. You should not allow the USPS to charge less to deliver foreign mail than American mail, except perhaps for correspondence from the very poorest companies. And we recommend that you not allow the UPU's Committee of Postal Officials to legislate international regulations binding on the U.S. Government or courts. And, finally, we recommend you exempt bulk business letters from the requirement of a uniform rate for all letters, which is about half of all letters. Universal service should be preserved, but allowed to evolve with changing times. No political or economic reason whatsoever, in our opinion, remains to require uniform rate for bulk business mail, and we recommend that you give the USPS maximum operational freedom consistent with maintaining universal service. That concludes my comments, Senator, and obviously I would be happy to answer any questions that you might have. Chairman Collins. Thank you very much. Before turning to questions, I would like to call on my colleague, Senator Carper, for any opening remarks that he may have. As many observers are well aware, Senator Carper and I have committed to joining together to draft a bipartisan postal reform bill. We hope that bill will be enthusiastically embraced by all of our colleagues. Senator Carper. At least by George Voinovich. [Laughter.] Chairman Collins. Senator Carper. OPENING STATEMENT OF SENATOR CARPER Senator Carper. Thanks very much. Mr. Smith, I understand that when I was just about to walk into the room, you said some supportive things about the legislation that I introduced this past year, and maybe, Madam Chairman, if Mr. Eskew comes in and supports it as well, we could just go right to the markup on that bill. Chairman Collins. I don't think so. [Laughter.] Senator Carper. I didn't think I would get you on that. Chairman Collins. Nice try. Senator Carper. I have a statement for the record that I would like to submit, and we are just delighted that you are here. We have had, really, a series of excellent hearings, and I think given the lineup that we have here today, we are going to get a lot out of it, and I look forward to marking up the Collins-Carper-Voinovich bill some time in the next couple of weeks. Thank you. Chairman Collins. That is right. [The prepared statement of Senator Carper follows:] PREPARED STATEMENT OF SENATOR CARPER By all accounts, the Postal Service has been a success since its creation. It receives virtually no taxpayer support and the service its hundreds of thousands of employees provide to every American nearly every day is second to none. More than thirty years after its birth, the Postal Service is a key part of the nation's economy, delivering to more than 200 million addresses and supporting a massive mailing industry. Even a casual observer, however, could see that the past few years have not been easy for the Postal Service. As we learned earlier this week, they have also been difficult for the private firms, large and small, and the millions of mailing industry employees who depend on stable postal rates. I am pleased, then, that we have a once-in-a-generation opportunity now to work in a bipartisan way to modernize the Postal Service and update its business model for the 21st Century. Congress has been at work on postal reform for nearly a decade now, mostly in the House under the leadership of Congressman John McHugh from New York. This year, however, I sense that we have some momentum that hasn't been there in the past. At the end of last year, President Bush issued a set of postal reform principles focused on those recommendations from his postal commission aimed at improving transparency and accountability at the Postal Service and giving management the increased flexibility they need to streamline operations and seek out new mail volume. His principles touch on the main themes addresses in S. 1285, the comprehensive postal reform legislation I introduced last June. S. 1285 itself was based in large part on the most recent postal reform bill put forward by Congressman McHugh. I think it's safe to say, then, as I've said before, that we probably have agreement on 90 percent of what should be in a new postal reform bill. Now that this committee's schedule of postal hearings is nearly complete, I look forward to sitting down with you, Madam Chairman, and all of our colleagues to begin putting that bill together. Chairman Collins. Thank you, Senator. Thank you both for your testimony. As competitors of the Postal Service, your views and experience are very important to our deliberations as we review the Commission's recommendations and sit down to draft a bill. Mr. Eskew, during your presentation to the President's Commission, you testified that the package delivery sector is well served by private companies, and some observers felt that you implied that the Postal Service should not compete in this area. Some observers have felt that both UPS and FedEx's goal is to get the Postal Service out of the package delivery service. Earlier this week, we heard from both small and large retailers, for example, a small company in Maine called Cuddledown, a larger company that owns Harry & David, who testified before us that their companies could not exist without the Postal Service, even if they are customers of yours as well. Would you please comment on the issue of whether UPS believes the Postal Service should get out of the package delivery business altogether? Mr. Eskew. Yes, Madam Chairman. My comments to the Commission was that philosophically we believe that the package business in the United States is well served by the private sector, and we think that this country was founded on the free enterprise system that really has made it the envy of the world in terms of the things that we do and the things that we bring to market. And to the extent that we do service very well, completely, the package business, we think philosophically that the government does not need to be in there, that we serve the needs of the public very well. Practically, they are in this business. Mr. Smith talked about the 750,000 people. So we think to the extent that they do compete in this business, it needs to be on a level playing field, and that is what we have practically been talking about. So that is the first part of your question, I hope. The second part, just to think about--I am not sure about the small company in Maine or Harry & David's comments about the Postal Service. But quite frankly, I would agree that the Postal Service is absolutely necessary to be able to ship out catalogues and bills and the things that we rely on them to do. Also, we could not exist without a strong Postal Service. So to that extent, I think that is real. To the extent that they are talking about parcels, on the other hand, though, we service all the State of Maine, from Calais to Corea to Presque Isle to Greenville, and every village, every town, every hamlet, every street in the United States, and we do not stop at the mailbox. We go to the door. We go to the porch. And there is an awful lot of these customers that tell us, ``You're the only one to come to the ranch,'' or ``You're the only one to come to the farm,'' in parts of Ohio and Maine and in Delaware and all over the United States. So we do service the whole country in terms of parcels. Harry & David's parcels are heavy. They are pears, they are apples, they are rosebushes. They do not fit in the mailbox. And in those places where they do not fit in the mailbox, they go back to the post office. A postcard may be left in the mailbox, and the person would come to get them. We deliver them all the way to the door. And if for some reason there is a pricing differential, I think that is the whole competitive landscape that I like to talk about in terms of level playing field, because those heavy parcels are not part of the in- trace, in-sequence part of what the letter carrier finds on his tray with the next stop that fits nicely into the mailbox--and should not carry any overhead burden. Those things require overhead burden. Chairman Collins. Doesn't UPS rely on the Postal Service for the delivery of packages in certain areas? Mr. Eskew. Madam Chairman, we have two million daily pickup accounts in the United States, some infrequent, some every day. We have two accounts, two of the two million, one per million, that we have an experimental pilot program where we are using the Postal Service to deliver about less than 20 percent of the volume we pick up from those two accounts. Those two accounts' packages fit in the mailbox, a place that we, as Mr. Smith mentioned, do not have access to. If we could have access to those mailboxes, that 20 percent would be much less. But those two customers that we use the post office to deliver less than 20 percent, a very small piece, are satisfied with the slower services and less than--the visibility that we provide with the total services that we offer, and so we do use the Postal Service for those two accounts. Chairman Collins. Thank you. Mr. Smith, in some ways, your testimony seems to go even beyond Mr. Eskew's when you refer to the difficulty of winding down an organization that employs some 750,000 individuals. I want to clarify what your position is since I do not think you really are endorsing the dismantling of the Postal Service, if it were practical, but perhaps you are. But what is your position on whether the Postal Service should be in the parcel delivery business? Mr. Smith. Well, Senator, let me clarify the first point there. What I was trying to say, perhaps not as clearly as I meant to, is that the Congress of the United States has two choices. Technological trends are such that you can either decide to liquidate the Postal Service because that is what is going to happen if you don't do anything. Technology is going to basically fundamentally change it. Or, secondarily, you can modernize it. We support the latter completely. And in that regard, some of the things that we have recommended, not dissimilar to what Mike Eskew said, are that the Postal Service divide its competitive and monopoly products into two buckets. And those competitive products have to bear an appropriate level of the overhead and the cost structure of the Postal Service. If you really look at the practicalities of the situation where the Postal Service shines compared to the private delivery companies like UPS and FedEx, both of whom serve every address in the United States the same way the Postal Service does, it is in those very small, particularly lightweight packages that can be commingled with letter mail. When the Postal Service has to have a completely separate delivery structure or an off-route delivery by letter carrier, that is not a marginally costed activity. And if you divided the Postal Service along the lines that we mention in here, into competitive and non-competitive products, and had the competitive products bear an appropriate level of the cost, my guess is the marketplace would solve all this on its own. And that is why we support the bill that Senator Carper authored and a companion bill over on the House side which is headed in that direction. So we do very much support the modernization of the Postal Service. Chairman Collins. Thank you. Senator Carper. Senator Carper. Thanks very much. Just look forward, if you will for us, 10 or 15 years--and think about when Ted Stevens was a freshman Senator, he held hearings--I do not know that they were so much in rooms like this, but he actually shared with me once that he held breakfast meetings, I