Copyright 1999 Federal News Service, Inc.
Federal News Service
FEBRUARY 11, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH:
11931 words
HEADLINE: PREPARED TESTIMONY OF
THE
HONORABLE EDWARD J. GLEIMAN
CHAIRMAN
BEFORE THE HOUSE
COMMITTEE ON GOVERNMENT REFORM
SUBCOMMITTEE ON THE
POSTAL SERVICE
SUBJECT - POSTAL RATE
COMMISSION
BODY:
Chairman McHugh, members of
the Committee on Government Reform, Subcommittee on the
Postal Service, thank you for the opportunity to provide
testimony on H.R. 22, the Postal Modernization Act of 1999. With me today are my
colleagues, Vice Chairman W.H. "Trey" LeBlanc, George A. Omas, Ruth Y. Goldway
and Dana B. Covington, Sr.
I appeared before this subcommittee almost three
years ago to testify on an earlier postal reform proposal
introduced in the 105th Congress as H.R. 3717. The current proposal to modernize
the Postal Service and alter the way it participates in the nation's economy is
a substantially improved version of that earlier piece of legislation. That
said, we intend to offer several suggestions that we think would improve it
still more.
One reason that I preface my remarks here today with a reference
to my earlier testimony is that a lot has happened since this subcommittee's
response to the initial impetus for postal reform. In the early
1990s, mailers were reeling from the Postal Service practice of
imposing large rate increases every three or four years, there were claims of
unfair competition, and the Service was incurring year after year of
multimillion dollar deficits. On top of that, there was the serious fear that
technological advances in communication, in particular the widespread acceptance
of facsimile and e-mail messages, might make the Postal Service obsolete.
This subcommittee responded to concerns that the Postal Service was in
serious difficulty by initiating a dialogue on ways to solve its problems, and
by developing draft legislation. Today's hearing represents a continuation of
that dialogue. As the Chairman has frequently commented, he views postal
reform as a work in progress. Since this effort began, low inflation, a
strong national economy, the development of new mail processing technology, and
recently improved productivity have allowed the Postal Service to limit itself
to moderate rate increases and still enjoy an unprecedented string of profitable
years.
Despite the financial and operational accomplishments of the Postal
Service over the past three years, the future still does not look particularly
rosy. There is a consensus that it is just a matter of time before the large
portion of the First-Class mailstream made up of bills and bill payments is
susceptible to electronic diversion. This mail makes up nearly half of
First-Class Mail. It tends to be "clean mail," that is, regular sized, letter
envelopes that are accurately addressed, and it makes a disproportionate
contribution to the $20 billion institutional cost burden of the Postal Service.
If a significant portion of this mail leaves, the Postal Service will be forced
to impose steep rate increases unless it can sharply reduce its costs, find
sources of substantial new profits, or both. The question all of us must face is
whether H.R. 22 can help that process. We believe that with some adjustments, it
may.
H.R. 22 has three major innovations. First, it would establish a new,
"price cap" rate setting mechanism applicable to "noncompetitive" mail, that is,
mail not currently subject to direct, effective competition. Second, it would
allow the Postal Service freedom to set rates for its "competitive" products,
while attempting to establish a level playing field. Third, it would authorize
the Postal Service to establish a private corporation to operate subject to
normal commercial laws.
I will discuss each of these three innovations in
turn. In addition to commenting on the system that would result if H.R. 22 was
enacted in its present form, I will discuss amendments to this legislation
recently proposed by the Postal Service. Copies of the Postal Service amendments
were provided to the Commission only recently, and we understand that revisions
may still be under consideration. Nonetheless, it appears to us that the Postal
Service amendments are directly contrary to the bedrock principles of H.R. 22.
These amendments would, by and large, erase many of the checks, and decalibrate
many of the balances, that have been carefully and thoughtfully incorporated
into the bill in response to the concerns of interested parties.
Before
addressing the specifics of the three innovations in H.R. 22, let me briefly set
out these bedrock principles. The first and foremost of these principles is that
the Postal Service remains a basic and fundamental service provided to the
people by the Government of the United States, and as such, it should be
operated in a fair and nondiscriminatory manner. Mailers, suppliers,
competitors, and other interested citizens should have assurances that the
Service will perform its functions consistent with the policies set forth in
Title 39.
The second principle contains two interrelated parts. If the
Postal Service can be operated more efficiently, rates will not increase as fast
as they would otherwise, and this will benefit both mailers and the nation as a
whole; and, management and labor are most likely to operate more efficiently if
they can receive personal, financial rewards, in the form of bonuses, for doing
so.
A third principle is that competition between the Postal Service and
private enterprises should be as fair as possible. In colloquial terms:
competition should take place on a level playing field. H.R. 22 contains
numerous provisions designed to level the competitive playing field.
H.R. 22
ties these three complementary principles together in a compact between mailers
and the Postal Service. The consistent themes of H.R. 22 are to level the
playing field for competition between the Postal Service and private enterprise,
and to provide mailers with lower rates by restraining price increases through
the imposition of statutory price caps and rate ceilings that will hold price
increases below the rate of inflation. It allows substantial bonuses to be paid
if the Postal Service is operated profitably under these price caps. These
themes explain H.R. 22, and the suggestions we offer here today are designed to
foster those themes.
PRICE CAP RATEMAKING
The first innovation I will
discuss is the substitution of price cap ratemaking for the current cost of
service ratemaking system. Price cap ratemaking allows management the freedom to
set rates, so long as rates remain below a fixed ceiling. H.R. 22 establishes a
price cap that holds rate increases below inflation by allowing the Postal
Service to change rates for noncompetitive postal products each year within a
percentage range surrounding the previous year's change in the Consumer Price
Index (CPI) less a factor to account for likely productivity improvements.
Private utilities operating under price cap regulation are motivated to
operate efficiently because they are allowed to retain any profits they earn
while providing service under capped rates. The Postal Service does not have
residual claimants who demand a reasonable return for their equity investment.
To motivate the Postal Service to operate efficiently, H.R. 22 establishes the
opportunity for postal employees to earn substantial bonuses if profits are
realized while providing promised services under capped rates.
H.R.
H.R.
22 also includes a ceiling on rate increases so that, on a
cumulative basis, they may never exceed the price cap. If, over time, the Postal
Service holds increases below the price cap, it may recoup the difference in
subsequent years, so long as no increase is ever more than two percent above the
applicable price cap for the current year. This assures that mailers will not be
subject to large, difficult to absorb increases.
Price Cap Ratemaking
Applied to Noncompetitive Products
HR. 22 gives management authority to
change rates for noncompetitive products without obtaining a recommended
decision from the Postal Rate Commission. Its flexibility is not unlimited
--there would be several important new statutory constraints, but within those
constraints it can adjust rates more quickly to meet changing circumstances.
Meanwhile the Commission's main role changes from recommending rates to
exercising regulatory review and taking appropriate action in response to
complaints from the public.
