The Postal Service is being faced with various forms of competition from all directions. Postal customers are rightly demanding prompt delivery of their letters and parcels and a full range of services for their money.

A lot of changes have taken place in the last 20 years since the 1970 Postal Reorganization. It seems logical that the ratemaking process could benefit from an update to make it more flexible. I look forward to the testimony form officials with the General Accounting Office as well as the Joint Task Force on Postal Ratemaking. Increasing labor and all general operating costs threaten the stability of our postal system and fixing the alleged woes of the ratemaking process will be instrumental in stabilizing the Postal Service yet not a guarantee in its good health.

A hard look at the Postal Reorganization Act of 1970 may be needed to uncover other areas in which dramatic changes are needed to direct the Postal Service into the 20th century when competition will be inevitable more fierce.

I look forward to the insight which I believe our witnesses here today can provide on the issues of updating the postal ratemaking process and keeping operational costs to a minimum.

PREPARED STATEMENT OF HON. DON YOUNG, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ALASKA

Mr. Chairman, I commend you for holding this oversight hearing to address the operational and economic challenges facing the U.S. Postal Service.

Perhaps no time since I've been in Congress has the Postal Service faced as many serious financial, service and management challenges as we face today. I am deeply concerned about the future of the U.S. Postal Service and its dedicated employees. Under the direction of former Postmaster General Frank, the Postal Service has implemented aggressive policies designed to keep operation costs below the rate of inflation in order to meet both financial and service demands. Moreover, Postmaster General Frank was instrumental in implementing a new automation program to improve service and productivity, and help control operation costs.

Despite these initiatives, the Postal Service is in poor financial condition, and the benefits of automation cannot solve all of the problems facing this vital institution. In the 20 years since postal reorganization, the Postal Service's position within the marketplace has gradually declined. This is due, in part, to two factors: Increased competition from the private sector and rising operating costs.

Since the last rate increase, the Postal Service has witnessed a decline in mail volume and income. This is due in large part because a growing number of mailers are using alternative delivery service. This development is very disturbing for two reasons. First, a reduction in mail volume results in less income. This in turn forces postal management to file for another rate increase much sooner than expectedthus, threatening to decrease mail volume further through higher prices. Second, the rising prices and operational costs threaten to undermine the principles of universal mail service and the Postal Service.

Today, this committee will hear testimony from the General Accounting Office, and the Postal Board of Governors/Postal Rate Commission Task Force. It is my understanding that GAO will issue its study on the postal automation initiative, and the task force will present its recommendations on improving the postal ratemaking process. Clearly, these important topics must be addressed if productive changes are to be implemented in a wise and timely manner.

I look forward to hearing the testimony of our witnesses today.
Thank you, Mr. Chairman.

Chairman CLAY. Mr. Stevens, the report on automation indicates that the Service will have a reduction of 50,000 work years by 1996 due to automation. I quote the report as saying, "The Service hopes to achieve all automation-related reductions by attrition." Is that hope realistic, and, if so, what must the Postal Service do to realize its hope?

Mr. STEVENS. The former Postmaster General, Mr. Frank, did announce his belief that all of the automation-related reductions could take place through attrition. We have not heard that since he left. I think the critical unknown, Mr. Chairman, is what happens to volume. If volume continues to decline, I don't think that commitment, if indeed it is a commitment, can be kept.

The second matter on which the Postal Service has been somewhat vague is the location of vacancies and positions that are lost and the correspondence between those two. Certainly the Postal Service will have no trouble using attrition as the means of averting layoffs in a fast-growing area like San Diego, for instance, and parts of Florida, but in more stable areas where the economic and population growth is low or even declining, where the Postal Service jobs are pretty good, attrition will be lower, and we don't see the same possibility of avoiding lay-offs in those areas. You still can't move somebody from Pittsburgh to California under the agreements.

Chairman CLAY. What is your best estimate as to whether or not the volume will increase or decrease or remain the same?

Mr. STEVENS. Again, Mr. Chairman, that depends, I think, to a great extent on the ratemaking provisions. The Postal Service's businesses are increasingly competitive; even first- and third-class mailers now have alternatives in the form of alternative delivery and alternative means of communication from written paper. They are businessmen; very little of the mail is household-to-household any more; most of it is affected by hard-headed business calculations of what does it cost and what does it cost compared to competitive ways of getting those messages across.

I don't think that we will see a continuation in the decline that we saw this year, which was based on rates, but the truth is, no one really knows.

