THE PRICE IS RIGHT, OR IS IT? AN EXAMINATION OF USPS WORKSHARE DISCOUNTS AND PRODUCTS THAT DO NOT COVER THEIR COSTS HEARING BEFORE THE SUBCOMMITTEE ON FEDERAL WORKFORCE, POSTAL SERVICE, AND THE DISTRICT OF COLUMBIA OF THE COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED ELEVENTH CONGRESS SECOND SESSION MAY 12, 2010 Serial No. 111-76 Printed for the use of the Committee on Oversight and Government Reform ( Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html http://www.house.gov/reform U.S. GOVERNMENT PRINTING OFFICE WASHINGTON 58-349 PDF : 2010 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 U:\DOCS\58349.TXT KATIE PsN: KATIE COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM EDOLPHUS TOWNS, PAUL E. KANJORSKI, Pennsylvania CAROLYN B. MALONEY, New York ELIJAH E. CUMMINGS, Maryland DENNIS J. KUCINICH, Ohio JOHN F. TIERNEY, Massachusetts WM. LACY CLAY, Missouri DIANE E. WATSON, California STEPHEN F. LYNCH, Massachusetts JIM COOPER, Tennessee GERALD E. CONNOLLY, Virginia MIKE QUIGLEY, Illinois MARCY KAPTUR, Ohio ELEANOR HOLMES NORTON, District of Columbia PATRICK J. KENNEDY, Rhode Island DANNY K. DAVIS, Illinois CHRIS VAN HOLLEN, Maryland HENRY CUELLAR, Texas PAUL W. HODES, New Hampshire CHRISTOPHER S. MURPHY, Connecticut PETER WELCH, Vermont BILL FOSTER, Illinois JACKIE SPEIER, California STEVE DRIEHAUS, Ohio JUDY CHU, California New York, Chairman DARRELL E. ISSA, California DAN BURTON, Indiana JOHN L. MICA, Florida MARK E. SOUDER, Indiana JOHN J. DUNCAN, JR., Tennessee MICHAEL R. TURNER, Ohio LYNN A. WESTMORELAND, Georgia PATRICK T. MCHENRY, North Carolina BRIAN P. BILBRAY, California JIM JORDAN, Ohio JEFF FLAKE, Arizona JEFF FORTENBERRY, Nebraska JASON CHAFFETZ, Utah AARON SCHOCK, Illinois BLAINE LUETKEMEYER, Missouri ANH ''JOSEPH'' CAO, Louisiana RON STROMAN, Staff Director MICHAEL MCCARTHY, Deputy Staff Director CARLA HULTBERG, Chief Clerk LARRY BRADY, Minority Staff Director SUBCOMMITTEE ON FEDERAL WORKFORCE, POSTAL SERVICE, COLUMBIA AND THE DISTRICT OF STEPHEN F. LYNCH, Massachusetts, Chairman ELEANOR HOLMES NORTON, District of JASON CHAFFETZ, Utah Columbia MARK E. SOUDER, Indiana DANNY K. DAVIS, Illinois BRIAN P. BILBRAY, California ELIJAH E. CUMMINGS, Maryland ANH ''JOSEPH'' CAO, Louisiana DENNIS J. KUCINICH, Ohio WM. LACY CLAY, Missouri GERALD E. CONNOLLY, Virginia WILLIAM MILES, Staff Director (II) VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 U:\DOCS\58349.TXT KATIE PsN: KATIE CONTENTS Page Hearing held on May 12, 2010 ............................................................................... Statement of: Burrus, William, president, American Postal Workers Union, AFL-CIO; Lawrence G. Buc, president, SLS Consulting, Inc.; Michael Riley, professor, University of Maryland University College; James R. O'Brien, vice president for distribution and postal affairs, Time Inc.; and Hamilton Davison, executive director, American Catalog Mailers Association . Buc, Lawrence G. ...................................................................................... Burrus, William ......................................................................................... Davison, Hamilton ..................................................................................... O'Brien, James R. ...................................................................................... Riley, Michael ............................................................................................ Robinson, Maura, vice president of pricing, U.S. Postal Service; and John Waller, director of Office of Accountability and Compliance, Postal Regulatory Commission ...................................................................................... Robinson, Maura ....................................................................................... Waller, John ............................................................................................... Letters, statements, etc., submitted for the record by: Buc, Lawrence G., president, SLS Consulting, Inc., prepared statement of ..................................................................................................................... Burrus, William, president, American Postal Workers Union, AFL-CIO, prepared statement of ................................................................................... Connolly, Hon. Gerald E., a Representative in Congress from the State of Virginia, prepared statement of .............................................................. Davison, Hamilton, executive director, American Catalog Mailers Association, prepared statement of .......................................................................... Kucinich, Hon. Dennis J., a Representative in Congress from the State of Ohio, prepared statement of .................................................................... Lynch, Hon. Stephen F., a Representative in Congress from the State of Massachusetts: Prepared statement of ............................................................................... Prepared statement of the National Newspaper Association ................ O'Brien, James R., vice president for distribution and postal affairs, Time Inc., prepared statement of ................................................................ Riley, Michael, professor, University of Maryland University College, prepared statement of ........................................................................................ Robinson, Maura, vice president of pricing, U.S. Postal Service, prepared statement of ................................................................................................... Waller, John, director of Office of Accountability and Compliance, Postal Regulatory Commission, prepared statement of ........................................ 1 47 70 47 100 92 82 10 10 20 72 50 9 102 118 4 32 94 84 13 22 (III) VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 U:\DOCS\58349.TXT KATIE PsN: KATIE VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 U:\DOCS\58349.TXT KATIE PsN: KATIE THE PRICE IS RIGHT, OR IS IT? AN EXAMINATION OF USPS WORKSHARE DISCOUNTS AND PRODUCTS THAT DO NOT COVER THEIR COSTS WEDNESDAY, MAY 12, 2010 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FEDERAL WORKFORCE, POSTAL SERVICE, AND THE DISTRICT OF COLUMBIA, COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, Washington, DC. The subcommittee met, pursuant to notice, at 3:01 p.m., in room 2154, Rayburn House Office Building, Hon. Stephen F. Lynch (chairman of the subcommittee) presiding. Present: Representatives Lynch, Norton, Cummings, Kucinich, Clay, Connolly, Chaffetz, and Bilbray. Staff present: Jill Crissman, professional staff; Aisha Elkheshin, clerk/legislative assistant; Williams Miles, staff director; Rob Sidman, detailee; Dan Zeidman, deputy clerk/legislative assistant; Howie Denis, minority senior Counsel; and Alex Cooper, minority professional staff member. Mr. LYNCH. Good afternoon. The subcommittee on Federal Workforce, Postal Service, and the District of Columbia hearing will now come to order. I apologize for the brief delay. We had some roll calls on the floor. But I would like to welcome our ranking member, Mr. Chaffetz, and members of the subcommittee, all hearing witnesses and those in attendance. In light of the financial difficulties confronting the Postal Service, we have called today's hearing to explore the current economic impact on various workshare discounts, and to examine whether these pricing structures correctly incentivize mailers. The hearing will also investigate the issues related to products that do not currently cover their costs. The chair, the ranking member, and the subcommittee members will each have 5 minutes to make opening statements, and all Members will have 3 days to submit statements for the record. Again, welcome. As you are undoubtedly aware, the Postal Service continues to confront a dire financial situation. While the Postal Service has recently revealed some good news, that it is doing better than previously anticipated by some $1.2 billion, the organization is still on track to lose approximately $7 billion by the end of this year. And this will be on top of a cumulative loss of nearly $12 billion over the previous 3 fiscal years. (1) VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 2 Much of the Postal Service's recent financial difficulties can be attributed to the rise of electronic communication and the corresponding dramatic decline in mail volume, as well as the nationwide economic downturn, and in some ways statutorily imposed prefunding of future retiree health benefit obligations. One of the most important tools that the Postal Service currently has to deal with its financial difficulties is its enhanced pricing flexibility as provided by the Postal Accountability and Enhancement Act. However, utilization of this flexibility has not been an easy matter, as the Postal Service and others have noted. In the given market environment, increasing rates must be justified, balanced and reasonable, since such changes could further accelerate the pace of mail volume declines. Recent reports and studies have identified several pricing areas that should be revisited and further explored as opportunities to generate more revenue. Today this subcommittee convenes to discuss pricing issues relating to workshare discounts and products that are currently considered as not covering their costs. First, with respect to workshare discounts, the Postal Regulatory Commission's fiscal year 2009 ACD, their Annual Compliance Determination, found that 30 workshare discounts exceeded their associated costs. According to the PRC, 17 of these discounts were justified, while the remaining 13 were not properly justified and should be realigned at the next general price adjustment. Toward that end, I look forward to hearing from today's witnesses on these particular discounts and other workshare-related topics, especially given that approximately 80 percent of all USPS mail is now workshared. With such a large portion of mail being workshared, it is crucial that workshare discounts be priced to maximize revenue and efficiency of the entire postal industry, especially during such bleak financial times. In addition to discussing aspects of worksharing, which is the amount of prep that is being done by mailers in advance of handing the mail off to the post office, and also workshare-related discounts, today's hearing also touches on the subject of postal products deemed not to cover their actual costs. Highlighted by both the PRC's Annual Compliance Determination and the Government Accountability Office's April 12th report, the Postal Service lost, in the aggregate, approximately $1.7 billion in fiscal year 2009 due to some 14 postal products that are not covering their costs of delivery. Although some of these products might be appropriately priced below cost for public policy reasons, many stakeholders have begun to call for more accurate pricing of these mailings, especially given the current financial status of the Postal Service. Toward that end, the subcommittee looks forward to an informative discussion exploring the Postal Service's pricing policies, approaches to data collection and utilization as it relates to products that have been found to fall short in covering their actual costs. Today's hearing will provide us an opportunity to hear from the Postal Service, the Postal Regulatory Commission, our mailers, affected unions, and well-respected economists and scholars on these vital topics. It is my hope that the testimony and feedback we receive from today's witnesses will provide the committee with information on the value of these important programs in a post-Postal VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 3 Accountability and Enhancement Act environment that incentivizes the Postal Service to make a profit and to alter its business model in order to meet the current and future challenges. Again, I thank you each of you for being with us this afternoon, and I look forward to your participation. [The prepared statement of Hon. Stephen F. Lynch follows:] VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 4 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 5 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 6 Mr. LYNCH. I now yield 5 minutes to the ranking member, Mr. Chaffetz, for an opening statement. Mr. CHAFFETZ. Thank you, Mr. Chairman. I appreciate holding the hearing, and to all the witnesses who are here today, I appreciate your patience in waiting for us after roll call votes, and I appreciate your testimony here today and taking the time and preparation for it. It's my understanding that the U.S. Postal Service is expecting to file an exigency rate case in July, and so this hearing's timing is significant. The world of worksharing discounts provided to businesses which perform duties that the Postal Service would have to otherwise perform and cost attribution of postal products is extremely challenging. On a basic level it is understood that worksharing discounts should only be as big as cost savings provided, and that the postal products should be covering their attributable costs. It is also equally understood, however, that the methodology for determining attributable costs is far from an exact science. Many of these money-losing products are not stand-alone pieces of mail, but are, in fact, responsible for a great deal of additional postal communication and consequently revenue. This is the danger of taking certain products in isolation. We must also bear in mind that products are only worth what the market is willing to pay. One cannot make the assumption that volume will stay the same as the price of the product is increased. This price sensitivity is something that we need to dive deeper into and must be studied very carefully. Hopefully this will be done leading up to the review of the rate case. Additionally, discussions of attributable costs are incomplete without a few facts regarding institutional costs, which are paramount in this case. Obviously, in every finance class there usually is spent time addressing the potential dangers of eliminating programs, outlets, or products that are not profitable. When these programs or products are discontinued, the institutional or fixed costs that were originally allocated to the shut-down program get redistributed to the remaining products, which makes products that were previously barely profitable suddenly notprofitable. I hope that the agencies understand this. This does not mean unprofitable programs can't be shut down, but it means you have to understand the total financial implication and not just the cost savings in that bubble. It also means that the U.S. Postal Service itself in this case must analyze its own efficiencies. While the U.S. Postal Service may be the most efficient postal system in the world, the truth is that there's no postal system like this anywhere in the world. This hearing could help establish some very basic building blocks for knowledge on these extraordinary complex issues. I would caution against jumping to conclusions over what we hear today. The world of rate setting and adjusting has massive implications for the trillion-dollar mailing and paper industries, and any congressional intervention must be done with great caution. With that, we look forward to this hearing, and, again, I appreciate the witnesses for their time and preparation today. With that, Mr. Chairman, I yield back. VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 7 Mr. LYNCH. I thank the gentleman. The Chair now recognizes the gentleman from Virginia, Mr. Connolly, for 5 minutes for an opening statement. Mr. CONNOLLY. Thank you, Mr. Chairman. And thank you for your leadership in helping us to restructure the Postal Service and for conducting a thorough investigation of options for cost savings and revenue enhancement. This hearing will examine workshare discounts and posted pricing for certain products that do not cover the cost of delivery. The Postal Regulatory Commission has investigated the Postal Service's workshare program and found that 30 workshare discounts are actually costing as much as they save, meaning that the Postal Service could be reducing losses by adjusting those discounts. This represents an opportunity to achieve cost savings without service cuts. PRC also identified 61 workshare discounts that are profitable for the Postal Service. In other words, the discounts for these workshares are less expensive than the cost the