At the same time, the price cap regime proposed
in the bill preserves many of the basic tenets of current law designed to
prevent undue discrimination between groups of mailers, including the
requirement that every postal product pay rates at least equal to the
attributable costs of the service they receive. This is an essential protection
that must be retained. We think that the balance of freedoms and restrictions on
rate changes set out in the bill is fair, and that if agreement emerges from
within the many segments of the postal community that price cap ratemaking will
provide better and less expensive mail service than cost of service ratemaking,
then H.R. 22 provides a sound basis for going forward.
However, the system
described in H.R. 22 is not without potential problems. Current rates
incorporate an extensive system of cost-based mailer worksharing rate incentives
developed over time with the support of the Commission, mailers, and the Postal
Service. These worksharing discounts embody the economic principle of efficient
component pricing, under which postal rates foster efficient use of society's
resources. If future rates cease to reflect actual cost distinctions, mailers
will receive inappropriate price signals.
If future rate discounts fall
below actual savings to the Postal Service, mailers may stop performing
worksharing that benefits the Postal Service and society as a whole. If future
discounts exceed actual savings to the Postal Service, other mailers will have
to generate revenues to offset these excessive discounts. This is a type of
burden shifting. Currently, the Commission strives to fairly balance the amount
of revenues over and above attributable costs that each type of mail must
provide. When discounts exceed cost savings, what really occurs is that the
mailers eligible for those discounts make smaller contributions to institutional
costs.
Because the Service generally supports cost-based worksharing
discounts, hopefully the fact that H.R. 22 does not require that discounts
reflect cost differences, and continue to pass through identifiable cost
savings, will not have any negative impact on rates. Nonetheless, the
subcommittee may wish to consider adding language that requires worksharing
discounts to reflect cost savings.
Although price cap ratemaking can be
applied to postal rates, the system laid out in HR. 22 is fairly complex. Let me
say here that your staff has been exceptionally helpful in providing assistance
to us as we have reviewed this legislation. Nevertheless I want to be certain
that all of us -- the Commission, the Postal Service, and affected private
sector entities A understand how the bill intends this system to work.Rate
changes under new Chapter 37 would be applied to "products." Products is a new
term, and we are not entirely certain of the extent that it is intended to
incorporate the current divisions of a class, a subclass, a rate category, a
rate cell, a rate element, or some combination of those terms as they are
understood by mailers and the Commission in developing rates. The definition in
Section 3701 refers to the next level of subordinate unit below a subclass as a
product. The levels of subordinate units below a subclass are rate categories in
some instances and rate cells in other instances, yet in most discussions there
has been an assumption that the same level (category, cell, or other) should be
applicable to all items in a basket. It is our current understanding that each
rate cell is a product.
This is important because H.R. 22 protects mailers
of products from rate changes that exceed the price cap and implicitly imposes
limits on shifting the overhead/institutional cost burden directly protected by
these limitations.
The Postal Service also views the term product as
difficult to interpret. It proposes to remedy the situation with an amendment
that would equate products and current subclasses. This amendment would allow
the Service additional flexibility to shift rate burdens among mailers by
eliminating the protections of price caps and rate ceilings that H.R. 22 accords
to subordinate units and further subordinate units of classes and subclasses.
In our opinion, a clarification that preserves the protections of H.R. 22 at
the rate cell level is a more responsible way to proceed and eliminate potential
confusion. The Postal Service proposal to redefine products is part of a package
of Postal Service amendments that would change the very essence of the system
for setting rates for noncompetitive products laid out by H.R. 22. As I
mentioned earlier, the essential goal of the current Postal
reform legislation is to cause rates for all mail to rise less quickly,
as a result of improved productivity, and to provide a means to reward those who
cause that improved productivity to occur.
The Service has presented a
package of amendments to the ratesetting process that would: (1) eliminate those
provisions that would provide an impetus for improved productivity and lower
rates, (2) eliminate those provisions assuring that the benefits of improved
productivity would be enjoyed by all mailers fairly, and (3) modify standards so
that bonuses would almost certainly be available even if the Service became less
productive.
Amendments of this nature subvert the purpose of
postal modernization and reform legislation,
and should be rejected.
Another amendment in this category is the
Postal Service proposal that the "cap" on rate increases be
changed. H.R. 22 limits rate increases to the change in the CPI less an
adjustment factor to account for expected productivity gains. The Postal Service
suggests statutory language that provides the adjustment factor would ordinarily
be zero, and that would allow a negative adjustment only when "compelling"
evidence indicates postal productivity will "consistently" exceed private
non-farm sector productivity. Moreover, the Postal Service proposes adjustments
that would allow rate increases to exceed growth in the CPI. Some circumstances
would require that the adjustment factor be in excess of the change in CPI under
its proposals. In sum, the Postal Service would eliminate those provisions that
protect mailers from unjustified, excessive rate increases.
Additionally,
the Postal Service's price cap regime appears to allow all cumulative banked
increases to be applied to rates in any year. Thus, rate increases in any year
could substantially exceed the CPI for that year, The Postal Service's
amendments further exacerbate this problem by permitting, through the
application of so-called banding, an additional amount of up to 1.5 percent over
the cumulative increase, depending on the basket. This approach would undermine
the inherent H.R. 22 philosophy of small predictable rate increases for the
mailers.
One might ask why the Postal Service would want the price caps to
be less restrictive. Recall that H.R. 22 provides substantial bonuses to postal
employees if the Postal Service operates at a profit while adhering to the
specified price caps. If price caps are set above the rate of inflation instead
of below the rate of inflation, it will be far easier for the Postal Service to
qualify for bonuses.
For example, assuming a change in CPI of 3%, the
H.R. 22 approach with an adjustment factor of 1% would permit Standard A rate
increases between 0 and 2%. The Postal Service scheme, with no adjustment and a
banding range of minus 2% through plus 1.5% would permit rate increases of
between 1 and 4.5%. It is much simpler to show profits when rates can be
increased up to 4.5% than when increases are limited to 2%.
Over the
twenty-nine year history of operations under the Postal Reorganization Act,
postal rates have generally tracked the CPI. By making price caps less
restrictive, rather than more restrictive as proposed in the bill, the Postal
Service would eliminate assurances that rate increases would be restrained; by
making its employees eligible for extraordinary bonuses simply for meeting a
standard that it has already beaten, it lowers the bar for earning bonuses to
the ground.Before leaving the subject of price cap ratesetting for
noncompetitive products, I do have a modest proposal that I believe would
improve H.R. 22. The current legislation provides that every five years the
Commission is to convene a proceeding to determine the appropriate adjustment
factor to be subtracted from the change in CPI. It contemplates that this single
adjustment factor would then be used in each of the next five years. I suggest
that instead, the Commission be directed to set annual adjustment factors to
reflect the evidence before it, so that if, for example, a new processing system
is expected to result in large productivity gains during the last two years of a
rate cycle, the Commission could set different adjustment factors for years 1 -
3 and years 4 and 5.
