Copyright 1999 Federal News Service, Inc.
Federal News Service
MARCH 4, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH:
7296 words
HEADLINE: PREPARED STATEMENT OF FREDERICK W.
SMITH
CHAIRMAN, PRESIDENT, AND CHIEF EXECUTIVE OFFICER
FDX CORPORATION
BEFORE THE HOUSE GOVERNMENT REFORM
COMMITTEE
POSTAL SERVICE SUBCOMMITTEE
SUBJECT - H.R.
22, THE POSTAL MODERNIZATION ACT OF 1999
BODY:
H.R. 22, the Postal
Modernization Act of 1999, is the most substantial and thoughtful proposal to
reform the postal laws of the United States in 25 years or
more. H.R. 22 charts a sound and balanced course for modernization and
reform of U.S. postal law. FDX Corporation,
including its subsidiaries Federal Express and RPS, will support enactment of
H.R. 22 into law provided that Congress refrains from amendments that undermine
the careful balance struck in the proposal.
At the outset, I would like to
commend the Subcommittee, and especially Chairman McHugh and his staff, for
their attention to public service in the best sense. Two and a half years ago, I
testified on an earlier version of H.R. 22. In the intervening period, the
Subcommittee has diligently sifted arguments and proposals advanced from many
different points of view and incorporated into the bill not the views of the
largest or loudest partisans, but the ideas that would, in the view of the
Subcommittee, advance the public interest. H.R. 22 is a qualitatively more
sophisticated bill than its earlier incarnation. This patient work has proceeded
steadily even though, in all this time, "postal reform" has not
once been featured on the Sunday talk shows. Balanced, nonpartisan
postal reform may not be the stuff of political glory, but it
is the sort of legislative work that will earn the long term gratitude of the
delivery services sector and the American people.
SHOULD THE POSTAL SERVICE
COMPETE WITH PRIVATE COMPANIES?
Critics of H.R. 22 have argued that a
government agency like the Postal Service should not be allowed to compete with
private industry.
Philosophically, I agree with these critics. But, as
events of the last six months--indeed, the last few days--have graphically
demonstrated, at some point philosophy must yield to reality. The major post
offices of the world, including the U.S. Postal Service, are in the process of
launching a massive commercial attack on private industry. Commercial
developments are threatening to overwhelm the incremental reforms of H.R. 22. In
the foreseeable future, governments will confront still more fundamental policy
choices in the postal field. If enacted promptly, I believe that H.R. 22 will
provide Congress with a rational basis for further decisions. If not, in my
judgement, Congress will have to move directly to more radical, and probably
less well considered, legislation.
Basically, the only proper justification
for a government Postal Service is to act as a provider of last resort for
necessary public postal services that would otherwise be unavailable from the
private market. A government Postal Service--which does not need to make a
profit, does not answer to shareholders, loads its fixed costs on a legal
monopoly, and cannot go out of business-- behaves so differently from private
competitors that it distorts the entire market. These dangers are compounded by
the perverse tendency of the Postal Service to use governmental powers for
commercial ends. The Postal Service has, for example, issued regulations which
expand the definition of the postal monopoly far beyond anything Congress
intended. As representative of the United States at the Universal Postal Union,
the Postal Service has negotiated treaties that advance its commercial interests
rather than those of the United States as a whole.
In the beginning of the
Republic, the Post Office Department was established on exactly this basis.
Given the undeveloped state of the national transportation system and financial
markets, only the federal government could establish a national Post Office for
distribution of letters and newspapers. In the early 1900s, the Post Office's
mission was expanded to provide a rural parcel service that the private market
was unable to provide.
Today, however, the Postal Service is inexorably
losing its status as a provider of last resort. The financial and operational
core of the Postal Service - the monopoly over the carriage and delivery of
letters--will one day dissolve in a technological mist. Senders of letters and
documents will have multiple alternatives to the Postal Service for delivery of
their correspondence.
As competitive services replace the public services of
the Postal Service, Congress must choose between two policy options. Either the
Postal Service must be wound down in an orderly manner as competitors are able
to take over its functions or the Postal Service must be allowed, and required,
to compete on terms that are identical to those faced by private competitors.
Closing down the Postal Service, like any other government agency that has
outlived its usefulness, is an option that ought to be considered seriously.