Postal Service would otherwise incur by processing the mail itself. Though some have condemned the practice as well as the underlying statute that permits the Postal Service to earn profits on these workshares, it seems to me we ought not to necessarily be discouraging the Postal Service from seeking more opportunities like these to make a profit when it's losing so much money. There is no inherent virtue in creating a workshare discount that precisely matches the cost of the Postal Service processing the mail itself. In fact, it's conceivable that the Postal Service could earn a profit through less discounted workshares by setting a price that still saves cost for private sector partners participating in workshare. We should protect the Postal Service's ability to make profits on workshares, while supporting the PRC's oversight to ensure that the Postal Service is not losing money on workshares. Although the workshare program was intended to be temporary, if the Postal Service can use it to achieve efficiencies, it should not be curtailed or eliminated at this time. Pricing for periodicals and mail flats represent another opportunity to increase Postal Service revenue. In 2006, Congress imposed a price cap on all classes of mail, which is linked to the Consumer Price Index. We should consider revisiting that cap to allow the Postal Service to reduce losses associated with mailing magazines and mail flats on catalogs. With these two product categories alone losing over $1.2 billion in fiscal year 2009, we need to provide authority to adjust prices as part of a broader Postal Service restructure. It's unrealistic to expect the Postal Service to function like a business when Congress has imposed pricing restrictions that do not apply to private sector businesses and competition. Again, I want to thank you, Chairman Lynch, for your ongoing leadership to identify policy options for Postal Service restructuring. Based on today's hearing, I believe it's clear that the Postal Service should maintain its authority to make profits for workshares and to receive additional authority to adjust certain mail prices to avert losses for magazines and mail flats. And I look forward to the testimony. VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 8 Mr. LYNCH. I thank the gentleman. [The prepared statement of Hon. Gerald E. Connolly follows:] VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 9 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 10 Mr. LYNCH. It is the custom before this committee that all witnesses to provide testimony shall be sworn. Could I ask you both to rise and raise your right hands. [Witnesses sworn.] Mr. LYNCH. Let the record show that each of the witnesses has answered in the affirmative. I am going to now just offer a brief introduction of our witnesses. Ms. Maura Robinson was named vice president of pricing at the U.S. Postal Service in June 2008. In this role Ms. Robinson is responsible for the pricing of all postal and nonpostal products and services and for providing analytical support and evaluation of all contract pricing and new product initiatives. Mr. John Waller is a director of the Office of Accountability and Compliance of the Postal Regulatory Commission. Mr. Waller leads the Commission's analysis of Postal Service pricing proposals and oversees technical support for studies including measurement of the Postal Service's performance and impact assessment of major Postal Service network reorganizations. Each of you will have 5 minutes for an opening statement. When you see the light turn red, you should probably wrap up. Ms. Robinson, you're now recognized for 5 minutes. STATEMENTS OF MAURA ROBINSON, VICE PRESIDENT OF PRICING, U.S. POSTAL SERVICE; AND JOHN WALLER, DIRECTOR OF OFFICE OF ACCOUNTABILITY AND COMPLIANCE, POSTAL REGULATORY COMMISSION STATEMENT OF MAURA ROBINSON Ms. ROBINSON. Good afternoon, Mr. Chairman and members of the subcommittee. Today I will discuss the Postal Service's approach to setting prices, the impact of the Postal Accountability---- Mr. LYNCH. Could you pull the mic closer? Mr. CONNOLLY. We cannot hear you. Ms. ROBINSON. Today I will discuss the Postal Service's approach to setting prices, the impact of the Postal Accountability and Enhancement Act of 2006, and our workshare discount philosophy. The Postal Act of 2006 enabled the Postal Service to bring new products and services to market more quickly. The additional pricing flexibility helps us better manage our products and services and make them an even greater value in the marketplace. The new postal law provided different pricing rules for mailing and shipping services. Prices for mailing services may not exceed the rate of inflation based on the Consumer Price Index for the previous 12 months for any class of mail, while price changes for shipping services must produce sufficient revenue above a price floor that covers attributable costs for each competitive product. Last year the Postal Service announced that mailing service prices would not increase in 2010. Due to the severe economic recession and the electronic diversion of mail, volume has dropped drastically, and we were concerned that a price increase would further contribute to this decline. Instead, to generate additional revenue and stimulate mail growth, the Postal Service implemented pricing incentives, seasonal sales, and a flat rate shipping option. Overall our goal was to foster a long-term pricing strategy that pro- VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 11 motes an efficient and cost-effective postal system, and to promote mail volume retention and growth through pricing and product innovations. We must use postal pricing as a tool to encourage customers to stay in the mail. The mail has great power to deliver customer value and has a demonstrated ability to help customers grow their business. After experiencing a year in which we lost an unprecedented 25 billion mail pieces, the Postal Service's current focus must be on retaining and growing volume. We know that our largest customers are increasingly more likely to mail less if postage prices increase. Among our financial challenges are products that fail to cover their attributable cost. This is clearly a cause for concern. No business can afford to lose on an ongoing basis billions of dollars on a few products. However, by the same token, no business can afford to take short-term actions that will create long-term irreparable damage to customers. Improving the financial contribution of money-losing products requires focus on both the revenues generated by the product through the prices charged as well as the cost of providing the product. Recently we announced that we intend to increase prices moderately in early 2011 using the exigent price change mechanism provided in the PAEA. However, as we move forward, we are working to strike a balance between addressing cost-coverage issues and maintaining our customer base. There are no easy solutions. Prices for below-cost products will be increased to address the cost challenges; however, we intend to do so in a judicious and measured way to improve financial performance over time. The Postal Service has long offered its customers choices through its worksharing program. If a customer presorts and prebarcodes mail, transports it closer to its ultimate destination, or performs other functions that reduce the Postal Service's costs, they pay a lower price based on the cost the Postal Service does not incur. Workshared mail is among our most profitable mail. The cost coverage for workshared first-class mail letters was 291 percent in fiscal year 2009, the highest for any product. For each dollar the Postal Service spends to process, transport, and deliver workshare first-class mail letters, we receive almost $3 in revenue. When a discount is discussed in pennies, it's easy to portray changes as minor; however, when you view those pennies in terms of the postage actually paid by our customers, a clearer view of the effects of changes in workshare discounts emerges. A 1-cent increase in prices translates to an average of $9 million in additional postage annually for each of our five largest customers. In an environment of tight budgets, cost cutting, and ample alternatives to the use of the mail, the potential effect of additional expenditures of this magnitude could be severe. A viable Postal Service can only exist if we offer prices and products that are good customer value. Over the last 30 years, stamp prices have increased at about the rate of inflation and remain a true bargain in today's world. Our mail system cannot survive unless it remains affordable for everyone. If today's actions shortsightedly accelerate the pace of electronic diversion and the search VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 12 for alternatives to the mail, it will be difficult to continue to provide the American people with the postal services that they need. In closing, during tough economic times we continue to achieve record-level cost reductions, maintain high service level, and attain successes with new initiatives for incremental revenue generation. I'd be pleased to answer any questions that you may have. Mr. LYNCH. Thank you. Thank you, Ms. Robinson. [The prepared statement of Ms. Robinson follows:] VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 13 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 14 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 15 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 16 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 17 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 18 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 19 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 20 Mr. LYNCH. Mr. Waller, you're now recognized for 5 minutes. STATEMENT OF JOHN WALLER Mr. WALLER. Thank you. Thank you for the opportunity to be here today. Appropriate pricing can sustain operations and provide postal services for the Nation. To help generate new revenue, the Commission has already approved 40 Service-proposed pricing initiatives this fiscal year, while providing the transparency and review required by law. This builds on the long tradition of the Commission working with the Postal Service and mailing community to develop workshare discounts that over the years have increased volume, revenue, and, most importantly, net revenue. That experience was incorporated into current law when worksharing discounts were defined as being provided to mailers for the presorting, prebarcoding, handling, or transportation of mail, as further defined by the Postal Regulatory Commission. When mailers perform one or more of these functions prior to mailing, the Service can avoid certain transportation and mail processing costs. If workshare discounts equal avoided costs, then other mailers are not disadvantaged, and the Service retains the same unit contribution to institutional costs. But when discounts exceed avoided costs, contribution can be lost, and a mailer has price incentives to perform postal functions that the Service can perform at a lower cost. The PAEA explicitly requires the Commission to ensure that this does not occur unless certain specified exceptional circumstances exist. The difficult computational task is to identify the cost of handling mail that is similar except for being workshared. As an example, consider a first-class letter mailing that satisfies automation requirements and is presorted to the five-digit ZIP code level. The average Postal Service unit cost for processing and delivering this mail is 8.7 cents. However, without presorting and other workshare requirements, the cost is 18.2. The 9.5 difference is the avoided cost. Methodologies for determining avoided costs have been developed over the years and continue to be refined through public hearings, with input from the Postal Service and other interested parties. Current avoided costs are determined each fiscal year as part of the Annual Compliance Determination process to ensure timely detection of discounts that are too large and need to be realigned. As noted by the chairman, for fiscal year 2009, the Commission found that 13 worksharing discounts exceeded avoided costs and were not justified by the Service, with exceptions outlined in the PAEA. The Commission has determined that the best time or most appropriate time to realign these 13 questionable discounts is the upcoming exigent rate case. Last year the Service had a loss of $3.8 billion with $1.7 billion due to 14 market-dominant products that did not cover their attributable costs and contribute to the institutional costs; $1.5 billion came from periodicals, standard mail flats, and standard mail nonflat machinables and parcels. All of these products involved flats for which the Postal Service has a longstanding cost-control problem. VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 21 Standard mail flats were given less-than-average increases for the last 2 years, and there has been a rapid increase in losses from that product, with a near tripling in 2009. While this pricing strategy has been given an opportunity to succeed, the Commission has cautioned against continued less-than-average increases for lossmaking products without a plan for how net revenue is helped over the long run. First-class and bound printed matter flats do cover attributable costs, so the standard flat mail losses are not an unsolvable problem. Standard mail nonflat machinables and parcels received significant price increases of 16.4 percent last May and 9.7 percent the year before, well above the average, but more work is needed to fully align revenue and costs. Periodical has not covered its attributable costs since 1997. The Commission and the Postal Service have a study underway to find out what some of the chronic costs and revenue imbalance causes are. It should be completed this year and sent to the Congress for consideration. The Commission has emphasized that financial difficulties to the Service is a multifaceted problem, not just a matter of piece--of the prices, but of operating costs, legacy costs, business model and a changing mail market. As solutions are sought, the Commission is responsible for providing transparency on revenue and costs. Thank you. Mr. LYNCH. I thank the gentleman. [The prepared statement of Mr. Waller follows:] VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 22 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 23 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 24 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 25 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 26 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 27 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 28 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 29 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 30 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 31 Mr. LYNCH. Let me just--I will yield myself 5 minutes for questions, but before I do, why don't we do this: Before I move to questions and begin my time, I would like to ask unanimous consent that the statement from the National Newspaper Association, which highlights their concerns over postal pricing for in-county newspapers, be included for the record. Hearing no objection, so ordered. [The information referred to follows:] VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 32 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 33 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 34 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 35 Mr. LYNCH. All right. Just so this doesn't get too technical, I want to, first of all, try to offer a little bit of an explanation to the folks who are unfamiliar with this process about workshare. Workshare simply refers to the portion of work that mailers conduct when they bring their mail--before they bring their mail to the post office, and that can involve presorting. If a mailer has a lot of mail, and they bring it to the post office and it's presorted, it can be barcoded, it can be bundled in ZIP codes and actually transported privately to the Postal Service rather than picked up so that private mailers are doing a lot of work that the Postal Service might have otherwise done, and that's what we call workshare. And the idea of these discounts is really trying to determine what the value of that presorting, bundling, delivery, barcoding, the things that they have done for the Postal Service to make the delivery more efficient. And