Negotiated Service Agreements
Section 202 of the
bill would add a new provision allowing the Postal Service to enter into
negotiated service agreements with users of monopoly and noncompetitive postal
services. Allowing these bilateral agreements would mark a major departure from
current ratemaking procedure, because the Postal Service would be authorized to
offer customized reduced rates to individual mailers by contract, rather than by
making discounts available to all potential users of a service under a uniform
published schedule of rates.
In principle, negotiated service agreements
could provide a new avenue of benefit sharing between the Postal Service and
mailers who are willing to undertake additional cost-saving activities, as the
Joint Postal Service/PRC Task Force on Postal Ratemaking found in its 1992
report. However, as that report also found, NSAs are desirable only when they
depart from established rates and classification schedules "in ways which add
value both for the customer and for the postal system as a whole." (Joint Task
Force Report at 54.) In practice, this means that NSAs make sense only if they
are justified by demonstrable cost savings, operational benefits, and protection
of the contribution to institutional costs made by the monopoly and
noncompetitive mail categories to which they would apply. In short, the Postal
Service has to be made better off.
As H.R. 22 recognizes, the availability
of negotiated service agreements does not eliminate the need for classification
cases. If the Postal Service believes that it may be appropriate to offer
reduced rates for an activity that many mailers can perform, it should propose a
classification case to establish a new discount category. Then the impact on
revenues can be evaluated together with the other applicable statutory
standards, and affected mailers will have the opportunity to express their
views.
The new Section 3641 contained in the current version of H.R. 22
addresses these concerns by imposing several protective criteria for negotiated
service agreements. These conditions include requiring the performance of
additional mailer functions, recovery of both attributable costs and an average
unit amount of institutional cost contribution, liquidated damages to be paid by
contracting mailers who breach minimum volume commitments or other material
terms, a 3-year term limit, equal access to NSAs by similarly situated mailers,
and the production of net benefits to the operation of a nationwide postal
system. Most importantly, Section 3641 requires the Postal Service to submit
proposed NSAs to the PRC for advance consideration in a public, notice-and
comment proceeding. Implementing these requirements would be a challenging task
for the PRC. In particular, it would be necessary to develop a cost base for
each NSA that would fully quantify cost savings that would not impose new cost
burdens on other users of the same service. Nevertheless, NSAs could yield net
benefits to all mail users and the postal system as a whole if the conditions
set forth in H.R. 22 are retained.
The Postal Service proposes an amended
version of Section 3641 that would retain most of the substantive criteria
applicable to NSAs, but would also subvert the new provision in a fundamental
way. Under its proposed amendment, the Postal Service would be authorized to
enter into NSAs without any prior review by the PRC, or even public notice. In
place of a Commission notice-and-comment proceeding to consider proposed NSAs as
contemplated by the bill's current provision, the Service's amendment would only
allow an interested party an opportunity to file a complaint with the Commission
after the fact, if the interested party somehow found out about the unpublished
agreement. I emphasize the word "only," because another portion of the Service's
proposed amendment would provide that, except for a complaint to the PRC and
court litigation on the contract between the Service and its NSA partner, these
agreements "shall not otherwise be subject to review by any court or
administrative body."
There is nothing in current postal policy, the
recommendations of the Joint Task Force on Postal Ratemaking, or what I
understand to be the objectives of H.R. 22 that would justify a program of
secret, non- tariff rates for monopoly and noncompetitive services to be
negotiated entirely outside public scrutiny. The potential for abuse would be
unacceptably high. Furthermore, requiring that defective NSAs be rectified only
through complaints after the fact is procedurally inferior to prior public
review, and would improperly shift the onus from the Postal Service to
potentially aggrieved mail users. For these reasons, we urge the subcommittee to
reject the Postal Service's proposed amendment on negotiated service agreements.
We also would encourage the addition of clarifying amendments to Section 3641
stating: (1) that the negotiation of individual service agreements is not
intended to become a substitute for broad-based changes in mail classification;
and (2) that NSAs are subject to a requirement of producing net financial, as
well as operational, benefits to the Postal Service and mail users generally.
One additional important point requires clarification. That is: are pieces
subject to an NSA still considered part of their former "product" when applying
price cap based rate increases and the "all products must recover attributable
costs" standards to that product; or does each NSA constitute a separate product
exempt from price caps?
Baseline Rate Case
An essential prerequisite to
price cap rate setting is an initial schedule of rates that accurately reflects
costs of service. H.R. 22 envisions a baseline rate proceeding within 18 months
of enactment to establish a baseline rate schedule that fairly reflects current
attributable costs and fairly allocates institutional cost burdens consistent
with the criteria included in Section 3622 of the existing law. There are no
provisions for subsequent cases to realign rates in accordance with Section 3622
criteria.
The Postal Service's proposed amendments to H.R. 22 do not
contemplate any rate realignment proceedings at any time. Those amendments
assume the rates in effect eight months after enactment of HR. 22 are the rates
to be modified by the first exercise under the price cap adjustment mechanism,
and that any changes in CPI since the previous rate case (e.g. R97-1) would be
banked and available as justification for rate adjustments. There would be no
review of the Postal Service's revenue requirement and, thus, no opportunity to
exclude amounts previously built in for contingencies.Based on our experience
with postal ratemaking, we have concerns about a process that jumps directly to
the price cap mechanism without first realigning rates in a baseline proceeding.
The Commission has found that cost and rate relationships of the various
subclasses and rate categories are subject to rapid distortion, particularly in
periods of technological change and modification of mail preparation
requirements. Docket No. R94-1 provides helpful instruction on this point. The
Postal Service proposed an across-the-board 10.3 percent increase for almost all
rates which would have preserved rate relationships established in Docket No.
R90-1. The Commission found that subclass costs and mail characteristics had
altered rate relationships to the point that the proposed across-the-board rates
failed to conform to the criteria of the Act. The Commission was required to
recommend rates that adjusted subclass relationships significantly from those
proposed by the Postal Service.
More recently we have seen the
introduction of advanced flat sorters that probably alter the costs that
supported imposing certain surcharges in the R97-1 rate case. We have also seen
reports of advanced OCR software that will read most handwritten addresses
successfully, which may significantly lower the costs of processing some types
of First Class Mail.
Another factor suggesting the need for a baseline case
is the influence of the three major classification reform cases, beginning with
Docket No. MC95-1. Those cases resulted in a significant change in philosophy
regarding mailer preparation of the mail prior to entry into the postal system.
