Copyright 1999 Federal News Service, Inc.
Federal News Service
MARCH 5, 1999, FRIDAY
SECTION: IN THE NEWS
LENGTH:
3776 words
HEADLINE: PREPARED STATEMENT OF
WILLIAM
B. DISBROW
PRESIDENT AND CEO
COX TARGET MEDIA, INC.
BEFORE THE
HOUSE GOVERNMENT REFORM COMMITTEE
POSTAL SERVICE SUBCOMMITTEE
SUBJECT - H.R. 22 "THE
POSTAL MODERNIZATION ACT OF 1999"
BODY:
Mr. Chairman, thank you for the
opportunity to present you and the other members of the Subcommittee with the
comments of Cox Target Media, Inc. with respect to H.R. 22, the Postal
Modernization Act of 1999.
Val-Pak Direct Marketing Systems, Inc. and Carol
Wright
Cox Target Media, Inc. has two wholly-owned subsidiaries which are
substantial mailers, primarily using Standard A Mail. Val-Pak Direct Marketing
Systems, Inc. is the nation's largest firm in the subset of the hard-copy,
direct mail cooperative advertising industry which is sometimes referred to as
"coupons in an envelope." Val-Pak operates in all 50 states through
approximately 210 U.S. franchises which are members of the Val-Pak Dealers'
Association, Inc. The work of these franchisees is supplemented by efforts of
approximately 1,200 sales representatives. Cox Direct, trading as Carol Wright,
is one of the largest firms in this same market segment. Both companies'
headquarters are located in Largo, Florida. Val-Pak also prints at and mails
from a large facility in Las Vegas, Nevada for 11 western states. Carol Wright
also operates two plants, located in Elm City, North Carolina and in Washington,
North Carolina. Val-Pak and Carol Wright collectively mail over 800 million
pieces annually.
Val-Pak, joined recently by Cox Direct, has been an active
intervenor before the Postal Rate Commission in recent dockets, including the
major reclassification case, Docket No. R95-1, the most recent omnibus rate
case, Docket No. R97-1, as well as a variety of other matters. In the last rate
case, we were quite pleased that the Postal Service finally elected to request a
modest increase, instead of waiting until operating deficits piled up to the
point where a major hike in rates became necessary. This change in policy by the
Governors addresses one of our prior criticisms of the Postal Service's approach
to rate- setting.
It must be understood that our two businesses are
enormously reliant on the United States Postal Service. We earnestly and
enthusiastically support the Postal Service in its carrying out its basic
mission -- to deliver the mail, rapidly and economically. We need and want the
Postal Service's delivery business to thrive and prosper in coming years. It is
for this very reason that we have been willing to make constructive criticisms
when we felt it necessary. As will be discussed later, Val-Pak was an early
critic of the Postal Service's inadequate research and development (R&D) and
capital investment plans, and a proponent of the Postal Service's shifting to a
policy of making massive investment in its own infrastructure. It is for this
reason that we are most appreciative of the time that you and your Subcommittee
have invested in the current effort to investigate changes in legislation which
rosy be necessary to assist the Postal Service to modernize so that it can
better face a variety of marketing and operational challenges.As I will explain
in more detail below, we agree fully that the Postal Service desperately needs
to expand and modernize its infrastructure at a much faster rate, become more
efficient, increase productivity, reduce costs and improve the service given to
all classes of mail, especially Standard A Mail. Nevertheless, we appear to view
the realities of modernization in terms that may be somewhat different and,
perhaps, broader than that of the Postal Service, or that covered by H.R. 22 in
its current form. In fact, we have serious reservations about certain portions
of H.R. 22 as well as reservations about certain of the extensive amendments
which the Postal Service has proposed. It is also our view that certain issues
essential to the future success of the Postal Service are not being adequately
addressed either by the Postal Service or by H.R. 22.
Postal Service
Infrastructure
In order to handle the vast volumes of mail that are
generated each business day, the Postal Service has an extensive network of
facilities and equipment through which the mail must move. Collectively, this
network and those facilities form the infrastructure that constitutes the
backbone of the Postal Service. In a competitive world no infrastructure can
remain functional without a process of constant maintenance and improvement.
This is especially true when the technology that undergirds the infrastructure
is undergoing rapid evolution. The health and vitality of this infrastructure
are infinitely more important than whether the rate setting process established
in the Postal Reorganization Act of 1970 is to be tinkered with. The generally
agreed-upon goal is for the Postal Service to achieve lower rates and better
service, which will benefit all mailers and also make the Postal Service more
competitive. The problem is not in the nuances of pricing under the Postal
Reorganization Act, which has worked admirably well for over 25 years. It is our
view that the principal problem faced today by the Postal Service is the Postal
Service's own unwillingness to invest in itself and its core mission as it needs
to do. The solution to this problem can be achieved by the Postal Service acting
alone, without a single legislative change.
