Copyright 1999 Federal News Service, Inc.
Federal News Service
MARCH 4, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH:
3996 words
HEADLINE: PREPARED TESTIMONY OF
KENNETH
B. ALLEN
EXECUTIVE VICE PRESIDENT AND CEO
NATIONAL NEWSPAPER ASSOCIATION
BEFORE THE HOUSE GOVERNMENT REFORM
COMMITTEE
POSTAL SERVICE SUBCOMMITTEE
SUBJECT - H.R.
22, "THE POSTAL MODERNIZATION ACT OF 1999"
BODY:
INTRODUCTION
This testimony is
submitted on behalf of the National Newspaper Association in order to comment on
the Postal Modernization Act of 1999, H.R. 22, as introduced by Chairman John
McHugh of the Postal Subcommittee of the House Government
Reform and Oversight Committee, as well as the recent proposed
amendments to this legislation offered by the United States Postal Service.
The National Newspaper Association, established in 1885, represents nearly
4,000 daily and weekly newspapers nationwide. Our members are customers of the
United States Postal Service not only for First Class mail, but also for the
Periodicals category of mail--both regular rate and within county Periodicals
mail. Most of our members use the Postal Service as their delivery agent rather
than using a private delivery system. Using the Postal Service allows newspapers
to focus on their product rather than upon distribution. For many of our
members, there is no alternative to the United States Postal Service for the
delivery of their newspaper. Many of our members have also taken the opportunity
presented by advertising mall rates and have developed new products under the
Standard A mail rate.
Community newspapers primarily focus on local news and
information essential to their local community. Our members are "refrigerator
news"--most likely to be tacked up and saved on the refrigerator door by
readers. Our members also have a proud history of serving their local
communities by working in cooperation with local business and by providing
commercial information through advertising that ties the community together. For
many of our members, they have been performing these functions for more than one
hundred years and over four generations.Our greatest partner in this endeavor
has been the United States Postal Service. Today, the commitment and dedication
of local postal employees to their community and the local newspaper is
inspiring and a great untold tale. The United States Postal Service and the
local community newspaper touch more lives on a daily basis than any other
institutions in the United States. Regardless of what the future holds for the
Postal Service due to the widely touted Internet revolution, newspapers will
always remain customers of the Postal Service. Therefore, we do not take the
issue of reforming the statutes governing the USPS lightly. We are interested in
a strong, vital United States Postal Service that provides universal delivery at
affordable rates.
OVERVIEW
During the Subcommittee's last heating on
H.R. 22, on February 11, it was not surprising to learn that the Postal Service
is reluctant to acquire added regulation. It was also not surprising to hear the
Postal Rate Commission argue in favor of added regulations. The underlying task
for Congress is to balance out these competing interests and create a system
that encourages the Postal Service to effectively and fairly serve all
customers--something that cannot happen without reasonable oversight to manage
the postal monopoly. Postal reform has been
compared to the reform of the telecommunications law in 1996.
But the intent of telecommunications reform was to provide
consumers with lower prices and more choice in services. The goal of
postal reform is to foster the lifespan of the United States
Postal Service in a changing communications environment to
enable it to continue to provide the intangible-universal service to everyone
everywhere. To date, little mention has been made of the postal
"consumer" or of Congress's desire to lower postal rates for
ratepayers.
Telecommunications reform occurred at a time
when computerization dramatically lowered operating costs, permitting the
telephone companies to earn record profits even with a price cap. This great
technological boon remains largely unavailable in print message delivery which,
by its very nature, requires massive numbers of human beings to operate.
We
do not disagree with the intent of postal reform and strongly
support the desire to protect and foster our nation's treasure. But as we
examine the reform provisions we continue to ask whether the reform solutions
are good for the American public. Before turning to specific issues in H.R. 22,
in general terms NNA seeks the following: - A level playing field so that the
USPS is not in the role of picking winners and losers among mailers.
-
Adequate oversight: NNA is not desirous of overregulation, but of protection
from a $60 billion government agency thirsting for new products and volume----we
need an avenue of recourse by an independent authority and strong oversight by
Congress to ensure continued dedication to universal service by the Postal
Service.
- Adequate public participation and public notice: to ensure
fairness, we do not seek post facto solutions where the Postal Rate Commission
would be cast in a "gotcha" role, but rather, an open process to enable all
customers to participate.
- A system that ensures mailers are rewarded for
preparing mail efficiently through discounts based on costs avoided by the
Postal Service.When NNA testified before this Subcommittee in 1996, we expressed
concern over the basic premise that greater volume for the USPS will enable it
to survive to provide universal service to everyone everywhere. This seems to
continue to be the main solution underlying many of the reforms sought by the
USPS and other volume rich customers. The underlying assumption is that more
volume will generate more revenues that will allow the Postal Service to
continue to operate without regard to long-run costs that probably would not be
absorbed by the high volume mailers. Such a premise underlies the desire for
volume-based discounts, pricing flexibility benefiting the volume rich, and
secret contracts that would be based on the best arrangement between the
contractor and the Postal Service. The winners will be large volume mailers,
while the losers will be small volume mailers such as newspapers.
