2. As a matter of good ratemaking administration, the Commission would welcome a more explicit linkage, in the Postal Service's rate-change proposals, between the Service's overall planning, budgeting, and leadership goals and the rate and classification changes it is advocating. One of the attractive features of the Joint Task Force's report on Postal Ratemaking in a Time of Change is the suggestion that rate cases include a policy presentation by the Service, preferably conducted by a high-ranking management official. The Commission has proposed procedures along these lines in its current rulemaking docket RM91-1.

Unlike most ratemaking legislation, the Postal

Reorganization Act provides a common statutory set of policies which both the Postal Service, as the regulated enterprise, and the Commission, as the ratemaking tribunal, are required to follow. Greater explicitness, of the kind just described, would enable the Commission to see the best way of carrying out these common objectives, and to the extent there is disagreement over what they mean or require in particular situations - to conduct a fair, public, and impartial inquiry into the best accommodation of conflicting viewpoints. It would preserve the necessary independence of the process, while making it more clearly responsive to the legitimate goals of the entire postal system.

OVERSIGHT HEARING ON THE U.S. POSTAL

SERVICE

TUESDAY, JUNE 9, 1992

HOUSE OF REPRESENTATIVES,

COMMITTEE ON POST OFFICE AND CIVIL SERVICE,

Washington, DC.

The committee met, pursuant to call, at 10:10 a.m., in room 311, Cannon House Office Building, Hon. Frank McCloskey, presiding. Members present: Representatives McCloskey, Hayes, Norton, Gilman, and Myers.

Mr. MCCLOSKEY. Good morning. The full committee will come to order.

The recent discussion on postal ratemaking reform and the financial status of the Postal Service directly affect today's witnesses, the mailers. Their livelihood depends on decisions made by the Board of Governors, Postal Rate Commission and Congress.

Today is the first in a series of hearings where we will hear from the customers of the Postal Service who are so vital in keeping the Postal Service intact.

The Postal Service has recently been experiencing severe fiscal problems as a result of a sluggish economy, lower mail volumes and spiraling costs. Mailers cite these examples, as well as the need for ratemaking flexibility, as placing their positions in jeopardy.

To add to these budgetary concerns, the mailers must constantly adjust to the massive automation program being instituted by the Postal Service. The regulations surrounding the automation of the program are enormous, and mailers must direct their resources to keep abreast of each change. Ultimately, though, automation should keep rates down for mailers and provide more efficient service.

In addition to automation, rate reform is also a primary concern of the mailing community. This committee has received the March 1992 GAO report on demand pricing, which has been lauded by mailers and the Postal Service alike, especially those mailers who primarily use third-class rates who will most benefit from demandbased pricing.

The GAO report highlights what many mailers have been repeatedly saying for several years: postal rates need to be set with increased attention to market demand. I expect that many of our witnesses today will mention the GAO report in their discussion of ratemaking reform.

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I look forward to today's testimony. Members of the committee will closely examine your recommendations and comments during upcoming months as we attempt to address these problems and opportunities for the Postal Service.

I have been told that before too long we will have one or more Republican and Democratic members.

We will have three panels today and I look forward to hearing from everyone. I am hopeful that if we expedite things and summarize and focus that all of you could be out of here by noon. Let's try to go for noon.

So, our first panel is Mr. Timothy J. May, general Counsel, Parcel Shippers Association; Mr. Stephen L. Bair, chairman of the Postal Committee of the Association of American Publishers; Mr. Arthur B. Sackler, managing director of the Mailers Council; and Max Health, vice president and executive editor of Landmark Community Newspapers, chairman of the National Newspapers Association.

Good morning, gentleman. At least half the panel is very well experienced at testifying before this committee and similar committees. It seems Mr. May would proceed first, according to our agenda.

Tim, we will accept your written statement for the record. In fact, we will accept everyone's written statement for the record right now for all three panels. Please proceed as you like.

STATEMENTS OF TIMOTHY J. MAY, GENERAL COUNSEL, PARCEL SHIPPERS ASSOCIATION; STEPHEN L. BAIR, CHAIRMAN, POSTAL COMMITTEE OF THE ASSOCIATION OF AMERICAN PUBLISHERS; ARTHUR B. SACKLER, MANAGING DIRECTOR, MAIL. ERS COUNCIL; MAX HEATH, VICE PRESIDENT AND EXECUTIVE EDITOR, LANDMARK COMMUNITY NEWSPAPERS, AND CHAIRMAN, NATIONAL NEWSPAPERS ASSOCIATION, ACCOMPANIED BY BOB BRINKMAN, NATIONAL NEWSPAPERS ASSOCIATION Mr. MAY. Thank you, Mr. Chairman. The Parcel Shippers Association is pleased to be able to have this chance to comment both on the current status of the Postal Service and on the proposed changes in ratemaking procedures that have been put forward by the Joint Task Force composed of the Governors and the Postal Rate Commissioners.

I think I can summarize the status of the Post Office by saying it is rather bleak right now. The promises of automation have not been seen. Probably some of that is just natural entropy, the difficulties of changing to a new system. Obviously, some of it is bad management, bad deployment of the human resources of the Post Office, failure to adequately prepare for the switch. I still have the hopes that in the long run automation will indeed provide the savings that have been promised. But I am afraid at this rate not for too long a time.

