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very formal, and the over-application, as we call it, of the ex parte rules contributed to that.
However, it got to the point where they were chided by the court in the Newsweek case about the lack of cooperation between the two agencies. I was a member of one of the agencies at the time, and without recounting all of the disputes, it is adequate to say that communication between the two was excessively formal and constrained.
In recent years, however, I think all parties see the need for an improved Postal Service, an improved way of serving the public both with expedited ratemaking and with flexibility for postal pricing and improving accountability, and we think that the climate is right now for the agencies to take advantage of that new awareness. They have cooperated. The existence of this committee jointly sponsored by both agencies, I think, is evidence of that cooperation, and we think that cooperation can continue, and if it does, then within the present law a great deal can be accomplished.
Chairman Clay. Did this new awareness begin before or after the 29-cent debacle?
Mr. Sullivan. I can't say exactly when it began, it but is certainly there now. There will always be issues between the two parties, as there should be.
When I learned as a postal official in 1970 that a separate agency would be setting postal rates, I was despondent; I felt it wouldn't work. I had worked hard, along with many others, to establish a new Postal Service and to give the Postal Service control over its costs and its revenues, that I felt it was a serious mistake to establish a Postal Rate Commission, and some of my fears were fulfilled. But as time has gone on, I have come to see that it is a division of responsibility, not to be too grandiose about it, not too different from the fact that when this Nation was set up the founding generation established an executive and a legislative and built in a tension between those two and with the third branch.
Chairman CLAY. Am I to assume that you support the proviso under the Postal Reorganization Act that in order for the Governors to modify a Commission recommendation that the vote has to be unanimous?
Mr. SULLIVAN. Well, as a matter of fact, I personally do support that provision of the law. Even though it is awkward and unprecedented, it represents that division of labor. The Postal Service has the final say because it must protect its revenues. It is charged with a vitally important service. It is the largest businesslike service operated and owned by the American people. It is provided for in the Constitution itself, it is older than the Constitution, and it is essential that it succeed as an employer, and as a service provider, and as a financially responsible entity.
The mechanism set up in the Postal Reorganization Act, although it doesn't please any party it has worked, I think within that act, without the need for changing its provisions this group came together with the realization that a great deal could be done within the confines of the act, assuming cooperation, and I think if the two agencies agree on something, that carries a certain amount of weight.
Chairman CLAY. Thank you.
When you briefed the Governors and the Postal Rate Commission, did they object to any of your recommendations, and did they request that any recommendation be changed, deleted, or added to?
Mr. Hall. The format was not such that they were expected to, but the answer is no, they did not. They heard our verbal recommendations, asked questions to make sure that they understood what we were recommending, but really reemphasized that they would need to see the written expression of the ideas that we presented verbally before they could opine in general.
Having said that, we didn't find resistance in the tone of the questioning to the thrust of what we were recommending.
Chairman CLAY. They just reserved the right to object.
Chairman Clay. When you talk about the rates being designed and used on the 3-year period, the break-even period, et cetera, and then you say your recommendation would be a 4-year period, would that result in higher rates at some point?
Mr. Hall. Well, two things: One, what we proposing, unlike the current system in which you only have data submitted for one test year and then the Postal Service tries to keep the rates established on that process as long as possible, and that has been running about 3 years, but there is no guarantee that it would last that long or that it couldn't last longer. But there is no explicit data supplied about any other time period other than the "test year.” Under this proposal, the Postal Service would submit its full 4-year plan including all volume expectations and projections, all cost, all expenses, and what prices would be over that time. Having submitted that, it would then be accountable to achieve those results if its proposal on prices is acceptable.
The 4 years is broken into two periods of 2 years each. After submission of the initial 4-year plan, rates would be formally set for the first 2 years, and the expected rates for the second 2 years of the 4-year period would also be established.
Chairman CLAY. Thank you.
