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September 19, 2000, Tuesday

SECTION: CAPITOL HILL HEARING

LENGTH: 16287 words

HEADLINE: HEARING OF THE POSTAL SERVICE SUBCOMMITTEE OF THE HOUSE GOVERNMENT REFORM COMMITTEE

SUBJECT: OVERSIGHT OF THE U.S. POSTAL SERVICE

CHAIRED BY: REPRESENTATIVE JOHN MCHUGH (R-NY)

WITNESSES:

WILLIAM HENDERSON, POSTMASTER GENERAL AND CEO, UNITED STATES POSTAL SERVICE;

BERNARD UNGAR, DIRECTOR, GOVERNMENT BUSINESS OPERATIONS ISSUES, GENERAL ACCOUNTING OFFICE;

KARLA CORCORAN, INSPECTOR GENERAL, UNITED STATES POSTAL SERVICE;

LOCATION: 2154 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

BODY:
REP. JOHN MCHUGH (R-NY): I want to apologize at the outset. There are all kinds of new electronic gimmicks up here and systems, and I haven't been cleared for flying this machine. So if there's any breakdown, I apologize for that.

Let me welcome you all here. And I don't see a gavel. I called the meeting to order.

Thank you so much for being here in such strong numbers. Certainly, as we all know, our witnesses today are not newcomers. They have testified before the subcommittee on previous occasions. And I want to thank them again in participating in our annual oversight hearing. And of course, they include the postmaster general, Bill Henderson; the inspector general of the United States Postal Service, Karla Corcoran; and again, Mr. Bernard Ungar of the General Accounting Office. And I know I speak for all of the members of the subcommittee when I express our appreciation to you all for your help and your cooperation over these past years. And certainly we're very interested in what you're going to share with us here today. I'd also like to state my appreciation to the postmaster general, for those of you who've had the time to read his opening statement, for the kind things that he has to say about me in that presentation. I'm not certain they're deserved, but they are greatly appreciated. And I think he describes very well the road that we have traveled these past six years in trying to modernize our postal laws; and it's been a road that's been filled with detours and potholes and distractions.

And indeed, to the detriment of many Americans, I fear that postal reform may not in fact be enacted in the Year 2000. But we are fooling ourselves if we think that with the growing cost pressures and shrinking revenue base of the Postal Service that this Congress can continue to delay addressing this most important matter.

Sustained volume declines coupled with yearly delivery cost increases assure that the postal laws will have to undergo I think a major adjustment. My fear is that rather than undertaking reasonable and gradual changes, as we have attempted to accomplish, we will instead find ourselves dealing with a worse crisis and be left with choices of desperation in our duty to provide affordable universal mail delivery that binds the nation together.

And let's not kid ourselves; the crisis is upon us. In the past year, the Postal Service has encountered increasing financial difficulties as mail volumes have grown more slowly than expected and as postal costs have increased greatly and have been proven difficult to restrain. With just days left in the fiscal year, the Postal Service is facing its first money-losing performance since 1974. The postmaster general stated last month that the Service could be as much as $300 million in the red when the books are tallied a few days from now.

The testimony of the non-partisan independent General Accounting Office I feel focuses like a laser on the key policy challenges facing Congress and the American people. And I'd like to quote from that report briefly, if I may.

"The Postal Service faces an uncertain future. Can the Postal Service maintain, and where necessary, improve on the quality of mail delivery service? Can the Service continue to provide affordable postal rates? Can the Service remain self-supporting through postal revenues? Can the Service continue in the long term to provide the current level and scope of universal postal service?"

Postal Service is lumbering along under a 30-year-old legislative framework, and it may not be able to overcome the problems it faces. As the inspector general will underscore, the Service faces major management challenges in its attempts to grow revenues and to compete in rapidly changing market, maintain affordability, improve the workplace climate, and enhance productivity.

It's no surprise that the Postal Service is seeking innovative approaches to dealing with these challenges. About two weeks ago, the Postal Service announced a possible strategic alliance with Federal Express. Questions have, and I suspect will continue to arise from this pronouncement. And we'll be interested in further explanation and evaluation from our witnesses on that topic today.

There's plenty to be discussed in this oversight hearing. Both the IG and the GAO are on the front lines as America's postal watchdogs, and they have proven to be valuable partners with the Congress in reporting to us a broad range of postal operations. We look forward to their testimony today in our review of initiatives they have recommended the Postal Service could be undertaken to improve it's own performance. As both the IG and the GAO have found, the Postal Service requires significant attention in such areas as labor management relations, internal controls, and revenue projections. And the subcommittee looks forward to hearing from them and from the Service as to plans to develop innovative solutions to these longstanding problems.

One of the more troubling findings of the GAO is its negative assessment of the Postal Service's efforts under the Government Performance and Results Act. The performance plans and reports that are required under the act should allow Congress, postal managers, and the American public to easily determine how well the Postal Service is improving its performance and achieving its goals. Unfortunately, it appears that the latest reports are not as clear and understandable as they might be. And we look forward to discuss this important issue today.

Those are just a few of the topics that I suspect we'll be venturing into, and there may be, and in fact probably will, be others.

Let me go off script for a moment. As I suspect, the number of people here suggests, many of you are aware that this will be our final oversight hearing in this congress. As I understand the rules, and as I understand the vagaries of elections, it will probably be my last as chairman. And I want to express my deepest appreciation to all those who have been so helpful to me.

Of course, Mr. Fattah here, the gentleman from Pennsylvania, in his very active role in assisting us, along with our staffs, in trying to undertake in -- I'm proud to say, one of the more bipartisan efforts of any committee in Congress -- this very important challenge.

It has been a pleasure to all the subcommittee members on both sides. I appreciate all of the help, all of the insights and hard work that they have put together.

To the postmaster general Bill Henderson and his successor for putting up with me and my well-intended, but, nevertheless I suspect, far too often misguided and misdirected efforts. And to the folks here at the panel. And I want to thank those of you in the audience, many of whom I've gotten to know so very well over the past six years.

I have said repeatedly that I did not recognize the scope of what the Postal Service means in America when Bill Klinger (sp) called me that first day and asked me to take up this position. I am amazed at how this network of sometimes very different organizations and interests work so well together. And even when there is disagreement, the focus remains upon the critical nature of delivering our nation's mail to virtually every household in America. It is a humbling experience, and I can only express in very inadequate words the admiration I have for the more than 800,000 postal workers in this nation who deliver tens of millions pieces of mail each and every hour of each and everyday to America. It's something that most of us take for granted because they have done it so well for so long. But I would hope that would be an opinion and a perspective that in the future this subcommittee not adopt because it doesn't just happen. It takes a lot of hard work and a lot of cooperation, and we need to be productive players in that.

And lastly, and certainly not least, I want to express both my deepest thanks and my highest admiration for the subcommittee staff members-- the folks who are seated here who really are remarkable in their understanding and their dedication to this initiative. I understand that government employees -- staff people -- whether they be here on the Hill or located in the bureaucracy, are often maligned, and I think very unfairly so. But I have never in now nearly 30 years of public service been associated with a finer group of individuals. And I get into trouble if I start mentioning names, but I do want to mention a few.

Dan Blair (sp) who is our first committee director, who has now moved on to bigger and brighter things he tells us over in the Senate. I'm sure that that's true. And, of course, Steve Williams who has moved on to better things. I saw Steve earlier here today who was so helpful in those early days. And we now have some folks who started with the subcommittee and moved on who may be in the room today, Ken John (sp) who went on to the GAO; Abby Horowitz (sp) who definitely took a demotion and came to work in my personal staff, but remains such a joy and a delight. We have Tom Sharkey (sp) who was first a detailee from GAO to the subcommittee, and then from the IG to the subcommittee; and Lawrence Scurva (sp) and Matthew Batt. And, of course, Iia Fallas (sp) who has been with the subcommittee for so many years who brings a sense of focus to us, and Jane Hatcherson (sp), and others who are here.

And I save, in my humble opinion, the best for last. I really want to thank the gentleman on my left, Robert Taub, who now is the director and is my chief of staff, and is continuing to give me the opportunity to work with one of the brightest men I've ever met in my life, and one of the nicest guys I've ever met in my life.

And those folks taken collectively have given me invaluable insight and assistance. On those times when I was too far off point, it was because I didn't listen to them well enough; and those times when I came out looking fairly well was because I'd listen to them very well. And I want to thank them and all of you.

And with that little trip of nostalgia, I would now be happy to yield to the ranking member, the gentleman from Philadelphia, Pennsylvania, for any opening comments he might wish to make.

REP. CHAKA FATTAH (D-PA): Thank you, Mr. Chairman. Let me first indicate that I think that when the entire story's written on postal reform that the gentleman from New York will have been the impetus for reforming the postal services here of these United States. Your work, even though it may not realize a result immediately in the short-term future, I think does set the context in which this country will go forward and in terms of trying to respond to a set of uncertainties that exist in which the Postal Service has to operate.

I want to commend you for your work. And for those of us here in the minority, we have never felt as if we were in the minority working with you. We felt that it was a partnership. And we want to thank you for your leadership on these critical issues.

I do want to recognize many who are in the audience, but in particular we have a Board of Governors member from my state of Pennsylvania, Dana Sapier (sp), and I recognize her presence. And I have a formal statement that we'll enter into the record. But it's obviously that the Postal Service has -- as I think the postmaster general will lay out -- a multi prong strategy to deal with the issues that it confronts-- cost containment, and growing revenues, and the question of legislative reform. And I don't want to delay us from hearing from the postmaster general and from the other witnesses.

