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staffs of the two organizations, can agree on an appropriate approach to this change. If we are at each other's throats on this thing, if we are in clear disagreement, it is just not going to work.

Here I think we have a real opportunity, and I am hopeful we can take advantage of it. In terms of the Postal Service's final reaction, a lot will depend on what the detailed regulations referred to here earlier by a couple of the Commissioners, what those recommendations actually say. That is where the real rubber hits the road in this case.

Mr. MCCLOSKEY. What about demand pricing, which is raised so definitively in the GAO report? You heard Mr. Haley today, and indeed his comments are more specific on the GAO report than what he said verbally. I guess in their communications they say that the Postal Service as such has never asked for or emphasized demand pricing.

Could you comment on that? What does that mean, and am I exaggerating by saying 5-10 years from now we could have a real problem in the present economic base and structure of the Postal Service, and ultimately universal mail service? Am I out of line by saying that is implicit—that problem is implicit in the GAO report? If I am, tell me. I would love to hear it.

Mr. COUGHLIN. No, I think it is partially implicit. I think you are right on the mark, Mr. Chairman. I think it is a broader subject than just rates

Mr. McCLOSKEY. Right.
Mr. COUGHLIN (continuing). Or ratemaking-
Mr. McCLOSKEY. Absolutely.

Mr. COUGHLIN (continuing). But I think you are right on the mark. It goes back to the comments I made a few minutes ago.

Let me just comment generally, and then I will ask Hal Hughes to comment on some of the history of demand pricing.

I prefer, I guess, the phrase market pricing as opposed to demand pricing. Demand pricing at times in the past has been boiled down to a phrase that goes something like "whatever the market will bear,” and to be perfectly honest, I am a little uncomfortable philosophically with that kind of an approach to pricing a product of a government service.

But clearly prices that make sense in the marketplace, that is so sensible it is hard to believe we haven't gotten there yet.

Hal, do you want to add something to this?
Mr. HUGHES. Yes, thanks, and thank you, Mr. Chairman.

The Postal Service certainly shares GAO's concern, and you will have seen Mr. Frank's letter at the back of the GAO report where he said that demand pricing, which considers the value of service to the sender, should be given greater weight in the criteria used as a guide in setting rates.

Now the Postal Service, when it presents its case, does present so-called value-of-service testimony, that is, demand testimony, and in the last rate case of course we would have suggested lower thirdclass rates based on those considerations.

Value of service is one of the nine factors that the Commissioners told you they had to consider. It is the second listed factor, and as you heard from Commissioner LeBlanc, we think more weight has been put on factor No. 1. “fair and equitable rates.” But there

is nothing in the act that mandates the weight those factors are to receive. The third factor, the attribution, the carrying of direct cost, is mandatory, but for the others it is a matter of judgment, and we have presented

Mr. McCLOSKEY. So it can be done now or could have been done previously, right?

Mr. HUGHES. And has been done. We present demand testimony using a judgmental methodology. That is, taking it into account and making some judgmental adjustments, and the Commission does consider it.

There has been some change in court doctrine over the years, first that inhibited the use of judgment, and later when the Supreme Court straightened out a conflict among the circuits, it allowed us to get back into it.

We would like, as GAO suggests, to see demand considered more and see the evidence we present get more weight on that.

Mr. McCLOSKEY. Changing gears for a second—I don't want to go on and on about this because we have had six or eight conversations in this regard over the years, but Mike believe me, I am not being anecdotal when I say it is coming in from all over, that there are real problems in service and delivery. I am holding the first postal hearing, as you probably know, in my district, in my entire 10 years in the Congress.

But literally, from one end of Bloomington to the other, we have examples delivery taking of 7 or 8 days. I am not saying that it is every letter, but we have checked into some of the dynamics of it. There has been backup in Bloomington and they sent it up to Indianapolis for processing. There was backup in Indianapolis so it goes to Fort Wayne, and then it comes back through Indianapolis and back to Bloomington for that bill going a mile across town.

People are starting to really complain to me about the reliability of the Post Office, and when I talk to postmasters—and I am not just saying Bloomington, they tell me yes, there is a problem. I don't believe that anybody back there isn't sincere, dynamic, or not doing their job.