However, the practical and political problems would be formidable. No matter how
quickly technology and competitive alternatives advance, America will be
dependent on the Postal Service for some period of time. Managing an
organization the size of the Postal Service through a long period of decline and
diminution of function, while maintaining quality of service, be an extremely
difficult task.The alternative is to require the Postal Service to compete on a
level playing field whenever it competes with private companies. If and when the
Postal Service finds itself in competition in all aspects of its business, then
it must, in all aspects of its business, face the same conditions as private
competitors. In other words, it must become a private company. There will no
longer be any public policy justification for a postal monopoly law or a
governmentally owned and operated Postal Service. As in the aviation industry,
minor market failures will be addressed by government contracts to remedy
specific problems.
H.R. 22 moves towards clarification of these options.
H.R. 22 restructures the Postal Service into two fundamental divisions: non-
competitive and competitive. On the one hand, H.R. 22 preserves the ability of
the Postal Service to perform its remaining non- competitive, public service
missions. On the other hand, H.R. 22 gives the Postal Service freedom to offer
competitive products on even terms with private industry. Accounts for the
non-competitive and competitive products must be kept separately. In addition,
non-postal products and joint ventures must be provided through a separate
Corporation. Eventually, I believe, this discipline of structural separation
should be extended to all competitive products.
In the foreseeable future,
there will be no escaping a fundamental decision on the fate of Postal Service.
The clear distinction between non-competitive and competitive products
established by H.R. 22 will lay the proper groundwork for this decision. If,
after a few years, it turns out that the Postal Service has learned to compete
fairly and successfully, then Congress should move towards complete
privatization and demonopolization. If not, then Congress can, with a clear
conscience, act to spin off the Corporation and restrict the Postal Service to a
shrinking pool of noncompetitive functions. In the long term, we can live with
either outcome.
What we cannot live with is the current situation. The
center of gravity of the Postal Service is shifting more and more towards a
competitive posture, yet the Postal Service, operating under a 1970 law, is not
required to abide by the same laws as private companies. There are no clear
rules as to what businesses the Postal Service can enter or how its competitive
ventures are to be financed.
Only a couple of days ago, the Postal
Service announced that it would provide international express service in
conjunction with the German Post Office through a subsidiary, DHL, bought
largely with public assets. In this way, the Postal Service is able to piggyback
on the anticompetitive accomplishments of foreign post offices. Faced with such
a situation, the Postal Rate Commission does not begin to have the tools to
enforce even the vague rules that do exist.
H.R. 22 will clarify the rules
for now and lays the groundwork for a more fundamental decision on the long term
final fate of the Postal Service. In my judgement, H.R. 22 is the right postal
bill at this time.
UNIVERSAL POSTAL SERVICE
Postal Service competition
with private companies is a two-sided coin. For many, the principal issue is not
the difficulties faced by private companies but the threat that competition may
pose to the Postal Service's ability to maintain universal postal service.
Let me be clear. I support universal postal service. Every citizen in every
part of the Nation should have access to basic, affordable postal service. I do
not want to see stamp prices increased unnecessarily. I recognize and respect
the spirit of public service that motivates men and women in the Postal Service.
"Should the United States assure universal postal service?" is not an issue so
far as I am concerned. But "What is the most efficient way for the United States
to guarantee a level of universal postal service consistent with our national
needs?" is a legitimate question that proponents of universal postal service
must address seriously and quantitatively, with more than knee-jerk calls for
monopoly and postal privilege.
The role of the postal monopoly in the
provision of universal postal service is frequently misunderstood. It is often
argued that anything that allows the Postal Service to expand its business in a
given market is desirable so long as revenues cover incremental costs and earn
an additional dollar. This dollar, it is said, reduces the overhead costs borne
by first class mailers. This logic would support extension of the Postal
Service's monopoly into any business activity in which incremental costs are
less than total costs. For example, granting the Postal Service a monopoly over
air freight services could, by this reasoning, reduce the price of a first class
stamp by several cents. What's wrong with logic? What's wrong is that a monopoly
not only generates economies of scale, it also breeds inflated costs,
inefficiency, and lack of innovation. I can tell you from personal experience
that no one in his right mind would suggest that the United States would have
better or cheaper or more universal express service today if the Postal Service
had succeeded in extending its monopoly to include express services in the
1970s. Suppose the Postal Service had participated in the early express business
by pricing at marginal costs and loading overhead costs on to monopoly mailers?
