During the past 20 years, the Postal Service's competitive position in the marketplace has eroded, particularly in the parcel post and the overnight delivery markets where private carriers now dominate the profitable business-to-business segment and have left the Postal Service with the more dispersed and less profitable household market segment.

Now, rising postal rates are encouraging competition for the first- and third-class markets, which are the Postal Service's core business, of course, and some postal customers are actively seeking alternative means of communication. This could create further decreases in Postal Service volume, which last year suffered its first overall decline in two decades, reduce revenues to lower than required to break even, and generate the need for more frequent rate increases to cover revenue shortfalls-in short, a vicious cycle of volume and revenue shortfalls leading to still more frequent rate increases.

Given this possibility, the question arises as to whether the criteria that are set forth in 1970 to guide postal ratemaking are still adequate in light of the competitive and changing environment that the Postal Service faces.

Since the late 1970's, the Rate Commission and the Postal Service have disagreed over the extent to which ratemaking criteria allow the use of demand or elasticity factors to allocate the Postal Service's huge overhead burden among the various mail classes. This disagreement, of course, is what lies behind the Postal Rate Commission's decision to turn down the Postal Service's request for a 30-cent stamp to make it a 29-cent stamp and to raise third-class rates by an average of 8 percentage points more than the Postal Service had requested. The Commission also rejected volume discounts as a discriminatory pricing strategy when the Postal Service proposed such a discount for its Express Mail service.

We believe that Congress should reexamine the nine criteria that the Rate Commission applies and determine if demand pricing, which considers the value of service to the sender, should be given greater weight in those criteria. We also think that Congress should reexamine the question whether volume discounts to large business users are, in fact, undue discrimination and preference, given the wide use of this practice by private competitors to the Postal Service. In the long run, if demand-based pricing is not given more weight in the criteria, Congress could be faced with demands to further open postal markets to competition or to subsidize the national delivery network through direct appropriations. Increased ratemaking flexibility, however, certainly will not, in itself, guarantee survival of the Postal Service in the competitive marketplace. Control of operational costs is also essential, and this inevitably leads you to some focus on employee pay and benefits since they are still well over 80 percent of overall postal costs and have been for a number of years.

Faced with the reality of not being able to exercise complete control over pay and benefits, the Postal Service tries to make its workers more productive and has placed its major hopes on its automation program to improve productivity. Now we are releasing today, as you pointed out, Mr. Chairman, the latest of six reports we have issued over the past few years on the automation program,

beginning in 1983. This one concentrates on the effects that the automation program had on employment and productivity in 1991.

Just a very quick summary of that: We found that although the program is producing work hour savings in certain functional areas specifically, over what employment would have been without automation-it is unlikely to be a panacea or a cure-all that will reverse the persistent tendency for costs of the Postal Service to outpace inflation in the economy.

It is somewhat surprising to us, given the importance of automation to the Postal Service, that the measurement of savings from it remains somewhat ad hoc and inconsistent. In his public statements, former Postmaster General Frank placed a good deal of emphasis on the decline in the number of career employees as a measure of the savings made possible by automation. This gross measure, in our view, ignores the fact that work hours, the work actually put in by postal employees and paid for by the Postal Service, have not fallen anywhere near commensurately with the career employment.

When career employment was down by 34,000 during 1991, overtime at this same point was higher by an amount equivalent to 15,000 full-time employees, and then noncareer employment also added another 3,000 full-time equivalents. The fact is that the total hours of work in the Postal Service increased in 1991 even though there was that drop in career employees and even though the volume of mail declined.

While hours did decrease in the work functions that are most directly affected by automation, the reduction was only 1 percent from the previous year and a little more than half the amount the Postal Service had planned. Because more than half the work of the Postal Service is not directly affected by automation, this reduction in the affected areas did not have a perceptible effect on overall postal costs which continued to go up by more than the general rate of inflation.

It is also a fact that work hour savings that have been achieved by automation are being overwhelmed by annual increases in costs per labor hour. For example, we estimate that work hour savings in 1991 in the functions most directly affected by automation amounted to about $138 million, but the work in those functions cost $627 million more than the year before because of the increases in wages and benefits.

Just one final observation before closing, Mr. Chairman. Former Postmaster General Frank in his farewell address said that the success of the Postal Service may well come down to two factors: "how employees treat our customers, and how employees treat each other." We as an institution would certainly agree that these are fundamental considerations and believe that Congress, in its future oversight activities, should carefully monitor the Service's progress under the new Postmaster General, Mr. Runyon, in addressing these two imperatives.

That concludes my statement, Mr. Chairman. Mr. Elmore and Mr. Griffiths and I will be glad to respond to any questions you or other members have.

[The prepared statement of Nye L. Stevens follows:]

Mr. Chairman, Mr. Gilman, and Members of the Committee:

We are pleased to be here today to participate in the Committee's oversight hearings on the United States Postal Service. Over 20 years have passed since the Postal Service was reorganized as a governmental quasi-corporation, sharing characteristics both of a business and a public service. During these 2 decades, it has

accomplished many of the goals Congress set forth in the Postal Reorganization Act of 1970. It has modernized its operations, improved the compensation and working conditions of postal employees, forgone the direct taxpayer subsidies that used to support its operations, and maintained its mandated universal service. Today, however, the Postal Service is operating in a fundamentally different and increasingly competitive

communications marketplace from the one that existed in 1970. Competition and the need to raise prices to cover continued escalation in its operating costs threaten the viability of this important institution.

They

Because of the changing postal environment, there are two significant issues that we would like to focus on today. concern (1) changes to the rate-making process to permit the Postal Service to meet the competitive demands of the marketplace and (2) efforts by the Postal Service to meet its competitive

challenges by improving productivity and controlling costs through automation.

POSTAL RATEMAKING

As you will hear from other witnesses today, the Postal Service's Board of Governors and Postal Rate Commission established a joint task force last year to identify ways to improve the postal

ratemaking process. In commenting on this action, former Postmaster General Anthony M. Frank said, "The Postal Service can't maintain its competitiveness, its responsiveness to its customers, its drive for greater efficiency or the highest levels of quality service to the American people if it does not receive more flexibility in the ratemaking process." We agree with this In our March 1992 report to Congress, we discuss

statement.

the competitive threat facing the Postal Service, the constraints and obstacles that affect the Postal Service efforts to compete effectively, and the major issues of postal ratemaking in a I will briefly summarize some of the

competitive environment.

major points in the report.

During the past 20 years, the Postal Service's competitive position in the marketplace has eroded, especially in the parcel post and overnight mail markets. Although the Postal Service developed both of these markets, private carriers dominate the profitable business-to-business segment and have left the Postal Service with the more dispersed and less profitable household

U.S. Postal Service: Pricing Postal Services in a Competitive Environment (GAO/GGD-92-49, Mar. 25, 1992).