so we try to give them a discount that exactly matches the service that they have provided. The problem begins when on the one hand sometimes we overcompensate the mailers. We give them more of a discount than the value of the services that they provided, which ends up in a boon or a windfall, some say, to the mailers and an inefficiency or a lack of valuing of the service provided by postal employees. On the other hand, sometimes we shortchange our mailers, and we don't give them enough of a discount, and in that instance you actually have an antitrust problem or a situation where the Postal Service is actually retaining revenue or taking advantage of the mailers. So that's where we have these differences. And hopefully that's a little bit clearer than just using terms like ''workshare'' and ''cost avoidance'' and other things like that. Let me ask you, during the Postal Service's March 2, 2010, announcement of its new business plan, the post office stated that their goal was to have all products covering their costs. Now, we have several general categories of mail that actually cost more to deliver than what we charge, and so those products do not meet the cost of delivery based on the rates that we charge. How do you plan to meet your goal of having all products covering their cost by 2020 based on the situation we have right now? Ms. Robinson. Ms. ROBINSON. As I've indicated, there are problems with some of our products that do not recover our costs, and that's not a situation that is sustainable for any organization. The Postal Service is looking at all alternatives to grow mail volume, to increase our revenue from those products, and to operate with those products as efficiently as possible. More practically we're going to be addressing the pricing issues through, in part, an exigent price increase which will be filed later this year in which we intend to have a moderate price increase that will in part address the cost challenges within products such as standard mail, flats, and periodicals. Mr. LYNCH. OK. Let me interrupt there. So we have flats, which you've got magazines and catalogs, things like that, that are not currently paying for themselves. We're subsidizing the delivery of those products. They're awkward, but large; they're odd sizes. Then give me another area where we are mispricing. Ms. ROBINSON. The three largest categories where you're not covering costs would be periodicals, magazines and newspapers. VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 36 Mr. LYNCH. Right. Ms. ROBINSON. Standard mail flats, which is typically catalogs and other large paper-size pieces of advertising mail, and standard mail parcels, which are lightweight parcels weighing under---- Mr. LYNCH. How are we going to bring those up to a category where they pay for themselves? Ms. ROBINSON. We're looking at increasing the product prices over time. We are going to be doing it in a measured way over approximately a 10-year horizon. Mr. LYNCH. All right. Ms. ROBINSON. However, we do need to address the customers' concerns that we don't severely damage their businesses by price increases that are too large. Mr. LYNCH. Let me ask you--and my time is running out. You say in your testimony that through this exigent pricing or emergency pricing adjustment that we're going to do in 2011 that you're going to institute a, ''moderate increase.'' Give me a hint on what you mean by ''moderate.'' Is there a percentage that you can attach to that or something that I would be able to divine what the cost might be as opposed to being moderate? Ms. ROBINSON. The Postal Service's Board of Governors is going to make that decision, and we're looking at balancing the impact on our customers versus the Postal Service's need for additional revenue and to address the cost challenges. Mr. LYNCH. Do you have a moderate range? Can you give me a range of between what and what, what that might cost, or are you afraid of scaring people? Ms. ROBINSON. That's a decision that's going to be made by the Postal Service's Board of Governors, and they've not made that decision yet. Mr. LYNCH. OK. I've used up all my time. The chair now recognizes the gentleman from Utah Mr. Chaffetz for 5 minutes. Mr. CHAFFETZ. Thank you, Mr. Chairman. Ms. Robinson, you say in your testimony here, if I'm reading it right--at least on page 5 of the copy that I have here, it says: ''Workshare mail is profitable. There are many myths about worksharing, including an oft-cited observation that if discounts are greater than avoided costs, then it must be profitable. Nothing could be further from the truth. Despite the sometimes vocal rhetoric, workshare mail is among the most profitable mail for the Postal Service to handle.'' So you cited three areas where you say it's not profitable, and yet in your testimony you also say it's very profitable. What are those areas where maybe we're not giving enough discount? You cited three where we're maybe going the opposite direction, but what are we overcharging for? Ms. ROBINSON. Well, I'm not sure I would characterize it as overcharging. For example, in workshared first-class mail letters, typical pieces, bills, statements, correspondence you would receive from other businesses, the cost coverage---- Mr. CHAFFETZ. But we're not giving them enough discount; is that what we're saying? Because as the chairman pointed out, there are some legal implications for not passing it along, and if VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 37 you're citing things that are saying, well, these are unprofitable, but the overall category is very profitable, what are those areas, specific items, that you're not giving enough discount for? Ms. ROBINSON. I would not characterize it as not giving enough discount. The discounts are greater--greater than the avoided cost, which is one factor to consider. We're also evaluating the net contribution of, for example, first-class mail letters, which is very high, and the potential effect on customers if we reduce the discounts, effectively increase the prices for those customers. Categories such as standard mail flats, which are some--a fairly workshared category, do have fundamental cost challenges that we're addressing for operational---- Mr. CHAFFETZ. Are there specific categories, specific pieces of mail that we're not giving enough of a workshare discount to? Ms. ROBINSON. I think there are specific categories of mail where we need to very seriously consider the effects of---- Mr. CHAFFETZ. You can't name any right off the top of your head right now? Because you've named some that you felt like--you know, periodicals and that sort of thing. Ms. ROBINSON. I think the first-class mail is a category where we have high profits. It's a very profitable source of mail for the Postal Service. I would not characterize the discounts---- Mr. CHAFFETZ. And you won't be seeking a rate increase in those categories, correct? Ms. ROBINSON. No. When we look at increasing prices through the exigent price mechanism, we will be looking at increasing prices for all mail. Mr. CHAFFETZ. Even if it's in that most profitable area? Ms. ROBINSON. Yes. First-class mail is contributing about 70 percent of the contribution to the institutional costs of the Postal Services. Given the Postal Service's financial condition, we can't afford not to increase the price of that mail as well as the prices of other categories. Mr. CHAFFETZ. If the volume had stayed the same, would we be having the same discussion, or is it directly related to volume? Ms. ROBINSON. It is in part related to volume and to the pressures in the industries in which our first-class mailers do business, but given the financial pressures on the Postal Service, we believe that we---- Mr. CHAFFETZ. But I'm saying those financial pressures, if the volume had remained the same--and I understand and appreciate that we've taken a precipitous dip. If they had stayed the same, would we be having the same discussion? Would there need to be this discussion happening? Ms. ROBINSON. I think if the volume had remained the same, the financial circumstances facing the Postal Service would obviously be substantially---- Mr. CHAFFETZ. Would we still be upside down, do you think, or in the red? Ms. ROBINSON. If the volume had remained the same, there are some pressures on the Postal Service financially associated with retiree health benefits and some other fundamental issues, with at least the secular decline associated with electronic diversion. If the volume remained the same, I think the Postal Service would be VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 38 moving forward on a typical schedule for price increases under the price cap. Mr. CHAFFETZ. One of the things, Mr. Chairman, that I still struggle with is clearly in your testimony and just the basic economics, you say raising prices will reduce volume. Ms. ROBINSON. Yes. Mr. CHAFFETZ. But you also say at the same time one of the biggest challenges or opportunities, if you will, for the Postal Service is to increase volume. And that's where there's a disconnect that I just worry about, the accounting of how we try to go and institute. It's the basic question. It's the multibillion-dollar question. I realize how difficult it is to come to the conclusion. Mr. Waller, I've only got seconds here, but is there anything you would like to address in the questions I asked? I'm sorry I didn't---- Mr. WALLER. Yes. In the ACD, if you look in chapter 7, there's a list of all the products that are either above or below or equal to avoided costs. Mr. CHAFFETZ. And is there anything in that list that you think arises above and beyond what the legal prescription is for---- Mr. WALLER. Well, there are those that are greater than 100 percent, and that's the legal prescription that is in the PAEA. Mr. CHAFFETZ. But there are some that are in excess of 100 percent. Mr. WALLER. Yes, there are. There were the 14 that we identified, and they are--yes, and there are some big volumes there, too. Mr. CHAFFETZ. Thank you. Mr. Chairman, I just ask unanimous consent to enter into the record a Congressional Research Service report entitled, ''Postage Subsidies for Periodicals, History and Recent Developments,'' dated January 22, 2009, and I would like to add that to the record. Mr. LYNCH. Without objection, so ordered. Mr. CHAFFETZ. I yield back the balance of my time. Thank you. Mr. LYNCH. The chair recognizes the gentleman from Virginia, Mr. Connolly, for 5 minutes. Mr. CONNOLLY. Thank you, Mr. Chairman. We just had a discussion about the fact that the pricing of certain items, magazines, catalogs, might raise antitrust issues. Making a profit rather than taking a big loss might raise antitrust issues. Has that issue ever been adjudicated? Ms. ROBINSON. Not to my knowledge. Mr. WALLER. And I think the area of concern is in the worksharing discounts. If it's equal to 100 percent, you're sort of neutral on the--whether the Postal Service does it or competitors. Now, a lot of businesses have come into existence like consolidators, and they do--they make their money by doing the-- getting lots of mailers' mail together and doing it cheaper than the Postal Service, sharing that with the mailer, and they depend upon a fair discount in order to stay in existence. So I think that's where some of the charges you set--a competitive world has been set up in mail processing and if that gets restricted. Now, the Commission has not been involved in any decisions on that I'm aware of and---- VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 39 Mr. CONNOLLY. It just seems to me that when we're losing $7 or $8 billion a year of taxpayer money, frankly revisiting some of those assumptions and some of those nice things to do for competition might be in order, because our first obligation isn't to private sector competition; while we welcome that, it is to the taxpayers who are ending up helping to subsidize---- Ms. ROBINSON. I'd just like to---- Mr. CONNOLLY [continuing]. These losses. Ms. ROBINSON. I'd just like to point out that the Postal Service does not receive taxpayer dollars. Our revenue comes from the postage that our customers pay. Mr. CONNOLLY. All right. Those customers are our constituents, and they are still subsidizing those losses. Otherwise, you wouldn't periodically, when we have hearings like that, be bringing those losses to our attention and the need for urgent action. Your testimony, Ms. Robinson, notes three products--periodicals, mail flats, and standard mail parcels--fell short of covering their cost by $1.4 billion last year. The PRC's most recent Annual Compliance Determination cautioned against less-than-average price increases for loss-making products without a plan for increasing net revenue in the long run. Does the Postal Service currently have a long-term plan to ensure that those products increase in that revenue? Ms. ROBINSON. Yes. The Postal Service is developing a long-term plan to address those issues. We are going to be increasing the prices of the products that are not covering their costs in a measured way to address the issue, while maintaining the--limiting the effect on the customer base. Mr. CONNOLLY. So you're working on a long-term plan. Ms. ROBINSON. We are developing a long-term plan that will include a price increase using the exigent price mechanism that will be filed with the Postal Regulatory Commission later this year. Mr. CONNOLLY. Any idea when we might expect to see that longterm plan? Ms. ROBINSON. That will be up to the decision of the Board of Governors. We should be seeing it relatively shortly. Mr. CONNOLLY. Relatively shortly. OK. The chairman talked about the workshare discounts, and again, the PRC in its Annual Compliance Determination found that 30 of those workshare discounts exceeded their avoided costs, 17 of them justified under statutory exceptions, 13 not justified. How do we intend to go about correcting those 13? Ms. ROBINSON. The Postal Service believes it justified the workshare discounts that exceeded avoided costs largely based on the potential effect of the efficiency of the Postal Service---- Mr. CONNOLLY. I'm sorry, Ms. Robinson. I cannot hear you. Ms. ROBINSON. I'm sorry. The Postal Service believes it justified those discounts based on the efficiency exception within the statute. Reducing those discounts, effectively increasing the prices for those products, would cause a reduction in volume that we are concerned would substantially reduce the volume to our system and hamper the efficiency of the system. So we believe we've addressed the issues surrounding those discounts. Mr. CONNOLLY. Thank you. VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 40 Mr. Waller, I'm going to run out of time, so let me ask quickly, in general how often ought rate adjustments be made to realign avoided costs with the workshare discounts? Mr. WALLER. Well, they're on--we're on sort of a yearly cycle now because that's the way the costs come together. Very expensive to find out what each product costs, what each activity costs, and there are a lot of surveys and things that go on. So we're sort of tied into an annual cycle, and that probably is appropriate because you will catch it before it goes on too long. Last year the--at the beginning of the year, there were a lot of the discounts that were exactly equal to 100 percent. Actual mailprocessing costs dropped, and therefore the discounts were too large then. It was caught this year, and the adjustments can be made in this next rate case. Mr. CONNOLLY. Thank you, Mr. Chairman. Mr. LYNCH. Thank you. The chair now recognizes the gentleman from Maryland, Mr. Cummings, for 5 minutes. Mr. CUMMINGS. Thank you very much, Mr. Chairman. First of all, thank you all for being here today, and I just want to--Dr. Riley, whom we're going to hear from in the next panel, says that--in his testimony, he says that ''in the 1990's, management began to view the primary customer of the post office as the larger mailer instead of the individual customer. These representatives focus on obtaining discounts for their clients, the large mailers, and/or converting first-class mail to less expensive categories of mail.'' I wanted to give you all a chance to respond to that. What do you think of that? Do you agree with him? Ms. ROBINSON. During the 1990's, we did see a substantial growth in commercial mail in what would be considered to be the workshared categories. That was in part in response to incentives that the Postal Service put forward through the workshare discount program. That