Mr. STOVER. I would supplement that, if I might, Mr. Chairman. One of the reasons why we favored this explicit 4-year cycle is that the test year model, we found, is very suitable for what I will call a classical public utility, an enterprise that is growing slowly, steadily, the costs are not changing in a rapid or disorderly way, and the markets aren't changing in a rapid or disorderly way.
You heard a lot of emphasis earlier today from the General Accounting Office on the growth of many different forms of competition. We have seen new technologies coming in, like the automation technology that Mr. Stevens and his colleagues described. This is a situation where taking 1 year in the future and assuming that it is going to represent an indeterminate stretch of the future, like 3 or even 4 years, doesn't work all that well.
So we went to the idea of saying why don't we take explicit data for those years, also take advantage of all the planning work that the Postal Service does for that future period, put them together, and base a rate case explicitly on that whole plan? That, in turn, lets you have more frequent and smaller rate increases so that the
mailers don't suffer from the sticker shock which so many of them complain about now when we do have an omnibus rate case.
Chairman CLAY. Thank you.
Mr. Hall. The task force members were appointed in December 1991, and our first meeting was in early January of this year.
Mr. HORTON. And how often do you meet?
Mr. Hall. We have had at least two meetings a month, each meeting over a 2-day period. So in January we met for two 2-day periods, I believe, and I believe that was repeated in each of February, March, and April. In May we are winding up meeting more frequently than that due to the opportunity to be here today and the opportunity to present to the Board of Governors and the Commissioners.
Mr. HORTON. What is the time limit as far as the task force is concerned?
Mr. Hall. Our final report will be issued in early June. Shortly thereafter we intend to disband.
Mr. HORTON. Was that the way it was set up to begin with?
Mr. HALL. Yes, it was. The implementation of the recommendations would be left to the Postal Rate Commission and the U.S. Postal Service.
Mr. HORTON. The agency that created the task force was a combination of the Governors and the Postal Rate Commission?
Mr. Hall. Yes, the chair of each of those two bodies appointed these members.
Mr. HORTON. And do you have any recommendation with regard to whether or not there should be a further continuance of the task force even after the recommendations?
Mr. Hall. Well, in body and in substance let me give two answers. In body, I think this body should be disbanded. In substance, I think the concept of a partnership should continue and that it be comprised of existing Governors, existing Commissioners, and their staffs, and go forward.
Mr. Horton. You were talking about a 4-year period prior to the time of the ratemaking group act. In other words, before it was a 1. year period. Now what you are recommending is a 4-year period, and then you are talking about a 4-year period after that recommendation is made?
Mr. Hall. No. First let me just clarify what I said, and then let me ask David Stover to provide more details on the 4-year process.
I'm only speaking in units of 4 years, so that if we could implement it by the next rate case, for example, the Postal Service would submit a plan for a 4-year period including the prices of all of its services over that 4-year period.
Mr. HORTON. That is what I understand. That is a proposal or recommendation that the Governors would submit a 4-year plan.
Mr. HALL. Right.
Mr. Horton. But did I also understand you to say that the Rate Commission should take into consideration the 4 years prior to the time?
Mr. HALL. No, solely the 4-year period, and it would implement
Mr. HORTON. That is the period after.
Mr. HORTON. In other words, you are talking only about the increase of the rate, that is all you are talking about, for the 4-year period.
Mr. HALL. Hypothetically, and I say purely hypothetically, let's say the Postal Service came forward under this recommendation in 1993 with a plan covering 1994, 1995, 1996, and 1997. It would propose its cost expenses, what prices it believes should be in effect over that 4-year period; the Postal Rate Commission would approve formally prices for the first 2 years.
Mr. HORTON. That I understand. What I'm trying to find out is if there is a recommendation with regard to the period of time that the Postal Rate Commission should look at? As I understand it now, it is just basically a 1-year period that they examine before they make their determination with regard to the increase.
Mr. HALL. Yes. This would eliminate the concept of the test year and look at the total 4-year strategic cycle. In fact, let me ask Dave Stover to comment on the structure of the proposals.