Then we hear about it from other regions too, and we can call the stuff anecdotal but when it comes in with a certain volume, it is out there.

What are we going to do about all of this? My staff and I have talked to Roger Nienaber, the Indianapolis postmaster, and he is a man of good will, dedicated, as are the people in Bloomington. Obviously, the situation is likely going to change there by the time I have the hearing, but are we pushing the water over to Elkhart or Terre Haute? When are we going to get a handle on this?

Mr. Coughlin. I had a pretty extensive conversation with Roger yesterday, after I got wind that the problems were reappearing out there again and they were hearing the kinds of things you were.

I guess I, based on that conversation, had several observations. One, Roger acknowledged that things weren't as good as they could be, and he certainly isn't denying what people are telling you—and telling you truthfully—that it took 4 days or whatever it was from one town to another.

I had a fairly lengthy discussion with him about his staffing and what the history of that has been over the past year, and he indi

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cated they have done almost zero hiring there in the past 142 years. He has done it primarily in anticipation of the effects of automation and specifically the implementation of the remote barcoding system in Indianapolis come October of this year.

He also indicated that his overtime rate had been pretty high. It is starting to come down now, and he is hopeful that that plus the fact that he has been able to add about 150 transitional employees to help him through this period is going to begin to alleviate his problem there.

I think there is a connection between some of the experiences that you have heard about from your constituents and some of the other things we have seen around the country in the fact that we ended up getting the transitional employee about 6 months later than we had expected to. It took a long time to work out the details of that. In the meantime, our people were holding back on hiring, trying to avoid hiring a 30-year employee when the possibility existed that a year or two later they were not going to need them.

I think that is part of the problem. There is a whole series of things that are going on. Staffing is just part of it. I am convinced that Roger understands the need to make sure he gets his act cleaned up out there. I believe he is committed to it. I will stay with him on that and make sure he follows through on it.

Mr. McCLOSKEY. I am not as much up on the specifics lately as I should be on the 2 and 6 vis-a-vis the 4 and 4 delivery schedules in preparation for automation affecting the letter carriers. We have heard some real grief from different communities and areas on this. How is that going?

Mr. COUGHLIN. Unevenly. There clearly are problems, particularly in the relationship between the local management and the NALC in specific areas where we are implementing. We have had regular ongoing discussions with Vince Sombrotto and his compatriots here at the national level, and they have some concerns about that implementation.

We continue to try to adjust to find areas where we can agree, that will make both of our lives easier. Nevertheless, we have to make sure that we are in a position to capture the savings from this automation when it comes into effect, and we are looking down the barrel right now. Next March, we intend to implement the delivery-point barcode and the beginning of carrier walk sequencing, and we must have carrier routes structured in a way that when that begins to take effect, we can begin to capture the savings and pull them out.

I am concerned about the relationship problems and we are going to continue to try to deal with those. My bigger concern is the potential effects on customers. I get concerned when I hear about delivery at 5 or 6 o'clock in the evening or delivery that is an hour or two later than people were used to, and we are doing what we can to try to head those things off when they happen. That is what we really need to focus on, that area, I believe.

Mr. McCLOSKEY. Do you have any comments on my concerns as to the future, the stability and participation of third-class mail particularly in view of the increasing use of alternative delivery systems and they are paying a higher rate than the Postal Service proposed? Is that a significant negative factor in our fears and

trends now, or is that just one more little blip that we can iron out?

Mr. COUGHLIN. You bet it is a matter of great concern. Third class represents about 38 percent of our pieces today and about 20, 21 percent of our revenues.

The numbers that were bantered back and forth here earlier when the Commission was here are essentially right. Commissioner Haley was right in that the third-class volumes are, in fact, higher than the Commission had predicted at the time they came out of the rate case. The real difference, though, in both first and third is the mix of third class and first and the revenue being generated and some of those assumptions about the revenue. While the pieces may be there, the revenues that were counted on are not. That is a very big factor in our current financial picture.

I just want to say for the record, lest there be any doubt, the Postal Service considers our third-class mailers, first-rate customers. They are extremely important for the financial and other health of this organization. This is, in case nobody has noticed, a volume-driven organization. With our current cost structure and operating structure, without volume this system will collapse in a hurry, financially. Critical to that success is continuing support and patronage from the third-class advertising industry, and we have to do everything we can to make sure we keep it.