mail helped to drive the automation program in the Postal Service that kept costs low for all customers, including the individual household customer. So there's been a large expansion of the efficiency of the Postal Service that has been in part enabled by the existence of very high-quality, clean mail that efficiently runs in operations that helps to keep the total cost of processing mail down. The Postal Service looks at the typical household mailer as very important to us. That's our fundamental customer base, and we're very interested in preserving the mail for the typical household customer, and in part we need to do that by preserving the financial stability of the Postal Service and managing our pricing and product structures for commercial customers so they stay in the mail, to enable the typical household customer to continue to be able to have a viable Postal Service for the future. Mr. CUMMINGS. Mr. Waller, do you have a response to that? Mr. WALLER. Yes. The importance of having the discount equal avoided cost is that it doesn't put the burden of the discount on the small mailer--on the individual mailer. No other mailer has to pick up that extra institutional cost that might be given away by having a discount larger than the avoided cost. I think that's why it got VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 41 put in the act, so that the Commission should ensure that doesn't occur. That's the way to protect not only the small single-piece mailer, but all the other mailers in the system, too. Mr. CUMMINGS. Mr. Waller, you testified that the Postal Service has had longstanding cost-control problems with the handling of mail flats, is that right? Mr. WALLER. Yes. Mr. CUMMINGS. And would you give me a little bit more explanation on that? Mr. WALLER. Well, the reason I say ''longstanding'' is back when I was first kind of with the Commission in 2000, the--it was tracking the costs, and periodicals were still going up at that time, and they were mainly flats. So the Commission said, Postal Service, send over some witness, explain what's going on. And basically what was happening was that the automation or mechanical processing equipment wasn't really helping that much. A lot was still being manually sorted, and the promise was, well, we've got a new system coming, the AFSM-100. It did help a lot, but still those costs seemed to spiral out with too much manual sorting and too-- too expensive handling costs on the flats. Now the answer is supposedly in the FSS, but we'll have to see the flats sequencing system, if that actually produces any savings. It just has maintained itself as the high cost of handling flats. It hasn't gotten a handle on it yet. Mr. CUMMINGS. Now, you also state that due to the continual changes in the postal operations, it's necessary to periodically review how workshare costs are developed. And who conducts those reviews? Mr. WALLER. The Commission does. The--we have order--or procedures for what data the Postal Service is to provide so we can track those costs. And as I said a moment ago, what happened in 2009, some of those avoided costs, the Postal Service found a way to perform them in a less expensive way. So the costs avoided were less, so, therefore, the discounts should be dropped and appropriately adjusted. And it's on that ground that you have to continually look at that, because if suddenly something becomes operational, some magical way of processing, you want to build that in as costs are less now, less give, less discounts. Mr. CUMMINGS. I see my time is up. Thank you, Mr. Chairman. Mr. LYNCH. I thank the gentleman. The chair now recognizes the distinguished gentleman from Missouri, Mr. Clay, for 5 minutes. Mr. CLAY. Thank you, Mr. Chairman, and thank you for conducting this hearing. Ms. Robinson, we recently held hearings in this committee regarding the Postal Service's uncertain financial future. In your opinion, how much do issues with workshare discounts factor into the Service's financial woes? Any contributing factors? Ms. ROBINSON. Clearly you need to evaluate all pricing in relation to the Postal Service's financial position. I'd like to observe for the majority of first-class mail workshare, which is most of the workshare mail, we are actually making 5 cents more per piece for that mail than we do on single-piece mail. This is highly profitable mail, and continuing that workshare program is very important for VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 42 the Postal Service. Some categories that are cost-challenged, such as standard mail flats, are very heavily workshared. We're looking at addressing those issues over time. Mr. CLAY. OK. It has been reported that the Postal Service predicts the rate increase being proposed through the exigent circumstances appeal is moderate. Can you elaborate on this assessment? Ms. ROBINSON. The Postal Service's Governors are evaluating the current situation, and are going to be making a decision on the size of the increase. That will be announced in the near future. At the moment we do believe the circumstances facing the Postal Service meet the exigent conditions. They are extraordinary. These are really dramatically challenging financial times for our customers. Mr. CLAY. So do you think there will be a rate increase and it will make up for the difference? Ms. ROBINSON. As we announced on March 2nd, we are planning a rate increase in early 2011. Mr. CLAY. OK. In July 2009, the Postal Service filed a request with the PRC to alter their revenue analyst method. Can you explain what this methodology has to do with workshare costs and the Postal Service's financial viability? Ms. ROBINSON. The revenue--I'm sorry? Mr. CLAY. It's called the--they filed a request with the PRC to alter their revenue analysis methods. You're not familiar with that? Ms. ROBINSON. I'm---- Mr. CLAY. OK. Well, I will go on to the next question, then. Mr. Waller, can you respond to that? Mr. WALLER. Oh, well, last year we talked about how you have to relook at these costs all the time. The Postal Service last year filed 30 different requests for modification, the way costs are calculated. Twenty-nine of those, in fact, were approved. One was denied. But--so that's an ongoing process. But they came in through the year, some of them in July, some of them earlier and later. Mr. CLAY. OK. A question for either one, and both of you can tackle it if you would like. How much do products which do not cover their attributable costs factor into the financial hardships of the Postal Service? How much of that adds to your deficit? Ms. ROBINSON. In fiscal year 2009, the products that did not recover their costs cumulatively lost $1.7 billion. Mr. CLAY. And the overall loss to the Postal Service was how much? Ms. ROBINSON. About $3.8 billion. Mr. CLAY. OK. So it was almost a half or---- Ms. ROBINSON. Yes. Mr. CLAY. Or over a half. Go ahead. Ms. ROBINSON. Pardon me? Mr. WALLER. No. I agree with that. And not only did they not cover their costs, then they did not create an extra contribution to the institutional cost, which is part of the act, too. They're supposed to make a reasonable contribution to institutional costs. So those products actually had a larger impact. VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 43 Mr. CLAY. OK. How can workshare issues be addressed overall to ensure that the Postal Service gets maximum productivity? How do we address that, Mr. Waller? Ms. ROBINSON. When we look at our customers, we need to look at what they're using the mail to do. We're talking a lot in terms of discounts, price differences between different categories of mail. In reality our customers pay prices. They pay dollars out of their pocket to mail, to accomplish their business objectives. As we look at improving the financial condition of the Postal Service, we need to keep the mail affordable for those customers. We need to weigh the efficiency concerns around workshare discounts. We need to weigh the fact that our customers have a lot of alternatives to the mail. The number of electronic possibilities for sending a bill, a statement, the information that would be in a newspaper or magazine is growing, and we need to consider that as we price our products. Mr. CLAY. Thank you. Thank you, Mr. Chairman. I yield back. Mr. LYNCH. Thank you. Let me ask you in light of the gentleman's question, the $1.7 billion delta here in terms of products that do not support the cost of delivery; so we're losing money on certain aspects. I know that Congress, very early after the establishment of the Postal Service at the very birth of our country, made some conscious policy decisions back then that newspapers and periodicals, because they had an informative dimension to them that served the public purpose-- this was back in the day when they did not have radio, they didn't have TV, they didn't have 25 news stations, they didn't have the Internet. Congress made a decision back then as public policy that we needed to subsidize newspapers and periodicals because that's how the populace was informed. That was the decision 200 years ago. Today you can click around, and it's just nonstop news on every single channel. You've got the Internet, all kinds of blogs and Web sites and radio. You've got an abundance of sources for informing the electorate, our citizenry. In light of that change in technology and in our daily lives, are we still justified in granting discounts to newspapers and periodicals, the cost of which is borne by others who are paying the freight for those periodicals and newspapers? Do you think as a policy decision it remains justified? Ms. ROBINSON. Over the history of the Postal Service, Congress has made a number of decisions that have promoted the editorial content within magazines and newspapers. For example, the periodical prices right now for mailing editorial content are much lower than for the advertising portion of the mail. In the early to mid1990's, a decision was made by Congress that periodicals should no longer be directly subsidized through appropriations, and that those--that product should cover its costs through the prices paid. However, the public policy goals of promoting the dissemination of information and news has been maintained through the pricing structure of periodicals. Mr. LYNCH. OK. I understand that. What I was asking you is in light of the fact that we now have the Internet, we have radio, we VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 44 have TV that we didn't have when we adopted that policy, can it still be justified given the fact that other ratepayers, other mailers, other customers of the Postal Service are subsidizing newspapers? Ms. ROBINSON. The role of periodicals in American society is really one that is one of disseminating information. I think there's a lot of value of that to the American people. When we survey customers, folks that receive the mail, they get a lot of value and use out of the mail from finding that periodical that they requested in their mailbox. The periodical is one of the few things that people actually pay to receive. That value in the mailbox is important for the Postal Service to keep our customers interested in valuing the mail that they receive. Mr. LYNCH. I understand that. I guess we're not really getting at the question, though. There are a lot of good things that are out there for people that are provided by the private sector without subsidy. They actually pay for stuff, and they pay full price for that item, for that information, for the Internet, radio, TV, and--but this is a special category that we set out early on at the birth of this country that we were going to subsidize through the Postal Service, the dissemination of periodicals and newspapers, and I'm just asking you as a public policy position whether that is still justifiable given the fact that there's all kinds of other sources of information out there that are available to the public that serve this purpose and are not subsidized by the Postal Service. Ms. ROBINSON. The Postal Service is looking at adjusting periodicals prices so they do cover their costs. We're concerned about the potential effect on the periodicals industry. We did that all in one step. At the end of the day, there is a public policy decision that is framed and discussed in the terms that Congress has established for periodicals pricing, which it does recognize in law the fact that the educational, scientific and informational value of the mail is important and needs to be considered within the prices we charge for periodicals mailing. Mr. LYNCH. Thank you. Mr. Waller. Mr. WALLER. Well, it's in the law, and the Commission is focused on, you know, following the law, and considering that it's always been--those factors have been there, I think that's a policy decision that Congress needs to address more than someone like the Commission. But in some of our hearings we have had very lively debates about this issue that you are talking about right now where the various mailers, in fact, came to--with a complaint to the Commission that the--a few years ago that the pricing of periodicals was not appropriate given all the changes that you've---- Mr. LYNCH. Look, in a perfect world I guess if we were making boatloads of money at the post office, we probably wouldn't be having this hearing, but I'm worried about the pension benefits, the health care benefits for these workers, and just trying to stabilize this system. And here is this somewhat of a luxury--I know we've always done it this way, but times have changed enormously, and the justification and the underpinnings for our policy have certainly eroded over time with the abundance of medium. VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 45 Mr. WALLER. The Commission, back the last time that we set rates before the PAEA came into effect, made some fairly dramatic increases in--or changes in the pricing structure to get what was perceived as maybe a fairer sharing of the burden of the periodicals costs among all the mailers there. It was sort of trying to address things are changing, maybe the pricing structure does need to change, and some were put into effect. They did have some negative impacts, and the Commission was criticized very heavily for some of those decisions. So I'd say the policy reasons are very alive out there for continuing this. The American public does seem to still want the special treatment for this, at least several of the groups that participate in this industry. Mr. LYNCH. OK. I've overstayed my time. The chair now recognizes the gentleman from Utah, Mr. Chaffetz, for 5 minutes. Mr. CHAFFETZ. Thank you, Mr. Chairman. Talking about nonprofit mailers if I could for a second, very similar to what the chairman was talking about, give me a sense of the size and scope and the subsidies that really the American people are making for nonprofit mailers. Ms. ROBINSON. Nonprofit standard mailers typically pay 60 percent of the average revenue per piece of a--a commercial mailing that would be similar. There are also discounts associated with periodicals mailed, about a 5 percent discount. So there are preferences granted by statute for that mail. Mr. CHAFFETZ. And either of you, what is the total subsidy that's coming from the American people? And isn't there an appropriation that actually is there to cover that cost, or does that just go to the bottom line? Mr. WALLER. That's for the blind---- Ms. ROBINSON. Yeah. The only congressional appropriations that we receive associated with providing mail is for free mail for the blind and overseas voters. Mr. WALLER. About half of that loss in standard mail that we were talking about, standard flats, can be traced to the nonprofits. Mr. CHAFFETZ. Dollarwise what would that be---- Mr. WALLER. Dollarwise. Dollarwise. Mr. CHAFFETZ. What would be that dollar amount? Mr. WALLER. About $300 and some thousand--$300 million. Mr. CHAFFETZ. $300 million. Mr. WALLER. I was looking for the exact number here. The loss per piece on standard mail flats that are the commercial is 4.7 cents. It's 22.4 cents for the nonprofit mail. So it's taking a big hit, and even though they're a smaller percent of the volume, it comes out almost equal, $311 million or something like that, or approximately that. We did put that number in the---- Mr. CHAFFETZ. When is the last time we did an analysis of what would happen if we, you know, got rid of the subsidy or adjusted the subsidy or however you want to frame it, but when's the last time that's been reviewed? I'm new to this