Chairman CLAY. Does the Postal Service have a plan to assist those employees in the event that there are going to be some massive lay-offs?

Mr. STEVENS. Not really, Mr. Chairman. Let me have Mr. Elmore address that more specifically, because he has looked at it more carefully than I have.

Mr. ELMORE. Mr. Chairman, as you know, the Postal Service has a strategy for handling workers that are displaced by automation. The strategy is, starting in May 1989 they put on a hiring freeze, and essentially they have been holding these vacancies. They haven't been filling the jobs that become vacant by attrition, they have been holding the vacancies for the employees that are displaced by automation or the employees that may become excess from the lack of volume.

Essentially, that is the strategy, and, as far as I know, that is the plan. There is no plan that I am aware of beyond that strategy. There is nothing that looks at 1993 and 1994, saying we expect to have this number of vacancies, this number of displaced employees, and match them up; I'm not aware of such a plan.

Chairman CLAY. You say that part of the problem may be their lack of flexibility in terms of ratemaking. What specific legislation, if any, do you recommend?

Mr. STEVENS. Specifically, Mr. Chairman, we believe that it is time for Congress to revisit the nine criteria that were first set forward in 1970 to guide the Postal Rate Commission, principles that the Postal Rate Commission should adhere to.

There are, as the Rate Commission will be the first to admit, some inconsistencies there; there is some balancing that needs to be done. But they have interpreted these to rule out demand pric

ing or giving special attention to the susceptibility of particular businesses to competition and the Postal Service's ability to say: UPS or Federal Express is charging a certain amount, and we need to cut our prices in order to keep that business.

So the area of demand pricing is one in which there have been very fundamental disagreements between the Postal Service's interpretation of the law and the Rate Commission's interpretation of the law. Courts have looked at this and tried to interpret congressional intent on that matter, and they found it somewhat vague. We think it is time for Congress to revisit that issue and make a policy statement that would guide both parties.

The second matter is on volume discounts. The Postal Service's competitors have made great headway by giving large business users discounts for their large volume, as most businesses do, in fact. The Postal Service cannot do that; it has been interpreted by the Rate Commission as discriminatory pricing. Again, I would suggest that congress should weigh in on that fundamental policy question.

Chairman CLAY. If they are given this flexibility so that they can compete with their competition in the private sector for the business of businesses, what impact will that have on the cost of firstclass mail?

Mr. STEVENS. It is less than I would have thought, at least in the short term, Mr. Chairman. Obviously, if the Postal Service had had its way, we would have a 30-cent first-class stamp right now and somewhat lower third-class rates, and it all depends again on what effect the various rates have on volume. If the Postal Service were to lose up to half, I believe, of its third-class, unaddressed letter mail, the effect would only be another penny on the first class stamp, up to 31 cents.

Chairman CLAY. Thank you.

Mr. Gilman.

Mr. GILMAN. Thank you, Mr. Chairman.

Mr. Stevens, you discuss in part of your testimony the fact that the rate of growth of third-class advertising mail volume is at its lowest level since the mid-seventies. In your opinion, primarily to what other mediums have that excess mail been shifted, and do you believe that the expanding alternative delivery industry has been successful in making major inroads in the delivery of advertising mail?

Mr. STEVENS. I think the immediate effect, Mr. Gilman, is probably related to the economy and the recession, which has cut down economic activity in general.

In the longer term, there are a number of companies beginning alternative delivery services. They are expanding; I believe the latest I heard was 75 different cities, all the largest urban markets. If you read the postal press, you will believe that this is a very hot enterprise to be in; there is lots of money to be made; it has got a great future.

I can't say that it has actually happened yet. We believe the threat is real; we can see patterns from the Postal Service's loss of both its parcel post business and its overnight mail business from the past. But there is a certain element of speculation here, and, of course, if the Postal Service is able to reduce its rates, it is going to

slow down the growth of that competitive industry, and there is an economic cost to that, too.

Mr. GILMAN. So you would say then primarily the cause of their slow rate of growth is the economy rather than competition.

Mr. STEVENS. So far. So far I would have to say I believe that is true, yes.

Mr. GILMAN. Do you foresee the possibility that what occurred in the Express and Priority Mail classes could happen in the other classes of mail, and, if so, can you elaborate on what other classes could be particularly susceptible to outside competition, and what protection or security does the letter mail monopoly continue to offer the Postal Service?