Mailers were required to do much more than formerly to ensure and improve the
compatibility of their mail with Postal Service processing equipment and
procedures. However, the recently enacted rates, the result of Docket No. R97-1,
only partially reflect this new environment. R97-1 was filed using FY' 1996 as
the base year, the period for which actual operating data are projected to the
test year. The rates and classification changes resulting from MC95-1 were in
effect for only one full quarter of FY 1996. Despite attempts by the Commission
and the parties, efforts to update R97-1 data for the effects of the new
operating environment were only moderately successfully. A baseline proceeding
should occur before the price cap mechanism is implemented so that rate
relationships reflect current mailer preparation requirements. Absent such a
baseline case, any rate distortions caused by the changed environment will be
enshrined in future rates.
It is inevitable that institutional cost burdens
will shift over time among the various subclasses and services. All interested
parties, and the rate adjustment process, could benefit from knowing how much
change has occurred over time. H.R. 22 directs the Commission to issue, at least
every six years, a report to the President and Congress covering postal
operations and the regulatory system then in place. The legislation also
requires annual Commission reporting on various aspects of postal operations. I
suggest that this legislation include a requirement that in one of the above
reports the Commission present institutional cost burdens by subclass, the
extent of any shift in burden since the baseline proceeding, and the extent to
which rates for each of the various worksharing categories depart from cost
based criteria and sound economic principles. This would provide all interested
parties the opportunity to assess the need for future realignment rate
proceedings. In addition, it would be in the interest of all parties if the
legislation specifically authorized the Postal Service to file a realignment
case. If the timing of this realignment case is at the Postal Service's
discretion, flexibility for the Service, an objective of H.R. 22, is ensured.
SEPARATE TREATMENT FOR COMPETITIVE PRODUCTS
The second innovation in
H.R. 22 is the division of postal products into competitive and noncompetitive
categories, and the development of separate rules for providing these distinct
categories of products to the public. The legislation provides a specific list
of existing products that are initially to be treated as competitive. A major
feature of this division is that several existing subclasses are split, with
portions in the competitive category and portions in the noncompetitive
category.
Perhaps the most striking division affects First-Class Mail. H.R.
22 essentially limits the Postal Service monopoly to letters mailed for $2.00 or
less. This opens to competition items weighing more than 8 ounces, and Priority
Mail is placed in the competitive category. Other significant divisions affect
parcel post and international mail. Apparently on the assumption that the
majority of single piece mailings in these classes are sent by individuals with
little opportunity to utilize alternative carriers, in most instances single
piece mail is considered noncompetitive while bulk mailings are classified as
competitive.
Ratemaking for Competitive Products
H.R. 22 gives the
Postal Service broad latitude in setting rates and adjusting services for
competitive products. Essentially, there are only two limitations: (1) that each
competitive product cover its attributable costs; and (2) that competitive
products in total have at least the same cost coverage as competitive and
noncompetitive products collectively. These two standards are needed to assure
that the playing field for competition is level.The legislation also levels the
playing field by clarifying that the panoply of fair trade laws and regulations
are equally applicable to Postal Service competitive products and competing
services offered by private enterprise. Within the ambit of those laws, the
Postal Service is able to offer rate and serve differentials between individual
customers as private enterprises do. The legislation simultaneously adds
provisions that enhance the Postal Service's ability to compete by allowing it
additional flexibility to experiment with new products and develop special
arrangements keyed to the particular circumstances of individual mailers. It is
hoped that this additional flexibility will help the Service to explore new
markets and respond creatively to changes in the hard copy delivery marketplace.
The Postal Regulatory Commission is charged with evaluating complaints that the
Postal Service is failing to adhere to restrictions described in Title 39, and
with collecting sufficient information to support appropriate reviews of Postal
Service competitive operations.
This balanced approach of granting the
Service almost complete freedom to set rates and adjust services while
subjecting it to most of the controls applicable to private industry should
extend the benefits of competition to the users of competitive products.
However, the Postal Service again proposes amendments which would seriously skew
the competitive balance in its favor. These Postal Service proposals should be
rejected.
The Postal Service does not specifically eliminate the requirement
that each competitive product must cover its attributable costs, but its
proposed amendments substantially weaken that standard. As I mentioned in the
discussion of the application of price caps to noncompetitive products, the
Postal Service proposes eliminating the concept of subordinate units in defining
products. Thus, all competitive parcel post or international mail would be a
single product. This would allow the Service to price any of the various
categories of parcel post below cost so long as revenue for the competitive
portion of the subclass equals attributable costs. The Postal Service could then
engage in protracted below cost pricing in attempts to capture competitive
markets.
It is not in the public interest to allow the government to engage
in destructive, below-cost pricing as a means of competing with private
enterprises. The concept that subordinate units of subclasses should generate
sufficient revenues to recover attributable costs is consistent with the basic
cost of service rate standard that has been the pre-eminent means for assuring
fair and nondiscriminatory postal prices since enactment of the Postal
Reorganization Act.
The Commission also considers as eminently reasonable
the proposition that competitive products should have at least the same cost
coverage as all mail services combined. Private sector firms must cover overhead
costs and generate profits. Competitive postal products should generate at least
a proportionate contribution to the institutional costs of the Postal Service.
If the average contribution is so high that it reduces the Service's ability to
compete effectively, either the Postal Service has excessive overhead costs, or
the rates for monopoly products are too high and should be reduced. There is no
valid reason for captive customers to have to pay more toward overhead than
users of competitive services.
The Service would completely eliminate (after
5 years) the obligation of competitive products to make any contribution to the
overhead of the Postal Service. It is unclear how users of monopoly products, or
the Postal Service as an organization, would be assured of any benefits from its
competitive products. The only beneficiary possible would be the private law
corporation, which under H.R. 22 is funded from surplus competitive fund
contributions. By eliminating the H.R. 22 equal contribution. requirement, the
Service would make any revenue above cost into excess profit available for
transfer to the private law corporation.
Postal Service material suggests
somehow separating the assets, liabilities, revenues, and costs between
competitive and noncompetitive segments of the Postal Service, and implies that
it would treat the provision of competitive products as an independent
enterprise; but it does not actually propose that a separate, tax- paying
private corporation be established to offer competitive postal products through
arms-length purchases of acceptance, processing, transportation and delivery
services. To the contrary, its proposed amendments would preserve and expand
benefits such as exemptions from lawsuits for its competitive products. Its
brief discussion does not mention an allocation of a fair portion of the
overhead burden to competitive products. Furthermore, in deciding during the
first five years whether competitive products as a whole make a sufficient
contribution, the Postal Service would remove attributable "purchased
transportation costs and operational costs (such as those for dedicated
processing networks) which are uniquely associated with a specific product" from
the equation.
In sum, the Service has attempted to fashion a
best-of-both-worlds environment for competitive products in which it would
retain the protections of a government service but provide no certain
contribution to the financial health of the organization. By excluding purchased
transportation and dedicated processing costs, it would be able to claim that
almost any subclass covered its costs while engaging in what would otherwise be
forbidden as predatory pricing.The Service also proposes to alter the review and
reporting obligations of the Commission so that it would not be authorized to
evaluate and report to Congress on whether the rates and fees for competitive
products (individually or collectively) were in compliance with applicable
provisions of Title 39. These Postal Service amendments to H.R. 22 should be
rejected. We are also firmly opposed to a number of the amendments suggested by
the Postal Service which seem designed to prevent either the Commission or the
courts from exercising effective review of potentially anti-competitive acts.