So I'll enter my statement for the record. And I'd be very interested to hear not just on the broad subject that the postmaster general will outline, but also we have emerging now a new set of interesting concerns relative to the FedEx discussions. And even though there's been no formal material provided, or perhaps even agreed upon at the moment, obviously this committee in its work will have to be informed by those discussions as we go forward.

And I want to thank you, Mr. Chairman, and I'll provide my formal remarks for the record.

REP. McHUGH: I thank the gentleman for his kind comment. The feelings are mutual.

We do have a request from non-subcommittee members who would like to -- in the procedure we followed in the past is to allow those folks, without objection, to have an opportunity to pose questions after the subcommittee members will. So we have Mr. Tierney from Massachusetts. And Ms. Biggert has also suggested that she would wish to drop by.

So I would ask that as we have in the past, those two full committee members be extended that courtesy after the presentations of our witnesses and the questioning by the regular members. And without objection, so ordered.

With that and all the niceties out of the way, let's kick some butt here. Please rise, and we'll administer the oath.

Raise your right hand.

Do you swear the testimony you're about to present will be the truth, the whole truth, and nothing but the truth, so help you God?

WITNESSES: Yes.

REP. McHUGH: The record will show that all of the witnesses responded to the oath in the affirmative. And with that, it is our custom-- I'm happy to yield to the postmaster general of the United States, Mr. William Henderson, for his testimony.

Thank you for being with us, Bill.

MR. HENDERSON: Thank you, Mr. Chairman. I won't read my testimony to you. I'll ask that it be entered into the record. But I would like to say that I appreciate your leadership. I think you have started a dialogue of reform where --

And I agree with your assessment that there is troubling times -- we estimate that we'll miss our revenue plans by as much as --

Sorry about that, $790 million under plan in revenue this fiscal year. And we're having to adjust our plans for next fiscal year because of the softening growth. So the problem exists today, and the solutions of raising prices are just killing off the market. So we have to figure out something else to do. And that something else I believe starts with postal reform.

So I appreciate your leadership in that. And I look forward to working with you as this congress winds down.

REP. McHUGH: All right. Thank you very much, Bill. I appreciate your brevity. That gives us more time for discussion afterward.

We move to the inspector general, Ms. Corcoran.

MS. CORCORAN: Good afternoon.

REP. McHUGH: It was complete. I read it. Without objection, so ordered.

MS. CORCORAN: The Postal Service is challenged now more than ever to maintain its reputation for reliability. Although it faced challenges this year, the Postal Service also had many notable achievements, such as the Year 2000 Initiative.

My office has identified over a quarter of a billion dollars in savings this year. In addition, our investigations have yielded 26 arrests, 11 indictments, 3 convictions, approximately $10 million in recoveries, and 35 contractor suspensions and debarments.

My testimony today will highlight work we've done over the past year to help the Postal Service meet what we believe to be its major challenges.

We have examined relocation benefits paid to postal executives. Our first audit questioned whether the moves were in the best interest of the Postal Service. Our second review questioned why the amount of miscellaneous expenses paid to executives was up to five times higher than those paid by comparable private companies. In both reviews, we questioned whether these relocation payments were used to augment the statutory pay cap.

We reviewed the external first-class measurement system. We found customers were not fully informed that on-time delivery scores did not measure postal-wide performance. We investigated a major telecommunications contractor. Our investigation resulted in the Postal Service recovering $12.2 million in mischarges and avoiding up to $96 million in additional costs over the remaining life of the contract. We also identified $36 million in questioned contract costs with the assistance of a contract audit agency.

In a joint investigation, we found two postal managers were able to defraud the Postal Service of $3.2 million. We reviewed the budget formulation process, and found that it was difficult for the Postal Service to manage its program costs because accounting records only reflected census after they are paid at the program level.

Now I'd like to turn to the important issue of labor management relations. We were pleased that the Califano (sp) studies references much of our work. We have continued the work that we discussed with you last year concerning Postal's implementation of the Violence Prevention and Response program by looking at the program in 26 district offices.

In the area of workplace safety, we issued our first video report, which allow postal management and the governors to see first hand the conditions at a facility.

Enhancing whistle-blower protections within the Postal Service has been of interest to you, Mr. Chairman. The postmaster general recently agreed with me that the protections provided by the Whistle Blower Protection Act should be adopted in the Postal Service as a matter of policy.

In the area of technology, we saluted the Postal Service's efforts to automate its processes. We believe this is the direction the Postal Service needs to go in the 21st century. Our reviews have been directed toward assuring that postal management has accurate and reliable information to base their decisions on technology investments. While the benefits of technology are enormous, proper computer security safeguards are extremely important.

In recent e-commerce testimony we cautioned that the Postal Service needs to address lessons learned from more traditional programs, such as contracting, which could also affect the e-commerce area. We are working with the Postal Service to ensure that the OIG has appropriate access to information, while recognizing the need for confidentiality.

As you know, our enabling new legislation requires us to conduct oversight of the inspection service. One of the initiatives successfully completed this year was to revise definition of function. That generally provides that OIG will perform all audits and procurement fraud investigations within the Postal Service.

Now, I would like to update the subcommittee on my office's progress. We have worked to educate postal managers and other stakeholders about our mission, and our independence in carrying out that mission. Therefore, we reacted quickly when changes proposed by the General Accounting Office and challenged our independence. We voiced our concerns, and I am pleased to report the controller general recently advised me that our office would continue to be viewed as organizationally independent.

Mr. Chairman, we are extremely proud of the diverse talent, skills and professional experience of our staff. Of the 660 individuals on board as of today, 50 percent are women and 48 percent are minority.

REP. McHUGH: Mr. Chairman and Mr. Fattah, I would like to thank you for your support in establishing this office. I would also like to thank you and the governors for recognizing the continued benefits of our work. The approval of our FY 2001 budget will help increase our visibility to postal service stakeholders.

In closing, I'd like to thank you for this opportunity to testify before the subcommittee. We will continue to assist the Postal Service, the governors and Congress by providing accurate and objective information to help you make important decisions. This concludes my statement.

REP. McHUGH: Thank you very much, Ms. Corcoran. I appreciate it, and appreciate all your work as well.

And finally, and certainly not least, Mr. Bernard Ungar who is director of Government Business Operations Issues for the General Accounting Office. Let me say a special thanks to you and to the GAO for being so responsive to our many requests issued by both sides here to try to assist us in understanding the issues and the challenges that face the Postal Service. You have been a tremendously supportive co-player in this process, and we're deeply appreciative for that.

And with that, Mr. Ungar, our attention is yours.

MR. UNGAR: Thank you, Mr. Chairman, for those nice, kind words, and members of the subcommittee. We're certainly appreciative of being here today to assist the subcommittee in its oversight efforts with respect to the Postal Service. As the inspector general and postmaster general did, I too would like to submit the formal statement for the record, and summarize our statement.

REP. McHUGH: Thank you, sir.

MR. UNGAR: Before I do that, I'd like to mention I am accompanied by Teresa Anderson and Gerald Barnes, assistant directors of our in general government division who have worked on postal matters for longer than I have, so they're quite in tune on those issues.

In brief, over the last five years, the Postal Service's performance have certainly had a number of quite positive aspects to it in terms of profits that it had not heretofore made, and delivery performance, high rankings in customer satisfaction. These are certainly well, noteworthy achievements.

As the postmaster general indicated, on the other hand, all the news is not good. Mail volumes and mail revenues have not grown as much as expected, and costs have increased more than expected. This, obviously, has put the Postal Service into a very uncertain situation.

The Postal Service's most recent, strategic plan paints a more pessimistic scenario in terms of the volume, or expected volume, growth and revenue growth than the picture it presented to us last year, and that we presented to the subcommittee last year.

While the future is certainly difficult to predict, and it's very difficult to say what exactly is going to take place, that doesn't mean that the Postal Service nor the subcommittee should sit by and let events take shape without aggressive and innovative interaction.

With that, I'd like to show a graphic that we have distributed in advance that kind of shows what the dilemma is with respect to fist class mail volume. If first-class mail volume doesn't grow as expected, or grows less than expected, or grows slightly, it presents a real predicament for the Postal Service. I think this graphic shows why.

We're looking at first-class mail volume. It constitutes 51 percent of the volume, 58 percent of the revenue, but contributes two- thirds of the overhead costs. These overhead costs in the short term generally don't vary with volume; over the long term they could. Thus, if first-class volume goes down or doesn't grow very much, the post service is going to have a difficult time trying to capture the funds to try to cover the overhead; and over time is going to certainly have to either look at the price structure, look at the Service, or a combination thereof.

This certainly raises the question that H.R. 22 has addressed and other folks have addressed, and that is, what kind of organization does the Congress want the Postal Service to be in the future? What kind of flexibility should it have, what kind of constraints should it operate under, what kind of rules and regulations should it be subject to? This is certainly a question with the Federal Express announcement that was made earlier. That is really what we see as the key policy issue facing this congress, and probably the next congress, and maybe the one after that.

On the oversight area, there are three issues that I would just like to briefly summarize that are closely related to the public policy issue.