Mr. McCLOSKEY. The comments particularly from Mr. Folsom as to the task force report, seem to reflect a certain amount of enthusiasm for the Postal Service having more flexibility for parcel post and Express Mail and so forth. As I have indicated, there are some areas in our good customer base that will not receive that idea with massive enthusiasm.

But should that be our concern there, flexibility to enable the Postal Service to obtain a greater share of those markets, or should our major concern be that we do not lose the third-class base, or should we look to both? As you know, this is going to be a subject of protracted discussions.

Mr. COUGHLIN. Well, Commissioner LeBlanc said several times that 92 or 93 percent of our volume and revenue comes from first and third-class mail, so those had better be our first concerns.

But by saying that, I don't want to minimize at all the importance of products to this organization like Express and Priority Mail, Priority Mail particularly. That is almost a $2 billion product. It is only one of two volume categories right now that is growing over last year. In the last accounting period, it was something like 24 percent higher than it was a year ago, Priority Mail, and every piece that we draw in is helping to keep other rates down.

So those are very, very important to us as well.

Mr. McCLOSKEY. Do you think it is reasonable to expect that we could work together to get a broad consensus and get ratemaking reform passed this summer?

Mr. COUGHLIN. I think we certainly ought to keep the discussions going that have gone on over the past year or so. My first concern is—and I think Chairman Haley or one of the other Commissioners mentioned it as well—what has been proposed by the task force, for the most part, we can do without legislation. If we can agree on that, we ought to press forward with that and we are. We will see

how that comes out. If there are other needs, we ought to continue the discussions and make the changes as we can agree on them.

Mr. MCCLOSKEY. But could our major concerns be addressed before the time constraints or the next rate filing?

Mr. COUGHLIN. My personal opinion, I think it would be awfully tough.

Mr. McCLOSKEY. Yes.

Mr. COUGHLIN. Now you know, of course, a lot more about how this process up here works than I do, but getting some kind of consensus on that change is a real tough process.

Mr. McCLOSKEY. I think you could do it in a month or two really in a month—if everybody really worked, but it is still

Mr. COUGHLIN. Yes, there has already been a lot of discussion

Mr. McCLOSKEY. Right.

Mr. COUGHLIN (continuing). On various aspects of ratemaking reform, so a lot of the groundwork may well have already been done.

Mr. McCLOSKEY. Mike, I would appreciate any communications whatsoever, informally, verbally, or in writing, as to some of the cost dynamics you are facing right now and your cost-cutting and cost-control strategies.

Quite frankly, having met Mr. Runyon and being personally impressed, if anything he arrives being massively touted as a costcutter and an axe-swinger, and that is said with respect. We are obviously going to need those talents right now.

But I would surely appreciate it, if, as soon as possible, you and Mr. Runyon, and the Board start filling in the specifics with us.

Mr. COUGHLIN. Yes, we will make every effort to do that.

Mr. McCLOSKEY. If you care to add anything else or make any observations, any of you three good gentlemen, I would appreciate it.

Mr. COUGHLIN. The only thing I guess I would add is that we do appreciate the support that you and other members of the committee provide us. It is sometimes not easy to get for an organization like ours, but you have been pretty consistent, as have other members of this committee, in helping the Postal Service and we appreciate it.

Mr. McCLOSKEY. Well, thank you, Mr. Coughlin. I look forward to being with you soon. Thank you.

Mr. Coughlin. Thank you.
Mr. McCLOSKEY. This meeting is adjourned.

[The prepared statements of Hon. Eleanor Holmes Norton and Hon. William L. Clay follow:) PREPARED STATEMENT OF HON. ELEANOR HOLMES NORTON, A REPRESENTATIVE IN

CONGRESS FROM THE DISTRICT OF COLUMBIA Mr. Chairman, I am pleased that Deputy Postmaster General Michael Coughlin and members of the Postal Ratemaking Commission are here today to assist us in our continuing oversight of the Postal Service. They are an integral and indispensable part of this process.

I am particularly interested in learning Mr. Coughlin's opinions about the status of the Postal Service in light of the current 29 cent rate for first class, efforts to implement automation, and the decline in volume and workload. I am sure he shares our concerns on whether the Postal Service will break even this year, wheth

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