so I need some help being pointed in the right direction to where specifically that is and when--when is the last time we actually revisited that particular portion of it. VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 46 Ms. ROBINSON. We did an analysis that was presented to the FTC. I believe it was 2007 or 2008. The cumulative---- Mr. CHAFFETZ. Whatever it is, could you provide that to us? Ms. ROBINSON. We can provide that for the record. Mr. CHAFFETZ. I know it is hard right off the top of your head. And it actually kind of scares me that you actually know that right off the top of your head. Ms. ROBINSON. Yeah. Basically the cumulative value of the nonprofit mail subsidies and the periodicals together was about $11/2 billion. Mr. CHAFFETZ. OK. And of that, the nonprofit was--OK. Ms. ROBINSON. I believe it was about half and half, so I don't remember the exact numbers. Mr. WALLER. I was talk talking about the flats. It was $311 million. Mr. CHAFFETZ. OK. A significant enough number that I would, Mr. Chairman, urge that we revisit and think that through as well, because it is a huge, huge number. And there are many tax benefits that are offered for being a nonprofit, but the American people have to subsidize that. However you want to frame that, I think it is worthy of diving into and rediscussing at some point. I yield back. I know we've got another panel that's waiting, so thank you for the additional time. Mr. LYNCH. I thank the gentleman and I welcome his questions. And I agree there are nonprofits and there are nonprofits. And maybe we should look and see the amount of benefit that is actually derived to the public for each and every one. Let me ask in closing, I know we talked about this exigent rate case that's coming up in 2011, do we have a timeframe on that? And when should we--I know you've got a delicate balance here because of the potential shock value or shock impact of that rating decision on a very fragile system here. So do you have at least a timeframe in mind? Ms. ROBINSON. Yeah, we would be looking at changing prices to the exigent mechanism early in 2011. Under the statute, the Commission has 90 days to evaluate our request once that's filed. And we intend to leave an appropriate amount of time for our customers to actually implement that change. So we're looking at about 6 months lead time. Mr. LYNCH. OK, thank you. Mr. WALLER. And the Commission is committed to getting that in 90 days, as required. Mr. LYNCH. OK, well, that's great. I want to thank you both. I think you've suffered enough. Ms. Robinson, Mr. Waller, thank you for your testimony, for helping the committee with its work. Have a good day. Could we ask the second panel to take their seats? Thank you. Thank you and welcome to our second panel. Before we move to questioning, as you know, the custom for this committee is to have all witnesses sworn who are about to offer testimony. May I please ask you all to rise and raise your right hands? [Witnesses sworn.] VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 47 Mr. LYNCH. Let the record show that each of the witnesses has responded in the affirmative. I will now offer a brief introduction of each of our panelists on our second panel. Mr. William Burrus, is president of the American Postal Workers Union. Mr. Burrus is also a member of the executive committee of the Union Network International, a global federation of unions that represent postal and other service workers. Mr. Lawrence Buc is the president of SLS Consulting, Inc. SLS is a Washington, DC, Consulting firm that specializes in postal economics and environmental analysis. Mr. Buc participated in rate classification and complaint cases regarding the Postal Service for 35 years. Dr. Richard Riley, is a professional--excuse me--is a professor in the MBA and executive programs at the University of Maryland University college where he teaches finance, economics and accounting to MBA candidates and executive MBA candidates. Previously Dr. Riley served as chief financial officer of the U.S. Postal Service from 1993 to 1998. Mr. James O'Brien, is vice president of distribution and postal affairs at Time Inc. and has been with Time since 1978. He is currently the chairman of Mailers Council and a member of the Magazine Publishers of America, Government Affairs, and Postal Committees. Hamilton Davison has been executive director of American Catalog Mailers Association since its founding in April 2007. Mr. Davison's involvement in postal affairs began in 1992 with his service on the Greeting Card Association Postal Affairs Committee. Welcome all. As you know, each of you will be given 5 minutes for an opening statement. The lights will indicate green at the beginning, yellow as you proceed, as you're getting toward the end, and then red when you should wrap up. President Burrus, you're recognized for 5 minutes for an opening statement. STATEMENTS OF WILLIAM BURRUS, PRESIDENT, AMERICAN POSTAL WORKERS UNION, AFL-CIO; LAWRENCE G. BUC, PRESIDENT, SLS CONSULTING, INC.; MICHAEL RILEY, PROFESSOR, UNIVERSITY OF MARYLAND UNIVERSITY COLLEGE; JAMES R. O'BRIEN, VICE PRESIDENT FOR DISTRIBUTION AND POSTAL AFFAIRS, TIME INC.; AND HAMILTON DAVISON, EXECUTIVE DIRECTOR, AMERICAN CATALOG MAILERS ASSOCIATION STATEMENT OF WILLIAM BURRUS Mr. BURRUS. Thank you Mr. Chairman, Chairman Lynch, Ranking Member Chaffetz and members of the subcommittee. Thank you for providing the opportunity to testify on behalf of the more than 250,000 members that we are privileged to represent. We are proud to work for the Postal Service, the largest and most efficient postal system in the world. I ask my written remarks be entered into the record, please. Mr. LYNCH. Without objection. VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 48 Mr. BURRUS. I begin by thanking you for scheduling a hearing on the subject, Workshare Discounts. This is a topic of great interest to our union and we appreciate the opportunity to share our views. The law that requires the Postal Service to provide universal service at uniform rates is absolute. There are no exceptions for large or small mailers or for great or short distances between senders and receivers. This universal service obligation justifies the Postal Service monopoly and restricts competitors who would attempt to skim the profitable segments while leaving the poor, the handicapped, and those living in rural communities to fend for themselves. Unfortunately, the Postal Service in concert with major mailers has implemented discounts that violate the standard of universal service at uniform rates. This is not only illegal, it is also self-defeating, depriving the Postal Service of the revenue to maintain the Nation's mail network. Workshare discounts were introduced in the 1970's, but as early as 1990 the Postal Service acknowledged that the relative value of presort is declining. Today workshare discounts artificially reduce the mailing costs of favored customers at the expense of individual citizens' small businesses. The law stipulates that workshare discounts may not exceed postal costs avoided. However, the PRC has repeatedly found the discounts exceed this standard. Most recently, they found that 30 types of workshare discounts exceeded the postal cost avoided. When discounts exceed the standard, the result is that individuals in small businesses contribute a larger share of the institutional cost, and, contrary to sound economic principles, as postal efficiency has increased, workshare discounts have also increased from 7.6 percent of the postage rate in 1976 to 23.9 percent in 2009. This is a Ponzi-like scheme that Bernie Madoff would be proud of. The Postal Service begins with a monopoly power to set rates, then diverts volume, resulting in a self-induced exaggeration perpiece cost to set the discounts. At the same time, discount-funded private mail processing plants are open, while more efficient postal processing centers are consolidated. The results benefit major mailers, while making the Postal Service less efficient and more expensive. In response to reduced mail volume and the crushing burden of prefunding future retiree health care liabilities, some have opined that postal workers must make wage and benefit concessions to fund this transfer of revenue and productivity. For the record, I have challenged the Post Master General to set employee compensation at a rate that is lower than the discounts offered to major mailers. Simply put, pay postal employees at the cost of the awarded rate. He has not responded to date, and I don't expect him to. APW has long asserted that postage discounts in their current form are indefensible and illegal. So now the Postal Service and major mailers are attempting to change the standards, and we urge Congress to reject any such change. Regarding the excessive workshare discounts, the burning question is, why? Why would the Postal Service forego billions of dollars per year in revenues, particularly when they are projecting a $7 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 49 billion loss? When it is suffering from reduced volume, the unachieved payment schedule for future health-care liabilities, and the cultural shift in communications I ask, why? One anticipated answer is volume. However, history shows that rate increases equal to or below the rate of inflation have only a marginal effect on volume. The record shows that volume has declined by more than 30 percent at a time when postage rates, when adjusted for inflation, are at their lowest level in 50 years. A graph attached to my testimony shows that even as discounts have increased, volume has declined. Workshare discounts and other give-away programs have peaked at the same time that mail volume has plummeted. If rates indeed drive volume, we would expect the opposite to be true. So given the data, why would the Postal Service set discounts above the legal standard? A defense that cries out for review is the assumption that if not for the illegal rates, volume would have declined even further. Such a defense shifts the burden of proof to the unknown, the impossible to prove, and evades the requirement of the law. The American public is entitled to know why the cost avoided and uniform rate standards have been breached. I respectfully ask that Congress provide the answer. Thank you for the opportunity to testify and I will be pleased to answer any questions you may have. Mr. LYNCH. Thank you, sir. [The prepared statement of Mr. Burrus follows:] VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 50 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 51 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 52 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 53 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 54 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 55 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 56 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 57 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 58 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 59 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00063 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 60 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 61 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00065 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 62 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 63 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00067 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 64 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00068 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 65 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00069 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 66 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00070 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 67 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00071 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 68 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00072 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 69 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00073 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 70 Mr. LYNCH. Mr. Buc, you are now recognized for 5 minutes for an opening statement. STATEMENT OF LAWRENCE G. BUC Mr. BUC. Chairman Lynch, Ranking Member Chaffetz and other subcommittee members, I appreciate the opportunity to testify this afternoon. My name is Lawrence Buc. I'm the president of SLS Consulting, Inc. I've been analyzing Postal Service costs for 35 years. I'm testifying today on behalf of the Magazine Publishers of America, the Direct Marketing Association, the Alliance of Nonprofit Mailers, the Association for Postal Commerce, the Parcel Shippers Association, the National Postal Policy Council, and National Association of Presort Mailers. My prepared testimony makes three important points. First the Nation, the Postal Service, mailers and consumers, all benefit from combined total cost of preparing, transporting, sorting and delivering mail. Second, correctly priced work-sharing gets us there. It's the only way to get lowest combined cost. And it also induces large mail volumes. Third, setting work-sharing discounts at the right level is complex. I'll now address each of these points in turn. First, total lowest mailing cost and large mail volumes benefit the Nation and all members of the mailing community. The Postal Service may have a monopoly on the mailbox, but it does not have a monopoly on overall forms of communication. Cost and prices matter to businesses, not profit entities and government organizations as they make decisions regarding the best channel to use for communicating with customers, prospective customers, donors and constituents. That's why it is important to achieve the lowest total mailing cost. My second point is that work-sharing gets us lowest combined cost and large mail volumes. With work-sharing correctly priced, work will be performed by those who can perform it at least cost. In many cases this will be postal employees. Work-sharing discounts are correctly priced when they equal the cost the Postal Service avoids by the work-sharing activity. That sends the pricing signal that it incents efficient behavior and results in whoever can do the work at least cost actually doing that work. If discounts are less than costs avoided, the Postal Service performs work that others could perform at less cost. And if discounts are more than costs avoided, others do the work that the Postal Service could perform for less. Both of these unnecessarily increase costs. Work-sharing results in far more mail, both through lower prices and by stimulating the overall use of mail. According to econometric analysis, Dr. Edward Pearsall, a consultant to the Postal Regulatory Commission, work-sharing is responsible for half of all mail. In other words, there is twice as much mail today as there would be without work-sharing. Without worksharing, according to Dr. Pearsall, there would be closer to 85 billion pieces of mail, with 169 billion pieces projected for this year. Think about the Postal Service's financial situation with only 85 billion pieces of mail. Actually it's almost unthinkable. VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00074 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 71 It's important to realize also that the Postal Service has large fixed costs that are not affected by changes in mail volume. More mail lets these fixed costs be spread over more mail volume, and that results in lower prices for all mail. And incidentally, worksharing mail is more profitable than other mail. For example, Postal Service data show that with first class letters, work-shared prices--work-shared pieces contribute almost a nickel more to Postal Service profitability than do single-piece letters. My third and final point is that estimating costs, costs avoided and setting work-sharing discounts at the right level is complex. The Postal Service processing, transportation, and delivery systems are large and complex. Consequently, estimating costs and cost avoidances is also complex. My testimony--my written testimony provides several examples. Under the 1970 Postal Reorganization Act and continued with the new Postal Reform Act of 2006, final responsibility for postal costing and prices was delegated to the Postal Service and the Postal Regulatory Commission. There have been and there always will continue to be differences as to whether the PRC and the Postal Service