Mr. STEVENS. I'll turn to Mr. Griffiths for that response in a moment, Mr. Gilman, because he has certainly studied it very carefully. The most direct challenge is in third-class, of course, where businesses have many other ways of communicating with the consumer other than direct mail advertising. There is television, of course, magazines, newspapers, telemarketing, and so forth. But there is also a potential impact in first-class as alternative means of communicating a message other than paper becoming adopted. We certainly have seen the telephone already replace the vast majority of household-to-household communication. That is less than 5 percent now of the mail stream from one household to another; 95 percent involves business in one way or another, either as a sender or recipient of mail.

Let me have Mr. Griffiths address that.

Mr. GRIFFITHS. Yes. Mr. Gilman, one category of mail that is facing competition is Priority Mail. It is the heavier weight_firstclass mail. Currently, it is protected by an urgent letter regulation that requires a cost of double postage. There have been some indications that the private sector would like to see the double postage rule suspended, and they would rely on a cost test of $3. If this would occur, this would essentially open up all the Priority Mail to immediate competition. Priority Mail in fiscal year 1991 generated about $1.8 billion. That represents about 4 percent of revenues. It makes a major contribution now to the institutional overhead burden of the Postal Service. I believe in fiscal year 1991 they are estimating about a $730 million contribution to the about $15-$16 billion overhead burden.

Another type of mail that possibly could be affected would be your first-class nonpresort mail if the double postage rule were suspended. Under current rates, it is unlikely that there would be major inroads into the heavier ounce categories 9/11 ounces-but rate increases in 1993 or 1994 in the range of 20 percent would open up the heavier weight, first-class, nonpresort mail to approximately be near or over the $3 cost test. So that could be an inroad the first time into the first-class mail system.

Mr. GILMAN. Mr. Stevens, can you tell us what impact the usage of the transitional employees has on our overall system and the potential for savings by the use of those transitional people, and what effect does the use of these employees have on the quality of services being provided to our postal customers.

Mr. STEVENS. The quick answer, Mr. Gilman, is no, I can't. They haven't really been hired yet, and I'm not sure that the use of tran

sitional or even contract employees needs to reduce quality because they are not doing the same jobs. We visited the remote bar coding system operation.

Mr. GILMAN. Don't they have transitional employees on board? Mr. STEVENS. They are certainly authorized by the new contract. Mr. GILMAN. Have any actually been hired?

Mr. ELMORE. I'm not sure, Mr. Gilman, whether they have been hired yet or not. I know they are gearing up to hiring them, but I'm not so sure whether they have hired any or not; they are gearing up to do it.

Mr. GILMAN. Could there be substantial savings in the use of these transitional employees?

Mr. ELMORE. There is a difference in the pay between the clerks and the letter carriers; there are some differences that I don't recall. But the advantage of transitional employees is that their term of employment is limited. In other words, they carry a 1-year term with a 6-day break, and then they are reemployed for another year. But if the job being done by the transitional employee is replaced by automation, then that employee can be let go. That is the advantage of having a transitional employee, plus they don't earn all the total benefits that a career employee earns.

Mr. GILMAN. So we truly don't know at this stage because not enough of them are under way. Is that it?

Mr. ELMORE. Well, they are gearing up to do it now. They may have some on the street already, but I'm not aware of how many. Mr. STEVENS. They do have, Mr. Gilman, subcontract employees who sit at remote video and coding terminals and do a job that was formerly done by letter sorting machine operators.

Mr. GILMAN. One more question: In your prepared statement you talk about the need for demand pricing and setting rates for the more competitive classes of mail. What effect would that pricing structure have on the prohibition against cross-subsidization of the mail classes?

Mr. GRIFFITHS. One of the nine criteria requires that each mail category or each class of mail or category is required to recover those costs that are directly or indirectly attributable to that service. As long as that is in place, they will set rates along those lines. Each mail category will have to recover the attributable costs of that service.

The other condition there is that it should at least make some contribution to the overhead of the organization. The difference between the Rate Commission and the Postal Service has been on what contribution should each of these categories of mail make, and particularly between first-class and third-class. The Postal Service would not put as heavy a markup on third-class as the Rate Commission did in the last rate decision.

Mr. GILMAN. Would demand pricing then affect the subsidization?

Mr. STEVENS. No. You see, each class of mail will have bear the direct costs of its performance for delivery-in other wor`, all it directly costs to have third-class or first-class mail delivered, that would be borne by that class. It is the overhead burden that needs to also be divided that would be affected. So it is not a subsidy, but