There is no justification for exempting the Postal Service from the standards
private companies must meet.
Finally, H.R. 22 provides the Commission with
authority to require the Postal Service to cease offering a competitive service
that consistently fails to recover attributable costs. The Postal Service
proposal eviscerates this provision which protects both monopoly mailers and
competitors. It would limit the Commission to responding to a complaint, if such
complaint follows three successive years of failure to recover attributable
costs by a competitive product. Furthermore, the Service seeks to limit the
"remedies" following such a proceeding to a Commission public report and/or a
recommendation that the Postal Service take some action. These remedies are
obviously inadequate. Note too, that by adding a special provision titled
"Complaints Regarding Loss-Making Products" the Service becomes able to argue
its proposal preempts the right of a concerned competitor to file a complaint
under Section 3662 unless there are three successive years of below costs
revenue, or to obtain any of the more useful forms of relief provided for in
that section.
The Division Between Competitive and Noncompetitive Products
H.R. 22 includes provisions for moving products between the competitive and
noncompetitive categories, and for placing new products within the appropriate
category. The legislation appears to consider both monopoly products and
products over which the Postal Service exercises market dominance as
noncompetitive. The Commission would bear responsibility for applying these
provisions.
The Postal Service proposes an amendment that would redefine the
distinction between competitive and noncompetitive products so that mail not
subject to the private express statutes could be reclassified as competitive,
but only if the Postal Service initiates such a transfer. This proposal is
troublesome on its own. However, as mentioned previously, the Service also seeks
to eliminate the requirement that competitive products would be expected to
contribute a fair share of postal overhead. These amendments, when taken
together, would permit the Service to burden a shrinking pool of captive
customers with recovering all of its institutional costs.
The mechanism in
H.R. 22 for allowing products to move in to or out of a particular basket
successfully balances the need for flexibility to foster Postal Service
innovations with the need for private enterprises to have some protection from
unfair Postal Service actions. The Postal Service would eliminate the
opportunity for the Commission or members of the public to initiate the process
for moving products between baskets and between competitive and noncompetitive.
It explains that it wants to retain control over its product line. However, the
movement of products between baskets is accomplished by classification cases,
which are subject to final decision authority of the directors. The Postal
Service could not be forced to accept a change.We believe affected members of
the public should retain the opportunity to obtain a meaningful public review of
the Postal Service categorization of its products.
The question of whether a
service is competitive or noncompetitive is also best left to independent
outside review. Recall that the Postal Service proposes that the parts of a
competitive subclass should be allowed to be priced below costs if the subclass
as a whole covers its cost. If the Service has inherent advantages so that it
has market dominance as to a portion of a subclass, it could use its position to
compete unfairly. Affected mailers and competitors should have the right to seek
reclassification.
A final disturbing aspect of the Postal Service comments
and proposals is their complete focus on the competitive portion of its
operation. The vast majority of the current mailstream is within the
noncompetitive arena. Most of the individuals and businesses that rely on the
Postal Service for essential services use noncompetitive products. The Postal
Service states in comments explaining its legislative proposals that it expects
all new products to be in the competitive arena. For the Postal Service to
remain a valued and viable public service, it must focus its attention on
providing service improvements the users of noncompetitive mail will need in the
coming years. Mail users, and the nation, do not benefit if the entire intellect
of postal management is focused on improving and supplementing its competitive
product line and bolstering its private law corporation, leaving the majority of
existing mail services to stagnate or even deteriorate.
PRIVATE LAW
CORPORATION
I now will turn to the third major innovation of H.R. 22, the
provision allowing for the establishment of a private law corporation by the
Postal Service. This is a concept that is new to postal
reform. The former H.R. 3717 did not provide for a private law
corporation, so no public record has been developed on its pros and cons.
The private law corporation in H.R. 22 can engage in both postal and
nonpostal activities. It is intended to be separate from the Postal Service, and
the Commission is charged with assuring that when the corporation purchases
services from the Postal Service, the prices paid are fair to ratepayers and
competitors. The directors of the Postal Service would select the directors of
the corporation.
Our understanding is that in its original conception, the
private law corporation was simply a means for the Postal Service to offer
nonpostal products without having them underwritten by monopoly revenues and
without having the government, as such, entering new areas of competition with
the private sector. The development of nonpostal products by the Postal Service
was considered desirable by some as a means of generating profits which could
then be used to offset losses incurred from the widely anticipated diversion of
lucrative First-Class volume to electronic media.
The concept of the private
law corporation has evolved, however. Some observers believe it is a mechanism
for the Postal Service to acquire other companies and to form partnerships and
alliances with firms in the private sector. As written, H.R. 22 permits the
private law corporation to offer to the public every kind of postal and
nonpostal product. In fact, the private law corporation is so broadly defined
that it even could serve as a contractor to the Postal Service to perform
collection, processing, transportation and delivery of monopoly products, thus
allowing the Postal Service to become a "virtual" entity, hollowed out so that
it consisted of little more than a contract and ratesetting shop. In addition
H.R. 22 seemingly allows the private law corporation to engage in activities
which have absolutely no nexus to the Postal Service.Just as the mission of the
private law corporation has evolved so has its funding. Initially, the monies
available to the private law corporation were thought to be limited to the
so-called surplus in the competitive products fund. The surplus would consist of
overhead contributions from competitive products above what is required by the
equal markup provisions of H.R. 22. Recently we have heard it suggested that the
private law corporation could be funded by asset sales from the competitive
product fund balance sheet. These might be in the form of sales to the Postal
Service with a lease back provision. The Postal Service even goes so far as to
propose that all competitive product revenues (not simply profits) could be
injected into the private law corporation. The Service also wants the bill
amended to allow the private law corporation to sell stock to the public and to
its own employees. As we understand it, the bill already allows the private law
corporation to set up subsidiaries which could sell stock.
The desirability
of the Postal Service engaging in nonpostal activities, the scope and effect of
the private law corporation's activities, and the manner in which the private
law corporation will be funded raise important issues of public policy which
need to be examined.
Scope and Effect of Private Law Corporation
Activities
Currently, the Postal Service offers a limited number of
low-revenue, nonpostal products competing with the private sector under the
mantel of the U.S. Government. We believe it is generally inappropriate for the
government to enter into competition with the private sector. It is especially
so when the government claims numerous special privileges such as exemption from
taxes and fair trade laws. Nevertheless, if the Postal Service is going to
engage in nonpostal activities, the private law corporation is an improvement
over current practice. H.R. 22 recognizes the need for a level playing field and
this is highly desirable.
