For the Postal Service to operate in a more businesslike fashion, its managers must have greater flexibility to manage and innovate. With this latitude, however, comes the need for enhanced managerial accountability and public-policy oversight. Managerial accountability comes from a corporate-style Board of Directors tasked with holding Postal Service officers responsible for performance. Public-policy oversight must come from an independent regulator endowed with broad authority, adequate resources, and clear direction to protect the public interest and ensure the Postal Service fulfills its duties appropriately and continues to meet the evolving postal needs of the country.

Toward this end, the Commission recommends transforming the Postal Rate Commission (“PRC”) into a new Postal Regulatory Board with broad authority to set the public-policy parameters within which the Postal Service is allowed to operate. Rather than a narrow focus on rate setting and mail classifications, this new regulatory entity would:

• Ensure the financial transparency of the Postal Service;
• Establish rate ceilings for Postal Service non-competitive products and pre-approve rate increases that exceed the rate ceilings;
• Ensure the Postal Service remains focused on traditional products and services;
• Ensure that competitive products are not cross-subsidized by revenues from non-competitive products;
• Guarantee that the Postal Service is meeting its universal service obligation and refine, as necessary, the specific elements of that obligation;
• Review proposed changes to service standards when such changes are expected to have a substantial and negative national impact;
• Review the postal monopoly for its public benefit and, if circumstances warrant, narrow it over time;
• Review worksharing discounts, negotiated service agreements, and other non-competitive rates for undue or unreasonable discrimination; and
• Ensure that the Postal Service upholds its statutory obligation to compensate its employees at a level comparable to the private sector.

It is imperative that the Postal Service (in part, a monopoly) have clear, independent regulatory oversight. Placing the oversight function in a strong, independent Postal Regulatory Board will allow greater operational latitude to Postal Service managers, while assuring the nation that the quality, reliability and affordability of the nation’s postal services will continue. As such, an improved regulatory structure can deliver both dividends and disciplines to the Postal Service of tomorrow.

Transform the Postal Rate Commission

Like the Postal Service, the current regulatory framework was established by the 1970 Act with the creation of the independent, five-member Postal Rate Commission. The PRC’s current narrow regulatory oversight of the Postal Service has a very uneven impact. At one extreme, the Postal Service’s competitive products are burdened by ratemaking procedures far in excess of anything required of private competitors or current best practices in regulated industries. At the other, the quality of services entrusted to the Postal Service on a monopoly basis largely escapes scrutiny altogether.

A key feature of the present rate process is the fact that new domestic rates and classifications are subject to lengthy review by the PRC prior to taking effect. The PRC must give all interested parties a chance to challenge the Postal Service on the need for the change. This administrative procedure, involving dozens of participants, can become extremely costly, time consuming and litigious. This makes it very difficult for the Postal Service to operate in a businesslike fashion—for example, by offering discounted products to leading customers or adjusting to unanticipated changes in costs. Every significant change demands a major administrative proceeding. This unfortunate construct places the Postal Service in an adversarial relation-ship with its major customers and at a distinct competitive disadvantage.

The Commission believes that independent regulation of the Postal Service must continue but that a major revamping of the regulatory review process is in order. In light of lessons learned under the current regime and the changing nature of postal markets, the Commission believes that the laudable goals of the current regime can be achieved more efficiently and effectively. Protecting postal customers against undue discrimination can be continued while minimizing the regulatory costs imposed on the Postal Service. Restrictions against cross-subsidy from non-competitive to competitive products can be maintained and enhanced without hamstringing the ability of the Postal Service to participate in competitive markets.

A Postal Regulatory Board Founded on Public-Policy

The Postal Service’s need for oversight today is as broad as the PRC’s authority is narrow. The Postal Service urgently needs a vigilant, broadly empowered and independent Postal Regulatory Board to focus on its ability to fulfill its core duties in an appropriate and effective manner. Given the significant responsibilities vested in this regulatory body, the Commission envisions three individuals of significant stature, appointed by the President of the United States for five-year terms and subject to Senate confirmation. The Commission believes that the Postal Regulatory Board members should have backgrounds in areas relevant to the regulation of large, complex business entities and that they should be selected solely on the basis of demonstrated expertise and professional standing. In selecting new members, care should be taken to ensure the broadest possible representation of skills among Board members. Additionally, no more than two of the members should belong to the same political party.

It is imperative that the Postal Regulatory Board be a truly independent institution. Like the PRC, the Postal Regulatory Board should be an independent establishment within the executive branch of the Federal government. Unlike the PRC, its budget— while supported by ratepayers—should be subject to Office of Management and Budget review but not Postal Service approval.