But it is the usual situation that we find. When volume goes down, the Post Office can't manage it. They can't down-size, so you have the usual specter. The situation is volume is down, revenues down, costs up, productivity down. They simply have not learned how to deal with any diminution of volume.

Second, the subject before the committee, which is the changes in the ratemaking process, generally we endorse them. We think the concept is fine, but we caution that there is no panacea. We do not think they are any answer to inefficiency at the Post office, the failure to really manage the changes dictated by automation. We don't think they are any answer to the weird philosophy of the Postal Rate Commission that has two successive times visited almost 60 percent increases on a vast segment of the third-class mail industry over a period of 4 years. Anyone can understand that those kinds of increases will drive out huge amounts of volume.

So this change in process is not going to by itself change the attitudes and philosophies of those who are making rates at the Postal Rate Commission. Nor is it going to make the Post Office more efficient. So I don't think that the process, as faulty as it is, can be scapegoated as the reason for all of the ills of the Post Office. That just isn't the case. It doesn't mean we shouldn't improve that process, and it can be improved.

The only ray of sunshine we see, and it is certainly beneficial to our members and our organizations, is in parcel post. Both the Postal Service and the Rate Commission have adopted innovations in rate design. They have been implemented and, indeed, what we have long forecast has happened. The volume in parcel post, in contrast to everything else in the Post Office, is up; revenues are up; and, indeed, the Post Office has a chance again to become a real competitor in that market.

Unfortunately, our members also use third-class mail to reach their market and it is much more important to them. So, as happy as they are about what has happened to parcel post, the bad news about third class just drowns everything else out for them.

But I don't want to leave this without giving a plug to the Post Office people who have managed the changes in parcel post.

Mr. MCCLOSKEY. I am sorry, Tim. Would you repeat that last point? I think I missed something.

Mr. MAY. Yes. I don't want to pass by this without giving a note of congratulations to the people at the Post Office who have managed these changes that are taking place in parcel post. They have worked very cooperatively with the mailers to try to manage these changes, the new DBMC rates. Their marketing people are out trying to get more business. They are behaving like a business at last, at least in parcel post. And we want to give them a plug and a pat on the back when they are doing a job, and they are doing a good job there. We hope that continues and we think there is a chance that the giant monopoly-UPS-might finally have a little competition from the Postal Service.

The specifics of the proposed rate changes and procedures, we think it makes sense. As you know, it contemplates a 4-year cycle with the opportunity after 2 years for a mid-course correction. So, presumably this will make everybody a little more realistic about what the projections are for the forthcoming period because everyone will know that false assumptions can be corrected. Right now, the game that is really going on is, even though supposedly rates are being made for just a test year, 1 year, we all know what is happening is that those rates are artificially high. The Post Office inflates their costs, the Rate Commission goes along with it because

they know full well that unless they give them more money than they need, including a phony contingency allowance, that at the end of the test year there won't be any big surplus, and the whole idea currently is to create a big surplus in the first year, break even in the second year, and pay for the losses in the third year with the surpluses in the first year. So this has bred a relative amount of dishonesty in the whole process.

Now, with a 4-year cycle, where you know you are going to make a correction in 2 years, hopefully everyone involved in the process would be a lot more realistic about what the true projection of costs and revenues are going to be because they know they can correct it.

On the other hand, the downside of that is that the projections are necessarily going to be even more speculative than they are now because these poor people at the Post Office are going to have to project out for 5 years ahead of where they are at the time they are doing the work. But at least you have this opportunity to make mid-course corrections.

Second, the recommendations include a type of deregulation of the classes of mail that have direct competition. That is, among others for sure, parcel post, heavyweight Priority Mail and Express Mail. There they would propose a band of rates to give the Post Office some pricing flexibility. We applaud that. We think that makes sense.

But it does not go far enough. In our view, at least parcel post rates have to be completely deregulated and that takes legislation. There is no reason in the world to have this cumbersome procedure for the Post Office who is trying to compete with the monopolist. When it comes to parcels, it is UPS that is the monopoly, not the Post Office, and to tie the hands of the Post Office in any way in trying to compete with that monopoly is ridiculous, and it does not need any kind of regulatory protection in order to protect the public and the users of parcel post.

You need only-it seems to us the only protection should be that the Postal Rate Commission should be tasked with ensuring that parcel post rates recover fully their own attributable costs. Beyond that, the Postal Service should be able to operate in the same business-like way UPS is, should be able to meet their service offerings, their rate offerings, and they need to respond quickly.

That is probably the case with Express Mail and Priority Mail as well, except that at least in the case of Express Mail there is plenty of competition out there. There is more than one carrier. În the case of parcel post, it is the duty of the U.S. Government, including the Postal Service, to make sure competition exists in the small parcel market. It does not now. And that is a positive duty of every Government agency. We don't see how you can really get there without fully deregulating parcel post rates.

Additionally, the task force has made some sensible recommendations in terms of permitting the Post Office to experiment with new things and to come up with new products. It is simply the case that in private industry, if there was a law that said private industry had to breakeven on a new product in the first year they of fered it, no one would ever offer a new product. And that is the nature of the business, that when you come up with a new product