are getting it exactly right. But generally they are doing a very good job. Not in every single case and not in every single detail. You certainly wouldn't expect perfection in a system this large and this complicated. In general, they have done very well. Thank you and I will be glad to answer any questions. Mr. LYNCH. Thank you, Mr. Buc. [The prepared statement of Mr. Buc follows:] VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00075 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 72 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00076 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 73 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00077 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 74 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00078 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 75 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00079 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 76 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00080 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 77 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00081 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 78 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00082 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 79 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00083 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 80 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00084 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 81 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00085 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 82 Mr. LYNCH. Dr. Riley, you are now recognized for 5 minutes. STATEMENT OF MICHAEL RILEY Mr. RILEY. Thank you for letting me testify before you. I am here because I care about the Postal Service as an institution. I care about the people and I care about the customers and I don't like the way things are going. The Postal Service is dying from self-inflicted wounds because it has discounts that have gone crazy, and they need to be scaled back. Vice President Robinson testified that the Postal Service would never do anything to harm its customers or any segment of its customers. And to that I say: Well, stop with the Saturday delivery plan, do not end Saturday delivery, keep the thing going. And while I've got your attention, I would like to make two more proposals to you. I think the law needs to be changed, the retiree health-care provision in the 2006 act needs to be changed to put the Postal Service on the same position as any other major company in this country and ought to be structured like a mutual insurance company or mutual savings and loan, so that people realize it needs to earn a profit to provide the capital for new products, for new buildings, for expanded service, for converting the fleet to hybrid vehicles instead of the old-fashioned 1995 long-life vehicles still out there. I'm going to give you a little background. In 1994, in spring, I sat before this committee with Chairman Bill Clay, and I'm going to show you a graph as to what it was like. Then the worst-ever year of the Postal Service happened in 1993, and I joined Marvin Runyon in August, with 6 weeks to go in that year. In the spring of 1994 I sat before Congressman Clay, and I walked up to him today and said, You know, I testified before your father back in 1994 and he was very---- Mr. LYNCH. The Honorable Mr. Clay is here today. I just want to acknowledge that. Mr. RILEY. And he let me go for a bit, and said his father died in 1976. I apologize to you for mistaking one for the other. I'm going to tell you one more story. Back here a Congressman named Steny Hoyer, who was rising in the House of Representatives, told Marvin Runyon he was full of beans when Marvin said, I've got the place turned around. He said, I'll eat crow if you can turn this place around. And I was at the ceremony where Congressman Hoyer came to the Postal Service and cut the first piece of cake in a giant crow cake. He made a wonderful speech. The Postal Service had 4 years of billion-dollar profits, and it did it because it focused on the individual as the recipient. We had a balance score-card strategy focusing on the customer, the employee, and the finances of the Postal Service. We had an incentive system that backed it up. And Marvin Runyon--this chart goes only to the third quarter of 1998, because that's when Marvin Runyon stepped down as Post Master General and when I stepped down as CFO. This is the chart I showed the board of Governors at my last meeting as CFO. At the time, the major mailers were saying the Postal Service is earning too much money, way too much money. Profits are excessive. And new management promised to solve that problem, and VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00086 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 83 solve it they did. They managed to get almost nonstop billion-dollar losses, with the exception of 3 years, thanks to the work of a guy named Bill Tayman, who was able to get the government to realize they were overcharging the Postal Service for CSRS retiree costs. The Postal Service has excess discounts. Congressman Connolly summed up my position exactly when he said that when you have a way to save money, you save it equally; you save it so the Postal Service gets some of the benefit and so the mailer gets some of the benefit. Vice President Robinson said, Well, gee we have this percentage markup, and as I tell my MBA students, you can't spend percentage, you can only spend cash. And because focusing on the wrong things--and the Postal Service has--it has a strategy that focuses on the representatives of the major mailers as customers, it focuses on productivity, and frankly productivity is applied as service. If you cut one person up behind the window and have an hour line wait, that means your productivity goes up. But it sure doesn't mean the customers like you any better. I for one used to be an avid postal customer. I got cured from having bad problems with the Postal Service in the last 2 years. The Postal Service needs to put the service back and focus back on the individual customer and not on just the discounts and who can justify the biggest share for their person. When we were having record profits for 4 years, we didn't have to have a price increase. And that benefited the major mailers. And I would argue that today the Postal Service has driven away its customers. I was showing one of the Representatives earlier today in the room, the Annual Report of the Post Master General of 1872. The Postal Service has been crying the sky has been falling because of the electronic version for 1882. Back in 1993, we had a report that said the Postal Service was losing huge market share every year to e-mail. My kids got their first computer in 1983, but in 1872 the Post Master General complained that with the recent advances in mystic Casini's fax machine, the Postal Service is going to be completely threatened with going out of business. 1872. It took 100 years for the fax to come in. When it finally did, it was gone in 20. And I've used my time, Mr. Chairman. Thank you. I would ask, in summary, make them scale back the discounts, change the law to help on the retiree costs and the profits, and do not let them go to 5-day-a-week delivery. Mr. LYNCH. Thank you. [The prepared statement of Mr. Riley follows:] VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00087 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 84 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00088 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 85 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00089 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 86 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00090 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 87 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00091 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 88 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00092 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 89 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00093 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 90 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00094 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 91 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00095 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 92 Mr. LYNCH. Mr. O'Brien you're now recognized for 5 minutes. STATEMENT OF JAMES O'BRIEN Mr. O'BRIEN. Mr. Chairman, my name is Jim O'Brien. I'm the vice president of distribution and postal affairs for Time Inc., the largest magazine publisher in the United States. I'm testifying today on behalf of Time Inc. and the Magazine Publishers of America, the industry trade association for consumer magazines. About 90 percent of printed magazines in this country are delivered to their readers via the Postal Service. Time Inc. and the MPA care greatly about the Postal Service, its financial situation, its future viability and its effectiveness in controlling the costs of periodicals class. We have been longtime partners with the Postal Service in examining postal and mailer operations to improve efficiency, streamline mail processing, and reduce costs. In 1998, I participated in a joint USPS Periodicals Mailers Task Force. We visited 17 postal facilities at all hours of the day and night to see every step in the processing of periodicals mail. Following our 1998 joint task force, the Postal Service issued a strategic improvement guide for flat processing. A main focus of the guide was to reduce the manual processing of periodic mail. To do our part, Time Inc. and MPA members had made significant investments in an ongoing effort to identify and implement ways to minimize the work required for the Postal Service to process and deliver our magazines. I brought with me today a carrier route bundle of Time magazine. Bundles like this are trucked by Time Inc. from our printing plants to USPS facilities that are located very close to the subscriber's zip code. This bundle remains intact throughout the process until it is opened by the letter carrier. This is the most efficient product that we can deliver to the Postal Service. The Postal Service and the Postal Regulatory Commission agree that preparing mail in carrier route bundles saves the Postal Service money. In 1989, 29 percent of periodicals mail was sorted to the carrier route. In 2009, carrier route sorted mail grew to more than 55 percent. However, despite the industry's successful efforts to improve efficiency and reduce cost for the Postal Service, periodicals costs, as measured by the Commission, continue to outpace inflation. Why hasn't the Postal Service been able to take advantage of the industry's cost-cutting efforts and its own investments and equipment to improve automation? I have learned from many years of analyzing postal operations and cost that the key problem facing the Postal Service and the major reason for the continuing increase in periodicals cost is excess capacity. In my experience, excess capacity often leads to manual processing, despite the availability of automation. And manual processing leads to increased costs. The strategic improvement guide for processing was crystal-clear on this point. The report states, ''The inability to capture and process bar-coded flats through automation results in a significant cost differential. In fiscal year 1997 we failed to automate over 6 billion bar-coded flats.'' Mr. Chairman, I visited a postal facility just 3 weeks ago and observed an operation that the USPS refers to as a ''bull pen,'' which VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00096 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 93 is an entirely manual operation. Saw that 3 weeks ago. After spending billions of dollars on automation, the USPS continues today to manually process periodicals mail. This manually processed--this manual processing isn't requested or desired by periodicals mailers, it is the result of choices made within the Postal Service. Yet the Postal Service attributes these costs to the periodicals class. In analyzing costs, the Postal Service assumes that all costs are incurred efficiently and that all worker time and other resources spent on processing a particular class of mail are needed by and of benefit to that mail. Charging periodicals for the extra costs of manual processing that periodicals publishers did not request and do not need is unjust and unreasonable. The bottom line is while the magazine industry has provided the USPS with more cost-effective mail, periodicals unit costs as measured by the Commission have risen since 1986 by more than 300 percent, 107 percent above inflation. Between fiscal year 2006, the year in which the PIAA was enacted, and fiscal year 2009, the CPI increased by 9.8 percent. Periodicals unit costs as reported by the Postal Service increased by 24 percent. Something is clearly wrong with the cost attribution process in the manual processing of periodicals mail. Periodicals mailers should not be asked to shoulder the burden of cost they did not cause. Thank you. Mr. LYNCH. Thank you, Mr. O'Brien. [The prepared statement of Mr. O'Brien follows:] VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00097 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 94 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00098 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 95 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00099 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 96 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00100 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 97 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00101 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 98 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00102 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 99 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00103 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 100 Mr. LYNCH. Mr. Davison. STATEMENT OF HAMILTON DAVISON Mr. DAVISON. Thank you, Chairman Lynch. Thank you for your invitation to testify today. I represent the American Catalog Mailers Association. Half of America buys from catalogs, and for those who do buy from catalogs, when it arrives, it's arrival is something that's exciting and helps keep mail interesting and relevant to all-- to the recipient. Catalogs also provide significant social benefit delivering goods and services to the infirm, handicapped, elderly, and rural Americans, none of which can access stores easily. Catalogs are also ecofriendly. They may be America's biggest carpool. They save countless hours of driving and fuel and congestion on the road and are particularly helpful to single parent--time-starved single-parent families as well as dual-income households. In 2006 Congress modified the ratemaking cost, but the cost accounting approach has not been modernized. The one that is in use today is a result of 36 years of intense litigation, and as far as I'm aware, has no parallel in any gap regulation or private industry standard cost system that is in widespread use. Time doesn't permit me to delve deeply here, but I would say that the setting of prices and allocation of costs is an extremely complicated area that is properly placed with USPS management, with the review and concurrence of its regulator. The USPS is a high-fixed-cost system that is operating below its available capacity, and as more volume leaves the system, the remaining fixed-cost base has to be spread over fewer and fewer pieces. Using a nonstandard justification to push prices up just further perpetuates that downward spiral. In fact, standard flats--the standard flats mail category was covering its costs until 2007 when there was an enormous increase in postage costs that drove a lot of catalogs to reduce their circulation. And further increases in this environment would be counterproductive and serve only to divert more catalogs out of the mail, put more companies at risk, and undermine the entire system. I think there's some useful concepts in private industry. For almost every company there are products that the profitability of those products vary, and yet customers buy across many different categories. Companies regularly look at the sales in each customer's segment and try to understand the segment's profitability. Applying this to catalogs, we mail