Since the Postal Reorganization
Act became effective, the Postal Service has enjoyed a remarkable growth in mail
volume. From 1978 to 1998, total volume more than doubled, from 96 to 198
billion pieces. Too many of our existing postal facilities were not built to
handle today's volume, much less any future increases in volume. Considering the
cramped and over-crowded condition in which many postal employees must work,
they do an admirable job of getting the mail delivered. We often marvel at how
well they do under such adverse circumstances. However, because the Postal
Service has struggled so long with an infrastructure that has been inadequate
for the growing volume of mail, it may have become complacent about the fact
that it perenially has so many undersized and cramped facilities. We urge you to
consider whether this infrastructure is being properly tended to before
legislative changes are finalized, for it is the infrastructure that will
determine whether the Postal Service will be successful into the next century.
Inadequate Spending on Capital Investment by the Postal Service
The
amount of money invested by the Postal Service over the last decade, along with
its operating revenues, is summarized in Table 1. As shown in column 1,
operating revenues have grown each year, from approximately $40 billion in 1990
to $60 billion in 1998. Net investment, however, shown in column 4, is another
story. Beginning in 1993, net investment declined precipitously as the Postal
Service's automation program virtually ground to a halt for several years. Even
after recovering a bit, the $1.56 billion of net investment in 1997 was still
less than the $1.69 billion of net investment in 1992, not even considering the
inflation creep and volume increases over the intervening years.
Column 5 of
Table I helps put the Postal Service's net investment spending into better
perspective. It shows net investment as a percentage of the Postal Service's
operating revenues. Between 1990 and 1992, the percent of operating revenues
spent on net investment grew from 3.0 to 3.7 percent, then dropped to as little
as 1.2 percent.
With respect to investment spending, the Postal Service
appears to have been "ramping down" during a time when it should have been
"ramping up." We would urge that net investment be ramped up to at least 3.7
percent of operating revenues, the level reached in 1992.
The level of the
Postal Service's long-term debt is also revealing as an indicator of the Postal
Service's ability to have undertaken net investment spending. The Postal
Service's long-term debt is summarized in Table 2. As you can readily observe,
since 1992, the Postal Service's outstanding long-term debt has declined
sharply, from $9.2 to $2.8 billion. This reduction in debt may have strengthened
the financial balance sheet. However, it was obtained, at least in part, as a
result of the meager level of net investment by the Postal Service, and the
concomitant failure of the infrastructure to keep up with the growth in volume.
Had the Postal Service been modernizing aggressively during the last six
years, it would have been unable to pay down its long-term debt as rapidly as it
did. The long-term debt level certainly would not have declined by 70 percent;
more likely it would have declined less, perhaps stabilized or, under an
aggressive investment strategy, it could even have increased (although we are
not necessarily saying that such a high level of investment should have been
undertaken). Under an aggressive investment plan, the statutory debt limits
contained in 39 U.S.C. Section 2005 might have needed this Subcommittee's
review, since those restrictions on borrowing were set when the Postal Service
was a substantially smaller enterprise than it is today, and before automation
became a feasible avenue for profitable investment.
The six-year decline in
investment spending represents a missed opportunity to modernize. Opportunities
like this are difficult, if not impossible, to recapture. One result of these
years of investment neglect is the emergence of too many cramped and overcrowded
postal facilities, which, we believe, have contributed mightily to the
inconsistent quality of service received by Standard A Mail.
In Chairman
McHugh's prepared comments delivered at the hearing on February 11, 1999, he
noted that former Postmaster General Runyon's call for reform of the current
regulatory system some four years ago was perhaps the most important factor
starting the Subcommittee on its current journey. On more than one occasion we
have wondered whether the current legislative drive to change the way rates are
set inadvertently may have diverted attention from the critical issue of why the
Postal Service was cutting back on its automation program and doing so little to
expand and modernize its infrastructure.
Inadequate Spending on Research and
Development by the Postal Service
Another critical area that has been
neglected woefully by the Postal Service is R&D. Spending on R&D is like
seed corn. It is a vital investment in the future, because it creates
opportunities for productive ways to invest capital. When directed properly,
R&D spending can be among the wisest investments of all.
Postal Service
spending on R&D since 1990 is shown in Table 3. As can be easily seen, again
starting in 1993, R&D expenditures were curtailed sharply, and since that
time they have remained at a comparatively low level. To us, this reduction in
R&D seems extremely short-sighted for an organization that generates over
$60 billion in revenues, has over 800,000 employees, and must move increasingly
large mountains of mail each year. Unless the necessary R&D takes place
today, it is somewhat unrealistic to expect the appearance of opportunities for
investment in modernization tomorrow.