We believe
that the USPS is best serving the public when it delivers the mail that exists
rather than focusing on generating more mail volume. Its operating costs should
be governed accordingly, expanding or contracting with the mail. Unfortunately,
in the current environment, volume loss does not necessarily equate to cost
reduction, as the rising costs for Periodicals mail show. We also wish to
underscore that it is not good policy to ask the mail delivery agent to not only
deliver the mail, but to generate more mail and craft new products rather than
serving as a passive carder of products and services. It would then be possible
that the Postal Service would determine that it need not deliver products of its
competitors. Or, if the law required it to operate as a common carrier, it would
simply provide slower or less dependable service. It would then be more likely
that the Postal Service will favor its own products and services when it
structures its competitive offerings. Postal employees could be required to
deliver the products and engage in service offerings of the USPS's private law
corporation rather than serving the delivery needs of the local community.
Without appropriate structural separations and a Chinese wall erected in the
database, the Postal Service would also have an insider's view of competitor's
mailing patterns and their targeted reach to certain coveted segments of the
marketplace. What would prevent the Postal Service, for example, from making a
better offer to Safeway for advertising distribution once it detected a new
Safeway ad in the local newspaper? Ultimately, the free marketplace would be
skewed by the participation of a federal agency in private ventures.
SPECIFIC CONCERNS WITH H.R. 22
We believe that H.R. 22 in its
current form contains many of the essential checks and balances necessary if we
were to trade the existing cost of service regulatory scheme for a new,
uncharted price cap regulatory scheme. Our main concerns with the legislation
and the Postal Service's proposal are outlined below: Price Cap Regulation:
Under today's rate-setting procedures, the United States Postal Service
submits an omnibus rate request before the Postal Rate Commission approximately
once every three years. The Postal Rate Commission conducts a ten-month
regulatory hearing--a short time period in which to decide appropriate rates for
the diverse mailing community. Newspapers are part of the Periodicals mail
class. Our members pay the regular Periodical rate for newspapers travelling
outside of their local counties. Most small newspapers also qualify for the
within county rate, which includes the attributable cost for our mail subclass
plus a contribution to the Postal Service's overhead. Within county mailers pay
one half of the mark up of the most closely corresponding commercial rate,which
is in this case, the Periodicals rate. (See 39 U.S.C. Section 3626.) Within
county mailers must be entered within the county of the local post office in
which the mail is entered for delivery to addresses within that county. Such
newspapers must have a total paid circulation of less than 10,000 or the number
of paid copies of such issue distributed within the county is more than 50% of
the total paid circulation of such issue. (39 U.S.C. 3626 (g)(1-2))
Existing
law provides for consideration by the Postal Rate Commission of important
factors of the educational, cultural, scientific and informational value to the
mail recipient, among others. (See 39 U.S.C. Section 3622)
Newspapers
perform extensive and time-consuming work-sharing in order to lower their
overall postal rate bill. This may include drop shipping their newspapers so
that the mail moves farther into the mail stream and saves the USPS added costs,
a practice for which they presently receive no discount unless they comply with
complex "additional entry" regulations. The newspaper publisher may also be
performing mail sortations so that the newspaper is sorted for the postal
cartier route. Many also attempt to sort their mail according to the postal
carrier's walking pattern or line of travel-another contribution for which some
are denied a discount for not meeting a certain number of mail pieces. This also
will lower the overall postal bill for the newspaper. Performing these functions
saves the publisher and the Postal Service hundreds, even thousands of dollars
in postal costs. Over decades of rate case proceedings, these worksharing
discounts have been shown to be beneficial to the Postal Service and to the
economy as a whole.
Under the new system in H.R. 22, a price cap would be
applied for the noncompetitive mail based on the consumer price index minus an
adjustment factor on an annual basis. Rather than an omnibus rate proceeding,
the Postal Service will apply the cap. (Sections 3731, 3732, 3733.) The
strengthened Postal Regulatory Commission would establish the adjustment factor
once every five years in an open proceeding (Section 3733.)
Numerous
economists testified before this Subcommittee in April, 1997 that the price cap
regime was crafted for the circumstances of a privately-owned, profit seeking
firm that is regulated to prevent the exercise of market dominance rather than a
federal agency operating the largest labor force in the public sector.