The first issue has to do with the Postal Service's progress in improving productivity and cutting costs-- certainly a very important area. Here for example, we are encouraged by the growth and the productivity that the Postal Service expects this last year, 2.2 percent. This is very positive encouragement considering it has not improved productivity. In fact, productivity declined in a number of the years before this year.

It's also encouraging that the Postal Service has embarked on a series of cost-cutting initiatives, including breakthrough productivity. We think it's very important for the subcommittee to ask the Postal Service about these particular measures-- what are they, when are they going to take place, and what kind of progress is being made?

The second area relates closely to an area that the inspector general mentioned as well. That's the human capital area. Here there are three specific elements to that, that we'd like to highlight.

One is a long-standing problem the Postal Service has faced in the labor management relations area. We're encouraged that some progress has been made, but there's still a long way to go in that area. There's a large number of grievances that the Postal Service has to deal with, recently reported by the Violence Commission. While these are certain important to the work force, they also detract from the main mission of delivering the mail, and certainly absorbs the substantial number of costs which have been estimated at over $200 million a year to deal with.

The question here is, do the postal unions, the management associations, and the Postal Service itself share the same sense of urgency that these relations have to be improved, have to be worked on so that the Postal Service and its stakeholders can get on with the business of addressing the major challenges that the Service faces?

Also, the postmaster general recently said that a very large percentage of the Postal Service executives are over the age of 50, and succession planning is a very key ingredient into the futures of the Postal Service. It's going to be important for the subcommittee to oversee the Service's efforts to deal with this issue, as well as assure that its diversity goals are achieved in the same light.

Finally, the last issue that I would like to briefly mention has to do with the reliability and the credibility of the information, the performance information that the Postal Service has been reporting.

Today we issued to the subcommittee our report enhancements needed in the Postal Service's Results Act efforts. And here, as well as in a recent effort that we did for this subcommittee and the Senate Subcommittee on Electronic Commerce, we were distressed to see that some of the information that the Service had been reporting in terms of its financial performance was unreliable and not credible. And some of the information it had been reporting on its overall performance in its 1999 performance report was, in our view, quite misleading.

We're pleased that the Postal Service has recognized that there are areas here that need to be improved, and has promised prompt and swift corrective action.

That concludes my summary, Mr. Chairman. I would also like to, as others have done, thank you personally and the rest of this subcommittee for the support that you have shown for GAO, particularly in those years when we were going through some fairly challenging budget reductions. So we certainly appreciate your support then and your continuing support.

REP. McHUGH: Our pleasure. Thank you.

As a lifelong New York Giant fan, I immensely enjoyed the performance last night on FedEx field.

But speaking of FedEx, Mr. Postmaster General, no secrets, your discussion with Federal Express has gained some attention. As I understand it, it was not your intention to make any announcement at the time that the media came upon and reported your discussions. But nevertheless, we have a new reality there where a lot of questions have been raised.

In short, what can you tell us about that alliance, as it's being called?

MR. HENDERSON: For the record, we did not announce any strategic alliance with Federal Express. The discussions were leaked to the media, and we decided -- Fred and I -- rather than to have no comment, that we would actually comment on what we were discussing.

The cornerstone of our discussion revolves around the use of Federal Express' air transportation network, which is not something new to the Postal Service. We today use Emery Air -- a subsidiary -- or CNF. And so we are just in discussions with them, talking about the possibility of using their air transportation network, which is the finest and most extensive in this country.

As a part of that discussion, we had had discussions with RPS, which is now FedEx ground service, for several years about the possibility of using a drop-ship rate that exists in the current rate structure for residential delivery of packages. We've continued that discussion with FedEx ground service. And again, that's not something new; it's something that's been ongoing.

And the new part is that we did talk to Federal Express about the possibility of selling retain in post offices, allowing post offices to sell FedEx products. And also in the return business to pick up FedEx products if those who use that merchandise want to return it with the explosion of e-commerce; that we would use our residential delivery network to return those to Federal Express.

These are all just topics that we're discussing. We've reached no agreements yet. We would like to do this in the framework of a strategic alliance. There is no exclusivity involved in this. Anyone who wants to come to the table and talk is welcomed to come to the table. And we're talking with a similar arrangement to what we have with DHL.

REP. McHUGH: On the exclusivity question, you may be aware, for example, that Judiciary Chairman Hyde has written the Justice Department, asking them to look at and report back on possible antitrust concerns that evolve out of this proposal. I suspect that's a little hard to do having no details. But the concept and the question is I think central to many of the concerns -- understandably -- that have been expressed.

Obviously, I and others I assume, like Senator Daschle, who has endorsed H.R. 22, believe that the Postal Service in its unique position is pretty well free of antitrust requirements. That's why we put in H.R. 22 provisions very specifically that would subject the Postal Service to antitrust requirements as they apply to the private sector.

But nevertheless, did you or anyone in the Postal Service discuss antitrust or legality questions with the Justice Department prior to entering the discussion, or did you intend to do that upon completion of a framework?

MR. HENDERSON: We intended to go to the Justice Department when we reached an agreement. And independent of that, our general counsel looked at the concept, even though there's no concrete agreement, and concluded with the help of independent counsel that there were no antitrust issues here.

REP. McHUGH: You do have strategic alliance guidelines that, frankly, evolved out of, I believe in part, the recognition that the general thought is antitrust provisions don't apply, but there had to be some framework and some guidelines by which you can enter these.

Was this agreement -- and it's hard to say because it's not completed. But are you putting it together in a way that's consistent with those strategic alliance guidelines, or how are you approaching that?

MR. HENDERSON: Well, that's our proposal to Federal Express, that we follow those guidelines, similar to the ones that were tested in court earlier, a couple years ago. But I don't have a response from Federal Express.

REP. McHUGH: I guess the answer was you will, but you haven't because you're not done.

MR. HENDERSON: Right.

REP. McHUGH: I'm going to step out of normal course here because this is an issue that's of concern to other members. And I would yield to other members of the subcommittee at this time, if they have a question they'd like to pose now. They can certainly pose it on their own time, but now in this regard.

REP. FATTAH: Well, two things. This is housekeeping. I have an opening statement from Congressman Tierney that I'd like to have entered into the record.

REP. McHUGH: Without objection it will be entered in its entirety.

REP. FATTAH: And I'd like to also reference the Hyde letter, and ask that that be entered into the record. Because I think the chairman's letter indicated that it was his opinion that the Postal Service would not be incumbent by antitrust laws presently. That's at least how I remember the letter. But if you should agree that it be entered into the record.

REP. McHUGH: We agree on both points. I do think that was the chairman's position. However, he was asking for a formal review. And it will be entered without objection into the record.

REP. FATTAH: Now, Mr. to the postmaster general, these discussions that you're having with Federal Express you say don't have any exclusivity associated with them. And you have had discussions with others, or are willing to entertain discussions with others vis- a-vis what you see as the viability and the profitability of strategic alliances with entities that may have the capacity similar to Federal Express, like UPS or others; is that correct?

MR. HENDERSON: That's correct. Yeah, off and on over the years we've kept in contact with people like UPS and Federal Express, and have had informal discussions about a whole range of topics. Actually, I had started this conversation with Federal Express some time ago, and it kind of lay dormant for a while. And suddenly, we both were interested in it, and we put teams together. But we're open to discussion with anybody. There is no exclusivity here.

REP. FATTAH: I think that's an important point. Also, I would imagine it's difficult to have these types of discussions, however, in the context of a congressional hearing.

MR. HENDERSON: It's a little awkward.

REP. FATTAH: But I think that you can understand the general concern that has been raised when such an alliance between the Postal Service and Federal Express -- approached in the media it suggests to the people perhaps that there would be some concern. But I think that you should be taken at your word that the Postal Service is looking for partnerships among and between any number of different entities to the degree that it helps you meet your goal.

So I want to yield at this time, Mr. Chairman, and revisit this as we go forward. Thank you.

REP. McHUGH: Certainly.

Mr. LaTourette.

REP. STEVEN LaTOURETTE (R-OH): Thank you, Mr. Chairman. And I appreciate your courtesy so we can talk about this issue all at one time.

Something I didn't get to say at the beginning of the hearing is that when we were doing the Contract with America, we Republicans thought of term limits for subcommittee chairman and chairman was a good campaign issue, but in fact it hasn't turned out to be so good. And I would say that the reason I volunteered for this subcommittee the last two congresses has been your leadership. Although I apologize to your for being a burr under your saddle from time to time, I have done nothing but benefit from your guidance. And even when chastised by you, I know in a way that it has been to make me a better member of Congress. And I appreciate your kindness. (Laughter.)

Mr. Postmaster General, I have some questions too. I guess it came as a little bit of a surprise to me. I understand how now that you've described it, but I read about it in the newspaper, and I suppose some other members did. The reason that it came as a surprise is during our August recess, the Postal Service in Cleveland was kind enough to have us all in for a congressional briefing to tell us what was going on with the Postal Service. I don't remember this specifically being on the list.

As I heard you respond to the chairman, apparently not only general counsel, but an independent counsel has looked at the issue of exclusivity. I understand that.

Let me ask you this. Does the information you've received back from general counsel and the independent counsel spell out what law, regulation or other authority exists for the Postal Service to enter into such an agreement?

MR. HENDERSON: I don't know that off the top of my head, but I'll be glad to provide that to you.

REP. LaTOURETTE: Could you provide that to the subcommittee for the record. I would appreciate that.