guess at his house here in the Washington area, back in 1970, 1971, had people over for breakfast and they talked about what kind of changes were needed in the Postal Service. And out of those breakfasts--maybe we should start serving breakfast at these. I don't know. But out of that series of breakfasts came sort of the foundation for the changes in the Postal Service that have endured for over three decades. I don't know that anything we will come up with will have that kind of life span, but just look forward for us, and I am sure in 1970 they did not know we would have an Internet, the kind of changes that we see in the delivery of information. My guess is that no one was even thinking about it then. But look forward ahead for us 10 or maybe 15 years and tell us what kind of postal system, delivery system, including your operations, what are we going to have? I am asking you to be futurists and look ahead. What do you think it will look like 10 years from now? Let's go in alphabetical order. Mr. Eskew. When we think about the future in our business-- and then perhaps I will come back to the Postal Service--we really think that it is goods and it is information and it is funds. It is all wrapped together. It is commerce all over the world in a much more global perspective than perhaps we think about it now. So it is going to allow companies like ours to be certainly one to one, each package as if it is the only one we have, each customer as if it is the only one, and it will be much more tailored and much more one to one with our--and that information about the goods moving through our networks allow us to do those kinds of things. So that is where I think that we are headed. Now, when you think about letters and documentation, Mr. Smith said it the right way, I think, that certainly the Internet and electronic transmissions, e-billpay, those kinds of things are going to go much further and much easier and much more--as younger generations age, it is going to be much more well received than it is today. And it is going to be much more practical to use it because it is going to be part of the process of ordering, payment. It is all going to be the virtual process of one touch, the bill gets cut, the bill gets paid, it is all electronic, it never gets reduced to paper and never finds its way into the Postal Service. Senator Carper. All right. Mr. Smith. Mr. Smith. Well, we have gone under a very simple premise for a long time, and that is that whatever can be moved electronically eventually will be moved electronically. Now, that threatens, if you will, a great part of the existing First-Class mail monopoly that the Postal Service has. I think virtually all of the invoicing that currently moves through the postal system will go to an electronic format simply because the cost/benefit ratio is enormously favorable. I mean, you can go online and find an invoice that you owe and pay it for a few cents, where the overall transaction cost of producing an invoice, mailing it, mailing back in a check is well over a couple of dollars. So just the efficiency of that will lead most institutions to go to an electronic invoicing system. Most of the personal communications that are written today have gone, of course, to E-mail. Now, I think on the other side of the coin, however, the Postal Service actually has a huge business opportunity in the future because what the Internet and cable TV are actually doing are balkanizing the broad communication systems in this country. You know that from the political campaign business. So the Postal Service has a tremendous advantage in that it is a product-push organization rather than a customer-pull type situation that the Internet is. If you are interested in looking at something on the Internet or buying something on the Internet, you have got to go on it and search it and find it. The Postal Service can reach out to specific slices of society like no other institution in terms of advertising, promotions, publications, catalogues, and then that in turn will create a tremendous amount of traffic going into homes and businesses, some of which the Postal Service, if it is reformed along the lines we suggested, can compete for and hopefully there is a significant amount of business there for FedEx and UPS and other private competitors. So I am quite optimistic that there is quite a good business for the Postal Service, but only if it is reformed and can encourage and incent that business, and then on the other side of the coin is required to cost account for competitive products in a way that you do not get this muddled situation that they have today about what is really costing what and what this should cost versus that. So that is our view. Senator Carper. Thank you. Talk to us a little bit about corporate board structure. Look at your own corporate board structure. Look at that that exists in the Postal Service with the Board of Governors. I think in the President's Commission they had recommended that we have a board of 12 members. I think the Postmaster General would serve along with three people, nominated by the President, confirmed by the Senate, and then they would go out and select from others in the country, eight or nine others to serve on the Board of Governors. They would serve 3-year terms, not 9-year terms. There would be age restrictions; I think no one could serve over the age of 70. I think there would be a requirement that, for people to serve on the board, they would have to have had some experience in the enterprises that relate more or less to what the Postal Service does. Those are recommendations in the President's Commission, and looking at your own operation, the way your own board operates the way you select your members and what we are going to be trying to figure out with the Postal Service, what advice would you have for us? Mr. Eskew. Again, with any board in our governance, transparency is the rule of the game, and we need to make sure that anything that the board of our companies is fully transparent, fully reported, fully able to be audited and applied to all the proper commissions. And that is a big part of any part of governance for the Postal Service in the future. In terms of the board makeup, independence may be a little bit difficult because there are so many people that have so many contacts with the Postal Service. That may be a bit problematic. Senator Carper. Everybody is a customer. Mr. Eskew. That is right. That may be a little bit difficult to do, but certainly independence and proper oversight and transparency, the same type things that we do with our boards. Senator Carper. Mr. Smith. Mr. Smith. Well, based on my experience both at FedEx and serving on five other New York Stock Exchange companies over the years, I would say that the fundamental requirement for a good director of the USPS or any other large commercially oriented enterprise is business understanding and business knowledge. A person might not understand the particular details of the business, but if they understand how a commercial enterprise operates in general, they can generally provide good input to that organization. The second thing that they have to have is independence. In our particular case, there is only one insider on our board. All the others are independent directors and always have been. I think at one time we had two insiders on the board, so it is one out of 13. And I think that the second criteria is to have strong, independent directors. And the third, just as Mike Eskew said, is that you have to have a board that is willing to and insists upon a great degree of transparency to the various publics that oversee and depend upon the Postal Service. Senator Carper. I might say, Madam Chairman, this issue of transparency that they both come to, when we talk about the issue of whether or not the Postal Service would have the ability in the future to use the profits from their monopoly operation to cover some of the overhead that relates to their competitive products, to the extent we could have good transparency, it would help ensure that that kind of thing does not happen. Chairman Collins. Thank you, Senator Carper. Senator Voinovich. Senator Voinovich. First of all, I would like to say that I do not have the benefit of the time that the Chairman of this Committee has had in studying the report of the Presidential Commission. I apologize if some of this may sound redundant. First, would you clarify if you are suggesting today that the Postal Service get out of those areas where they have high cost drivers and where the private sector is getting the job done. One of the concerns I have--and I am sure the public has-- is that if the Postal Service withdrew from some of these competitive businesses, it would impact pricing. For example, if I am American Greetings or I am a big mail house like Donnelley or a mail order business like Harry & David, there is a concern that they are going to end up with one railroad and not have competition. As a result of that see their costs go up because there isn't any competition. What are your comments on this? Mr. Eskew. Senator, I will start. When we think about price and we think--the Postal Service has a number of different products, but I will simplify them into two. They go to market with a monopoly set of products and products that compete with the private sector. And when they go to market with that monopoly set of products, then the burden is to make sure that the cost is allocated and priced properly and it is managed properly and transparency is all there. The Postal Service has been able to allocate to each product about 60 percent of the cost. About 60 percent of the total cost is attributed to the product, and the other 40 percent is left over in overhead. Think about what happens with the 40 percent that is left over in overhead. To be able to partition those, they mark up each of those sets of products. In the monopoly part, if they mark those up by 69 percent, an extra 69 percent applied over and above the attributed cost a monopoly might---- Senator Voinovich. In other words, you are saying that the Postal Service uses one part of its business to subsidize other parts. Mr. Eskew. Well, they do mark up the monopoly products by 69 percent, only 28 percent in the competitive side. Two and a half times as much is marked up in the monopoly side that is protected. So that is something that when you do go to market and when you do have those kinds of markups that are two and a half to one, that gives us some concern. It is the price of going to market with the monopoly and competitive products, is proper oversight, proper regulation, proper reporting, proper transparency, and proper regulation up front. Also, if you think about who suffers because of that and you talk about prices, it is the captive First-Class user who, we believe, pays the price for the overall system. And so cost burden is shifted, and depending upon how that cost is cut up. Senator Voinovich. So you are saying that the First-Class customers are subsidizing the inefficient operations of other business lines? Are you saying the Postal Service should get out of those inefficient operations? Don't you think that if they did, the costs of UPS and FedEx would go up substantially? Mr. Eskew. We have a lot of great competition that we have to watch. We have to earn our business every day. And I did not say get out. I do think it just needs to be on a level playing field, and that attribution measurement certainly needs to be evaluated much more