Exhibit 4-1

Streamline the Rate-Setting Process

Once the Postal Regulatory Board is in place, it should move quickly to improve the rate-setting process, allowing greater flexibility to Postal Service managers while imposing firm price and spending discipline on the institution, so that rate increases are the last line of defense against rising costs rather than the first.

Unfortunately, the current rate-setting process achieves precisely the opposite effect. It is simultaneously inflexible and undisciplined. Today, when the Board of Governors anticipates that rising costs will exceed revenues, it proposes a new schedule of rates and classes and asks the PRC for a formal opinion. It can take as many as 18 months before the Postal Service sees the revenues it needs. What takes so long? The Postal Service is required to prove (and opponents spend millions of dollars seeking to disprove) that the proposed rates are “fair and equitable.” In the course of public hearings, it is not uncommon for the PRC to hear from dozens of witnesses and sift through tens of thousands of pages of supporting documents. Even after the PRC has submitted its formal opinion, the Postal Service remains tightly constricted. The Board of Governors can accept, reject, implement under protest, seek reconsideration or challenge in court the PRC’s recommendations. What management cannot do is rapidly adjust rates to changing circumstances, based on its expert opinion of the needs of the operation. What the PRC cannot do is tell the Postal Service that the overall level of rates is too high.

Exhibit 4-2

If the current rate-making process teaches us anything, it is how not to motivate a large government entity to act in a more nimble, businesslike, and disciplined fashion.

As Exhibit 4-2 illustrates, the Commission firmly believes that the current rate-setting process should be abolished and replaced with a more streamlined structure that continues to impose rigorous standards on rate setting, but does so without impeding the ability of Postal Service officials to manage and lead. In addition, this new process should proactively encourage the Postal Service to improve productivity and efficiency and not rely solely on rate increases to secure its fiscal health.

A Powerful New Tool to Encourage Productivity, Cost Savings

While increases in postage rates over the past 30 years have been kept more or less within the bounds of inflation, it is important to keep this achievement in perspective. During this same period, the prices of many other goods and services have fallen dramatically in real terms. And, compared to earlier times, the pace of postage rate increases has accelerated dramatically. Since 1970, there have been 12 increases in the price of a First-Class stamp. In the last 30 years, rate increases have become the first cure for the fiscal woes of the Postal Service, not the last.

Not surprisingly, inefficiencies and excessive costs—often structural in origin—are apparent throughout the Postal Service. This begs an important question: If the Postal Service can deliver “affordable rates” without rooting out what many believe to be billions of dollars in inefficiencies and unnecessary costs, is the Postal Service providing the best service it can to the nation? Clearly, the answer is “no.” But in a public-sector monopoly environment, with none of the flexibilities or bottom-line disciplines of private-sector competition, the question becomes how can the institution be sufficiently enabled and motivated to rise to a higher standard of service? Addressing this challenge head-on is implicit in the Commission’s proposed mission for the Postal Service “to provide high-quality, essential postal services by the most cost-effective and efficient means possible at affordable and, where appropriate, uniform rates.”

One of the most important tools to press the institution in this more businesslike direction is the adoption of an incentive-based regulation called “rate ceilings.” Appropriately designed, this new mechanism would greatly assist Postal Service management in its drive toward controlling costs and realizing new efficiencies. Successfully deployed, it also could deliver a wide array of corporate-style flexibilities and results:

• Simplicity: Instead of a litigious, costly and lengthy ratemaking process that can delay needed new revenues by more than a year, adjustments would be at the discretion of the Board of Directors, so long as rates remain under the ceiling. If additional revenues are needed, prices could only be increased with the prior approval of the Postal Regulatory Board.

• Certainty: Of almost equal concern to frequent mailers as the cost of postal services is the predictability of prices. Rate ceilings would permit mailers to factor rate increases into their business plans with greater predictability. They also would benefit Postal Service managers by giving the Postal Service a ceiling under which management knows they need to control costs.

• Timeliness: Rather than having to estimate two or three years out what the revenue needs of the Postal Service will be, managers will be able to adjust rates and make other operational decisions based on the realities of the current climate.

• Alignment: By building in appropriate incentives, such as the ability to retain earnings that result from keeping costs beneath set limits and allowing the Postal Service to use those earnings, in part, to finance incentive-based compensation (see Chapter 6), the motivations of Postal Service managers will be more closely aligned with the interest of customers who value controlling costs over higher postage rates.

For these reasons, the Commission recommends that the existing rate-setting procedures be replaced with an incentive-based process.