And then, aside from exclusivity, I come to this a little bit as a old county official, and not just exclusive contracts, but non- competitively bid contracts.

Are you of the opinion that the Postal Service as they enter into a strategic alliance does not have to come up with an idea; that is we want someone to do -- we're going to take your stuff the last mile, and we're going to use your air service? Are you of the opinion you don't have to bid that service, you can enter into these discussions?

MR. HENDERSON: The last mile, there's really no way -- we have a rate that anyone can use today to drop packages at our post office. And we'll deliver them the last mile, whether they're FedEx, or UPS, or DHL. In fact, we do have DHL packages today.

REP. LaTOURETTE: To enter into such a strategic alliance, however, is there any belief that this has to be bid, that you have to come up with a proposal and then bid to use the service, or the deal that you want to enter into with somebody, and have somebody come back with the lowest and best price, or doesn't that apply to the Postal Service?

MR. HENDERSON: No. Entering into a strategic alliance does not have to be put out for an open bid, no.

REP. LaTOURETTE: Okay.

I understand that there are discussions, but can you sort of spell out for the subcommittee where you think it's going to go from here? And by that I mean, not are you going to make a deal or not. But say that you reach a deal, what review and approval process for this proposed strategic alliance or this deal is going to be subjected to before it is finalized and everybody signs off on it?

MR. HENDERSON: Well, obviously, it would come to the Management Committee of the Postal Service. I'm not personally negotiating the arrangement with Fred Smith. And then following that, I've made a commitment that I would take it to the Board of Governors for approval.

REP. LaTOURETTE: And you mentioned Emery in your remarks as well. And I'm aware of not only the agreement that the Postal Service has with Emery, but also there apparently was a difficulty recently with negotiated amounts in terms of what Emery thought it was going to undertake on behalf of the Postal Service. And they thought they needed more money for not only the regulation but the volume that the Postal Service was providing. The agreement was renegotiated; now it's the subject of litigation.

That's an accurate statement, right?

MR. HENDERSON: The litigation is concluded. They filed a lawsuit. They being Emery, filed a lawsuit to terminate the contract. And a judge ruled that they could not terminate the contract. And we are back in negotiations with Emery. The crux of the issue with Emery is the fact that we planned and budgeted on one rate, and they said their costs were simply higher. And so we feel their costs are too high, and we're going to mutually agree to figure out a way to get out of an arrangement with one another.

REP. LaTOURETTE: I had understood that the judge granted summary judgment, and basically said that the Postal Service until a date certain, October 12th -- if I remember right -- to come back and comply with the agreement; found you out of compliance with the agreement.I wrong in that?

MR. HENDERSON: Well, the subject of the lawsuit was to terminate the agreement. And the judge said that Emery could not just terminate the agreement. He asked us to go back to an interim rate, which we used at one point when we felt that Emery really did have some costs that -- we wanted a win-win situation; we didn't want a win-lose situation. That's not the way you partner.

But we did an audit of Emery, and we found some cost discrepancies. And we asked the IG to do a complete audit. And we told Emery as soon as that audit is completed that we will settle whatever obligations we both have.

REP. LaTOURETTE: And the strategic alliance, or the agreement that you had with Emery is smaller in scope than what's being discussed with FedEx though. Is that accurate?

MR. HENDERSON: It's a different type of arrangement, whereas parts of it is similar. The air transportation piece is similar. There's no plan to have FedEx do distribution as Emery does today that's contracted out. So it's just a different arrangement in its totality than Emery.

But as I say, the cornerstone is air transportation for both Emery and for the Federal Express strategic alliance.

REP. LaTOURETTE: The last question I would have -- and I again thank the chairman -- if I understood your discussions with FedEx ground and the sale of FedEx packages, and then the return of things ordered over e-commerce or FedEx, are you contemplating, or is it under contemplation, that there would be a FedEx delivery box, or personal drop-off box, located in the lobby or somewhere within the physical confines of the United States post offices in this country? Is that within the scope of your discussion?

MR. HENDERSON: Well, that's a subject that they're discussing with us that we haven't agreed to.

REP. LaTOURETTE: I guess I'd just be interested in your feeling about that. I understand you haven't agreed to it, but how do you feel about that?

MR. HENDERSON: Well, I would not want something to be a flag for employees sitting in the lobby. And it would depend on how much money we can make off something like that. We're very opened to having Federal Express, or UPS, or anybody else at our counters. The devil's in the details; how much money can we make off of it.

REP. LaTOURETTE: But again, the advice that you've received from general counsel or independent counsel, or from whomever you rely on for legal advice is, you could reach a strategic alliance that would permit you or allow FedEx for payment to put their boxes in the lobbies of post offices across the country, and no one else is, unless there was a similar agreement in place, unless you reached a deal with somebody else to do the same thing?

MR. HENDERSON: Right. And if we didn't reach a deal, we wouldn't be able to do it. But yes, we feel that we have the right to sell whatever we want to sell within reason. We're not selling packaged meat products and things like that, but that's certainly something that we would look at-- another source for revenue. We're very much interested in improving our revenue picture. We think that's an obligation we have as management, and we think this is an interesting way to do it.

REP. LaTOURETTE: Thank you very much.

And thank you, Mr. Chairman.

REP. McHUGH: Thank the gentleman. I didn't know he was trying to be a burr in the saddle; I thought he was trying to help me strive towards excellence. I appreciated his untiring efforts in that regard.

Let me go back to revenues.

I'm sorry, Mr. Davis from Illinois. I didn't see any indication earlier. My apologies, sir. I'm happy to yield.

REP. DANNY DAVIS (D-IL): Thank you very much, Mr. Chairman. I want to thank you for yielding. And I also want to share the compliments that have been made relative to the manner in which you have conducted the affairs of the committee. I too feel like Ranking Member Fattah, that you've made this side feel much less like a minority. And we certainly appreciate that.

I also want to compliment you, Mr. Henderson, and your colleagues on keeping the Postal Service in the black moving ahead, although there are changes in the business climate, and certainly changes in the technology. And I appreciate the fact that we have the opportunity to discuss the FedEx question right now. Obviously, it's a great concern of mine as well as it's a great concern of some of its competitors.

People like United Parcel, who are constituents of mine, have some serious concerns in terms of not knowing what the details are going to be, and having some feeling that there might end up being some disadvantage at which they're placed. And we certainly don't want to see that happen.

As I understand it, FedEx provides very specific delivery and money-back guarantees on both its air and its home delivery service. The Postal Service's delivery and refund guarantees are much more limited.

How are these differences going to be resolved in the context of shipments that originate in one place or on one network, and then terminate on the other? Have you gotten into discussions or have ideas about that?

MR. HENDERSON: Well, we're not commingling the products. We at this point don't have a co-branded product, so FedEx will operate the way it normally does, and we will likewise operate the way we normally do.

REP. DAVIS: Are you saying that there would not be instances where there would be joint movement, or where there would be movement at one level part of the way, and movement at the other level by a different entity-- Postal Service in one instance, FedEx in another?

MR. HENDERSON: Now FedEx, it's my understanding -- and I don't like to answer questions for Federal Express; that's not really what I do. But Federal Express does not intend to share their product, transportation or delivery of overnight packages because that's their core business. That's completely separate.

They have talked about using their drop-ship rate at the DDU, which is opened to anyone. And that discussion began before FedEx bought RPS. That's been ongoing for a long time. The only thing that we would do in that instance would be, if it's their decision, we would be delivering the last mile, so to speak, to the residents. Other than that, the only, again, relationship would be the air transportation of U.S. Postal Service products, much like Emery does today. We would lease their planes for a per pound rate. And just as a matter of information, we do that with UPS today at Christmas time. We will lease planes that are available.

I mean, that's how the deal works. And it would be constituted under a strategic alliance like we did with DHL.

REP. DAVIS: It's also my understanding that it's generally the case that Postal Service requires payment up front of postage before it processes and delivers mail.

Is that the general policy that would be applied to FedEx shipments that are handed off to the post office for final delivery? I'm saying, in the Postal Service, you generally pay first, and then you get service. Is that going to be the arrangement with FedEx?

MR. HENDERSON: Well, to the degree that we can. It would probably be some sort of electronic manifesting that would tell us how much money they owe us. We haven't worked out that kind of a detail yet. But the DDU rate is available today. And right off the top of my head, I'm not sure how the customers actually reimburses for the postage. But it would be under similar guidelines for Federal Express.

Now, we both have corporate accounts, so that all the money isn't paid up front. You have a corporate account with the Postal Service, for example in express mail, in which we can bill you for, for the postage.

REP. DAVIS: I've also been trying to figure out in my own mind and determine, how much difference is there between a strategic alliance and a contract?

MR. HENDERSON: Well, a strategic alliance is a little broader. A contract is a fiduciary document that agrees in price. A strategic alliance, you continue to have discussions about where you can synergy, where you can build off other folks, your infrastructure. It's just a broader arrangement. It's not like a vendor/supplier arrangement. And in my opinion, it's a better way to do business because you have an ongoing relationship. It's not just about money and service.

REP. DAVIS: And so you maintain that relationship. Does that ongoing relationship in any way preclude -- it's almost like being married in a way.

MR. HENDERSON: A little like it polygamy. Polygamy, yes. More than one wife in a marriage, yes.

REP. DAVIS: I mean, but you're precluded from having that same relationship with other entities.