carefully, and more than 60 percent of it needs to be attributed to each product, and the way it is marked up beyond that needs to be studied. Senator Voinovich. Well, I want to say to both of you that I am a customer, and both outfits do a very good job, and I congratulate you on that. The other issue I would like to ask about is the issue of management. We have had the most revolutionary change in the last 25 years in the Title 5 dealing with the Federal workforce. And both of you have had an opportunity to observe the postal management and how it is organized. In terms of just fundamental business practices, empowering people, training, giving employees the tools they need to get the job done, what are your candid thoughts about the management? Mr. Smith. First, Senator, let me just clarify what you said to the question that Mike Eskew answered. We have not recommended that the Postal Service get out of anything. What we have said is break it into two parts, the monopoly and the competitive, and the competitive should be required to allocate appropriately the cost when it is competing with private industry, because, otherwise, you end up with someone subsidizing someone else. It is just that simple. And there is a great social experiment that has been going on for the last 10 years that shows what happens when you get oblivious to those types of fundamental business principles, and it is what has happened in Europe. It is incredible that these postal monopolies have been able to take these enormous protected monopoly cash flows and been able to diversify into competitive businesses, which earn a fraction of the returns of the noncompetitive businesses. Now, whose interests have been served? Only one, and that is the management of those regulated businesses over there. So we do not propose anything other than what I just mentioned, dividing it into two parts. Regarding the management, it is first-class, and the management of the Postal Service, particularly in the last two administrations of Postmaster General Henderson and now Postmaster General Potter, are as fine business executives in transportation and distribution as I have seen anyplace. And I think the common denominator there is that both of those Postmaster Generals, as opposed to the political appointees before, really understood the operations and the issues of the Postal Service as an operating entity. And the political appointees, while they were fine folks and some of them personal friends, simply did not have that level of knowledge. So the Postal Service is extremely well managed, in my opinion, and it is because of that fundamental change that took place with Postmaster General Henderson's appointment. Chairman Collins. Thank you, Senator Voinovich. We have been joined by Senator Stevens, who probably knows more about the Postal Service than any Member of the Senate, and we are very pleased he could find the time to join us this morning. OPENING STATEMENT OF SENATOR STEVENS Senator Stevens. Thank you very much, Madam Chairman. I am delighted to be here, and I am delighted that you are holding these hearings. With the Postal Service and the two gentlemen at the table, I think you are talking about three of the largest employers in my State, as a matter of fact. So the scope of this hearing is really, I think, most interesting to us. Unfortunately, I cannot stay because I have got an appropriations hearing, but I did want to come by and pay my respects to Mr. Smith and Mr. Eskew and the people that work for them, as well as the Postal Service. I think the recent changes in our economy show that we really have to find some way to bring about a better balance in this, and I congratulate you and the Committee for holding these hearings. There is no question that the scope of the mailing industry is changing, and its tasks are becoming just overwhelmingly difficult really to balance all the interests involved. I look forward to working with you and Senator Carper and the Members of the Committee, Senator Voinovich, in trying to find some answers to some of the questions that are being raised here. But I do not have any questions for them. I, instead, have thanks because I do not think we could get along very well in Alaska without the Postal Service or the services that FedEx and UPS provide to our citizens. I am happy to have a chance to just drop by and say hello. Thank you very much. As a matter of fact, I think FedEx is the largest employer in my home town, so I am glad to see you here, Fred. Thank you very much. [Laughter.] Chairman Collins. Thank you, Senator Stevens. I want to thank both of you for taking the time to come testify personally. You both represent outstanding companies, and I think we can learn a lot from your experience. So we hope you will continue to work with the Committee as we proceed down the road of postal reform. Thank you very much for your testimony. I would now like to introduce our second panel of witnesses. Gary Mulloy is the Chairman and Chief Executive Officer of ADVO, Incorporated, the Nation's largest targeted direct mail marketing company based in Windsor, Connecticut. Gary Pruitt is the Chairman, President and Chief Executive Officer of the McClatchy Company, which owns the Sacramento Bee, the Minneapolis Star-Tribune, the Raleigh News and Observer, and he appears today on behalf of the Newspaper Association of America, which represents 2,000 large newspapers plus a number of weekly newspapers. Mr. Pruitt serves as Chairman of the NAA's Postal Committee. Robert Wientzen is the President and Chief Executive Officer of the Direct Marketing Association which represents 4,700 member companies, both commercial and nonprofit, including numerous catalogue companies and direct mailers. Mr. Wientzen has over 30 years of experience in the marketing industry. In his position as President and CEO, he is responsible to the DMA Board of Directors and oversees all facets of the organization's work. Mr. Mulloy, we will start with you. You may proceed. TESTIMONY OF GARY M. MULLOY,\1\ CHAIRMAN AND CHIEF EXECUTIVE OFFICER, ADVO, INC. Mr. Mulloy. Thank you, Madam Chairman. I am pleased today to represent the 3,700 associates of ADVO who serve 20,000 small and large clients across the United States. We are the largest user of standard mail, and we spend about half a billion dollars a year in postage. We are proud to be the constituent of the Ranking Member of the Committee in Connecticut, and we also have facilities in the States of most of the other Members of the Committee as well. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Mulloy appears in the Appendix on page 161. --------------------------------------------------------------------------- I would particularly like to thank Chairman Collins and Senator Lieberman and the entire Committee for your work on Public Law 108-18 which attempted to address the Postal Service's CSRS funding issue. One of the key events of that effort was a request by Senator Lieberman for a report from the GAO. I thank the Senator for his initiative on that effort and for the commitment of every Member of this Committee to see that CSRS funding is corrected. As a result of that law, the Postal Service has promised to hold rates steady until at least 2006. Following three rate increases in an 18-month period, this respite came at a critical juncture for the Postal Service, our industry, and the economy as a whole as it prevented another rate increase and therefore created a window of opportunity for this Committee and Congress to thoughtfully consider postal reform. In the letter I received from the Chairman and Ranking Member, I was asked to address a wide array of reform issues being considered by the Committee. In response, I have submitted written testimony. I will summarize certain parts of my written submissions today. I am going to focus today on a topic that is not always considered exciting, and that is accounting. This Committee and the Congress should address this issue in a comprehensive manner. The issues I am talking about here are related to the retirement and health care benefits which have actually been mentioned this morning already. If we would put the Postal Service on a truly transparent and more clearly understood financial footing by addressing these issues, we would then empower all other reforms to, in fact, succeed. In addition, proper accounting of these benefits would allow the Postal Service to keep its commitment to its employees and retirees; that all pension and retirement benefits and health benefits are paid, now and in the future; and the Postal Service will be able to offer its customers an extended period of rate stability that would allow it to take advantage of our now recovering economy to grow volume and revenue for the Postal Service and improve the financial health not only of the USPS but our industry and the overall economy. As one of the Postal Service's largest customers, I can confirm the GAO's comments that predict spiraling, increasing rates will continue to drive business, volume and revenue away. Non-competitive pricing that creates higher than necessary postal rates has led existing and potential customers elsewhere. It has also led to the creation of competitive alternatives that have drained revenue and profits from the Postal Service. Some, like us, have even begun our own private delivery services as alternatives and as a necessary hedge for fear of continuing rising postal rates. If postal rates were established, maintained, and managed in a more market-oriented, efficiently run system, private industry would use the USPS more, and both the Postal Service and industry would experience growth. Our current strategy calls for us to double our business in the next few years. This will be done by expanding the geographic coverage and increasing the frequency of what we do. This expansion could bring significant additional business to the Postal Service. However, we have already begun shifting a significant portion of our business to alternate delivery. In just the three markets where we currently conduct our own private delivery system, we are delivering mail pieces that have more advertising, are heavier in weight, with equal readership and response to what we deliver through the mail, and are achieving savings of over $6 million per year compared to the cost of using the Postal Service. Unless changes are made, much of our future growth will continue to be shifted away from the Postal Service and into the alternate deliveries. Now let me give you a glimpse of a different scenario. Extending the current period of rate stability beyond 2006 would allow us to be even more aggressive in our expansion because we would have the confidence that our largest single cost would be contained. We have the latent ability to create 3 billion additional packages. Importantly, we would be able to plan our growth in a rate-stable environment. Continued rate stability would benefit the mailing industry, the Postal Service, and the economy as a whole. This is no overstatement. The volume generated by this hiatus in rate increases, coupled with the impact of the important reforms this Committee is considering, would set the Postal Service on a positive course for the next generation. On the other hand, frequent excessive rate increases, such as the three that were implemented from the beginning of 2001 until mid-2002, will decrease business and lead to the fulfillment of GAO's prediction of spiraling declines in business. Stable rates coupled with comprehensive reform