The result would have been to discourage investment in the development of the
express industry. Either way, substantial Postal Service involvement would have
retarded evolution of our current, universal express network. In regard to more
traditional postal services, as well, a recent study by economists at the Postal
Rate Commission suggests that inefficiencies due to the postal monopoly exceed
economies of scale by several billions of dollars. While reasonable persons can
dispute the exact figures, no one can deny that a postal monopoly implies huge
costs as well as benefits. The truth is that the postal monopoly has probably
increased, not decreased, the cost of universal postal service in the United
States.A closely related issue is the cost of the Postal Service's universal
service obligations. Here, too, there are many misunderstandings. Economic
studies show that the cost of rural postal service is not much greater than the
cost of urban postal service. Even if there were no legal mandate, the Postal
Service would continue to serve all addresses in the United States, the same as
Federal Express. The major costs of universal service lie elsewhere.
In
place of misunderstanding and groundless assumptions, HR. 22 offers several
measures that would begin to develop necessary data and clear objectives.
Although the costs of legally mandated universal postal service are often
said to justify the extra revenues supposedly generated by the postal monopoly,
in fact no one knows the magnitude of such costs. Changing technology may or may
not have the effect of increasing the cost of universal postal service. Lack of
data has bedeviled postal policy discussions for decades. H.R. 22 would shed
needed light on this topic. For the first time, the Postal Regulatory Commission
will provide an annual estimate of the costs of universal service.
Another
often overlooked element of universal service is the quality of service. The
proper question is not whether postage rates are high or low, but whether the
mailer is getting good value for his money. H.R. 22 will require the Postal
Service to provide the Postal Regulatory Commission with regular reports on the
quality of noncompetitive services. This, too, is a distinct advance over
current law.
Cost and quality of service come together in the question,
"What level of universal postal service should the government guarantee in the
future?" As we develop more and more ways to communicate, this is a policy
question that deserves more careful consideration. In this respect, as well,
H.R. 22 makes a contribution by requiring the Postal Service to begin the
process of identifying specifically what level of universal postal service is
suited to national needs.
In sum, H.R. 22 will move us towards a more
efficient, more cost- effective universal postal service, better tailored to the
needs of the Nation. These measures are not only desirable; they are overdue.
FIREWALLS: THE LYNCHPIN OF H.R. 22
Given the bill's dual focus on the
rules of competition and protection of universal service, the core reform of
H.R. 22 is the division between noncompetitive and competitive products. This
division provides the framework for other reforms, including
all provisions giving the Postal Service greater commercial
freedom in competitive markets. Division is enforced by what the Chairman has
dubbed H.R. 22's "firewalls." The firewalls consist of several types of
provisions: - reliance upon objective factual criteria (degree of effective
competition), administered by the Postal Regulatory Commission, to define
noncompetitive and competitive categories;
- separation of accounts, both
operating accounts and capital assets;
- requirement of an allocation of
common overhead costs proportional to the distribution of attributable costs
(equal cost coverage rule);
- structural separation for Postal Service
participation in joint ventures and non-postal markets;
- an end to legal
privileges favoring the Postal Service in the provision of competitive products.
Without strong firewalls, H.R. 22 is a dead letter. Mailers will never
accept greater commercial freedom for the Postal Service if they will be forced
to underwrite the Postal Service's competitive adventures.
Competitors--including not only companies like Federal Express but also
newspapers, messenger companies, and private post offices--will oppose H.R. 22
unless assured that the Postal Service's competitive activities will not derive
substantial financial, legal, or commercial benefits from its noncompetitive
activities. Just as importantly, H.R. 22 will fail as a modernization measure if
the Postal Service is not required to operate with true private sector
efficiency. Subsidized Postal Service participation into competitive markets
will not raise the Postal Service's operations to the level of private
enterprise; it will bring down the competitive market to the false economies of
the Postal Service.
I cannot emphasize too strongly the importance of these
firewalls in our evaluation of H.R. 22.
Because of our concern for the
integrity of the firewalls, we cannot support a number of amendments proposed by
the Postal Service. For example, we oppose amendments which assign various
products to the competitive category regardless of whether they in fact face
effective competition. Similarly, we cannot support amendments that would give
the Postal Service exclusive authority to initiate reassignment of
noncompetitive products to the competitive category. Both types of amendments
are inconsistent with firewalls erected by H.R. 22. Commercial freedom for the
Postal Service should be coterminous with effective marketplace discipline.