MR. HENDERSON: No, we are not precluding anyone. If you're talking about UPS, we're happy to talk to UPS. I mean, the phone is silent. I can't get them to go out on a date, more less marry them. (Laughter.)

REP. DAVIS: Well, I'm not really a promoter of polygamy, but I would think in this instance that it certainly gives me a different level of feelings and assurance that we're not talking about closing the door; that we're talking about other approaches to doing business, but letting the door remain open to competition and opportunity for others to come in.

MR. HENDERSON: That's correct.

REP. DAVIS: Thank you very much.

I've got some other questions, Mr. Chairman, as we get to them. Fine, if not. Then I'd certainly want to submit those, and ask that we get written responses to them.

REP. McHUGH: Well, if they're as creative as your last round, we're looking forward to it. (Laughter.)

As a personal closure or marker of closure on this issue for this moment, obviously, there's a great deal of interest on this subcommittee. And I think it's fair to say through many sectors of government and the private sector as to how this is going to play out, we're looking forward to working with you as it unfolds further.

Back to numbers. It was in this subcommittee room about a year ago that we talked about potential revenue losses to the Postal Service deriving from a variety of sources, not the least of which is a diversion of first-class mail, to the Internet.

The figure that was used as the extreme was $17 billion potential losses. Some scoffed at that. In my opinion, some folks who theretofore showed a great deal of knowledge about the issue lost a lot of credibility in suggesting that there was virtually no threat at all.

I've never wanted to be more wrong about a question in my life than the fears that I've recently expressed repeatedly about the potential revenue losses to the Postal Service that, sad to say, we see accruing already.

And Mr. Ungar, in your written comments you cited a couple of figures and examples. You talked about 880 million social security checks, task refunds and other payments normally sent by the Treasury Department, that in 1998, 68 percent of that total were sent electronically, rather than mailed, and the calculation is $180 million in loss of first-class mail revenue, in that one segment alone.

You then go and discuss the figures applied, as I understand it, by the American Bankers Association, where banks, through a concerted effort -- and understandably through their business practices perspective -- had reduced their mail volume in 1999 by nearly 18 percent compared to just two years previous, their '96 level.

My first question -- because I didn't see it, and I'd be interested -- do you have a dollar figure for lost revenues that that 18 percent represents as compared to the $180 million on the Treasury mailing?

MR. UNGAR: No, Mr. Chairman, we don't have that.

REP. McHUGH: Mr. Henderson, are you familiar with that figure? Would you have any idea?

MR. HENDERSON: Would you repeat the question?

REP. McHUGH: Yes, sir. The American Bankers Association has reported that in 1998 versus 1986 they had reduced their mailings to first class by 18 percent.

I was just curious, how much money does that mean that you the Postal Service have lost because they're not longer putting that 18 percent in the mail?

MR. HENDERSON: They estimate -- and I'll make this more accurate if my memory's current -- about 1 percent of first-class mail has been marauded as a result of -- I wouldn't call that electronic diversion, but it's changing the business model out there where banks are consolidating.

There's also a number. There's 30 percent fewer banks today than there were in 1990 as a result of bank consolidations.

So those two combined have had a very slowing impact on the growth of first-class mail. And as you can see, as I said earlier, the growth right now is about 1.3 percent, and it's flat in the last part of the year. So there is an impact. It's hard to quantify, to reach in there, because we don't have any measure of that -- when I say that, of what bills and payments are doing -- other than by sampling. And we are doing the household diary this fall again, where we measure households across the United States. We use that for rate- making information. And we will get an indication on how much electronic diversion from that survey exists out there.

REP. McHUGH: Well, back to Mr. Ungar.

I appreciate your comment.

Is there any reason to expect that that 18 percent by the banks, or that 64, or 68 percent I guess it was, where electronic mail is the high watermark, or is it the low watermark?

I mean, it seems to me, intuitively, that banks are going to try to reduce that figure more; that both from a perspective of the Treasury service of what they would like to see happen, as well as how more and more of their recipients -- customers -- are going to want to have electronic transfers; that that figure's going to grow. I mean, this is the beginning rather than the end.

Is that a fair statement?

MR. UNGAR: Yes, Mr. Chairman. I think it probably is a fair statement. I think as you're probably aware there is legislation federal government-wide that requires federal agencies to go more and more electronic in the next several years. So that's certainly going to have a large impact. In the private sector, I'm sure that cost- cutting and efficiency is certainly something that many companies are interested in, and they'll certainly pursue. And with the greater and greater use of the Internet, and more and more competitors out there wanting and encouraging people to do transactions electronically, and pay bills electronically, it's probably going to rise rather than fall. Now exactly where this is all going to end up is a little unclear, but certainly it doesn't appear to be the low mark.

REP. McHUGH: Well, last year I asked you, as I recall -- you took the $17 billion figure at relatively face value that that's what the Postal Service suggested could be their ultimate extreme revenue loss. And as I recall, you said, well, we didn't verify that, but you have no reason to suspect that it's particularly out of line either.

MR. UNGAR: One point of clarification, Mr. Chairman.

REP. McHUGH: Certainly.

MR. UNGAR: We didn't directly deal with the $17 billion; we were addressing the potential or expected decline in volume. And I think maybe the Postal Service or another organization really entered into the picture of the $17 billion. But it was clear that the mail volume was expected to go down, and that would translate into some revenue shortfalls.

REP. McHUGH: You're right. I stand corrected. But it was a reasonable step from mail volume to revenues when you're dealing with first class.

Bill, you spoke about -- I believe the figure you stated was $790 million loss from your fiscal plan for this year?

MR. HENDERSON: Yes, that's correct.

REP. McHUGH: That puts you how much in the hole?

MR. HENDERSON: Probably in the neighborhood of $100 (million) to $200 million. That's very close. On $65 billion it could swing either way. But we're pretty sure that there's going to be a net loss this year.

I'll just give you some numbers. The $790 million is what we missed our plan by in revenue. The growth is down to about 1.3 percent in first-class mail. On the expense side, the gasoline prices, of which most surcharged for -- we couldn't because we had this elongated rate process -- that's going to be about $350 million in higher gasoline prices. Workers comp has gone up another couple hundred million dollars.

So we could have ended this year with over a billion-and-a-half in the hole. Fortunately, we sensed that in time, and we've cut costs over a billion. So getting down as low as $100 (million) to $200 (million), $250 million-dollar loss was a Herculean effort that the Postal Service accomplished at all levels, especially in the field.

REP. McHUGH: Well, let's talk about what the next step is. I mean, all of us -- certainly those people in my district -- we measure trips not in miles, but by hours. I hope very dearly that gasoline prices will stabilize.

I don't know if you can do this, but for the moment let's take it out of that equation. You have other realities that seems to me probably aren't going to go away in the short term. Mail volume I expect will continue on their current trend, if not become more drastic, and other costs where you've now squeezed quite a bit out.

How are you approaching your fiscal plan for next year? What are you looking at, and how do you plan to accommodate it?

MR. HENDERSON: Well, it's going to be very difficult to break even next year, given the unanticipated cost that we have in the softening of the revenue. We haven't concluded that and taken it to the governors. We are trying to figure out a way through cost-cutting to at least break even. But right now it's dim from my perspective, looking at all the cuts we've already made, the administrative cuts that we planned, the productivity numbers. We have the highest productivity this year that we've had in nearly a decade, and to have a $100-million dollar loss or $200-million loss with that kind of productivity tells you the kind of pressure that the U.S. Postal Service is being placed under.

REP. McHUGH: Mr. Ungar, can you give my friend, the postmaster general, a reason for optimism, or do you pretty much concur with the things he's seeing?

MR. UNGAR: Mr. Chairman, I think we pretty much concur. I think there are going to be additional pressures. That we know, for example, -- and certain Mr. Henderson knows -- that negotiations are currently going on with three of the unions. It's probably unlikely that wages will go down. And we know that retiree costs are going up, health care costs are going up. So it doesn't look too encouraging. It is a positive note though that the Service has announced its breakthrough productivity initiative, and has recognized that it really is going to have to focus on cost-cutting and productivity in order to assure that it remain affordable and carry out its mission.

REP. McHUGH: Cost-cutting and productivity. You agree that's pretty much -- I mean, the rates --

MR. HENDERSON: That's right. If we were a private business -- you can't live forever off cost-cutting, and that's how we've lived in the last couple of years. And at some point in time -- well, I'll be the first to admit there's always opportunity for cost-cutting -- you have to in order to be viable be in a business that grows. And as we've said earlier, we view ourselves as a wholly-owned government business. I mean, we are a business. We have a P&L just like a private company does, and we have a market worth just like anybody else would. And that asset is going to dwindle, in my opinion, unless we have some sort of substantive postal reform.

When I go to meet with foreign postal administrations, they're dumbstruck over the fact that the United States, which is the leader in most every area of the world, for some reason is blind to the requirement of postal reform. Everybody is. The Germans will go private in November, as an example.

And you talk about alliances. FedEx just announced an alliance with La Post (sp), the French. Deutsche Post is buying over 70 percent of DHL. And TPG, the Dutch, they own TNT. So the whole world is changing, and we sit on a 30-year-old structure. And it makes it very difficult for us to operate in this environment.