Incentive-Based Regulation: How It Could Work at the Postal Service

Rate ceilings are not merely a tool to deliver greater management flexibility. They are a powerful incentive for achieving what is largely lacking at the Postal Service today: the alignment of the interests of postal managers and employees with the interests of ratepayers. Specifically, rate ceilings allow prices to be adjusted upward within limits established by a regulator based on an “escalator” that incorporates factors for both inflation and productivity.

The organization will benefit from enhanced flexibility to adjust rates, so long as it does not exceed the ceilings established by the Postal Regulatory Board. This efficient approach would end the days of lengthy and litigious ratemaking proceedings and free the Postal Service to adapt to changing economic circumstances in a more businesslike timeframe. But if the rate ceiling is appropriately constructed, the Postal Service will also feel intense pressure to rein in spending and improve efficiency and productivity.

It should be noted that some doubt exists as to whether a public-sector institution (without, for example, employee stock options) can successfully use these tools. Leading experts, however, believe that a combination of negative incentives (such as holding managers accountable for performance) and positive incentives (such as performance bonuses) can take full advantage of this innovative mechanism to the ultimate benefit of ratepayers. [1]

Incentive-based regulatory schemes are designed to allow prices to be adjusted regularly and modestly upward within strict limits typically set below the rate of inflation to encourage aggressive cost reduction and productivity efforts. The specific mechanism, established by a regulator, is built around two levers: (1) the inflation factor allows rates to increase within limits to reflect rising costs, while (2) the productivity factor exerts downward pressure on rates, creating the “incentive” to reduce costs.

Such a construct forces an organization to prioritize productivity and cost savings. For the Postal Service, it abruptly ends the temptation to seek rate increases every time expenses increase. A well-designed rate ceiling can mimic the bottom-line pressures facing private companies and produce a 21st century Postal Service much more aligned with the interests of ratepayers.

Building the right rate-ceiling design is an intricate endeavor that the Commission recommends assigning to the Postal Regulatory Board. However, the Commission does have some thoughts on how such a mechanism could work:

Selecting an appropriate inflator. Numerous indexes have been suggested, most notably the Gross Domestic Product Implicit Price Deflator (“GDP-PI”), which focuses solely on the domestic economy; the Gross National Product Implicit Price Deflator (“GNP-PI”), which incorporates foreign investment flows; the Consumer Price Index (“CPI”), which focuses on consumer prices rather than prices of investment goods; and, because of the labor-intensive nature of the Postal Service, the Employment Cost Index (“ECI”), developed by the Bureau of Labor Statistics. Some economists suggest a hybrid approach—perhaps 80% ECI and 20% GDP-PI— would best suit the unique nature of the Postal Service. [2]

Selecting an appropriate productivity factor. As an offset to the inflator, the productivity factor is the pressure placed on inflation-adjusted prices to encourage Postal Service managers to reach a target performance level. It has been suggested by one economist that the Bureau of Labor Statistics’ private non-farm business total factor productivity could be a useful target for the Postal Service. [3]

Application of the escalator. Once identified, inflation and productivity factors combine to produce an “escalator,” the adjusted formula for rate ceilings to which the organization must adhere in the pricing of non-competitive products. The regulator must then determine how to apply the mechanism to the products offered. It is not likely that one rate ceiling for all Postal Service products and services would be appropriate. To accommodate varying costs and other concerns, regulators typically rely on “baskets” and “bands.” Baskets are broad groups of products and services subject to their own price cap. At the Postal Service, this mechanism could help guard against cross-subsidization (i.e. shifting costs among “baskets”). “Bands” work similarly, but within a given basket. With regard to the Postal

Setting Rates. Implementation of the new incentive-based rate-setting process provides the opportunity to discard the current system involving a time-consuming and expensive comprehensive rate case every two to three years. In its place, there will be an initial rate case used to set rates and rate ceilings for products and services. The Commission envisions that the process for this initial rate case would be similar to the current rate-setting process, but with one significant difference: It would be limited to the establishment of rates and rate ceilings for non-competitive products and services. The Postal Regulatory Board would not determine prices for competitive products; it would only ensure that the initial prices set by the Postal Service are not being cross-subsidized by revenues generated by non-competitive products.

The true benefits of the new process would become apparent after this initial rate case has been completed. Once the rate-ceiling regime is in place, the Postal Service would be free to change rates without prior review by the Postal Regulatory Board, as long as rates remain within established rate ceilings and other limits established by the Postal Regulatory Board.