Still more damaging to the firewall protections is the Postal Service
amendment that would replace the Competitive Products Fund with an uncertain and
unpredictable alternative accounting scheme. To implement this new accounting
scheme, the Postal Service proposes to scrap accounting practices worked out by
the Postal Rate Commission over thirty years and devise a new method for
assigning operational costs and revenues. Separation of accounts would be part
of a larger exercise to assure the Postal Service's ability to obtain financing
for competitive products. For five years, the Postal Service proposes to
continue use of the full faith and credit of the United States to borrow money
to compete against private companies. Lemming Express may support additional
commercial flexibility for the Postal Service's competitive activities under
such circumstances, but Federal Express will not.
Another Postal Service
amendment that would remove a firewall element crucial to the bill is the
proposal to sunset the equal cost coverage rule after five years. The Postal
Service says the equal cost coverage rule will be "unnecessary" after five
years. I cannot understand this argument.
Manifestly, this principle will
remain a critical element of postal policy so long as the Postal Service has the
ability to shift overhead costs of competitive products on to users of
noncompetitive products. The Postal Service also suggests that the equal cost
coverage test might become more difficult to satisfy if bill payment migrates to
email. While this possibility supports a provision, already in H.R. 22,
authorizing the Postal Regulatory Commission to adjust application of the equal
cost coverage rule for special circumstances, it does not in any way justify
sunsetting the rule itself.
In sum, Postal Service amendments which attack
the firewalls in H.R. 22 would loose a government-subsidized monster in the
delivery services sector and other segments of the American economy. Rather than
see creation of such a monster, we would join with those who believe that the
Postal Service must be confined to noncompetitive markets and dismantled as
these markets shrink.
NONCOMPETITIVE POSTAL PRODUCTS
For the foreseeable
future, the bulk of Postal Service revenues will continue to be derived from
markets that are noncompetitive because of legal or practical consequences of
the postal monopoly. H.R. 22 proposes a basic change in the regulation of
noncompetitive products with the introduction of price caps for baskets of
products.
The proposed price caps would address a fundamental flaw in the
1970 act. Under current law, the Postal Service has unfettered discretion to
determine the overall level of revenues to be extracted from customers who
cannot choose alternative suppliers. Such unchecked monopoly power is logically
absurd and detrimental to the public interest. The Postal Service has had little
reason to control its costs, and postal unions have had no incentive to moderate
wage demands. An independently administered system of price caps is a necessary
reform.
Details of the price cap mechanism are of greater concern to other
parties, so I will leave it to them to make specific comments. However, I would
like to offer a couple of general observations. Price caps essentially allow the
Postal Service two types of pricing freedom. First, the Postal Service would be
authorized to raise the overall level of postage rates within specified limits.
This type of freedom has gained a substantial measure of acceptance in the
mailing community. Second, the Postal Service would be allowed to adjust rates
of individual products, thus "deaveraging" or "re-balancing" the distribution of
overhead costs among different products. This type of freedom is much more
controversial. Each mailer of noncompetitive products fears that he will pay a
higher share of overhead costs and the other fellow will pay a lower share. In
response to such fears, H.R. 22 limits this second type of rate flexibility with
tightly drawn rate bands. The Postal Service has proposed amendments that would
allow it greater flexibility to re-balance tariffs. While I suspect that the
Postal Service may need somewhat greater flexibility than permitted in H.R. 22,
the politically feasible path probably lies closer to H.R. 22 than the Postal
Service's proposal.
At the same time, limiting the ability of the Postal
Service to re- balance tariffs restricts its ability to adjust tariffs to
reflect changes in underlying cost structures. Without such pricing flexibility,
the level of overhead costs borne by individual products could drift
substantially from the standards set in the baseline rate case. For this reason,
the Postal Rate Commission has suggested H.R. 22 provide for cases to "realign"
baseline rates. This proposal is worth serious consideration. The frequency of
realignment cases might be limited to ensure that they do not become a
substitute for price cap mechanisms provided in the bill.
H.R. 22 also
introduces a new concept into the pricing of noncompetitive products: negotiated
service agreements. Under this provision, the Postal Service will be allowed to
more closely integrate its operations with major mailers and pass on a portion
of the cost savings. At the same time, negotiated service agreements must be
structured so other mailers will not be disadvantaged. This concept represents a
major advance over the unlimited discounts contemplated in an earlier version of
H.R. 22.