are not a pipe dream. This Committee can help lead the Congress to make them a reality. Since 1971, the Postal Service has been required to break even by charging mailers its cost of operation. The USPS has not been chronically losing money or breaking even in its operation, despite what many people have said. In fact, since it was created, the Postal Service has generated an operating profit, and a handsome one at that. Since 1971, postal revenues have been billions of dollars more than the cost of handling postal operations. Even if Congress were to force the Postal Service to book 100 percent of its health care liabilities today, the Postal Service still would have generated billions more in excess revenue through rates charged mailers and consumers in the past and still in place today. That money has gone to the Federal Treasury. The USPS is not only not subsidized by the taxpayer, instead, surprisingly, it has been subsidizing the taxpayer. Last year, this Committee took the first steps to correct the retirement overpayments made by the USPS to the Treasury. This important first step was only a partial, temporary solution and included some provisions whose effects were not known by this Committee and Congress and that were not in the best long-term interests of the Postal Service. In implementing last year's action to correct the CSRS overfunding, the Office of Personnel Management made a very material accounting change to the existing 33-year methodology that substantially reallocated to the Postal Service some of the government's responsibility for its share of the pensions earned as a result of work performed by postal workers prior to 1971. The 1970 Postal Reorganization Act made the Treasury responsible for employee benefits earned while working for the old Post Office Department and it made the Postal Service responsible for benefits earned after they took over. For years, the benefit obligation for retirees with employment both before and after 1971 was allocated between the Postal Service and the Treasury based on the number of years of service employed at each agency, allocating the same dollar amount for each year of employee service. Using that methodology, the Postal Service has, as of today, even with last year's changes, actually overfunded the CSRS liability by $81 billion. However, that fact was masked when OPM, after discovering this overfunding thanks to Senator Lieberman's GAO request, responded by quietly adopting a new allocation method that shifted much of the pre-1971 obligation to the Postal Service, to the detriment of postal customers. Instead of an $81 billion overfunding, the USPS was told the obligation was still underfunded by $4.8 billion. Interestingly, congressional language in Public Law 108-18 established a method by which the USPS could appeal the change of the pre-1971 allocation to the CSRS Board of Actuaries. The USPS has filed that appeal. They make the case in that appeal that the original allocation method used for 32 years was fair and recently determined to be consistent with sound, common practice in both the public and private sectors by the Hay Group, a well-respected actuarial firm commissioned by the Postal Service. The USPS has a sound and well-substantiated case. However, the three-member, OPM-appointed board has not heard an appeal in its 84 years of existence. It is unclear what timeline or method will be applied to the USPS appeal. You have the opportunity to take control of that process and codify the former methodology in legislation, acknowledging postal customers have been grossly overcharged over the years, and make the operating and financial performance of the Postal Service clear and transparent as a productive base from which to implement other areas of reform. In addition, part of last year's legislative fix of CSRS was a new requirement that the Postal Service pay military, Peace Corps, and other government retiree benefits. This transferred an additional $28 billion in charges. We would suggest, along with the Presidential Commission, that that requirement be removed. We believe that this Committee can put the Postal Service on the road to financial health if you fix the problem of the allocation of retirement benefits carried before 1971, transfer the military benefits back to the Treasury, and release a portion of the identified overpayments from the escrow created last year. These actions will make prefunding health care possible and eliminate the Postal Service's debt to the Treasury. In addition, the Postal Service would have funds for needed capital expenditure, and it can provide additional years of rate stability going forward, that will, in fact, encourage revenue and business success for the Postal Service. We believe this resolution is fair to postal workers. We believe it is fair to the Postal Service. We believe it is fair to the consumer, and we believe it is fair to our industry that, in fact, relies on the Postal Service for its livelihood. Thank you for your time. Chairman Collins. Thank you. Mr. Pruitt. TESTIMONY OF GARY B. PRUITT,\1\ CHAIRMAN, PRESIDENT, AND CHIEF EXECUTIVE OFFICER, THE MCCLATCHY COMPANY, ON BEHALF OF THE NEWSPAPER ASSOCIATION OF AMERICA Mr. Pruitt. Thank you, Chairman Collins, Senator Carper, and Senator Voinovich. Thank you for the opportunity to share the views of the newspaper industry on the important issue of reforming the U.S. Postal Service. As mailers since the birth of the Republic, newspapers want and need a healthy and vibrant postal system for generations to come. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Pruitt appears in the Appendix on page 169. --------------------------------------------------------------------------- The Newspaper Association of America encourages this Committee to take a comprehensive and fresh approach to postal reform, including addressing the difficult yet critical issue of cost control. NAA supports most of the recommendations outlined by the bipartisan Presidential Commission, and my written statement provides a summary of the industry's position on all of the major issues addressed in the Commission's report. The main focus of my testimony is pricing flexibility, an issue of particular concern to newspapers. First, I would like to take a moment to describe how newspapers use the Nation's postal system. Throughout our history, newspapers have served as partners with the Postal Service in its mission to bind the Nation together. Congress has consistently recognized the important role newspapers and other periodicals play in our Nation's postal system. Newspapers today are among the leading local users of postal services and, collectively, we spend well over $700 million on all classes of mail, particularly in periodicals and standard mail. And because we collect the majority of our revenue from subscriptions and advertising revenue through the mail, we also have a special interest in first-class. Newspapers, whether large or small, daily or weekly, serve as vehicles for news and advertising. Generally speaking, there are two kinds of newspaper advertising. One is commonly called ``Run of Press'' or ROP, and it appears on the page of the newspaper. The other is called ``pre-prints,'' and they are free-standing inserts that we either put inside the folded newspaper or mail to non-subscribers. Newspapers compete with other Postal Service customers, particularly saturation advertising mailers, for both types of advertising. Unfortunately, over the years this competition with other mailers has served as a source of considerable friction between newspapers and the Postal Service. Newspapers do not believe that the Postal Service, an agency of the Federal Government, should take sides in the marketplace competition between one mail customer and another. Regrettably, our experience has been that the Postal Service has, in fact, chosen to favor our advertising competitors through pricing strategies and new initiatives targeting the advertising revenues upon which we rely to support news and editorial content in our products. In its 1998 marketing plan, the Postal Service clearly presented its goal of harming newspapers in favor of advertising mailers. It said the service would ``create the platform for moving substantial revenues from pre-printed newspaper inserts into the mail.'' Since this declaration, Postal Service actions have spoken louder than words. It launched an ill-fated $10 million market test called ``Auto Day'' that set out to divert automobile advertising from the Milwaukee Journal and into mail. Last year, in Iowa, the Postal Service employees made sales presentations to newspaper advertisers encouraging them to move their business out of newspapers and into direct mail. Finally, the Postal Service continues to advance the misperception that it is in the direct mail business. An example is its description in its 2002 Transformation Plan in which the Postal Service describes saturation advertising mail as ``low hanging fruit'' it seeks to increase, needless to say, at the expense of newspapers. While our concerns about the Postal Service choosing sides in the competition for advertising among mailers dates back more than two decades, we have been encouraged by the recent actions of Postmaster General Potter and his management team as they refocus the Postal Service on its core mission of mail delivery. We applaud their efforts, and we want to work with them as customers. Congress has heard from large mailers and the Postal Service that they want pricing flexibility and that that is key to the Postal Service's financial future. We encourage you to examine these pleas carefully. There is a big difference between improvements that benefit all mailers, making the process of changing rates simpler, more efficient, and more predictable, and certain changes that would allow large influential mailers to get special deals for themselves. High on the wish list for pricing flexibility is the ability to enter into so-called negotiated service agreements, or NSA's, with individual mailers. Although newspapers are often the largest mailer in a local market, we strongly oppose NSAs because we believe they unfairly favor the largest mailers with deals made by a government entity. Government services, here postal services, should not be based on negotiating or lobbying skills. I urge the Committee to support that principle. Newspapers believe strongly that NSAs for the benefit of individual mailers should be abandoned in favor of work-sharing arrangements that are available to all mailers, both large and small, who meet predetermined criteria for those rates, and that such discounts should be based on cost savings. By working with all mailers, the Postal Service would earn a far better return on its investment of time and effort than if it spends its energy and resources to negotiate special deals with individual mailers. While we oppose NSA's for individual mailers, we agree that the current ratemaking process is too lengthy, too litigious, and too expensive. NAA supports the creation of an expedited rate-setting process that would also protect mailers from unjustified or flawed rate proposals before they are implemented. The Presidential Commission has recommended that the Postal Service should be allowed to set rates within certain limits established by an enhanced Postal Regulatory Board, and under this approach, rate ceilings could rise no more than inflation, and within a rate index, the Postal Service would have flexibility to make annual rate adjustments without