Under
the price cap setting regime, we cannot answer whether work sharing would occur
that would give the Postal Service the incentive to pass on its cost savings to
customers. The price caps would be imposed on the non-competitive postal
"products." Yet the price cap provides flexibility for the Postal Service to
save up a rate hike by maintaining lower than authorized rates for a
time--possibly to seize market share from a new private carrier--and then to
suddenly raise them significantly once the private carder was out of the market.
We also remain concerned that the cap would allow the USPS to engage in
favored pricing beneath the cap. The ability granted to the Postal Service to
"bank" unused pricing discretion adds to our concerns.
We do agree, however,
that under the current system, there is little incentive for the United States
Postal Service to control its costs because all of its costs are ultimately
passed on to the consumer, regardless of how efficiently or inefficiently the
Postal Service operates. Periodicals customers face the consequences of such
inefficiencies in higher rates. But we are not convinced that the price cap
system proposed would effectively shield our newspapers from discriminatory
treatment, or that it has been established whether work-sharing by mailers would
continue to be an important factor to offset rate increases.
Negotiated
Service Agreements:
Under Section 202 in H.R. 22, in addition to price cap
regulation for noncompetitive services, the Postal Service would also be able to
negotiate private deals with its customers, assuming the deal will ensure the
Postal Service will be better off. Such an evaluation is often in the eye of the
beholder. The Postal Service could argue such a private arrangement benefits all
mail customers because it allows the Postal Service to retain market share and
its largest customers, rather than passing on cost savings to its other
customers. We are not yet comfortable with the concept of negotiated service
agreements, but do appreciate the advance review by the Postal Regulatory
Commission as provided by I-I.R. 22, rather than the secret tariff arrangement
advocated by the Postal Service in its amendments. Additionally, under the
Postal Service's proposal, publishers and other mailers would only be able to
file a complaint after the contract has been in place. The provisions of the
deal would remain confidential.
Such agreements are not meaningful to
America's community newspapers. It is not within the realm of reality that a
small, rural newspaper customer would provide the benefits the Postal Service
would seek in such arrangements, nor is it possible that our newspapers would
have the time to go before the PRC in an advance review proceeding in
Washington, D.C.
There is a danger that such special deals would result in a
two-tiered postal system--where one set of select postal patrons would receive
the best treatment, while other users would receive poor treatment and higher
rates because they could not offer the same enticements to the Postal Service.
These postal have-nots would be faced with only one avenue of recourse--the PRC,
but would have few tools to fight the deals since the arrangement would be
secret.
It is not adequately developed why such special deals are in the
public interest. There is a greater likelihood that universal service would be
damaged by allowing the agency to focus on a select group of customers. There is
only one national postal system that exists to serve all customers. It is
unclear what new operations would have to be put into place to serve select
customers by the Postal Service. It is more beneficial to the system as a whole
if available discounts were passed to all customers based on open, objective
criteria under the review of the Postal Regulatory Commission. We do not support
negotiated contracts and urge their rejection. Rates For Products in the
Competitive Category:
H.R. 22 separates the rate-setting provisions between
the non- competitive and competitive categories of mail. Non-competitive mail
would include the classes used by newspapers, namely, Periodicals mail and
Standard A for their advertising mail and shoppers. These mail classes would be
subject to the price cap regime. A second category would be "competitive mail,"
including Priority mail, expedited mail, mailgrams and parcel post. Rates in
this category are established by the Board of Directors of the Postal Service.
The product must cover its attributable costs and the entire category of mail
must collectively provide an equal cost contribution as is applied by non-
competitive mail. This category will also be subject to the same laws faced by
private industry.
We support this provision so long as there is a strong
firewall established between the competitive and non-competitive products. Our
concerns with this division, however, is that there is a danger that the captive
mail could cross-subsidize competitive mail if the amendments offered by the
Postal Service are adopted, or that the Postal Service would use its monopoly
powers to develop a purportedly non-competitive product and then catapult it
over the wall where absence of regulatory control would permit monopoly profits.
This has occurred in other industries where a project is rolled out by the
regulated entity through its subsidiary and financed by its monopoly products.
For example, in the early days of telecommunications reform, state
public utility commissions routinely complained that their meager auditing
staffs were wholly unable to detect the complex bookkeeping fiats that they
believed enabled local loop telephone companies to shift costs to the monopoly
so that the unfettered competitive subsidiaries could offer lower prices. It
will be quite difficult to demonstrate that the competitive products will be
able to cover attributable costs and can also "collectively"contribute to the
overhead.