REP. McHUGH: I commend you -- and I commend the workers, particularly -- on this year's productivity increases. I have to wonder, given the structure of your business, how much you can rely upon productivity increases to fill this gap, even under the most rosiest scenarios. Technology, as rapidly as it is changing, can only go so far. Rates become a point of diminishing return. If your rates go too high, then it affects very dramatically your volume. So it becomes actually a losing proposition.

Therefore, as you mentioned, I believe, in some comments you were making a few weeks ago, there are other cost factors that go to the heart of service-- six day a week delivery; the question of do you keep a postal infrastructure that I think in an ideal world is very beneficial, particularly in rural communities, where most communities enjoy a postal facility?

Are you looking at that those kinds of questions yet as a way by which to address your dilemma?

MR. HENDERSON: Not yet. We are trying to maintain the obligation of what we define as universal service. That is, we go by your house everyday, six days a week, whether you have one letter or you have 50 letters. But ultimately down the road, the issue of universal service, and affordability -- we've talked about affordability growth and reform, but the issue is affordability. I believe that there will be serious discussion of postal reform, based on price increases; that customers will not want to tolerate the general price increase being X amount. And then there will be a human cry for reform.

Unfortunately, that could have been avoided if we would have had postal reform earlier. But it has in the past, it appears to in this country now, it's going to require a crisis before we have serious action of reform.

REP. McHUGH: Thank you. I appreciate the members bearing with me.

Mr. Fattah.

REP. FATTAH: Well, I think that hopefully we won't need a major crisis before we move forward, and obviously the specter of a strategic alliance -- as it's been termed -- between the Postal Service and FedEx.

I assume part of the nature of having such a discussion in public in some ways suggest that you seek to entice others to be more forthcoming and engage in these discussions. But needless to say, I think the Congress is obviously grappling with where we are in a sense that, on one end we want the Postal Service to be an independent agency; on the other hand, we -- at least speaking for myself, and I think for the majority of the members of the United States Congress -- fully intend that universal service be continued under all circumstances irrespective of cost efficiencies associated therewith in the most rural areas of these lands. So there are some stresses and strains as we kind of go forward.

From what I've heard you say, cost containment is the first prong on your strategy, and you think you have reached a point of diminishing returns relative to how much cost can be cut within the postal service operation. Obviously, just in terms of from a rational basis, there's always something more you can cut, but that you're getting close to that point.

The other side of this is revenue growth. And I'd like to hear you speak a little bit more about your view about how you grow revenues within the context of e-business and all these other problems that exist. I mean, that's part of the challenge that you're going to have to meet.

MR. HENDERSON: Yes. Let me correct something on the cost, Congressman. I think there's plenty of costs that can be taken out of the Postal Service, they just happen to be painful when you do it. I mean, there's lots of money to be made in cost-cutting and productivity.

In revenue, it's kind of a mixed image of what the future holds. Last fiscal year we lost substantial volumes to the Internet in advertising mail. The Internet became the darling of the business world, and a lot of money was diverted from direct mail advertising to Internet advertising. And it wasn't very successful, especially during the fall mailing season last year. A lot of catalogers used the Internet without the catalog, or without direct mail, and the results were disastrous.

So to some degree that mail has returned to the Postal Service now. We're seeing growth today in direct mail. We think there's opportunity prior to the Internet revolution to continue to grow advertising mail in first class. It historically had been the fastest growing segment for first-class mail-- had been ad mail. So we see advertising as still having a strong future. I don't think it's if, but when bill payment and presentment migrates to an electronic platform.

The reason I say that is -- and not necessarily the banks, but I think the banks are in here -- the large builders of America -- the AT&Ts and American Expresses and Visas and companies like that-- there's a real financial advantage for them to go electronic. I mean, AT&T, it cost in the neighborhood of a $1.75 to send you a bill. That doesn't count the postage that you put on it to return it. So there's a real incentive. I think the initial estimate at AT&T was a billion dollars could go to the bottom line if they could get all of their bills electronic.

Now, the adoption of that is a whole other bag. There are varying number of opinions. So depending on what happens with electronic payment presentment, that will determine the fate of first- class mail, and it will have a huge financial impact on the U.S. Postal Service.

REP. FATTAH: But you have, in a tentative way, moved into that sector, right?

MR. HENDERSON: That's right.

REP. FATTAH: At least in terms of billing, how is that coming, or what could you tell the committee about that?

MR. HENDERSON: Well, that's just a part of what you have to do in today's business model. You kind of have to eat your young every once in a while. We have e-bill payment and presentment --

REP. FATTAH: Polygamy to cannibalism. (Laughter.)

MR. HENDERSON: It's a vicious world out there.

We have about 15,000 customers now on electronic bill payment. I don't have the revenue figures off the top of my head. But all of the e-commerce initiatives are probably, if you total them all up, somewhere in the neighborhood of $10 million. Really no one's making a whole lot of money out there on e-commerce today, except for the people that build the infrastructure.

REP. FATTAH: And the last prong is legislative reform, which we've heard your views on today.

Let me yield back, Mr. Chairman.

REP. McHUGH: Thank the gentleman.

With the gentleman from Ohio's forbearance, I'd like to yield to the vice chair of the committee, the gentleman from South Carolina.

Do you have any questions at this time?

REP. MARK SANFORD (R-SC): Let's see here. You're doing the Indiana thing, and you're not allowed to do that.

Let's see here.

REP. McHUGH: You could say nice things about me while you're thinking. (Laughter.)

REP. SANFORD: I'll hop in for a minute. I thank very much the chairman. And I would say thanks, because this may be one of the last chances I get -- simply to say thank you. It's been awfully, awfully impressive to see the way that the chairman has handled this committee, and in particular, the way he's consistently pushed toward making the Postal Service more competitive.

And I admire that. And I just want to publicly say that.

REP. McHUGH: Thank you, Mr. Sanford.

REP. SANFORD: Just a couple of different thoughts.

I've been awfully impressed during our couple of different visits, Bill, with your commitment to the Postal Service and to its employees who are making a difference. The one thing though that I would have exception with is, one of your comments just as I walked in -- and I apologize for being late -- was, "We're just a business wholly-owned by the U.S. government." We're just a business. And I would actually have to take great exception to that in that what's interesting to me about that is, if that was the case -- apparently, before I got here, you were answering a bunch of questions about this proposed FedEx deal, and I don't think if you were just a business you'd be having to answer those questions; you'd just be doing it. And similarly, in a business I think about going out and dropping a product line. You just drop a product line because it doesn't make sense, and you move on. Your hands are tied. With universal service you cannot drop unprofitable routes, though in a business sense, or a business model, you'd certainly do that.

So I think you're somewhere between being just a business and being something else, and I don't know what that something else is. And that's what puts a number of us in a real confusing spot because we've agreed very much with the chairman's efforts to move to making the Postal Service more competitive, and yet had an internal struggle with as a conservative, how do you give this something else, business- like responsibilities, business-like freedom, but recognize the fact that in essence it is something else? And it does have some monopolistic powers and some advantages that nobody in the private business world has.

So I also wanted to touch on that theme just because it's been a very frustrating spot to be as one who's been sort of gumming up the work in your very valid efforts to make this place more competitive.

On that front, I would say this. If you think about what happened in let's say Norway or Germany or Australia or New Zealand, and how they moved toward privatization, what was it that they did differently, or have they just sort of merged public with private? What was it that they did differently so that they were able to pull this off politically without private interests going wild?

Do you have any insight to help me in this?

MR. HENDERSON: Let me go back to the business. I agree with you that there is ambiguity in the nature of the definition of postal service, even though that we're forced to, within our own regulatory environment, operate like a business. There are things that we don't do -- you're absolutely correct -- because of our unique status. So I would agree with that assessment.

Most of the postal services that are going private have been given broad pricing freedoms. They have reduced the size of their monopolies, eventually phase them out, and they've been allowed prior to going public to act, just as you were describing earlier, as a business. But there have been unique circumstances to each one.

The Dutch Post, for example, is a very small entity, and it has gobbled up outside businesses, and it's just a part of the privatization of their government. The German Post received an infusion of money at the consolidation of East and West Germany, in which they got all the property. And I think they've testified at one of the hearings they received all the property that the East Germans had, and they were able to use that cash to make acquisitions. They're one of the largest logistics company in the world today. New Zealand Post moved because there was an economic crisis, and they had to change all of government. And Australia had a problem with labor that had to be solved. And in the course of that, their post was liberalized. So there are kind of unique reasons.

And the private sector does scream when that occurs. And I can understand that. If I were in the private sector, I wouldn't want a $65 billion dollar giant cut loose on my markets; that's perfectly reasonable to understand that they will do that. I look at it through postal eyes and say, if we're not given some freedoms, then this postal service that you enjoy today is going to be damaged in the future.

And it is a difficult position to be in, I understand that. I've talked with UPS about that, and I've talked with Federal Express about that. And they have grave concerns about what we would be allowed to do. But I think all would agree that a healthy postal service is in the best interest of the American public, and we think that you really need to take a close look at it.

REP. SANFORD: I look at the numbers here, which is, first-class mail accounts for 67 percent of your contribution rate. And yet, the rate of growth of that first-class mail is basically somewhere between 1.5 and 2.5 percent. And yet, you look at cost structure going into -- I mean, it's a math trap. As you presently point out, unless you change something, you've got a math trap coming your way.

And that brings me back to, if you don't go with the revenue side -- lettermen at the top 10 list -- what would be your top 10 list, expenses that you would look at? In a strictly hypothetical sense, what would be the top 10?