in standard mail flats, but we also mail an almost equal proportion in carrier route, which generates a net contribution to the USPS. We also, however, originate mail and standard mail letters, and standard mail postcards. We send profitable first class mail and we also spend almost as much on partial shipments as we do on sending catalogs, of which USPS is a relatively small market share there, and that provides an additional growth opportunity. I think the key to the future survival of the Postal Service is to understand their total customer segment contribution. As illustrated above, taking decisions on a single product category can lead to changes in volume in other categories from that same customer segment. The goal must be increasing the total contribution from VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00104 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 101 each market segment by optimizing the price and volume relationship. The greatest segment contribution is not always achieved by the highest price per piece. Sometimes a lower price which generates a maximum volume is one that is more profitable and sustainable. This is especially true in a volume-sensitive system with excess capacity. A customer-segmented approach also allows USPS to manage the content of the mail stream, the amount of highly valued mail from the recipient's point of view. With all the communications alternatives available today, it is critical to keep Americans engaged and interested in the mail. Managing the content does just that. Perhaps ironically just when the USPS is automating the flats mail stream, there are developments that threaten the amount of flats being processed. The USPS expects to dramatically reduce its cost to process flats with this equipment, but this will only occur if we do not drive flats out of the system before the automation comes on line. So to summarize, the unique postal accounting system developed through years of litigation may not accurately reflect postal cost and certainly does not capture the market behavior of customer groups. The infrastructure of the USPS is hard to reduce and the system needs to retain and grow volume. The catalog industry, which is a significant demographic tail wind behind it, is a great segment for the USPS managers to be focusing on for long-term growth. As catalog postage goes up, catalog volumes are going down. Since 1997 inflation has risen 37 percent, but catalog postage has gone up 58 percent, fundamentally altering the economics of cataloging, both reducing mail volumes and industry employment. In fact, the entire catalog supply chain remains severely strained from these large postal rate increases. Thank you for the opportunity to testify, I will be happy to answer questions. Mr. LYNCH. Thank you, sir. [The prepared statement of Mr. Davison follows:] VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00105 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 102 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00106 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 103 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00107 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 104 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00108 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 105 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00109 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 106 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00110 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 107 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00111 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 108 VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00112 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 109 Mr. LYNCH. I now yield myself 5 minutes. President Burrus, I know that in my early days on this committee, you've been an energetic advocate of, I guess, right-pricing the costs of these items that don't necessarily cover their actual delivery costs. And you've pointed out that's a real flaw in the current system. And if I read your testimony correctly, it states that first class single-piece mail makes a larger contribution to the overall institutional costs than its workshared counterpart. And I just wanted to hear your views on whether or not you can explain that, why that is occurring. And No. 2, is it right to try to assign at least the attributable cost of each piece of mail that goes through the system or, as Mr. Davison has sort of insinuated or argued, that you should look at the carriers' costs across various products. Mr. BURRUS. The problem with--my mic is on isn't it? Mr. LYNCH. It is, yeah. Mr. BURRUS. The problem with the attributable cost is that--and I've heard several witnesses respond to questions regarding it--is it takes the resulting contribution, the discounted rate, and from that they assign it attributable cost. APW's argument is it's a discounted rate, it is too steep, that the discounted rate should be higher than it is, then the attributable cost goes up, setting aside for a moment the percentages between nonattributable and attributable. But if the mailer is paying for the piece, then the contribution to the attributable, the institutional cost is increased. Our argument is that the discount is set too high. They are paying--postage rates are too low. It is really disturbing to me to hear witness after witness talk about the success of the program, and the Postal Service is projecting a $7 billion loss. Now, how can you forego--forgive over $1 billion a year in discounted rates and lose $7 billion? It just defies logic. It is like we're living in a different land; there are different economics that apply to the Postal Service that don't apply in the supermarket or someplace else in our society. The real assault on the U.S. Postal Service and its work force is when you set a discount at the cost avoided, and you take mailer out of the system, the mail that's lost--that is left, that is avoided, is more expensive. We have to have a network that serves the Aunt Minnies of the world, the single piece. Now if we have a major business in the community, then the volume is high and Aunt Minnie's mail is incorporated, integrated with all other mail, so the cost is reduced. Once you take all the other mail out of the system and presort it, apply workshare discount, you leave Aunt Minnie's mail, singular, like the flats that were mentioned, you leave only the most difficult mail in the system and the cost automatically goes up. And that is the standard they use to determine the cost avoided, what they leave the U.S. Postal Service. This entire workshare-discounted program has turned the rate structure of the Postal Service on its head. It is not generating volume consistent with the work that is performed because they are charging deflated costs for the same work. VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00113 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 110 I attached to my testimony two examples, of two letters, one where the rate paid was 42 cents, the other 34 cents, an 8-cent difference for that letter, and the indicia on the envelope were exactly the same; meaning they were handled the exact same by the U.S. Postal Service, including delivery. The Postal Service cannot exist if they are setting up a companion system in the private sector to perform the exact same purpose, the same functions. They will spin off sufficient revenue that cannot exist long term. Mr. LYNCH. Thank you. I know my time has just about expired. The chair recognizes the gentlelady from the District of Columbia, Ms. Eleanor Holmes Norton, for 5 minutes. Ms. NORTON. Thank you, Mr. Chairman. I thank you for yet another hearing on what I must say is a failing, if not obsolete, model known as the U.S. Postal Service. And I think your hearings on various aspects will lead us to where Postal Service isn't--certainly isn't leading us to where I think some hard decisions have to be made. For me, I must say this is a straight mathematical, if not arithmetical, exercise. If there are savings, if they are worth it, then there is a discount; if not, it's not. And I don't see why it is more complicated than that, especially considering the urgencies surrounding the financial conditions of the Postal Service, albeit with slight improvements that really don't matter because the model is failing in any case. Work-sharing is like the rest of the post office. It may have made some sense long ago when it was instituted, when automation was not the way in which the Postal Service operated, with less and less manpower of its own. But if the whole point is to modernize the service, if you get a model that works, I don't know why we would stick to this part of the model unless it can justify itself. I'm sorry I was not here to hear the testimony. I don't know if anyone has tried to justify the model. I was presiding in the Committee of the Whole on the floor, but I would be very interested to hear what justifications for the model exists in dollars and cents frankly, count it out. I mean, you know, there are harder--harder issues to figure out in the Postal Service that do not lend themselves to the same kind of numerical equation that I think could be done here. What most concerned me is, is there a cost to individuals in small businesses? That simply cannot be tolerated. And there is some testimony, as I look through the testimony, that indicates that may be the case. Look, if we all want to use this model, we're all going to have to do something very different from what's been done before. Eighty percent, or something like 70 or 80 percent of the American people in polls say, OK, eliminate Saturday delivery. Saturday delivery is a fairly recent phenomenon of recent decades, but I'm not sure what it will take to get that change, if that change is to occur. But the notion that we're sitting with the same model we've been having hearings about, I must tell you is very troubling to me, which is why I am pleased the chairman has chosen this aspect to consider here today. VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00114 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 111 The fact that--I was not aware until this hearing that worksharing was almost all that occurs in the Postal Service these days. It has taken over the Postal Service; 80 percent of the mail is workshared. So little has changed about the Postal Service. Mr. Chairman, I haven't been here long enough to ask truly intelligent questions. I simply want to go on record as saying I think the Postal Service has to be pressed much harder not to do what it's been doing, saving here and there around the edges. We're delaying the inevitable. It's just too late to do that. We have simply got to fish or cut bait. This model doesn't work. I don't know if enough people, Mr. Burrus, are going to retire in order to help the situation involving personnel. I don't know if they will make decisions about work-sharing. I don't know if they are going to quickly get to a recommendation on 5 or 51/2-day mail. All I know is it's going much too slowly to save the Postal Service. And above all, I want to urge greater efficiency, as it were, on the part of the Postal Service in getting themselves a brand new model and coming before this committee to share it with us. Thank you very much, Mr. Chairman. Mr. LYNCH. I thank the gentlelady. Mr. Buc, let me ask you, the Postal Regulatory Commission's most recent annual compliance determination revealed that, I think, 30 workshare discounts exceeded their--their avoided costs; seventeen of them were justified under statutory exceptions, but 13 were not justified. Have you had an opportunity to review that, you know, those-- at least the cases that were brought forward? And do you think that the PRC's determination was justified or do you take exception to that? Mr. BUC. I haven't reviewed each and every one of them in great detail. The PR--the Postal Regulatory Commission is the umpire in this world that calls the balls and strikes. We may argue with him occasionally, but most of us defer to them in judgments like this. Again, my testimony is that, in general, discounts should be equal to costs avoided. I don't believe that they should be less. I also do believe, in general, that they should be more. Mr. LYNCH. How do we--well, they found--they found differences here that we had departed from the ideal of matching the discount to the attributable cost. And so now they are struggling, as you heard at the previous panel, struggling to meet the goal of aligning the cost with the charges. And I know that you're concerned about that. Do you have any suggestions as to how they might align those costs without causing undue damage, or perhaps less damage, than otherwise might through this exigent rate case? Mr. BUC. It's a very, very hard question. You ask many people the same question. In the long run, it can't be the case that all products sell below their cost. You simply can't do that in the long run. But in a situation where costs are above price, there are actually two possibilities to get things lined up. One possibility is that you can reduce costs to be where the prices are. Mr. O'Brien has spoken about the flats world, where perhaps some things could go on that would take care of that. The other possibility is that you VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00115 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 112 would raise prices to cover some of those costs. And the Postal Service needs to be careful that it doesn't drive volume away. As you all know, in the world today, mailers have lots of alternatives. Ms. Robinson testified the choice is not between work-sharing and not work-sharing for many mailers. It is between mailing at all and not mailing. So the Postal Service has a really tough problem. If I had the solution, I would actually give it to them. Mr. LYNCH. Thank you. Part of this, we're confronting this in a very difficult time. A rising tide lifts all boats, and in this case the tide has gone out and so every sharp rock, every shoal is now exposed, and so we're trying to meet that challenge. It is a very difficult situation. And I understand for every reaction we take care to try to--to try to align costs with--align charges with the costs that those deliveries incur, we risk losing that volume of mail, which is exacerbating the situation. So we're between a rock and a hard place here. And we're trying to, I think, manage the current situation with the idea that if volume picks up, if we gain a fair amount of the market share and the volume that we've lost, that we can live to fight another day. I'm just trying to find out from the mailing community what that looks like. What can we sustain going forward without causing us greater harm? Mr. BUC. We actually have some optimism about some of the volume coming back in standard mail, marketing mail. Through the recession the Postal Service has actually kept its market share and increased its market share a little bit. So as the economy recovers, we're very optimistic that there will be more marketing mail. In first class mail, the prospects are not quite as optimistic. It turns out that historically every time the Postal Service has granted a new work-sharing discount, people have found new ways to use mail. And I do believe that's been responsible for much of the growth of postal volume over the years. There are some opportunities for additional work-sharing discounts that the Postal Service might think about availing itself of. Mr. LYNCH. Thank you. Ms. Eleanor Holmes Norton, you're recognized for 5 minutes. Ms. NORTON. No. No further questions, Mr. Chairman. Mr. LYNCH. Thank you. Dr. Riley, you went a little bit afield from your original testimony, but it was interesting nonetheless. I know you got away from the pricing question and spoke a little bit about the 5-day delivery question. And my own concern is this: that if we somehow eliminated Saturdays, then I actually think it puts us in a more difficult financial situation with the Postal Service. We would lose not only the Saturday delivery and that revenue, but I also think that customers may say, well, if they've got mail that's going out on Thursday, or--you know, or Friday, they'll say, Well, you know, the post office--not the post office--but there will be no delivery on Saturday and Sunday. If there is a holiday on Monday, maybe I ought to call USPS or FedEx or someone else, so