COMPETITIVE POSTAL PRODUCTS
H.R. 22 would grant the Postal
Service essentially the same commercial freedom in the pricing of competitive
postal products as enjoyed by private companies. The Postal Service would be
allowed to price any product down to attributable costs. The Postal Service
would be able to negotiate contracts with major customers and introduce volume
discounts. In a market test of a new product, the Postal Service would not be
constrained to cover attributable costs, although losses would have to be made
up from competitive product revenues in the future.
Pricing freedom is not
unlimited, however, any more than it is for a private company. Like a private
company, the Postal Service would be free to price some competitive products
more aggressively than others, but, in so doing, it would also run the risk of
losing business in other competitive products whose prices would have to be
raised to make up for lost contribution to overhead. If Postal Service fails to
cover overhead costs in a given year, it will be forced to make up losses in
succeeding years. This is the discipline imposed by the equal cost coverage
rule, a firewall provision described earlier. In administering the equal cost
coverage rule, the Postal Regulatory Commission would be authorized to make
allowances for intrinsic differences in the cost structures of noncompetitive
and competitive products. In addition, the Commission is authorized to phase-in
this requirement over five years to allow the Postal Service a fair chance to
raise its efficiency to market levels. While the discipline of the equal cost
coverage rule is flexible, it is also indispensable. Without it, pricing freedom
for competitive products is out of the question.
As always, an important
element of the regulatory framework is the mechanism for enforcing the rules.
H.R. 22 provides that the Postal Regulatory Commission will annually audit the
books of the Postal Service. These accounts will be available to the public in
sufficient detail so that interested parties can check the Commission's
conclusions. If necessary, any party, or the Commission on its own motion, can
initiate a complaint proceeding which can result in an order re-setting
competitive rates to lawful levels. H.R. 22 further provides that the Postal
Regulatory Commission can require the Postal Service to discontinue a
competitive product that persistently fails to cover attributable costs.
As
I have always said, we are ready, willing, and able to compete with the Postal
Service on equal terms. If the disciplines and controls provided in H.R. 22 are
not significantly weakened, we can accept the commercial freedom for the Postal
Service's competitive postal products granted by H.R. 22. My only suggestion in
this area is to ask the Subcommittee to reconsider the standards which the
Postal Regulatory Commission would apply in re-setting rates after a complaint
proceeding. In our view, these standards are not sufficiently clear, so we have
proposed a technical amendment on this point.
EQUAL APPLICATION OF LAWS TO
COMPETITIVE PRODUCTS
H.R. 22 takes great strides in advancing the simple,
but fundamental principle that the Postal Service should be subject to the same
laws as everyone else when it participates in competitive markets. In brief, the
Postal Service's competitive products would be subject to antitrust law, tort
law, unfair competition law, and zoning law in the same manner as a private
company, and the Department of Justice is directed to report on other
differences in legal treatment. I strongly support these reforms.
In
this part of my testimony, I would like to touch briefly on the application of
this principle to three areas highlighted in my 1996 testimony: mailbox access,
vehicular licenses, and customs laws.
Mailbox access. Under the mail box
access role (18 U.S.C. 1725), private companies are prohibited from placing
items in curbside mailboxes even though a GAO study has found that a clear
majority of Americans (58 percent) believe this restriction should not apply to
companies like Federal Express. This rule is the product of Depression-era
concerns. In the mid-1960s, the Post Office announced it would henceforth
deliver only to curbside boxes in new residential areas, citing studies showing
that curbside delivery was half as expensive as delivery to the door. This
policy has greatly increased the commercial importance of the mailbox access
rule. Today, more than 70 percent of residential deliveries are made to curbside
mailboxes, cluster boxes, apartment boxes, and similar Postal Service-only
receptacles.
In 1996, I urged the Subcommittee to repeal the restriction on
mailbox access. Unfortunately, the Subcommittee concluded that even a limited
experiment in opening the mailbox access was too controversial to include in
H.R. 22. Without seeking to revisit that decision in this bill, I would ask the
Subcommittee to consider the fairness of allowing the Postal Service to use the
mailbox system for delivery of competitive products while denying this right to
competitors. After all, the Nation's system of mailboxes was built and paid for
by mail recipients, not by the Postal Service. Unless the law on mailbox access
applies equally to all competitive products, the law will perpetuate a
tremendous bias in favor of the Postal Service in lawfully competitive markets.
I urge the Subcommittee to provide that the mailbox access rule applies equally
to all competitive products.