We recognize that nonpostal activities can be far
more glamorous than collecting, processing and delivering mail. It is more
exciting to contemplate being a player in electronic commerce, buying stakes in
publicly traded corporations, and entering into partnerships with private
companies. Because the Postal Service has a large amount of fixed costs, profits
earned by the private law corporation would be welcomed to offset a portion of
its overhead burden. They would be especially welcomed if substantial volumes of
highly profitable First- Class Mail are lost to electronic media. Nonetheless,
we must question whether the potential for gain exceeds the potential for loss
to the Postal Service, and whether society and the general economy will be
better or worse off if the Postal Service uses substantial postal revenues or
assets to engage in nonpostal activities.
In our opinion it is dubious that
a private law corporation spun out of the Postal Service would be able to make a
sizable contribution to the $20 billion institutional costs of the Postal
Service. We say this because it is hard to make profits in our competitive
economy. The Postal Service's recent experience with new products, as described
by the GAO, supports our concerns. Virtually every nonpostal product would have
very significant competition. More importantly, nonpostal products would not
benefit from the scope and scale economies of the Postal Service as do letters
and parcels. We see few comparative advantages for the private law corporation
in offering nonpostal products beyond the ability to get capital without meeting
the tests that ordinary startup corporations must meet.We see no justification
for the private law corporation using Postal Service assets to finance
businesses or products totally unrelated to providing postal services. A
somewhat better case may be made for the private law corporation exploring
opportunities to sponsor vertical or horizontal integration in the postal
sector. Remitco is an example of vertical integration already put in place by
the Postal Service. Other possible examples include purchasing transportation
companies or letter shops. Examples of possible targets for horizontal
integration would be small parcel delivery companies, overnight delivery firms,
money order firms and alternative delivery firms.
Title 39 describes the
Postal Service as "... a basic fundamental service provided to the People by the
Government of the United States..." As such it must deal fairly with its
customers and suppliers. Current law prevents the Postal Service from unduly
discriminating among its customers. Current law also limits the Postal Service's
flexibility in choosing its suppliers. In short there is now a level playing
field among the Postal Service's customers and suppliers. We believe that
vertical and horizontal integration in the postal sector would be very likely to
slant those level playing fields.
The logic behind the private law
corporation purchasing another corporation presumably would be that the acquired
company would become more profitable as a result of its new corporate alignment.
If the company does not become more profitable, the private law corporation
would not gain much from its acquisition assuming it paid a fair market price.
We must ask: how will an acquisition by the private law corporation lead to
greater profitability? The obvious answer is that it could become more
profitable by exploiting special relationships with the Postal Service as a
customer or as a supplier. It does not seem possible to have a level playing
field while honoring special relationships.Finally, we believe it is essential
that the management of any private law corporation should have an arms length
relationship with the Postal Service. Consequently, the private law corporation
Board of Directors should not be selected by the Postal Service Board of
Directors. For the same reasons, there also should be restrictions on postal
management transferring to jobs in the private law corporation and vice versa.
Important issues also arise from the concept of allowing the private law
corporation to offer postal products to the public that are currently being
offered by the Postal Service. If the private law corporation drains mail that
is making an overhead contribution from the Postal Service, it hurts the Postal
Service financially and leaves rate payers worse off. The only way rate payers
could benefit would be if the private law corporation improved the profitability
of postal products, and then returned these enhanced profits to the Postal
Service in the form of dividends. Unless these dividends exceeded the
contribution otherwise being made by the product, the Postal Service would be
harmed.
Allowing the private law corporation to offer noncompetitive but
nonmonopoly products not only has the potential to drain overhead contribution
from the Postal Service, it also would eliminate the protection the bill
provides to captive ratepayers. Furthermore, it would be in direct conflict with
the market dominance test incorporated in H.R. 22. As we understand it, the
private law corporation could offer nonmonopoly, noncompetitive products in
spite of the fact that the Postal Service has market dominance in these areas.
This would allow the private law corporation to serve profitable segments while
leaving unprofitable segments to be served by the Postal Service. This could
directly undermine the financial stability of the Postal Service.Thus we believe
that de facto monopoly products such as publications mail should not be offered
by the private law corporation.
Financing of the Private Law Corporation
H.R. 22 recognizes that the current law which allows the Postal Service to
enter into nonpostal activities with an unlimited draw on monopoly revenues is
unwise. The bill specifies that surplus monies from the competitive products
fund and borrowing without the full faith and credit of the government are the
sources of capital for the private law corporation. This is a great improvement
over current practice.
H.R. 22, however, is not completely successful in
insulating rate payers from becoming the implicit underwriter of the private law
corporation. Under current law, all the institutional contribution from
competitive products is available to defray institutional costs. Under HR. 22,
surplus contributions from the competitive products fund could be directed to
the private law corporation. Unless the stream of dividends returned to the
Postal Service from the private law corporation exceeds the amount of funds the
Postal Service invested in the private law corporation, the Postal Service and
ratepayers are less well off.
Moreover, other options could be far more
harmful. For example, assume the Postal Service were to purchase and lease back
from the competitive products fund assets allocated to competitive products. The
proceeds from these sales could provide a substantial source of funds for the
private law corporation. Under any form of funding it is possible that the
private law corporation might be able to manage to return only an anemic stream
of dividends, or it might even go bankrupt. Under either circumstance, the
Postal Service would fail to recover its investment.The American economic
landscape is littered with failed companies. There are no guarantees for new
ventures. Thus, we are inevitably faced with an assessment of the risk to Postal
Service rate payers. We must ask, does the private law corporation present a
good risk-reward tradeoff for postal rate payers? At this point, we don't have
an answer to this question. Until the concept of the private law corporation is
further developed, no one can answer it. But surely we should answer this
question before the private law corporation is enacted into law. The private law
corporation will not be getting its capital in the normal manner; that is from
investors willing to accept risks in order to reap rewards. The capital
contribution to the corporation by postal rate payers will amount to an
involuntary assessment.
We must also ask if it is in the public interest for
a private corporation funded with involuntary contributions from postal rate
payers to compete in the market place. With involuntary funding, the equity base
of the private law corporation will be larger than if all funds came from
voluntary investors. Such an enterprise would distort the competitive market.
If there is to be a private law corporation, we think H.R. 22 would be
strengthened if it required the private law corporation to pay a significant
portion of its earnings as dividends to the Postal Service.
Paying
dividends to the Postal Service is the only way the private law corporation can
mitigate the impact on mailers of the expected decline in hard copy mail. Since
postal rate payers will provide at least the initial capital of the private law
corporation, it is appropriate that they be major beneficiaries of whatever
financial success the private law corporation enjoys. Initial investors usually
receive a disproportionately large ownership stake by virtue of being first and
therefore taking the most risk.While H.R. 22 would make surplus contribution
from the competitive fund available to the private law corporation, a Postal
Service proposed amendment would be much more liberal. It would allow all
revenue from competitive products, not just surplus contribution, to be used to
capitalize the private law corporation. We believe the Postal Service proposal
violates important safeguards included in H.R. 22. Any financial firewall
between the Postal Service and the private law corporation would be breached if
the corporation is permitted to use competitive product revenues in this way.