going through the current lengthy Postal Rate Commission process. At the same time, mailers would be protected from large and frequent rate increases. NAA supports this type of pricing flexibility. Newspapers believe, though, that even with this revised system, mailers should be given at least an opportunity to challenge postal rates before they are implemented upon a complaint that a particular rate is flawed or discriminatory. Such a system would not cause delay in a proper rate change as the Postal Service must give mailers time to modify their mailing software to implement new rates. But it would provide an appropriate safeguard. Newspapers also agree with the Presidential Commission that with pricing flexibility must come enhanced oversight to ensure that the Postal Service operates properly as a public service. In particular, NAA supports the Presidential Commission's recommendation to give an enhanced regulatory body the authority and tools to ensure that the Postal Service is appropriately allocating its costs across its competitive and non-competitive products and services. The regulator in a separate proceeding should establish the methodology used for calculating and allocating costs and should be given necessary tools to compel the Postal Service to produce cost data. A more accurate and fair system for measuring and allocating costs should be a prerequisite of any reform measure. NAA appreciates the opportunity to provide the Committee with our views on postal reform and specifically on the issue of pricing flexibility. Congress established the U.S. Postal Service as a fundamental public service with a mission of providing universal mail service at affordable and non- discriminatory rates. We look forward to working with this Committee on comprehensive postal reform to improve this essential public service. Thank you. Chairman Collins. Thank you, Mr. Pruitt. Mr. Wientzen. TESTIMONY OF H. ROBERT WIENTZEN,\1\ PRESIDENT AND CHIEF EXECUTIVE OFFICER, DIRECT MARKETING ASSOCIATION Mr. Wientzen. Chairman Collins, I am Bob Wientzen, and I am President and CEO of the Direct Marketing Association. On behalf of the 4,700 members who are direct and interactive marketers--and, by the way, that includes about 350 nonprofit companies or entities that use mail to raise charitable funds-- I want to thank you for having us involved in these hearings. We consider this to be a vital issue for our industry, and, in fact, for its 9 million employees. This is the key to our continuing to be able to grow and be part of this economy. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Wientzen appears in the Appendix on page 183. --------------------------------------------------------------------------- Now, I also believe that direct marketing is, in fact, a vital interest to the future of the Postal Service as well as the economic and social interest of the country. Our business has about a $635 billion impact on the economy, and our nonprofits, in fact, raise about $50 billion a year through the mail. That is an important part of the social services part of the Postal Service's contribution to the fabric of this country's economy and its social work network. So we are talking about a major element of the economy and, in fact, over 50 percent of the Postal Service's revenue from both mail and parcels, a very important distinction. From the outset, I want to tell you essentially what I told the Presidential Commission, and that is, I do not believe that you can find a solution to this problem without someone's ox being gored. It is that simple. I do not think you are going to be able to find a way out without achieving less than that desired by some of the interested parties. My biggest fear at the moment is that the Washington drive to compromise will, in fact, produce a bill that ends up either not being effective or not being effective over the long term. And that view is shared by some of our larger members, who are worried that, in fact, we will not have a long-term solution coming out of this process. So that we want to acknowledge up front, that this is a tough one for you all to be dealing with. I want to cover a few of the key points that are covered in detail in our written testimony. Flexibility to set rates--clearly we think that the keystone of this legislation needs to be the ability to set increases on the part of the post office that are no more frequently than yearly and that are at or below the rate of inflation or the actual cost, whichever is less. To us that is sort of a bottom-line basis. We think that the post office and certainly us, the mailing community, need to be set free, as Mr. Pruitt and others have indicated, from this cumbersome and unbelievably costly ratemaking process that we now have before us. We also believe that the post office needs to have clear flexibility to achieve negotiated service agreements. On work sharing and workforce flexibility, another key point, I believe that any solution needs to build on the 25 years of work-sharing experience that we have. We agree with the GAO. We are saving $15 to $17 billion with the work-sharing agreements we have now. That is more than the discounts that are being provided. The post office needs the flexibility to continue that program. It also needs the flexibility to right- size its labor force and its infrastructure. There is no question about that. It has to be able to match the marketplace demand for its services, which is--as you heard earlier and we certainly agree--going to continue to change. Now, that may mean a smaller internal workforce over the long term. I suspect it does. We think that can be handled by the significant retirements that we are going to see over the next 6 years. Also, modest adjustments in the current collective bargaining process may be in order. Specifically, we think we should be seeing required mediation and, very importantly, restricting arbitration awards to be prospective rather than retroactive. We do not see any sense in that system. Arbitrators, further, should be required to consider the current marketplace conditions in their findings. This is a changing communication world, and we think arbitration simply has to take that into consideration. Regarding workers' comp--I agree with the Presidential Commission. An injured worker should receive the pension level that he or she would have ended up with had they not been injured. It is not comprehendible to me that somebody would end up with a bigger retirement having been injured versus somebody who served an entire career. And, Senator Collins, I know your staff is working with the employee groups on some of these issues to find ways to improve the collective bargaining process. We applaud you publicly for that. We know that is not simple. We would encourage you and we want to commit to being helpful in any way that we can in that regard. Let me make one additional point in that regard, and that is, we think there should be a continued effort to find ways to work with the employee units to increase volume. There is not enough talk of that, and some of them are working with us to try to find new ways to increase volume versus simply talking about cutting costs. Regarding universal service--we certainly support its continuation, and we think it ought to be reviewed periodically as the world changes. One important point, however, is we do see a continued need for a parcel delivery service component on the part of the Postal Service. It is vital to our members. Many of them depend on it, and it does provide a competitive base, and I think most of you realize that we believe that it is part and parcel of the work of keeping the system competitive. Now, two final big points regarding civil service retirement issues--we strongly agree with the Commission on this issue, and effectively we would say to you let's make it right, let's do it clearly, and let's do it as soon as possible. There is no logical reason to continue the current funding of military retirement benefits by the post office, no logical idea that we have heard advanced, and we should not force mailers to fund an escrow account or in any way continue the mistakes of the past in that regard. Again, do the right thing for the post office's future. And, Senator Collins, I know your initial bill did not include that escrow provision. To conclude, direct marketing is about arithmetic. It truly is. It is that simple. While we are a big industry, it is about the numbers. We use mail rather than use E-mail when mail works. We use mail rather than space ads when mail works. And, increasingly, there are competitions. We know that. Raising postal rates, to my knowledge--and I have been in the business a long time now, raising postal rates has never raised response rates. And, in fact, that has made the Postal Service less competitive with these other media. If we continue to raise them, we will make it even less competitive in the future. It is that simple. When the math says it no longer works, people now switch to other things, and they are increasingly doing so--a week does not go by that I do not have a meeting about issues of E-mail or wireless communication and so forth. And, in fact, if the mail continues to go up, we are going to see much more effort to use less of it. So I think this bill is going to have to end the death spiral that we have of increasing rates and diminishing volume. And I commit the Direct Marketing Association certainly to continue to work with all of you and ask that you really think of the fact that this bill, if it even comes close to the effort Senator Stevens and others made that was referred to earlier, is going to have to last us for a long time. We really need it to be effective. Thank you very much. Chairman Collins. Thank you, Mr. Wientzen. Let me start by responding to some comments that you made in which you expressed some skepticism about whether Congress will produce a comprehensive and effective bill. We would not be holding this, our sixth hearing on postal reform issues, if this were not a serious endeavor to produce a bill that does not just nibble around the edges but, rather, will be a comprehensive effort. I see the Commission's report as presenting an opportunity that will pass by if we do not act. And a great number of the Members of this Committee have been very active in this effort. So our goal is the kind of comprehensive and effective bill that you seek as well. In that regard, aside from the issues of fixing the escrow account, which you correctly noted was not in the original bill that we authored here in the Senate, and the military retirement issue, what provisions do you believe are absolutely essential to make sure this is an effective, comprehensive bill? Mr. Wientzen. Well, certainly as others have indicated, the ratemaking process is really the keystone to, we think, the future. If we limit rate increases to the rate of inflation--I personally favor the rate of inflation minus some productivity factor. That aside, if we limit those increases, then, in fact, we will have a systemic reason for the Postal Service to be more responsive to the marketplace demands. And I think that will be very important. So that, I would say, is a key issue. The issue of being able to right-size both the workforce and the facilities, I think, is the second issue that we simply have to find a way to depoliticize that. We have to find a way to allow the post office adequate flexibility. The post office is doing a great job. We think that we have a marvelous post