Vehicular license fees. H.R. 22 provides that
the Postal Service shall comply with Federal and State laws regulating the
operation of vehicles if such vehicles "are primarily and regularly used for the
transport or delivery" of competitive products. In reality, this
vehicle-by-vehicle test means that the Postal Service will almost always escape
license fees. In contrast, another provision of H.R. 22 imposes tort liability
on the Postal Service vehicles depending on the proportion of non-monopoly mail
being carded by the vehicle at the time of an accident. In one of its
amendments, the Postal Service argues that pro-rata application of tort
liability is impractical under such circumstances. We agree with the Postal
Service on this point. By the same token, however, pro-rata application should
be used wherever it is practical. In the case of license fees, it would be
perfectly feasible to require the Postal Service to pay license fees based on
the overall proportion of competitive products delivered by its vehicular fleet
in a given State. I urge the Subcommittee to consider these practical
modifications to the principle of equal application of the laws.
Customs
laws. Customs laws are the single biggest impediment to the development of
international trade. H.R. 22 provides that the Postal Service, in the provision
of competitive products, may not take advantage of discriminatory foreign
customs procedures designed exclusively for postal shipments. Implementation of
this provision is delayed for five years, however, to avoid imposing burdens on
U.S. shippers who have invested in Postal Service products that make use of
foreign customs preferences. I accept the fairness of a five-year grace period
for existing products, but I do not think the Postal Service should be able to
take advantage of this grace period to develop new international products and
services that take advantage of such discriminatory foreign customs procedures.
Therefore, I ask the Subcommittee to consider limiting this grace period
provision to existing international postal services.
IMPARTIAL
ADMINISTRATION OF THE LAWS
Closely related to the matter of equal
application of the laws is the problem of impartial administration of the laws.
Not only should the Postal Service, in its competitive activities, play by the
same rules as everyone else, but the government should apply the rules equally
and impartially to all. This obviously will not be the case if the Postal
Service itself is entrusted with exercising governmental authority. H.R. 22
addresses this issue in two important areas.
First, H.R. 22 divests the
Postal Service of authority to issue regulations administering the postal
monopoly. Current administrative suspensions of the postal
monopoly are preserved by statute. I strongly support these necessary
reforms. Not only will they give legal certainty to the scope
of the postal monopoly, but they will also go a long way
towards improving relations between the Postal Service and private operators.
The Postal Service has proposed an amendment that would, among other things,
resurrect the Postal Service's rulemaking authority over the postal monopoly.
Although the Postal Service has assured us that this was an unintended
consequence of this amendment, we urge the Subcommittee to scrutinize this
amendment with extreme care.
Another provision of H.R. 22 would generally
bar the Postal Service from competing in an area that it regulates or regulating
an area in which it competes. This principle is very important and must be
retained. We do not object to a Postal Service amendment that would, as we
understand it, require the Postal Regulatory Commission to follow antitrust
precedents developed by the Department of Justice and Federal Trade Commission
rather than concocting its own unique brand of "postal antitrust" law.
POSTAL MONOPOLY
H.R. 22 would limit the scope of the postal monopoly to
letters transmitted for less than six times the basic stamp price, that is, less
than $1.98 at today's stamp price. In addition, letters weighing more than 12.5
ounces could be carried out of the mail even if priced less than six times the
stamp price. This approach to limiting the postal monopoly is similar to that
adopted in many countries, including the European Union, although it is not as
pro-competitive as reforms adopted by countries such as Sweden,
New Zealand, and Germany, which have abolished their postal
monopolies altogether (in 2003 in the case of Germany). The practical effect of
H.R. 22's new limits on the postal monopoly will be to repeal the monopoly over
two-pound Priority Mail shipments that can legitimately be considered "letters,"
less than 4 percent of total Postal Service revenue.While I support these
provisions of H.R. 22, I would to go further. Over the long run, the only tonic
that can enhance the vigor of the Postal Service is competition, and I would
recommend a larger dose. While H.R. 22 is clearly moving in the right direction,
I encourage the Subcommittee to consider the wisdom of adding more stringent
limits on the postal monopoly, to be phased in after a few years. For example, a
price limit of double the stamp rate would still protect more than a third of
Postal Service revenue from competition. Given the pace of change, such a
prescription is not too strong medicine for the Postal Service.