Most importantly, the Postal Service's role changes from investor in the
private law corporation, using surplus profits, to cash cow susceptible of being
plundered by the private law corporation. In addition, the Service's proposal
would further diminish the likelihood that the competitive products side of the
Service would be of benefit to noncompetitive products customers. Of course, the
Postal Service amendment which eliminates the equal markup provision of H.R. 22
also frustrates this objective. Finally, the potential impact on the private
sector could be very large. The amendment has the potential to significantly
increase the capital base of the private law corporation in a manner that would
distort even further the normal means of capital formation in the private
sector.
OTHER ISSUES RAISED BY H.R. 22
Market Tests
H.R. 22 would
add a new Subchapter V to Title 39 to govern the subject of market tests to be
conducted by the Postal Service. New sections 3751 and 3752 would allow the
Service to freely conduct market tests of experimental noncompetitive and
competitive products, respectively, that are anticipated to produce no more than
$10 million in total revenues in any year. For larger-scale market tests- with
anticipated revenues not to exceed $100 million -- the Service would be
authorized to conduct such tests under regulations to be established by the PRC.
The Commission endorses a two-tiered approach to Postal Service market tests, as
well as the incorporation of limiting conditions and safeguards in the new
subchapter. However, based on our experience with the dollar amounts in almost
all Postal Service experiments, the threshold for the first tier may be too
high. Moreover, it would be helpful to the Commission if some additional
clarification were provided in the bill in order to forestall disputes in the
rulemaking process and potential litigation over the intended operation of the
new provisions.
For example, new sections 3751 and 3752 apparently intend to
preclude market tests that would cause "unreasonable market disruption" either
for competitive or noncompetitive products, while new section 3753 directs the
PRC to consider "the public interest in preventing unfair or disruptive
competition" in establishing regulations for larger- scale tests. It is unclear
whether the cited language is intended to direct the Commission's deliberations
to apply established antitrust standards of fair competition, or some different
measures of competitive behavior and market effect.
A more basic
consideration is the nature of the Commission's scrutiny of market tests
intended by the new subchapter. Sections 3751 through 3753 provide for
Commission orders that would cancel or terminate market tests if specified
conditions are not met, within the ambit of authority provided in the amended
PRC complaint provision, section 3662. Sections 3751 and 3752 allow the
Commission's issuance of a cancellation order "at any time." However, it is
unclear whether a complaint lodged by an interested party is intended to be a
pre- condition of issuing such orders, or when the Commission's scrutiny of
market tests noticed by the Postal Service is otherwise intended to commence. If
no prior review of Postal Service market tests is intended, as appears to be the
case, it would be helpful if the timing and conditions under which the
Commission should review ongoing market tests were clarified.
The Postal
Service proposes amendments to the bilrs market test provisions that would
considerably loosen, or even dissolve, some of the limits and protective
conditions incorporated in H.R. 22. The Service's amendments would eliminate the
distinction between ordinary and large-scale market tests for experimental
competitive products, replacing the $10 million cap for the former with a
uniform $100 million limit. At the same time, the Service proposes to delete the
protective condition that would preclude the introduction or continued offering
of experimental products which "cause unreasonable market disruption." It does
so on the grounds that this restriction is a "subjective criterion," and that,
after all, introducing any new postal product will inevitably impact on market
conditions, particularly if the new product is well-received.
Mr. Chairman,
when I testified on the market test provision in H.R. 3717, I noted that:
First, it should go without saying that $100 million per year is a huge
amount of money for most businesses. Gross revenues of this magnitude, if
achieved by the Postal Service relative to a single product or service, could
seriously disrupt many existing markets.
This observation is as germane
today as it was when I testified in July of 1996. Moreover, the Postal Service's
rationale for its proposed amendments would appear to confirm the anticipated
potential for market impact. Apparently the Service doesn't want to have to
worry about how its market tests are likely to affect conditions in preexisting
competitive markets, or to have Congress authorize the PRC to do its worrying
for it.
We recognize the perceived need to equip the Postal Service to
compete more effectively in today's marketplace, and that competing often means
setting your sights on someone else's lunch. If the Postal Service is to be
authorized to go after revenues of as much as $100 million in a market test, we
submit that some kind of oversight on competitive impact and fairness must be
exercised. The alternative would be to leave affected competitors with no other
recourse than a cumbersome private antitrust action in a Federal court.
For
these reasons, we oppose the Postal Service's proposed amendments on market
tests, and urge their rejection.
Qualifications of Directors
Directors
are to be selected solely on the basis of their proven ability to manage
organizations similar in size and scope as the Postal Service. We suggest that
the subcommittee also consider other qualifications and thus expand the pool of
talent from which selection could be made. Our first concern is that there are
very few organizations similar in size and scope to the Postal Service in this
country. In addition, we are mindful that the Postal Service is an organization
that touches the lives of all Americans. Candidates that possess a wider variety
of skills, experience, and exposure to different size organizations could
provide valuable insight into the needs of all citizens. Private corporations
frequently tap educators, civic leaders, and consumer representatives, as well
as business men and women, to serve as directors.
Bonuses
Bonuses to
officers and employees of the Postal Service are allowed under Section 3773 of
H.R. 22. The implicit objective of the bonus program, to provide incentives to
officers and employees to improve institutional performance, is laudable. We do,
however, have some thoughts on several aspects of this program.
First, the
amount of profits in a particular year establishes the maximum amount of money
available for distribution as bonuses for that year. We recognize this maximum
amount can be reduced to some extent by Commission findings, and limited by
Postal Service decisions regarding other uses for the profits, such as the need
to retire debt. Nevertheless, total annual profit is the starting point. We
believe it improvident to make all profit available for distribution as bonuses.
The Postal Service is an ongoing entity that operates in a dynamic environment.
A more prudent course would be to reserve some portion of profits for
modernization, emergencies, lower postage rates, or any number of other
important business purposes. We recognize that H.R. 22 permits the Postal
Service to retain profits for various purposes. But mandatory retention of some
portion of profits would be a feature of the legislation that would assure that
the Service would emulate the behavior of responsible parties in the business
community.
An important related issue is the wisdom of using profit,as the
measure of the efficiency of performance of the Postal Service.
The
amount of profit in a particular fiscal year is sensitive to a large number of
factors, many of which are outside the control of the Postal Service. Events
such as a labor relations work stoppage by a major competitor, extreme weather
conditions, or even legislative actions, can effect the amount of profit in a
year, plus and minus. Even more important is the strength of the national
economy as evidenced by the strong growth in postal volumes and revenues during
recent years. In addition, planned spending on needed programs may not occur.