office. We really do. But, in fact, the fear is that they are going to be hamstrung from continuing to be able to deliver a competitive product if they do not have the ability to right- size both the workforce and the facilities. Those are the two big points I would advance to you. Chairman Collins. Thank you. Mr. Pruitt, in your testimony, you said, ``Newspapers agree that the current ratemaking process can be too lengthy, too litigious, and too expensive.'' You also say that, for good reason, Congress has never granted the Postal Service both a legal monopoly and pricing freedoms, and you go on to say that Congress should take pleas for pricing flexibility with a healthy grain of salt. I would like to explore this issue further with you because it is an absolutely key issue, and many of our witnesses have said exactly the opposite. They said without the ability to adjust rates, without a short-cut to the 18-month rate-setting process, the Postal Service just is never going to become agile enough and responsive enough. If Congress were to give the Postal Service more pricing flexibility, should the Postal Service be able to set whatever rates it wants? Should it have a cap? Should it have a review process before the fact or only one that is triggered after the fact upon complaint? Could you explain what you think should be done in that area now that we know your concerns. Mr. Pruitt. Sure. I will do my best, and to the extent that I am not complete in my answer, let me know. We do think the current process is not effective--too expensive, too lengthy, too litigious. So we do, in general, support the Presidential Commission's recommendation on price flexibility and the indexing mechanism. Our concern there is that--and the way we would like to see that work is it would be indexed, say, to inflation or cost, whichever is lower, however it works, the rate announced, and would be put into effect unless there is a complaint, at which time the Postal Regulatory Board would quickly review and make sure it is fair, and the rate would be imposed. That is not unlike what the FCC used to do when they were administering rates and fees on telecommunications. There would be a rate announced, and without objection--and there usually was not--it would go forward. If the rate is within the indexed amount, I do not think there would be many objections. But as the Presidential Commission pointed out, there are different postal functions that are used in each class of mail, so it does not necessarily follow that each will go up with inflation or each will go up at the same level or at the same time. Our biggest concern here is we do not want First-Class mail subsidizing standard mail. We do not want a cross- subsidization going on, and if there is an after-the-fact review, we fear that there will be damage in the marketplace with advertising and business switching in a fiercely competitive marketplace that an after-the-fact review and refund system will not adequately address. And so we are concerned with an after-the-fact review, but we do think the Presidential Commission is on to something with an appropriate amount of pricing flexibility within an indexing mechanism. With regard to NSAs, our concern with NSAs is that we do not think an essential public service should negotiate with individual customers for a price break. We do not think that that is the best or fairest or even most cost-effective way for the Postal Service to address this issue. We think what they should do is get the mailers together and establish work- sharing criteria for all of the mailers and have input from a wide array of mailers, it will be a better return to the Postal Service. It will be fairer. If you have an individual negotiation, that individual mailer will seek to have terms that may be particularized or individualized to its company, and that will be unfair to the other mailers who are not a part of this negotiation. I think it will be subject then to litigation and claims and not have an adequate return on the effort that the Postal Service is engaged in to create the NSA. Senator Carper has incorporated some safeguards into his proposal with regard to NSAs which I think are quite encouraging and wise. But we still have concerns that hopefully can be addressed. I do not want to go on too long, but I hope that addressed most of those questions. I would be happy to follow up if you would like. Chairman Collins. Thank you. Senator Voinovich. Senator Voinovich. Mr. Mulloy, you made reference to the accrued liabilities of the Postal Service. You think those need to be tackled, $48 billion in unfunded retiree health benefits and $6.5 billion for unfunded workers' compensation costs? In other words, this is a ticking time bomb, and you are concerned if we do not face that forthrightly that down the road you are going to see these things just skyrocket. Also, this is news to me. Did you say that the Postal Service subsidizes the Treasury of the United States. Is that correct? Mr. Mulloy. Yes, Senator. Essentially what has happened is that overcharges have been assessed to the Postal Service over the years. The Postal Service has charged excessive rates and those monies have been turned back to the Postal Service and then back to the Treasury in a way of assessed retirement benefits payments that were, in fact, not necessary. In effect, therefore, the Treasury has been subsidized by the Postal Service by incorrect assessment of retirement benefits payment obligations. Senator Voinovich. So what you would say is that that should be looked at very closely and start to direct those dollars, instead of going into the general fund, toward dealing in a responsible fashion with these accrued liabilities. That would be interesting. Mr. Mulloy. Yes, sir, it would. Senator Voinovich. Because our accrued liabilities for retirement and health care in the Federal service, as you know are enormous. We do not have the funds in many of these accounts, and then when these retire, we have to take money out of the income that comes in. It is a pay-in, pay-out type of a system. And you are suggesting that, like any business, you must put the money aside and deal with funding retirement benefits in a responsible fashion. Mr. Mulloy. Exactly, Senator. I would add that unfortunately, in most commercial entities, the accrual for retiree benefits is not necessarily 100 percent secure, as we all know, even in the commercial world; and that, in fact, with what the Postal Service has paid, for the last 30 years or so, is in an enviable position, to actually deal with all these issues at one time if we, in fact, look at that as a totality. Senator Voinovich. Well, the problem is that, like so many of the other trust funds, there is nothing. We have spent the money. Mr. Mulloy. Right. Senator Voinovich. We say it is there, but it is not. So that is something that really would need to be done over a period of years in order to make it right. Mr. Wientzen, you were saying something about competition. I asked a question earlier of the other two witnesses about if the Postal Service got out of parcel delivery, you would not want that to happen. Mr. Wientzen. No, Senator. We think that would be a serious problem on a couple of fronts. First, a large number of our members really do depend on the parcel delivery service of the Postal Service. We are large customers, and many of our members are entirely dependent on the Postal Service for their parcel delivery. Of course, we have a number of members who are delivering-- -- Senator Voinovich. Will you tell me, which members? Mr. Wientzen. Well, I was just going to say, we have a number of members who are delivering smaller parcels--books, CDs, software, and so forth. Oftentimes, they are finding that the Postal Service is absolutely cost-competitive and they provide an adequate service. Beyond that, there are many of our catalogue members--and you heard, I think, an earlier firm, a couple of them--who find that the Postal Service's products are cost-competitive, that they are adequate for their needs and the Postal Service does a good job. I think finally we have a very serious concern that if the Postal Service were to either be pushed out of the business or to have encumbrances that make it less competitive, that, in fact, you would see prices being driven up by UPS and FedEx, good business practices that they would be, would simply move prices considerably higher and that would be bad for our members and bad for the customers that they serve. I do not know why so many people think that, for example, our industry, let's take just the catalogue part of our industry, has switched over to the private delivery services. They have not. There are many who use both, and we have a fairly good number who use principally the Postal Service. And I will tell you, many of them are not unhappy, again, with that value proposition, the cost and the quality of delivery. Senator Voinovich. The question is are you happy with that service being subsidized by other customers of the Postal Service? Mr. Wientzen. Well, it is a fair question, and I would argue, we do not think it is. We think that there is adequate protection in place at this point. But, beyond that, I would ask you to think about this: Does United Parcel charge all of its customers the same rate? No. We know they do not. In fact, I can tell you, having been on the other side, that you can sit down and negotiate with United Parcel or with FedEx, and depending on your volume and what you want and where you are and how much business they have and a lot of other factors, not just your size, you can come out with a different price. Now, I would argue, if I come out with a better price than you, are you, in fact, subsidizing me? I think you all have to make a big decision here. Are we going to move this thing more in a direction of the marketplace or not? And, yes, if you do move it in a direction of the marketplace, are there going to be a few inequities here or there? Yes, maybe so. But as long as they are not significant and serious, I think you have to decide to move it in a direction of a freer marketplace situation. If the post office can do a good job at a reasonable price and agree that they do not use the monopoly as the principal way of subsidizing it, I think we have to open that up, frankly. And I would also say to you that we think opening it up to other private delivery services, be they domestic or foreign, is not inappropriate competition. We are not afraid of that. Senator Voinovich. So you would say that you think they ought to have the flexibility to look out at the marketplace and look at what their costs are and what others are, and understand that in totality to compete. Mr. Wientzen. Well, I do. And I would say if you look carefully under the hood, you would discover that there is one form or another of ``unlevel playing field'' all over the place. Do the private delivery services use other businesses to subsidize delivery? They have leasing businesses that, in fact, are less profitable than the delivery service. I suspect that in today's world, we are going to see a lot of that. I grant you that government services are different, but the big decision you all have to tussle with is: Do you move this Postal Service further away from being a government agency and more into the private marketplace, competition world? Senator Voinovich. My time is up. Chairman Collins. Would you like to---- Senator Voinovich. I would just like to mention one other thing. Chairman Collins. Sure. Senator