there will be a migration of mail volume that is currently relied upon by the Postal Service to sustain its operations so that, at the end of the day, it's a self-inflicted wound. It doesn't make the Postal Service stronger, it actually may make it weaker, and considerably so. VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00116 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 113 I'd just like to hear what your thoughts are. I know you've talked about that in your original testimony, but I would like to hear your thoughts on that. Mr. RILEY. I think--am I on--I think you're precisely right. Congresswoman Norton talked about the business model being broken, and the business model is broken because people chose to break it. Saturday delivery, I think the Postal Service says that 71 percent of the people say they don't care, which means 29 percent of the people do care. Why do you want to anger 29 percent of your customers and drive them away, to finally give up and say, you know, I've had it, I'm going electronic. It makes no business sense. I can't think of one service organization in this country that looks to prosper by cutting back on its service. If you go to the FedEx Kinkos in Herndon, VA, which I did to get the charts printed up so you could see them, you'll discover they are open 24 hours a day, 7 days a week. Service businesses are in business to provide service, and the Postal Service has gotten away from that. In general terms, the Postal Service raised the price of a first class stamp 37 percent since 1998. Over that time, inflation has only gone up 33 percent. It has gotten rid of 20 percent of the work force and it is sill losing money. It should be coining money and it is not, because it is driving customers away for some of the smaller self-inflicting wounds. And Chairman Lynch, you're exactly right; this would be a huge self-inflicting wound. And I believe the Postal Service will not recover if it is allowed to proceed with that. Not that I feel passionately, you see. I have devoted most of my life to the Postal Service. Mr. LYNCH. I still have some time left. Mr. RILEY. Sorry. Mr. LYNCH. What about the idea--I know a lot of e-mail is just person to person, so that's probably not as big an impact on the Postal Service, because they weren't necessarily writing letters to each other, and that wasn't volume that was eliminated. But I do know that it is quite common now, even myself paying bills by mail--excuse me, by the Internet and on line, and there is a huge volume of mailers disappearing. And so I think it is irrefutable that we're going to a new model here. And I don't know, you know, you're much more familiar with this in your teachings and in your studies than I am, but at least the anecdotal evidence I see is fairly powerful. Mr. RILEY. I converted last summer to paying bills electronically because I couldn't get my mail sent to where I was. And that's because I was going to be in different spots in the country at different times. And I was willing to pay $15 a week for Snowbird mail to put it all in a priority mailbox and send it to me. It would only go to one address, and I could only choose one at a time and I had to specify the dates in advance. In a world where I can go online to every one of my credit cards and change my bill once a month with a password-protected device, I can't get my mail sent to where I'm at. So my solution was to pay my bills on line. The Postal Service--if everybody in this country knew about Snowbird mail--and there are 38 million retired people in this-- 38 million people over 65. And if that's--if just 5 million of them VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00117 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 114 were to use 10 weeks of Snowbird mail, that would add $750 million in revenue and the cost would stay the same, because the Postal Service is already forwarding most of that mail piece by piece anyway. It's more efficient to put it in a box and send it out. So there are a lot of good things the Postal Service could do to change the business model to take into account what's going on in this era. My daughter has been paying her bills on line forever, worried about identity theft and thinking about moving back. Does anybody ever advertise the Postal Inspection Service and say that mail fraud is still a crime and 96 percent of the people charged with mail fraud get convicted? Try getting somebody convicted for mail fraud over the Internet. I think there's a great business model that could happen that is being ignored. I think your instincts are right on. Mr. BURRUS. Mr. Chairman, I think there is a misconception that postal volume is driven by personal communications. A lot of personal communications has migrated through electronics, Internet, Tweeters, telephone and other. That is a very small percent of total volume. Postal Service volume is driven by commercial mail. I get more mail today, even with the decline, major decline of volume. I get more mail in a month than my father received in his entire lifetime. So there is no connection between growth of volume. In 2006, the Internet did not go on vacation; we reached our highest point of hard-copy communications in this country, in the world, in 2006. Mail is tied to commerce. As the economy grows, mail volume will grow. This side show of individuals sending birthday cards on the Net, certainly we would like to have all the mail, we would like every message to be converted to hard copy, but we can grow without it. The Postal Service is an advertising company. They have to understand and appreciate the fact that they have to grow. Their growth will be in commercial mail, letter mail, not in parcels. It will be in letter mail. And if they fail to capture a growing market in letter mail, they can't exist in niche services. Mr. LYNCH. Thank you. I think the truth is somewhere in between here, that all this mail is not going to go away. I think a lot of mail is going to come back with the economy and advertising. I also know there are technologies out there. I know--I think it is Sweden or Finland, where you can go on line and actually see your mail before it's delivered, and click on it if you want it delivered and, I guess, dispose of it if you don't want it delivered. And I think as that greater sort of interaction with the customer becomes more commonplace, I think we have to recognize that technology will be out there. So we're trying to provide--we're trying to reconstruct a system and modernize it so that it stays current and that we don't fall behind. You don't become the buggy-whip of the next century. We have the same problem here in Congress. We got rid of the powdered wigs, but that's about it. We're still operating the same way we did back in the 1700's and we're trying to keep up with modern industries that are running circles around us. Mr. O'Brien, I think it was you, in October 2007--it is terrible to come here and testify, because we can always throw your testi- VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00118 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 115 mony in front of you at a later date--but you testified before the subcommittee in favor of a recently redesigned rate structure to better align rates and costs for periodicals. Now several years after that rate structure has been in effect, do you think that the newer rate structure has been a success? Mr. O'BRIEN. Yes, the rate structure actually has caused a great deal of change. As I said in my testimony today, we used to only produce 29 percent--the periodicals volume came in carrier route bundles, the most efficient bundle we can give them. Today that's over 55 percent. Without that rate structure, we would not have incented that change. And that just improves the process. So the other thing that you should know is this carrier route bundle, the pass-through of cost savings is 711/2 percent. So this is not one of those underwater products that you've asked about earlier today. So if the Postal Service saves a dollar, 711/2 cents is what the incentive would be for the mailers. So this is a good deal for the Postal Service. Mr. LYNCH. All right. In your testimony before, at least part of it, you described the inefficiency with periodicals in that they were manually processed as something that was undesired and unnecessary on the part of the mailer. Can you flesh that out a little bit for me? Mr. O'BRIEN. Sure. Basically the Postal Service has spent billions of dollars on automation. And when you automate a process, you sometimes wind up with excess capacity and you need to have that excess capacity utilized in some way; otherwise people are standing around. And so what happens is things get created, like these bull pens, which are basically hampers that are all lined up in a circle, and people come and take bundles and throw them in these hampers designated to various zip codes in an area. And so that manual processing exists today. I saw it 3 weeks ago. I see it in every SCF that I go into, Section Center Facility that I go into, it exists today. After spending billions of dollars on machinery, they have to find a way to capture those savings and not do manual processing of mail today. I mean, it's a complete-- complete waste of time and it exacerbates the cost for periodicals mailers. We just can't have that happen. Mr. LYNCH. I'm trying to get these straight in my mind. Is that flat sequencing system? Is that---- Mr. O'BRIEN. It's not even that. There's--there are machines today that will sort bundles and just like this, and so instead of sorting the bundles on the machine, they're sorted by hand, and that's just insane. The machines exist today, but the Postal Service segregates periodicals out, puts us on manual processing. And the way that they track costs is something called the IOCS, which is an in-office cost system, and the way it works is like this: It stopped the music. So they stopped the music and say, what are you holding? I'm holding--I'm holding periodicals. I'm charged to periodicals. Mr. Riley's holding a catalog. He gets charged to catalogs. Well, if you automate a process, and you put manual labor on a certain class of mail, when you stop the music, more bodies are holding magazines, and we are attributed with the costs. It's not right. Mr. LYNCH. OK. Thank you. VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00119 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 116 Mr. Davison, I did recall in your testimony you didn't really discuss this, you talked around it, but the flats sequencing system and its potential effects on improving the costing of catalogs. Do you think this FSS, this flats sequencing system, has promise to address some of the concerns that you raised in your testimony? Mr. DAVISON. I think it has the potential to lower the cost of processing catalogs and magazines, and we only have nine machines out today, and they haven't even been fully accepted; so that's a little bit of an unwritten story still. But I have, as Mr. O'Brien describes, also been in facilities and seen the inefficiency in the processing of flat mail, and we very much need something that will automate that and allow it to be handled more efficiently. I mean, as was said by, I believe, Mr. Waller, the costs in this category have been very high and out of control. We've had a 58 percent increase in postage in a 34 percent inflation period. So we're much higher than inflation. It's just not sustainable from our perspective. So we've got to--we've got to go after the cost side. Mr. LYNCH. Where are we in that process? You said there are nine locations that have these, and where are we going, as far as you know, with full implementation? Has this been stalled, or why is it not more widespread? Mr. DAVISON. I can't--I can't answer the question for the Postal Service. I know they're working very aggressively on it. I know they've been working with us and others in looking how they can get mail to the front of the machine most effectively and induct it into the machine automatically. They've propagated a number of changes to the regulations to allow some of those things to occur. It's my understanding that they're still completely committed to it, and at the same time you do have flats volumes that are dropping. So it's a little bit of a moving target. Where do you put the machines, and what is the cost justification of them when you have so much volume leaving the system? It's--we're doing things to ourself in our pricing that's driving volume out rather than keep the volume in and lower the cost basis through automation, which seems to be a much more sensible approach. Mr. LYNCH. Let me put a question out there for Mr. Buc and Mr. O'Brien and Mr. Davison. The pending rate case there, the exigent rate case that they plan to introduce in 2011, what are your major concerns with--they've indicated a moderate increase. Do you have any sense of what that means? I mean, we tried to elicit from the earlier panel what that might actually constitute, but you might have a better idea. Mr. BUC. As you know, the Postal Service says that its Board of Governors speak for them; so I wouldn't want to speak for their Board of Governors. But the rumors on the street, and, of course, there are rumors on the street, is that moderate means under 10 percent and perhaps well under 10 percent. If you go read the trade press, you'll see that the trade press is reporting 5 percent for products that are covering their costs, 8 percent, 7 percent, 9 percent for products that are--I mean, that's all over the trade press. So that's not my number; that's trade press numbers. Mr. LYNCH. Is that what you're hearing, Mr. O'Brien and Mr. Davison? VerDate 11-MAY-2000 14:50 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00120 Fmt 6633 Sfmt 6633 U:\DOCS\58349.TXT KATIE PsN: KATIE 117 Mr. O'BRIEN. Yes. I think that's--that's very accurate. But the one point I'd like to make on that is they're talking about a higherthan-average increase for periodicals class and standard mail, which is the catalogrs. And the point that I'd like to make is before you do that, make sure that you get the costs right. You know, people don't object to covering their costs, but they just want to make sure that the costs are right. Everyone should cover their costs for sure, but just make sure that your costs are right before you arbitrarily increase someone's rates. Mr. LYNCH. Right. Mr. DAVISON. And I'd--I'd just add to that you have to consider where we are right now. We've just come through a very terrible recession, and the whole system is strained. There's just not a lot of ability to absorb large increases, and we are in a zero or near zero inflationary environment, and this is a time when jobs are very important. There's a lot on the line here. Mr. LYNCH. I appreciate it, and we spoke to that earlier about the fragile nature of the Postal Service, so we don't want to introduce any unnecessary shock, but we certainly do want to bring those products up to a point where they're closer to covering their entire cost. I mean, you can bring it up gradually over time hopefully, but I understand the vulnerability is heightened right now. Mr. DAVISON. When I ran a retail business, we would have products that weren't making the average markup, but we would use those to get people in the store and buy other products. And almost every business I'm familiar with has a variability between products of the profitability, and I would respectfully suggest we shouldn't look at the product profitability, we should look at the customer segment profitability and figure out how customers are using the service and what incents them to buy so that we can continue to add value in that relationship and develop new products based on our keen understanding of their unique needs that aren't being fulfilled today. And I kind of concur with Dr. Riley on that point. To the extent that you understand customer behavior, you can deliver products that they don't even know they need based on that understanding. Mr. LYNCH. OK. Well, I want to thank you all for your willingness to come to the committee today and help us with our work. I'm going to leave the record open for 5 legislative days for Members to submit questions, if they have any, for you or for the first panel. And with that I will declare this hearing adjourned. Thank you. [Whereupon, at 5:10 p.m., the subcommittee was adjourned.] [The prepared statement of Hon. Dennis J. 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