This could increase profits in one year to the longer-run detriment of the
Postal Service. Moreover, a standard accounting convention could require that a
prior year's adjustment, such as has occurred for worker's compensation, be
totally expensed in the current year. In this instance, current year profits are
impacted by circumstances or misestimates that actually happened in the past.
This could result in an understatement or an overstatement of current period
profit from the point of view of how well the Postal Service performed in the
current year.
A possible solution is to loosen the connection between
current year's profit and the amount of money available for bonuses. For
example, an annual moving average of profits for a number of years might permit
a fairer evaluation of Postal Service performance. There are undoubtedly other
methods that would lessen the impact of one-time occurrences on current year's
profit for purposes of determining the bonus pool and mitigate the influence of
events that are outside Postal Service control during a particular year.
As
an alternative to focusing on profits, we wish to suggest a system that
incorporates productivity explicitly. The Postal Service total factor
productivity (TFP) measure is a very sophisticated tool that takes into account
many pertinent factors such as capital investment, skill level of the work
force, and the changing workload content of the mail that has to be processed
and delivered. This is an objective measure of institutional performance, and we
suggest that this tool also be used to determine the amount of funds available
for bonuses. As an example, the pool of profits available for bonuses could be
reduced if the change in TFP is small. If TFP is negative, even with profits,
consideration could be given to prohibiting any bonuses at all. Linking the
bonus pool to Postal Service productivity would mitigate the impact of the
vagaries that impact profit, and more directly relate bonuses to performance.
Such a system could also reward postal employees in a year in which losses are
incurred for reasons beyond their control but in which productivity improved.
Judicial Review
In keeping with the new division of responsibilities between
the Directors of the Postal Service and the Postal Regulatory Commission,
section 202 of the bill amends current Section 3628 of Title 39, which governs
judicial appeals of final actions on rate and mail classification matters. The
amended version of Section 3628 appropriately provides for appeals of final PRC
decisions establishing adjustment factors and product transfers between the
noncompetitive and competitive mail categories. It also provides for appellate
review of decisions of the Directors to approve, allow under protest, or modify
PRC recommended decisions on mail classification changes, and on requests for
establishment of new noncompetitive products.
The latter provision presents
an opportunity to rectify an anomaly that has become apparent during the
Commission's institutional history. Under the current wording of Section 3628 --
which the bill's amended provision preserves -- decisions of the now-Governors
to reject PRC recommended decisions with no further action are not explicitly
appealable. This omission has provided the Governors with the equivalent of a
"pocket veto" over Commission recommendations with which they disagree, and
exercising this option can leave substantive recommendations -- particularly
recommended mail classification changes -- suspended in a limbo that offers no
recourse to affected parties. The Commission recommends that this procedural
void be filled by adding the words "reject without further action under Section
3625" to the list of appealable actions of the Directors in amended Section
3628(a).
On another matter, H.R. 22 clarifies the situations where the
Department of Justice provides legal assistance to the Postal Service. In past
litigation concerning issues that affect both the Postal Service and the
Commission, the Department of Justice has balanced the concerns of our two
separate agencies. We suggest that language should be added to this legislation
to make it clear that where the Postal Service is representing itself the
Department of Justice will still provide representation for the Commission.
Appeals under Section 404(b)
Finally, I want to take a minute to thank
the subcommittee for adding a provision to Section 404(b) to clarify the period
allowed for appeals of Postal Service decisions to close small post offices. As
you know, the Postal Service is not currently pursuing a policy of closing
offices. The Commission, nevertheless, has received a number of communications
from individuals that indicate a problem may exist with the Postal Service
exercise of its authority to suspend the operation of post offices in
emergencies. The General Accounting Office did a report on this subject
recently. The issue seems to be that in some instances the Postal Service does
not act to replace or close a suspended facility for years, and this inaction
leaves the community without service and effectively changes an emergency
suspension into a closure without the procedures required in Section 404. A
remedy might be to allow interested persons to file an appeal of any suspension
lasting more than 6 months.Implementation of H.R. 22
The Commission's review
of H.R. 22 has uncovered several areas where minor adjustments could be made to
improve the smooth transition from current postal ratemaking to the price cap
regime provided by the draft legislation. H.R. 22 calls upon the Postal
Regulatory Commission to exercise review over numerous aspects of the
transition. Each individual task assigned to the Commission is important, and
feasible. However, the sheer number of tasks that must be accomplished during
the first year of operation after enactment of the Postal Modernization Act of
1999 is quite daunting.
Attached as Appendix A to this testimony is a list
identifying the rules that would have to be developed by the Commission, through
open public processes, shortly after the legislation becomes law. Many of these
obligations would have to be met within very short timeframes so that the
Commission could exercise its review functions as required. While we understand
the desire to move into the brave new world expeditiously, we suggest that a
transition period follow enactment of this legislation so that the Postal
Service, the public, and the Commission can conscientiously contribute to
developing effective and workable implementing regulations and, thus, mitigate
the amount of confusion and litigation.
CONCLUSION
Mr. Chairman, we
realize our remarks today appear to be rather extensive. However, I have not
addressed every provision in H.R. 22, nor even every significant amendment
proposed by the Postal Service. We want to thank you again for the opportunity
to present our views.
We will be happy to answer any questions you may have.
**********************
PRC ACTIONS TO IMPLEMENT H.R. 22 REQUIREMENTS
Required Rulemakings. Most need to be completed immediately or by
establishment of baseline rates.
- Adopt regulations ensuring
confidentiality of certain USPS information provided in reports or under
subpoena-- Sections 3604(g)(3).
- Conduct notice-and-comment proceeding to
determine net value of assets and liabilities attributable wholly or primarily
to competitive products Section 2011(j).
- Adopt regulations establishing a
schedule and procedures for transferring non-postal products to USPS Corp.---
Sections 205(b)(2). - Adopt regulations defining "commercial entity" to
implement prohibition of certain USPS investments-- Sections 2011(d)(2)(B).
- Adopt regulations to implement the unfair competition prohibitions in '
404a--Section 404a(c).
- Adopt regulations specifying procedures for
establishing adjustment factors (including "exigent circumstances" provisions)
Sections 3733(b)(2)(B).
- Adopt regulations implementing cost coverage
requirements for competitive products under Section 3744(b).
- Adopt
regulations providing procedures for extension and cancellation of market tests
of experimental noncompetitive products ('.375.1(d)and(e)), and experimental
competitive products (Section 3752(d)and (e)).
- Adopt regulations providing
procedures for the conduct of large- scale market tests (Section 3753(d) and
(e)).
- Adopt regulations applicable to proposed new competitive product
introductions--Section 3763(c)(1).
- Adopt regulations establishing
procedures for the transfer of products between the competitive and
non-competitive categories under the requirements of Section 3764(d).
END
LOAD-DATE: February 12, 1999