In addition,
we have submitted to the Subcommittee a number of technical amendments to the
postal monopoly provisions of H.R. 22. These will clarify without changing the
intent of H.R. 22. For example, H.R. 22 plainly intends that bulk outward
international mail should be considered outside the postal monopoly because such
mail is placed in the competitive category. Nonetheless, no provision in H.R. 22
actually permits private carriage of such mail. We have suggested an amendment
that would do so. Similarly, although a provision in H.R. 22 provides for
grandfathering the current administrative suspensions of the postal monopoly, in
many cases the precise legal results of this provision will be unclear. We
therefore suggest that the Postal Regulatory Commission issue regulations that
would set out specifically the scope of the administrative suspensions
grandfathered by H.R. 22. Given the extreme importance of the postal monopoly
provisions for all parties, I urge the Subcommittee to consider these technical
amendments carefully.
PRIVATE LAW CORPORATION
H.R. 22 authorizes the
Postal Service to establish a private law Corporation. The Corporation can offer
non-postal products as well as postal products and engage in joint ventures with
private companies. Financing for the Corporation would be limited to the funds
and assets of the Corporation itself and the funds and assets of the Competitive
Products Fund, as well as such money as the Corporation can borrow on its own
credit or attract in the form of contributions from joint venture partners and
new shareholders (in subsidiaries). ! support this provision of H.R. 22 because
it will place clear and reasonable restrictions on the Postal Service's ability
to use public assets and monopoly revenues to gain a competitive edge in such
markets.
For the Postal Service, the Corporation offers an alternative
organizational structure for providing competitive products. Because of
structural separation, the Corporation will also allow the Postal Service to
escape the detailed oversight by the Postal Regulatory Commission necessitated
by joint costs.
The Postal Service will be able to move some competitive
postal products to the Corporation, although the inherent advantages of the
Corporation may be offset by losses in economies of scale. If the Corporation is
commercially successful, its enhanced value will improve the balance sheet of
the Competitive Products Fund. If it is unsuccessful, it should be allowed to
fail like any other private company.
As a means of preventing cross-subsidy
and other distortions due to the postal monopoly, structural separation is
manifestly superior to accounting separation of joint costs. As proposed, H.R.
22 requires the Postal Service to carry on new activities, which are separable
from traditional postal activities, in a structurally separate Corporation.
Indeed, after a suitable transition period, the Postal Service should be
required to spin off its competitive postal products to the Corporation to the
maximum feasible extent. Structural separation should be the rule, rather than
the exception, for all competitive postal products.
Another benefit of the
manner in which H.R. 22 establishes the Corporation is to serve as an
international precedent. In Europe, the European Commission has utterly failed
to devise the sort of standards set out in H.R. 22. European post offices have
freely sold public assets, like real estate, to underwrite purchases of private
companies like DHL. A clear U.S. policy will help us to make the case for
adoption of similar rules in Europe.
Some critics of the Corporation have
argued that it should be deleted from H.R. 22 because it allows the Postal
Service to enter non- traditional businesses. I believe these critics are
missing the point. The Postal Service has already begun to experiment with non-
traditional postal products, joint ventures, and non-postal products. In other
developed countries, post offices have gone further down this road than the
Postal Service. If Congress is not ready to stop this trend in its tracks, then
it is highly desirable to require that such activities be placed in a separate
corporate structure. After a few years, Congress will have a rationale basis for
deciding whether the Postal Service can and should be allowed to compete like a
normal company. If Congress decides the Postal Service should be divested of
such activities, a corporate form will facilitate sale.
Plainly, the
Corporation should not serve as an end run around the restrictions of the
Competitive Products Fund and the equal cost coverage rule. If the Postal
Service places assets into the Corporation, these assets must be independently
evaluated and the Competitive Products Fund should receive payment for such
assets in the form of bonds or stock issued by the Corporation. In addition, the
Postal Regulatory Commission will have to adjust the application of the equal
cost coverage rule if competitive postal products are shifted to the
Corporation. Similarly, the pricing of transactions between the Postal Service
and the Corporation will have to be subject to scrutiny by the Postal Regulatory
Commission.
It is certainly true, as pointed out by the Postal Rate
Commission, that the Corporation should not be able to "play" with its assets
without financial consequence. The law must never lose sight of the fact that
these assets belong to the people of the United States, not to the Postal
Service itself. Accounting rules should be devised to make sure that the
Corporation is motivated to act like a normal, profit oriented company and the
Postal Service is barred from shifting monopoly rents to the Corporation.