We believe that this Subcommittee
should look at both R&D and capital investment levels. We would urge the
Subcommittee, in its oversight capacity, first to investigate why the Postal
Service is not increasing its investment and R&D efforts and, second, to
examine whether the incentives contained in H.R. 22 are sufficient to get
investment and R&D back on the track. Surely these matters are not the fault
of the rate-setting mechanism which has received much unjustified criticism, as
the Postal Rate Commission has no jurisdiction over expenditures for R&D or
capital investment.
Modernization of Postal Service Facilities and Equipment
Modernization of the Postal Service infrastructure requires that relatively less
efficient labor-intensive facilities be replaced with relatively more efficient
capital-intensive facilities. So long as R&D and capital investment continue
at inadequate levels, however, the Postal Service inevitably will continue being
a labor-intensive organization.When it comes to replacing labor with capital in
postal operations, we recognize the time-honored principle of TANSTAFL - "there
ain't no such thing as a free lunch." It would be unrealistic to expect
otherwise. To avoid the need to hire large numbers of new and expensive workers,
a massive amount of capital spending is required. And catching up with
investment spending that did not occur during the last six years will require
time as well as money. To bring the Postal Service's infrastructure fully up to
rapidly evolving modern standards over the next 10 to 15 years, the required
amount of new investment could exceed $100 billion, a sum which dwarfs the
amounts set out in the Postal Service's Five-year Strategic Plan.
Val-Pak
filed comments with the Board of Governors in July 1997 criticizing the level of
capital investment planned for by the Postal Service, and urging far greater
capital investment than that contained in the June 16, 1997, draft Postal
Service's Five-year Strategic Plan (FY 1998-2002). Subsequently, the Postal
Service's own Blue Ribbon Committee issued a report that also criticized the
Postal Service's level of investment spending as inadequate and urged higher
levels. Not many voices were then urging increased capital investment.
The
Postal Service certainly has its work cut out for it. Moreover, with the
possible exception of the debt limit provision in the Postal Reorganization Act,
it would appear that the Postal Service has the authority under existing
legislation to do what needs to be done. Perhaps the incentive structure is what
is lacking, and perhaps the Postal Service needs more Governors who are familiar
with running large organizations. We question, however, whether the incentives
in H.R. 22 will provide the Postal Service with adequate motivation to correct
these obvious and continuing problems. Certainly the bill's provision dealing
with the experience required for Governors is a good idea, and perhaps the
emoluments of Governors should be increased, in keeping with the qualifications
sought in Section 212.
Retain the Productivity Factor in the Rate Cap
Formula
Our concerns about investment provide the basis for our views on the
productivity factor in the proposed rate cap formula in H.R. 22. As noted above,
we do not regard annual net investment of under $2 billion as sufficient for the
Postal Service, as it can usefully put in place much more. Substantial
investment, properly directed, should increase productivity markedly, and those
gains in productivity should be shared with mailers through lower rates via the
productivity factor. For Standard A mailers, the promise of higher productivity
and lower rates is the chief enticement of the rate setting mechanism proposed
in H.R. 22. Without this, the bill offers mailers such as us nothing but
potential increased competition from the Postal Service. For this reason, we
would strongly urge the Subcommittee to reject out of hand the Postal Service's
proposed amendment concerning establishment of the adjustment factor, because it
effectively would eliminate the productivity dividend by treating it normally as
"zero." Indeed, in our view, H.R. 22 should be structured to give the Postal
Service every conceivable incentive to increase productivity. One such incentive
would be for the Commission to set a high but attainable level for productivity
increases.
Retain Equal Markup for Competitive and Monopoly Baskets
H.R.
22 makes a useful distinction between competitive and non- competitive products,
and creates separate baskets for each. With respect to the basket of competitive
products, the Postal Service many deserve more flexibility in the way it sets
rates. However, that flexibility must not be allowed to relieve competitive
products from paying a fair share of the Postal Service's institutional costs.
Speaking as a customer totally captive to the Postal Service's monopoly, we are
of the opinion that the Postal Service's proposed amendment concerning cost
coverage of competitive products, which would sunset the equal markup provision
after five years, should be rejected. Without this provision, mailers whose
rates are in the non- competitive basket would stand a great risk of paying
virtually all of the Postal Service's institutional costs.
Postal Service
Competition with Private Sector Businesses Hopefully, the preceding critique
provides a useful backdrop for our views on how much and where the Postal
Service should be allowed to compete with the private sector.