Voinovich. We got into the issue of the workforce in terms of needing flexibility, and as I mentioned earlier, we have tried, working with the Chairman of this Committee, to make some real changes in Title 5, for our civil service. The concept is to work harder and smarter and do more with less; to pay for performance and give agencies flexibility to bring in people, for example, and paying them more than what the Federal Government says you can pay because they need the experts, but just giving them a lot more flexibility. It has not been easy because there is some real concern in terms of the employee unions, and I would like you to further comment on that issue. I know the Chairman has been working with the unions. We are trying to come up with something that they feel is going to be fair. But from your perspective, are we too inflexible in terms of our operations, in terms of human resources? Mr. Wientzen. Well, certainly you are less flexible or the post office is a lot less flexible than the private sector would be, and the fact is that that is where the competitive pressures are coming from. So the answer is certainly yes, there is a lot less flexibility. I do think that you have made some progress. I think we should acknowledge that. There is some great thinking going on, and we are feeling generally positive. I will also tell you that we are working with some of the unions in a much more cooperative and proactive way. And we are seeing some different focus by a number of those folks who do recognize now that there is going to be a significant drop in the volume of mail at the post office. And if we do not have more flexibility and they do not join in on that, we are not going to have jobs one way or the other. But there are lots of things that you can do yet. For example, I think preserving seniority if the trades move between one kind--because that is going to have to happen, I suspect. To have those inflexible silos like we have now is going to be really a problem down the road in the next couple years. You are going to have to have more flexibility there. I think the grievance process and some of those kinds of things need to be less bureaucracy oriented and faster. They need to move along, less incentive for spreading out things. We think the mediation thing I mentioned needs to be--we need to have incentive to move all of these processes more quickly, to make the post office more nimble and able to be competitive. It is not now able to really be as competitive as they want to be or they would be if we took some of the bureaucracy away from the structure that they are having to deal with. Senator Voinovich. Chairman, are the demographics the same in the post office as they are in most of the other Federal agencies in terms of this large group of people that are going to be retiring that could make it more easy to do some of the things that Mr. Wientzen suggests? Chairman Collins. Absolutely. Forty-seven percent of the postal workforce will be eligible for retirement within the next 10 years. So the workforce reforms, in my judgment, do not translate into the need for large-scale layoffs. I think a lot of the right-sizing can be done in a compassionate way that takes advantage of the aging workforce in the sense that they are eligible, going to become eligible for retirement. So I think a lot of the reforms that need to be instituted can be done in a way that creates a positive working environment, and I know that has been the Senator's concern as well. Mr. Wientzen. And if you look at the detail of the numbers, even within 6 years of--while we say a decade, if you really look at the numbers, within the next 6 years you have got a tremendous opportunity within that time frame to make a very significant difference. We just have to take sort of the boundaries of some of the things that the post office would do in terms of shifting people around and so forth. Chairman Collins. Thank you, Senator. Mr. Mulloy, I want to talk to you because you have a very interesting perspective. You are both a very large customer of the Postal Service, but you are also a competitor. You described in your statement that in three markets you have gone to an alternative delivery system. One of the issues that the Committee is debating is whether or not the Postal Service should be allowed to compete in areas where there are private sector providers. As you are well aware, the Postal Service has had some bad experiences in trying to sell products that really were not part of the Postal Service's core commission, and they ended up being money-losing enterprises. So, first, I would like to get your view on the issue of the Postal Service competing with the private sector. And second, and a related issue, is whether there are additional constraints that are needed, either statutory or regulatory, to ensure fair competition and to ensure that there is not a cross-subsidy between the monopoly products and the competitive products. Mr. Mulloy. I think to reply to the first part of the question, I really do believe that we would support and I would support that the Postal Service should be a stronger and more competitive commercial entity. I think with that I am implying that it should, in fact, compete with commercial entities that are conducting the same kinds of businesses. There should be a charter around the Postal Service in terms of where it should properly focus its attention. Some of the things that were attempted to be done with separating its business into three separate buckets that begin to look at First-Class separately from standard mail and some of the other pieces of the business that it is in, we would support that. But I do believe that the Postal Service should be encouraged to be a competitive entity where it is doing its business. Our company makes decisions to use our own private carrier delivery system when we think it is economically attractive. I wish that that were not something we needed to do to protect the outlook for rates and the uncertainty of that rate process going forward. If we felt that the Postal Service managed its rates as most commercial entities do, which is setting the caps around inflation, and understanding the way that you are incentivized to manage your business then its customers would have the reliance upon the fact that they are not going to have an inflationary cost, especially when that cost is a major part of the business that they do. The second thing is that I think there is only a certain amount of regulatory environment you can put around an entity. You cannot legislate out every single thing that might, in fact, be simply a slightly different way of interpreting things. The idea that we need to fairly burden the cost of all parts of the mail system with the cost of doing that part of the mail is something that we would endorse. That being said, in my 35 years of business, I know that cost accounting is not a science. It is an art. And it, in fact, does subsidize new ventures for a business. When a company goes into a new business. In the very first company I worked for, in the new product department of a personal care company, they allocated what they called ``before fixed overhead profitability.'' For the first 3 years of the product's life they did not even allocate fixed overhead to that product because it was being invested in as the future growth of the business. I am not implying that that is done broadly and deeply and arbitrarily, but, in fact, it is a way that businesses look to the future. And if we want the Postal Service to begin to look to the future, it has to be looking at where its business is going to come from and where it wants it to go. And I really believe, as I think even Mr. Smith said earlier, that there is a bright outlook for the Postal Service. I think there is a lot of business to be had, as long as it is encouraged to commercially market itself against the growing product streams that are out there. Chairman Collins. Mr. Pruitt, I would like to ask you a similar question because in your testimony, you gave an example of the Postal Service competing with the newspaper business. And I remember it very well because my newspapers in Maine were very concerned about that experiment as well to pull the newspaper ads out as separate mailers. What are your thoughts on the appropriate role for the Postal Service when there is a private sector provider of the same service? Mr. Pruitt. I think it is critical, and the Presidential Commission got it right, it is an essential public service, universal service, and in the First-Class and standard mail area, it is a monopoly. And as a monopoly, it has worked well to provide that universal service, and we do not object to that at all. Our only concern is cross-subsidization, and what we want to ensure is that there is a postal regulator, a Postal Regulatory Board, that has the power to ensure that measures and allocation of costs are fair and appropriate and that the Postal Service's delivery costs are covered within that class of mail. And we do not feel it is appropriate for a government service, a public service, with a monopoly to enter into private agreements with the mailers and give them a price break. That is our concern. In the competitive areas, I think it is a principle where cross-subsidies are also a problem, but, frankly, our biggest concern is the cross-subsidy in the monopoly areas between First Class Mail and standard mail. Our experience has been that alternative delivery has not been as effective in our products as mail delivery, and so we have delivery of the newspaper and then we use the mail, and we hope to use the mail, use it efficiently, but with fair pricing. Chairman Collins. Thank you. Mr. Wientzen, what is your opinion on this issue, which is going to be one of the major issues we tackle? Mr. Wientzen. Well, first, initially, I would probably be one of the few people saying I would let the Postal Service sell Buicks if I thought they could make money on it as a kind of a joke, but I do not believe we can, in fact, unbridle the Postal Service and say go do whatever it is that touches your fancy. But the problem that you are going to have with this is it is very easy to have a view of the right thing to do today. I think the difficulty is to figure out what is the right thing to do 5 or 10 years from now because the world is changing so rapidly. And if we put the post office in a box and say you can deliver letters and printed material, essentially what you are doing now, and that is it, I think you are going to--somebody, hopefully you, or someone else, is going to be sitting here 5 years from now scratching your head saying we really still have a problem because there has been this significant shift or there has been some new technology. So I think you have to provide a lot more flexibility, and to me, those who fear the post office just because of competition, I do not think we can listen to them. I think those who fear the post office because they do recognize that the monopoly benefit that they get could be used to create very unfair competition. But that is usually much more narrow than is being described. And I will say we have many companies, some of whom are my members, who would limit the Postal Service even within the business of doing the mail that they do now because it would benefit their particular business model. I think in your wisdom, you are going to have to give the post office more flexibility than they have, but you are going to have to find some way to provide the