MR. HENDERSON: Well, we've already targeted that. One would be administration, just the size of our infrastructure and overhead. A second one is transportation. We have a $4 billion transportation budget. We could take eventually -- and I'm not saying we're going to do this, but we could take everything out of the air. We could have only surface transportation in this country, which is a lot cheaper than air transportation, which would impact the organization. And finally, we could close processing center and consolidate them.

We right now are guided by service requirements. In other words, as all of you know, we have very high scores on our externally measured first-class mail service. We've prided ourselves on that. Over the last few years we've gone 11 points improvement. We're ranked the highest agency in government. In public approval we have 94 percent ratings. We're trying not to put any of that in jeopardy. We don't want to be viewed in a negative way.

So eventually somewhere down the road we're either going to have to raise prices or cut into the quick of the postal service so to speak.

I'll give you an example of how to raise -- just one right off the top of my head.

If you look at the financials of the Postal Service, our net income goes like this. It looks like a hump. And by the middle of the year we make all of our money, primarily because the infrastructure's full of volume. So if there was some way to incentivise the volume in the last half of the year to keep that infrastructure full, you're looking at the difference between making $100 million and making $2 (billion) or $3 billion, which I think would be very useful for maintaining the Postal Service.

So it's not like you're just being cut loose in the private sector to go take packages away from the package delivery companies. I'm talking about improving the pricing methodology for our own products. Ad mail would be a great product to reduce the price on in our last half of the year in order to stimulate the use of direct mail by businesses around America so that you could fill up your tank, so to speak, and make some money. We don't get inefficient in the last part of the year; we just can't adjust the infrastructure enough to offset the decline and the growth of volumes.

REP. FATTAH: Can I ask you one quick question.

We've got 40,000 post offices, right? How many letter carriers do we have?

MR. HENDERSON: Oh, I'm going to say 350,000 city carriers.

REP. FATTAH: How many of those are profitable?

MR. HENDERSON: I couldn't give you that information off the top of my head, but I can tell you --

REP. FATTAH: Percentage?

MR. HENDERSON: I can tell you that of the 40,000 post offices, the 26,000 smallest post offices, it cost over 2 bucks to bring in a dollar. That's just the math.

REP. FATTAH: So essentially what we have, is we have urban post offices subsidizing rural post offices.

MR. HENDERSON: To some degree, that's correct.

REP. FATTAH: Right.

REP. SANFORD: Now you're getting personal. (Laughter.)

REP. FATTAH: I'm not trying to be personal. I'm trying to follow up on some of the questions that were asked. Because, you know, one of the ways to get at some of this is that, since some part of what you're doing is a public service, is to try to isolate what those costs really are, and to deal with them as a public good or a public service, and not have them hidden in this other apparatus of the Postal Service.

We'll have some future discussions about this. Thank you.

REP. McHUGH: Would the gentleman yield?

The ranking member raises an excellent point. And that's been the point that we have been trying to illustrate for six years, with respect to this particular aspect.

And let me say to Mr. Sanford and Mr. LaTourette, I've had no problem at all with your concerns. Both of you gentlemen have dealt open and honestly with me and with the subcommittee. And where we have not been able to agree, that's life. But I do have a concern about some members who are turning their back on meeting this challenge because they either don't recognize or refuse to admit the very point that the ranking member just made.

If we allow this to continue, there are going to have to be made some extraordinary painful decisions, and they will particularly affect rural areas. Because you're right; if you look at a cost and income perspective, in general terms urban areas are subsidizing those rural post offices.

Now I happen to think that's perfectly acceptable, but you cannot enjoy that kind of cross-subsidy, if you will; you cannot expect high costs, low volume, low revenue routes and deliveries, i.e, rural areas, to experience the same kinds of services they enjoy today absent or doing something different. And I represent rural areas. And it is invaluable, both as a means of communication and as a means of social and economic fabric in those communities. And I don't want to see them go away, but that is where we're headed.

And that's why the general issue of postal reform is so very important and why we spent six years probing it. The Postal Service does too good a job to say, thanks; see you later. And I don't think our constituents -- the American public -- will allow us to do that. I pray to God they will not.

And as the postmaster general said, and as Mr. Sanford I think rightfully underscores, there are legitimate concerns expressed by the private sector that that reform should be attended with changes that level that playing field; that Mr. Henderson has admitted time and time again, is skewed in certain aspects to their unfair benefit. And that's what it's about. And that's just an editorialization.

So with that, I would go to Mr. Davis.

REP. DAVIS: Thank you very much, Mr. Chairman. I too listened to the discussion. There's a great deal of concern about the generalized condition of the Service and the complexity of tough decisions that are going to have to be made if we are to keep the system alive, and especially if we are to continue to guarantee, or even provide some semblance of universal service.

I have a need to shift a bit in terms of something that is currently taking place and ongoing.

Mr. Postmaster, I've recently been made aware of -- that I'm greatly concerned about -- what appears to be a very controversial procurement for the Postal Service's direct marketing sales support advertising contract. I've been told that an incumbent, Draft Worldwide, which is a constituent of mine, was prohibited from participating in the final solicitation round of a competition due to their refusal to provide what their attorneys deem to be confidential information that would put them in violation of their contractual relationship with other clients.

And my question is, if that was the case, did they bring that to the attention of the Service, and did they provide any alternative way of the Service getting that information?

They didn't bring it to the attention of the Service during the process; they did later on. And in fact, I talked to the president of Draft Worldwide.

The problem is they should have raised that issue -- if it were a legitimate issue -- in the beginning. There was a guideline that said -- and the other responders to the RFP provided this kind of information -- that if you did have a confidentiality agreement that you could blank out any references to the organization. And you could submit it just as a case study without naming anyone. That specific question was in the guidelines.

They have then filed a complaint over the process, and we will legitimately process that complaint. You have my assurances on that. And if there was any impropriety, we'll correct it. But to my knowledge -- and I've had the general counsel look at this, the IG is now looking at it, I think maybe at your request. If there is, we'll get to the bottom of it.

REP. DAVIS: Yes. We were so concerned about it that we actually did in fact request a full IG investigation. It just sort of appeared to me that even -- and I guess all of the other entities did in fact comply. But if you white out the names, I'm not sure to what extent does that really guarantee still confidentiality. That if I'm talking about a person who might be running for president who's father was president, I don't have a name, but --

REP. McHUGH: Adams? (Laughter.)

REP. DAVIS: Who's vice president and currently running for president, or something that wobbles. It just seems to me that -- I don't how confidential that might end up being. And I'd really like, if I could -- and I don't know if it's possible -- the responses from the others who were, in fact, in competition.

The other question that I've got-- if a company has been determined the top of the line, and has been determined to be number one by the experts in the field, it seems to me that it would be very difficult for them to not reach the point of being in the final solicitation based upon their track record and performance, based upon what they've consistently done.

Do you have a response to that?

MR. HENDERSON: Well, it's based on their proposal. The fact that they were a contractor prior with the Postal Service doesn't necessarily assure they're going to be a contractor in the future. I happen to look at the scores -- because you had raised this issue with me -- of the six individuals who were cross-functional, who reviewed their package, and they were consistently low; and in fact were the last, was the lowest rated. So there was something wrong with that submission. And whether they felt they had the business because they had done the business. But in advertising it really is about new ideas and new thoughts, and what you bring to the table and brainstorming.

So absent some different information from the IG, I just assumed that they took our business for granted, and didn't do as good a job as they might have on the submission because there was no one source of the low grading, and it was across the board. And I looked at the notes that the folks used. Then I interviewed one of -- I say interviewed, had a conversation with one of them in passing. I said described for me what happened here. And he said it was a very poor submission.

And you can't overlook the hard work of a new organization because one that you have existing took you for granted. I think that's what happened. And I know they're upset. But we do this every few years. We have our advertising agencies up for renewal; they're having their shot at it.

REP. DAVIS: I understand that the process suggests that if there is a formal complaint -- I understand that they've formalized a complaint -- that this stops the action for the moment.

Has the contract now been let or is work being done?

MR. HENDERSON: Yes. Let me go back to the first point. When a formal complaint is filed, the process is not stopped unless there's an obvious -- unless everybody sees that there's a real problem. In this case, before the complaint was filed, we had the general counsel review the entire process. Actually, the IG participated in the process as kind of a watch dog. So we would not stop the process as a result of their complaint because we don't think there's anything to it.

And we began negotiations with the successful folks. And I assume that they are either near conclusion or are concluded, just have not been publicly announced.

REP. DAVIS: So you're saying that that doesn't automatically stop the process; it stops it if you determine --

MR. HENDERSON: If we found a complaint was legitimate, we would rectify it. They complained to us informally first. And since I know the players who are involved here, I had it reviewed by our general counsel. For example, they had a whistle blower, so we interviewed that person and promised no retribution of any type. And there was just nothing there. And as I said, I talked to one of the people who was on that review team, and I looked at the notes of everybody. I mean, there's no substance to what they're saying. And it would be inappropriate for us to hold up awarding a contract since we're dark now really. I mean, we're out of a contract. We need to advertise in this period.

REP. DAVIS: So the contract is actually awarded. People are now doing work?

MR. HENDERSON: I think it's been signed -- I'm not sure -- which means it's awarded but not publicly announced, I think. There's been no public announcement on it yet.

REP. McHUGH: Would the gentleman yield?

REP. DAVIS: Yes.