As you can
tell from these comments, we at Cox Target Media are strongly in favor of the
Postal Service expanding and modernizing all of its facilities and carrying out
its traditional mission to deliver the mail, efficiently and reliably.In 1998,
the Postal Service had to deliver over 12 million tons of mail -- a formidable
task indeed. To its credit, the job did get done. On too many occasions,
however, delivery was inconsistent and not in conformity with the Postal
Service's own standards. Better carrying out of its basic mission would, of
course, make the Postal Service a strong competitor in the delivery service
arena. A reliable delivery service for Standard A Mail that consistently met
service standards 98 percent of the time would also help generate desirable
growth in mail volume, perhaps sufficient to sustain the Postal Service well
into the next century.
With respect to that basic mission, as an
illustration of the problem, we point to the principal class of mail that we use
-- Standard A Mail. For over 20 years, the Postal Service has been promising to
implement a system for measuring performance of Standard A (formerly
third-class) Mail delivery. To date, however, the Postal Service is not able to
track one single piece of Standard A Mail as it moves through the postal
network. Too many mailers report that service is inconsistent, and in need of
improvement. Consequently, first things being first, we are strongly of the
opinion that the Postal Service should get its own house in order and invest all
available resources in modernizing the postal network before it even
contemplates any investment in other non-postal ventures that are designed to
compete with or replace private ventures.While the infrastructure issue is being
ignored, we believe that attention is being mis-focused by some of the
provisions set out in H.R. 22. It is our view that new investment by the Postal
Service in competitive areas not directly related to modernization of postal
facilities, as sought by the Postal Service, is not the solution to any problem
reasonably faced by the Postal Service. Such investment in competitive areas
would be able to provide a meaningful offset to the Postal Service's $20 billion
of institutional costs if and only if (i) the return on such investment is well
in excess of the interest cost, and (ii) the return is sufficiently large to
represent a material offset to the $20 billion of institutional costs. Let us
take an illustration to see if this is likely.
Assume that investment in
competitive areas would earn an average gross return of 10 to 20 percent (even
though the General Accounting Office reports seem to indicate that most Postal
Service initiatives have failed to make any money at all), and interest would
cost 5 to 6 percent. The Postal Service would need to invest many billions of
dollars in order to effect a meaningful reduction in institutional costs that
now exceed $20 billion, and grow with each passing year. Such a multibillion
dollar investment program not only would divert much needed investment resources
and management attention away from the postal infrastructure, which is necessary
to carry out its core business successfully, but would also imply extensive
competition with the private sector by a government-sponsored monopoly virtually
anywhere in the economy the Postal Services feels it might have a competitive
advantage that it could exploit to earn additional net revenues.
To better
understand what the Postal Service could also do with the increased ability to
compete with the private sector, some recent history is instructive. Only a few
years ago, the Postal Service attempted to move into one area where it would
have been in direct competition with Val-Pak, in developing a new product which
it called Neighborhood Mail. Under this proposal the Postal Service would have
accepted unaddressed circulars from small advertisers for delivery as so-called
"third-bundles." Although Postal Service management eventually saw the
unworkability of this proposal, it took significant mailer efforts to get this
point across.
The Postal Service's recent move into the direct mail
advertising business by selling "coupon" type advertising to businesses as part
of its new mover mailings is another illustration demonstrating the Postal
Service's continued willingness to compete directly with the private sector.
H.R. 22 provides no guarantee whatsoever that Neighborhood Mail, other forms of
coupons, or similar bad ideas would be discouraged from being pursued. More
likely it would actually encourage the Postal Service to devise new ways to
compete with its customers in an effort to extract additional net revenues from
the m oil wherever it saw the opportunity. The provision for a private law
corporation is fraught with potential problems, and we would ask the
Subcommittee to reconsider whether it wants to open that Pandora's Box at this
time.
Lastly, while this bill allows the Postal Service increased
opportunities to compete freely, H.R. 22 offers the Standard A Mail customer no
benefits of competition, and no relief from the monopoly. If competition is
desirable for the Postal Service as a business, and the Postal Service wants to
be free to become a competitor with private firms, there is no justification for
the Postal Service to insist that it retain all of its governmental privileges
and maintain a statutory monopoly over the oil of businesses and individuals who
send so-called "letter mail." We have serious philosophical problems with
unfettered competition by a government-sponsored monopoly, as other, better ways
to retain universal service exist.
In light of the preceding considerations,
we strongly recommend that the Postal Service's ability to invest in non-postal
areas not be expanded at this time. The issue of diversification and unfettered
competition with the private sector can be revisited after the Postal Service
puts its own house in order with respect to its core function of efficient and
economical delivery of the mail.
END
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March 6, 1999 