Mr. HORTON. Mr. Stover.
Mr. STOVER. Yes. The way things are done now-let's take the last rate case, R90-1. In that case, the test year was fiscal year 1992, which was still some time in the future when the case was filed; it was first filed with the Commission in March 1990. So the test year, the data that really formed the basis for those rates, were estimated data for fiscal year 1992.
Setting one set of rates on that basis means that, roughly speaking, you will over-recover at the beginning, you hope you are going to just match up in the test year, and then the Postal Service goes into a period of deficit as these rates remain in effect after the test year.
The possible change with the explicit 4-year cycle would be that there would be estimated costs and revenues and volumes for all of the 4 years as Ira said, 1994, 1995, 1996, and 1997; the Postal Service could propose separate sets of prices for each of those 4 years; you would bring the costs and the rates for each of those 4 years into closer alignment than they are now and avoid the necessity, which seems to be built into the present approximately 3-year rate cycle for 17, 18, and 20 percent increases.
Mr. Horton. In other words, you would be talking about a 4-year budget basically, looking down the road as to what it might be in the 4-year period rather than a 1-year period.
Mr. STOVER. Yes, sir. A 4-year budget is a good metaphor for it, in place of an indefinite but roughly 3-year time represented by just 1 year chosen out of the future.
Mr. HORTON. Where did this idea come from?
Mr. STOVER. Variants of it have been discussed by a number of people. I think Mr. Hall mentioned it several years ago_didn't you?-in discussion with his colleagues. The former Chairman of the Postal Rate Commission, Mrs. Steiger, discussed something like it in an address a few years ago to one of the employee organiza
tions, and the idea of a 4-year cycle, not quite like this one, was
Chairman CLAY. Will the gentleman yield?
Chairman CLAY. What do you think the public reaction would be to the announcement of an annual increase in the postal rate for each of the next 4 years?
Mr. STOVER. I think it would depend on the magnitude of the increase as well as the frequency.
The first point I would make is that many of the complaints that have come back to the Commission, not just after the last case but after the previous one and, indeed, after most of them, has been the size of the increase. Business mailers in particular will say
that it is very difficult to absorb a 17- or 20-percent increase all in one bite.
Chairman Clay. Do you believe that when they say that? They are opposed to any increase. That is just a nice way of saying, "Hey, a 17- to 20-percent increase is just too much.” If you increase it 2 percent, they are going to object.
Mr. STOVER. I probably would, too. But there have been many complaints about the lack of predictability and about the Postal Service's policy, presented as policy, of maintaining rate stability for long periods of time. It has been questioned by some mailers as to whether that is really a good idea, and this was in the context of rate cases where large increases where being mooted.
Chairman CLAY. I thank the gentleman.
Mr. Hall. The suggestion of a 4-year rate cycle does not dictate that prices have to change in each of the 4 years, but it would say that we would render explicit what we expect the price to be in each of 4 years. So it could be a change every 2 years, it could be a change every year.
Chairman Clay. If the gentleman would further yield, if it didn't increase in the 4-year period, it would be a tremendous increase in the 5th year.
Mr. MILLER. I think, Chairman Clay, we discussed this specific issue because certainly the Postal Service as well as the Rate Commission have a lot of sensitivity. Just the fact of a rate change elicits a reaction from the broad population we serve. As we have discussed it in that 4-year case for the major classes of mail, particularly first-class, we can see and we have hypothesized that, in fact, the proposal in the Postal Service might be to hold the first increment of postage stable over the first half of the cycle and adjust it at the midpoint simply because of the transaction costs and the reactions associated with the annual rate change cycle. It is a balancing trade-off, frankly, that we have to make.
For the large business users of the mail who resell our services essentially as part of other products, a family of rates that changes on an annual basis fits very well into the way they do business with their customers. For the individual consumer, just a change is perhaps more of a concern than the absolute amount of the change at each cycle. The rate structures are so entwined, you can't separate the two issues, and so what we have tried to develop here is