Meanwhile, the Postal Service has offered amendments that would
eliminate the requirement that such products must make a contribution to the
overhead of the USPS-clearly allowing for the possibility that the captive
mailers will be paying for the successes and failures of such products in added
overhead costs. Will the postmaster, for example, be working for the monopoly
products exclusively, or will we pay his or her salary while the job drifts
irredeemably to developing the competitive side of the Postal Service? We are
also skeptical of the assertion by the USPS that it can separate its assets and
liabilities between competitive and non-competitive segments of the Postal
Service. Will depreciated buildings, for example, be shifted cost free to the
new corporation so that the monopoly ratepayers must pay the bill for new
facilities? Or will the cost basis and depreciation be recaptured and passed on
to the private law corporation in a sales price? Will the private law
corporation pay taxes on the basis of its acquisition-priced assets or upon the
basis of the Postal Service acquisition? Again, this may create a two tiered
postal system counterproductive to universal service where captive mailers are
paying for new ventures by the Postal Service. We would urge the Subcommittee to
reject these amendments. Market Tests:
H.R. 22 offers the opportunity to the
Postal Service to conduct two kinds of market tests. The first allows for a
market test for "experimental noncompetitive products," which would be
significantly different from all products offered by the Postal Service "within
a two year period prior to the test." (Section 3751) Revenues received could not
exceed $10 million annually. There is an added test to be performed by the PRC
to ensure the test does not cause "undue market disruption." The test could last
up to two years. (Section 3751) There is a requirement that the Postal Service
is to file with the Postal Regulatory Commission a notice setting out the basis
for the test 30 days before initiation. (Section 3751 (c)). The second type of
test would occur for experimental competitive products. This test would be for
products substantially different than all other products offered by the USPS in
the two-year period preceding the test. The test cannot exceed $100 million
annually in revenues. It would be limited to two years. The PRC would again
regulate these tests to ensure against "unfair or disruptive competition." There
is also a notice provision requiring the Postal Service to provide notice to the
Postal Regulatory Commission that the test meets the requirements of the law.
(3752 (c)).
NNA is concerned with the size of these tests and their impact
on private industry already offering many of the products the Postal Service
would seek to offer. To the Postal Service, as reflected in its proposed
amendments to H.R. 22, the size of the tests are not enough. To a small mailer
already subject to competition in the free marketplace, such tests would be
enormous.
We fear that these tests will focus the Postal Service on
competitive ventures while losing sight of its core universal service delivery
mission. We question where funding for such large tests would be derived. If
there is to be such a large test, will noncompetitive services need to pay for
the start-up costs? There is also no direction as to what the excess revenues
from market tests are used for, whether more tests or whether to lower mail
rates for the customer. Finally, we question whether the jurisdiction of the
Postal Regulatory Commission is being extended into the antitrust arena to
examine the impact of these test on the marketplace. Private Law Corporation:
H.R. 22 also would give the Postal Service the opportunity to set up its own
"private" corporation. (Section 204) The Postal Board of Directors could
establish this company and take all steps necessary for incorporation. It is
specified in the bill that neither the entity is not to be considered an
instrumentality of the United States nor a government controlled entity.
Meanwhile, the Postal Board would choose the Board of Directors of the
company--which begs the question of the corporation's independence from the
USPS.
The company would be able to issue stock but the shares must be
purchased by the "Postal Service Competitive Products Fund." This fund is set up
by the Postal Service to offset its costs in providing competitive services.
(Section 203) The corporation could offer any postal or non-postal products with
the exception of the postal monopoly. It would also engage in joint ventures and
other alliances with private industry.
Unfortunately, the provision in the
legislation as well as the proposals offered by the Postal Service itself fail
to even to support the concept of promoting universal service through funds from
this private corporation. Both H.R. 22 and the Postal Service seem to accept the
premise that the Postal Service is no longer a relevant agency in today's
society and should therefore be backstopped by a private company. We are
concerned that in offering postal products, this new corporation could erect a
new postal system operating on a parallel track with the existing Postal
Service, only funded by its competitive products. The private corporation will
gradually skim the cream, and quietly retire the public service obligation from
the traditional Postal Service as being too costly.
In offering non-postal
products, this new corporation could compete effectively with private industry.
NNA does not support the concept that the federal government should be unleashed
by Congress to compete with private business, even if the intent of the
competition is to further universal service. Meanwhile, nothing compels the
private corporation to fund universal service. We do not believe it serves the
public interest to allow the Postal Service to engage in nonpostal activities
where its economies will distort the private marketplace. We are not convinced
such a trade-off would serve the nation in maintaining a strong and healthy
Postal Service.
CONCLUSION
Despite our objections to some of the
provisions of H.R. 22, we understand that postal reform is an
evolving work in progress. The Subcommittee staff has been outstanding in
providing clarification and guidance. The staff of the Postal Service, under the
leadership of Postmaster Henderson has been open and involved in mailers' needs
and interest in postal reform. We appreciate the opportunity to
share our views and look forward to working towards an acceptable postal
reform bill that will be beneficial to our members and to the
communities they serve.
END
LOAD-DATE: March 6,
1999 