REP. McHUGH: I have a Postal Service news release here, dated September 11th, titled, Postal Service Announces New Ad Agency Contracts, listing one, two, three, four, five, six, seven.

MR. HENDERSON: That's the minority-based. We had an Asian, a black and a Hispanic company that we announced out at the postal forum in a press conference. But that's not the --

REP. McHUGH: That's not all total.

MR. HENDERSON: That's not what our discussion is about.

REP. McHUGH: Well, then I apologize. Some are listed clearly as minorities; others are not. But if that's what they are; that's what they are.

I yield back.

REP. DAVIS: Am I understanding that this news release is strictly for minority contracts?

MR. HENDERSON: Let me read that news release before I say that. I know we had a news conference. I apologize. I just did not attend the news conference out at Anaheim, in which we announced Bravo --

Oh, that one wasn't released.

REP. McHUGH: This one?

MR. HENDERSON: That's what they're telling me. I haven't read it. No, this one wasn't released.

We did not release this news release. This thing inadvertently went to our web page. We pulled it off after about 50 minutes. This is not suppose to be in the public view. The contracts had not been negotiated as of this point in time.

It's amazing. You get information I haven't seen.

REP. DAVIS: Well, I guess that happens sometimes.

REP. DAVIS: After the IG investigation, should the investigation turn up -- something that might have occurred, even unintentional or whatever, what happens then? Anybody?

MS. CORCORAN: We would send a report to the appropriate party -- probably in this case it would be the vice president for purchasing -- with recommendations as to what should happen. It is management who then takes whatever action is appropriate based on our recommendations. If they disagree with our recommendations, we would go back, and we would talk to management, and we would raise it through the appropriate levels within Postal Service if we thought it was serious enough.

REP. DAVIS: And so, it's possible that even though an investigation might turn up something, the process could take so long until much of the action would have been completed? Is that sort of what I'm hearing?

MR. HENDERSON: Kind of like an election, you know, when you question the outcome, I've never known anybody to get put back in office, even though the outcome, they have turned up that a few votes were lost here and there, whatever.

MS. CORCORAN: We were called into this about a week or so ago. Even before we had gotten the call from your office, Bill had actually talked to me, and said that there were some issues there. And so we put some people on it.

We have dealt with serious parts of it, and we're still looking at the longer part. The longer view of the overall operation and what happened is something that would be a longer type review. And you are correct, that in terms of an election, no one gets put back in office. I mean, we might say that there has been something done that was incorrect here, and we would make more systemic recommendations to postal.

How they would decide that they needed to deal, or whether your constituent would decide that they wanted to pursue it farther through court, using some of the information that we had in our report as evidence to try to support; that would be -- so it's not a short-term thing.

REP. DAVIS: So the only real possibility of serious redress would seemingly be that the contract not implemented, or not re- implemented, without the assurance that everything is appropriate and was done appropriately?

MS. CORCORAN: Well, it is my understanding that there currently is an appeal process. And that appeal process should identify anything that might have been irregular within the entire process. And then Postal Service would have their own process for dealing with that.

MR. HENDERSON: As I say, we've looked at all their allegations, and there's nothing there. I mean they're dead wrong from our perspective.

And we have a financial obligation when we sign these contracts with these other organizations to begin doing work with them. So you're almost damned if you do, and damned if you don't kind of deal. I mean, we're going to get sued one way or the other; we know that. We like to be on the side of justice here, instead of on the other side.

REP. DAVIS: So you're saying that your preliminary finding suggests that there isn't much, but the IG investigation goes more in depth. And even with that, there is an appeals process that is underway. And if there's no resolution, ultimately, in all likelihood, that would become a case for our judicial system?

MS. CORCORAN: Well, I really think we're talking a number of different issues here.

The appeal process is one process. And there's a Postal Service process. And as we go about doing our various reviews, we'll take a look at that overall appeals process, not just for this particular job, but overall-- does that appeal process work appropriately. Then to meet the request that you have, we're doing additional work. And we will see what we can do there. And then we've done some work with what Postal Service had brought to our attention two weeks ago, and we've given them some information on that. And with that we didn't see any issues. So we're continuing on to several different directions.

But the ultimate is that right now I don't think any of us are seeing something that's going to bring any immediate relief, based on what we're seeing.

REP. DAVIS: Thank you very much.

Mr. Chairman, I understand that Mr. Fattah had some questions that he wanted to submit, written questions on the record that he'd like to get a response to.

REP. McHUGH: As our normal practice, we'll have a number of those to which we'll append Mr. Fattah's questions.

I would say as well, Mr. Davis was very forthcoming in his association with this particular firm as a constituent organization. To my knowledge, I had never heard of Draft Worldwide prior to this issue. And admitting that a little knowledge is a dangerous thing, I'm, therefore, a very dangerous person in this regard. And we have their side of the story.

But in reviewing it, it does raise some concerns --a logical question about a company who provided this service for five years, and is not even qualified to submit a bid. We weren't talking about awarding a bid, but submitting it.

And the other particular question that I had was relating to a Phase II pre-qualification that was never contemplated originally. Having had a little experience in municipal contract negotiation, if you do that, that buys you a lawsuit no matter which way you turn.

So I think it has some important ramifications, obviously, for Draft Worldwide. But I think, as the inspector general was just pointing out, to ensure that the contract process used across the postal service universe is that it's appropriate as it can be. And the postmaster general assured that concern. And it was for that reason that I signed a letter happily with Mr. Davis.

And we're looking forward to your report, Ms. Corcoran.

Mr. LaTourette.

REP. LaTOURETTE: Thank you, Mr. Chairman. And if I could just go back for a minute, I would like unanimous consent to submit for the record a copy of Judge Reginald Gibson's decision of August 25th this year the case of Emery Worldwide v. The United States. Thank you.

REP. McHUGH: Without objection, so ordered.

REP. LaTOURETTE: Mr. Postmaster, I guess the crux of my concern -- and I had a chance to read it while others were engaged in questions. And I think I was right, and I would just like you maybe to take a look at the opinion too.

But the question I had with the strategic alliance is, if Emery Worldwide had been successful -- they not only ask that you go back and pay them money that they said that you negotiated and you should have paid them, but they also wanted out of the contract. And that for the moment has not been granted. That's not settled according to the judge's decision.

What sort of disruption by going outside of the Postal Service and contracting with this type of alliance would that have caused to the delivery of mail in this country if Emery had been successful in court last month?

And here's the context in which I ask it. Because it's my understanding, for instance, that FedEx has -- its pilots and so on to a labor organization is certainly okay, but if you enter into such a strategic alliance, and the FedEx pilots have difficulty not with you, but with FedEx, and decide to go on strike, I'm wondering how would you factor that in to the strategic alliance discussions that you have with these outside entities.

MR. HENDERSON: That's a liability that we have with everyone. We fly mail on United Airlines, for example, and we have to have contingency plans when that airline goes on strike. We have a contingency plan. You basically put priority mail on the surface, and you truck it. To the degree that we could get space, which is very limited on commercial airlines we would contract with, you just have alternate transportation arrangements.

REP. LaTOURETTE: And during the time since I had to ask you a question as well, I talked to my chief of staff, and she's a lot smarter than I am. And I was asking the exclusivity and competition and bidding question improperly. So let me put it as clearly as she thinks it should be put.

And that is, let's say you enter an agreement with FedEx, or anybody else, on a strategic alliance along the lines of your discussion. Are you indicating that if somebody else comes along and says, "I want that exact same deal too," that it's your position -- because it's a money-making venture, whatever the incentives are for the Postal Service -- that you'd enter into it with that other guy or gal as well, or that the first in sort of had the leg up, and others would be excluded from it, having the exact same four-cornered deal?

MR. HENDERSON: Well, the only part of the deal that you couldn't do would be to contract with an equal amount of air transportation. But keep in mind, when we put the Emery contract out for RFP -- the one that Emery was successful -- in the end there was only one qualified bidder because of the size and scope of it-- one person in the whole country was interested, and one person was qualified. So the answer to it is yes, we'd be open to discussions with anybody.

REP. LaTOURETTE: Mr. Chairman, what do you want to do about votes?

REP. McHUGH: I plan on voting. How about you?

Well, I had contemplated adjourning the hearing. However, Mr. Davis suggests that he has at least two more questions he wishes to pose. So I think that perhaps we should vote and come back. It sounds as though you that you have plenty.

REP. LaTOURETTE: I have two more that aren't related to this FedEx thing that I can submit in writing.

REP. McHUGH: If you're comfortable in that.

REP. LaTOURETTE: I'm more than comfortable.

REP. McHUGH: Well then, with that let me say we will have, as we usually do -- but I really mean it this time -- a wide array of questions. And I apologize to Ms. Corcoran. We really didn't get to her. She submitted a very thorough comprehensive testimony, and made some, I think, very important points that need to be pursued. And we will submit those in writing. And also Mr. Ungar, such things as the Government Performance Review Act in suggestion of some shortcomings that we very much want the postmaster general and the USPS to address. They're very important. That's a very important process.

So you will, all of you, be receiving that. And as you've done so faithfully in the past, we'd appreciate your cooperation.

And with that, again, a closing word of, truly, my deepest appreciation to all of you. It has been a hell of a ride. And until we meet again, keep those cards and letters coming out.

The meeting is adjourned.

END

LOAD-DATE: September 22, 2000

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