private sector for being protected from outlandish subsidization, I think as Gary has pointed out. But if you keep this definition very narrow, I am going to bet that in a few years we are going to have more problems because the Postal Service will not have enough business to continue doing the essential services they are doing. Chairman Collins. Thank you. Senator Voinovich, do you have any further questions? Senator Voinovich. Yes, just following up on your questions. Chairman Collins. Sure. Senator Voinovich. The competition aspect is important to me. I will recall that I ran a utility company when I was mayor of Cleveland, and it was in pretty bad shape when I started. We improved it substantially. Because we existed, we competed with an investor-owned company. The fact of the matter is that the businesses in our community benefited from that because we would offer a price and the competition would offer a price, and it kept rates down. You know, it was very good. Of course, the investor-owned utility did not like it. So I am real concerned about if we are going to be in a dynamic area, that they should have the flexibility. The question I have is: Do you have in your organization people who are going to have a choice between either mailing something or putting it in a newspaper? Mr. Wientzen. Oh, absolutely, Senator. In fact, the vast majority of my members, I would say 98 percent---- Senator Voinovich. So the fact of the matter is you have got a choice of either sitting down with the advertising folks at a newspaper and discussing how much is it going to cost you to put that advertisement in the newspaper. The alternative you have is to mail it and is it more cost effective to do that. And in some instances--I do not know if it happens in your State, but I get a lot of stuff now that is just delivered at the door, advertising mailers, that type of thing, but usually from local people. Mr. Wientzen. Local people. Senator Voinovich. Tell me a little bit about how that works. Mr. Wientzen. Well, as I say, our business is arithmetic. You sit down and you say it is going to cost this much to deliver this message, and my tests tell me--and we deal in data. My tests tell me that if I do it this way, if I deliver it in a newspaper or I deliver it in mail, here are the response rates I get and here is the cost. I divide it and I say that is within my margin of profit or not. And if it is not, I do not do it. If it is, I do as much as I can of it. What we are facing is there are new competitions, the electronic ones, which, while the response rates are low, the costs are low. And they are going to continue to be low. Even if they go up, they are going to continue to be much lower. And those are being used more and more as the costs for mail go up. But, in reality, almost every one of our members look at newspapers, magazines, mail, electronic, door-to-door, handing out things in malls, they use all of those techniques when they are economically viable. Now, the other thing I think you need to keep in mind on the competition point is that the Postal Service has a lot of other burdens to deal with. They have universal service, which, I mean, I think some of the households they deliver are not exactly profitable ones. We know that. And so they have a burden, a competitive burden that they are assuming as a part of this monopoly package that they have taken on. Just as your utility company, I am sure, did some things that a private company would not have done had they not been a public entity. And I think we need to think about that, that that does provide some balance, and maybe there is a little advantage to the public entity that is balanced off by the additional obligations that they have. Senator Voinovich. Well, Mr. Pruitt indicated that he did not like the idea of the Postal Service going out and competing for people that put advertising in the newspapers. I think that is what you said. But if the Postal Service could do that without subsidizing--in other words, that it is an even-steven thing--why should they be prevented from going forward and doing it? Mr. Pruitt. They should not be prevented from offering the monopoly direct mail service that our competitors can take advantage of and that we take advantage of. We have no objection to that. It is an essential public service. But there are companies like ADVO, other the direct marketing companies and newspaper companies that are in the advertising mail business and take advantage of that service. What we object to is the Postal Service taking a small portion of its institutional or overhead costs and allocating it to standard mail, and thereby taking first-class institutional costs higher and artificially reducing standard mail costs so that direct mail advertising is being cross- subsidized by First-Class mail. And as a result, it hurts our business because it is not a level playing field. If it were a level playing field with no cross-subsidy, we would be fine. We feel no problem with open competition. But our business is about numbers as well. It is also news and advertising. And if we lose advertising, we lose the ability to produce quality news. Senator Voinovich. Well, would that be the excuse to discourage them from doing that? Is the reason why you do not want them to do it because if they lose their advertisers, the newspapers are going to be hurt in terms of their editorial content and so forth? Mr. Pruitt. We just want fair pricing, and we feel perfectly comfortable going toe to toe with fair allocation of costs. Senator Voinovich. Your argument is that the First-Class mail people are probably subsidizing their ability to compete and get these folks to come in and be their customers. Is that right? Mr. Pruitt. That is right. The Postal Rate Commission estimated that 66 percent of institutional costs, that is, overhead, is allocated to First-Class mail and 22 percent is allocated to standard mail, advertising mail. Yet they are virtually identical in volume. It just does not seem fair. Senator Voinovich. The thing is, though, in 2006 rates are going to go up. From what I am understanding, when rates go up it means that you are going to be more likely to look at some other alternative sources than the post office. What I am trying to say to you, if I am running a business and I keep my costs at what they are today, and there is a little cross-subsidization but I can go out and pick up some more business, why shouldn't I be able to do it? Mr. Pruitt. Because it is a monopoly, and if it has pricing flexibility to disadvantage other customers as an essential public service and disrupt a competitive advertising market, that seems an inappropriate role for a monopoly government service. If it were in the parcel business, it might be different. I do not really have an opinion there. There is competition with FedEx and UPS and others. But in a monopoly-- but in First-Class and standard mail, that is the only game in town, as it should be. But then that means making sure that their pricing is fair and evenly distributed to all customers. Giving a monopoly that pricing power is something we do not allow in the private sector, and certainly I do not think we want to allow it for a government entity. Senator Voinovich. Mr. Wientzen, what is your perspective? Mr. Wientzen. The fact is that we do not think newspapers are bearing the total overhead of the post office that indeed they should or would if you did a direct cost comparison. We do not begrudge them that. We do not suggest that it should be changed because we do acknowledge that there is some special informational value, etc. But we do think there ought to be a balance here. There is already an advantage, in effect, in their acknowledgment of the special case for newspapers. And my suspicion is that we will only handcuff the post office if we continue to put barriers in the competitive front. I think you are going to have to make a decision and give them more competitive strength than they have now. Senator Voinovich. Madam Chairman, Mr. Wientzen said somebody's ox is going to be gored. [Laughter.] Senator Voinovich. We try not to do that. Chairman Collins. We are just hoping it will not be ours. [Laughter.] Mr. Wientzen. I do, too, Senator. Chairman Collins. I want to thank Senator Voinovich. He always makes such a contribution to the Committee's work, and I appreciate his taking the time to be here today. I am sure all of us have additional questions. We are, however, in the midst of the budget debate, as you know, and so I am going to submit any additional questions for the record. This hearing record will remain open for 15 days. [Prepared statement submitted by Senator Lautenberg for the record follows.] PREPARED STATEMENT OF SENATOR LAUTENBERG Madam Chairman: Postal reform is an important national issue, but most Americans spend little time thinking about it because they take postal service and the employees who provide it for granted. The importance of the U.S. Postal Service (USPS) to our national economy cannot be overstated. I'll give you an example: A 2-year delay in postal rate increases has the potential to save publication companies like Time Warner approximately $200 million in mailing costs. Last year alone, the USPS delivered more than 200 billion pieces of mail. So the important role the Postal Service plays in our economy and the contribution of its 843,000 dedicated employees should not be overlooked or taken for granted. Having said that, this is indeed a time of great change for the Postal Service. As the President's Commission has observed, ``traditional mail streams will likely continue to migrate to cheaper Internet-based alternatives,'' even as the Postal Service's delivery network expands at a rate of 1.7 million new addresses per year. Given the existing regulatory structure, the Postal Service's debt is likely to increase every year, making it tougher for the Postal Service to achieve its fundamental mission of universal service. Accordingly, it is clear that the Postal Service needs to become more efficient and more effective in fulfilling its universal service goal. I support the Commission's recommendation to make the rate-setting process less cumbersome and more efficient. Today, the process can take upwards of 10 months; the Commission's recommendations would reduce the rate-making process to 60 days. I am also intrigued by the notion of increasing work-sharing and private sector partnerships. I would hope, however, that such partnerships are not at the expense of the hardworking men and women of the Postal Service. Improving the Postal Service should not mean gutting its workforce. Today, I look forward to hearing from some of the U.S. companies that rely on the delivery system of the Postal Service to operate their business. I am also interested to hear from the Postal Service's business partners and competitors about the recommendations of the President's Commission and other postal reform ideas. Thank you, Madam Chairman. Senator Collins. We very much appreciate this panel's testimony this morning as well as the previous panel. Our next hearing is going to be on March 23, and it is going to be a joint hearing with the House Government Reform Committee, at which the Postmaster General will be testifying. We are going to continue our work and hope to introduce a bill in April that will incorporate all that we have learned at these hearings. So thank you for your testimony this morning, and this hearing is now adjourned. 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