Perhaps Congress should provide for the sale of a substantial portion of the
Corporation to the public within a definite time frame. Public ownership would
provide an independent evaluation of the value of the Corporation and ensure
that the Corporation's Board of Directors makes realistic business decisions
since "real" money of "real" investors will be at stake. This may be the only
way to ensure that the Corporation acts like a normal company. At a minimum,
Congress should provide for a comprehensive review of the operations of the
Corporation after a fixed time period. This review should include appraisals by
the Treasury Department, the Department of Justice, and the Postal Regulatory
Commission.
ROLE OF THE BOARD OF GOVERNORS
H.R. 22 proposes to
redesignate the Board of Governors as the Board of the Directors "to convey the
business responsibility of the Directors for ensuring effective and efficient
operations of the Service on behalf of the American public. "H.R. 22 also
requires that new Directors of the Postal Service be chosen on basis of
experience in managing organizations or corporations "similar in size in scope
to the Postal Service." At the same time, H.R. 22 retains the statutory duty of
the Board to "represent the public interest generally."
The proposed changes
in the title and qualifications for the Board of Governors highlight the
inherent conflict in the mission of the Postal Service. Is the Postal Service
supposed to pursue its commercial self interest or the general welfare? As the
Postal Service becomes an ever more competitive entity, this conflict is
exacerbated. Worse, it may become blurred; public interest responsibilities may
be invoked to justify commercial decisions. For these reasons, I suggest that
the Subcommittee consider clarifying the role of the Board by making its primary
focus either management of the commercial interests of the Postal Service or
representation of the public interest, not both.
INTERNATIONAL POSTAL POLICY
H.R. 22 would correct a basic flaw in the 1970 act by submitting international
mail to the same regulatory oversight as domestic mail. The reasons which
require regulatory oversight of domestic mail-- protection against abuse of
monopoly power and control of predatory behavior--apply equally to international
mail. I strongly support this reform.
H.R. 22 would also
vest authority for international postal policy in the
Department of State and set pro-competitive objectives for the Department of
State to pursue. This provision would extend and clarify amendments to the
postal law adopted last fall, and I support it.
Since last fall, Ambassador
Michael Southwick and his staff in the International Organizations office at the
Department of State have worked diligently to master complex issues quickly.
Urgency is required because the Universal Postal Union (UPU) convenes a general
congress in August in Beijing to negotiate the legal framework for international
postal services during the period 2001 to 2005. The deadline has already passed
for submitting certain types of proposals for consideration at the Beijing
Congress. Under Ambassador Southwick's leadership, the United States has
recently proposed that the UPU convene an Extraordinary Congress in 2001 to
reorganize the organization along commercially neutral lines. This is an
extremely important and responsible initiative for which the Department of State
deserves commendation.
On the other hand, the Department of State has failed
to develop procedures to open development of U.S. policy to all interested
parties, including the Postal Service, private carriers, and mailer groups. The
Postal Service continues to enjoy exclusive access to key policy proposals and
policymaking meetings. I am hopeful that the Department of State will move
rapidly to reform these procedures. If it does not, the United States Government
will not have the benefit of a public dialog on possible U.S. proposals to amend
the Universal Postal Convention. The deadline for submission of such proposals
is April 22 (with the co-sponsorship of two other countries). I urge the
Subcommittee to oversee these developments with vigilance and, if necessary, to
add to H.R. 22's provisions on international postal policy to ensure that the
U.S. policymaking is as open and transparent as possible.
TIMETABLE FOR
IMPLEMENTATION
In one amendment, the Postal Service
proposes acceleration of H.R. 22's reforms by doing away with
the baseline rate case and using instead rates from the last general rate case.
I agree with the Postal Service that the
reforms of H.R. 22 can be and should be introduced more
quickly, and I urge the Subcommittee to look into ways to do so. Most reforms
can take effect when baseline rates are effective and the Competitive Products
Fund is established. Whether or not a baseline rate case is needed immediately
depends in large part on whether realignment cases are allowed. A baseline rate
case for international rates will be needed in any case since these rates have
never been reviewed by the Postal Rate Commission.
CONCLUSION
With the
changes I have proposed, H.R. 22 represents a very sound approach to necessary
modernization of the Nation's postal laws. I hope that you will give serious
consideration to our suggestions for improving the bill.
Thank you for your
consideration of the views of FDX Corporation.
END
LOAD-DATE: March 6, 1999 