The Commission recognizes, however, that questions may arise as to whether the Postal Service’s rates for non-competitive products are, in fact, within established rate ceilings or whether rates for competitive products and services are covering the cost of providing the product or service. As a consequence, the Commission recommends that the Postal Regulatory Board be authorized to conduct expedited after-the-fact reviews of rate changes when a written complaint is filed. If the Postal Regulatory Board determines that the rate of a non-competitive product or service is not within an established rate ceiling or the rate of a competitive product or service is being cross-subsidized, it would be authorized to require the Postal Service to adjust the rate. Only Postal Service requests for rates in excess of established rate ceilings (for example, in the case of a precipitous decline in mail volumes), as well as rates for new products and services, should be subject to a similar expedited advance review.

Procedures established by the Postal Regulatory Board should ensure that all affected parties have an opportunity to participate through written submissions. As envisioned by the Commission, the process should be limited to the review of written submissions and should be completed in no more than 60 days.

The proper development of this rate mechanism is an intricate and sensitive under-taking. Fortunately, the Postal Service has a window of opportunity to implement this important change. Recent legislation signed into law by President Bush to reduce the Postal Service’s pension liability (discussed in detail in Chapter 6) also includes a passage strongly discouraging a rate increase before 2006. [5] This provides ample time for the Postal Regulatory Board to develop and fine-tune a workable rate ceiling mechanism. The Commission recommends that the Postal Regulatory Board, over the next two years, undertake an extensive process to design the most appropriate, workable and beneficial mechanism. While the Commission believes the Postal Regulatory Board should have broad latitude in doing so, it should generally strive to develop a mechanism that promotes: reduced costs and increased efficiency, rate predictability and stability, reasonable pricing flexibility, adequate revenues and a reduced administrative burden for the rate-setting process.

Defining the Appropriate Scope of Postal Service Operations

Beyond designing and implementing an unobtrusive rate ceiling that both ensures affordable rates and places greater institutional emphasis on cost controls and productivity gains, other essential roles of the Postal Regulatory Board are defining the scope of the postal monopoly, refining the appropriate components of the universal service obligation, and establishing the bright-line boundaries between the postal monopoly and competitive markets. In discharging these responsibilities, the Postal Regulatory Board would factor in changing market circumstances, hear the concerns of interested parties, weigh the arguments of the Postal Service, and make a final determination consistent with the more focused mission of the institution.

Upholding Universal Service

The Commission believes the Postal Regulatory Board is the most appropriate body to charge with regularly reviewing the components of universal service to ensure they meet the modern mail needs of a nation whose correspondence habits are changing dramatically. In Chapter 2, the Commission expressed its support for all aspects of the universal service obligation, but tasked the Postal Regulatory Board with refining key aspects of universal service as circumstances require and/or permit. These important decisions should rest with an independent entity charged with providing thoughtful, careful review and an outcome that best serves the public interest. For example, the Commission endorses maintaining the current list of products and services that are required to be offered at uniform rates, but empowering the Postal Regulatory Board to revise the list as appropriate in the future. These steps will ensure that the universal service obligation is a dynamic responsibility, one capable of changing as the country’s postal needs evolve and remaining in step with the country’s mail needs.

Service Standards

The 1970 Act currently requires the Postal Service to seek non-binding advisory opinions from the PRC whenever a “change in the nature of postal services . . . will generally affect service on a nationwide or substantially nationwide basis.” Before such a change may take effect, the Postal Service must first submit a proposal to the PRC for the purpose of obtaining an advisory opinion. In the years following the enactment of the 1970 Act, Federal courts interpreted this language in a manner that limited the necessity for the Postal Service to seek such advisory opinions to instances where three factors coexist: 1) the change must have a meaningful, quantitative impact on service; 2) the change must be in the “nature” of the postal service being altered; and 3) the change must affect service on a nationwide or substantially nationwide basis. [6] In one instance, a Court determined that the advisory opinion requirement did not apply to the consolidation of district offices because there was little evidence that consolidation would affect the nature of postal service; [7] in another, a Court concluded that a policy denying door-to-door delivery service to certain residents of Harris County, Texas, also did not require an advisory opinion because there was no nationwide impact. [8] As a consequence, the Postal Service has referred proposed changes to the PRC for advisory opinions only four times since July 1, 1971. [9]

Regardless of how often the advisory opinion requirement has been invoked, its practical impact is negligible. As one Court explained, Congress’s intent was for the advisory opinion requirement to be a safeguard applicable only in situations where Postal Service management contemplated significant changes. [10] The question for this Commission is whether a new approach is necessary.

The Commission is reluctant to recommend that the Postal Service continue to have unlimited ability to change service standards. Given the economic pressures facing the Postal Service, the temptation for management at some future time to turn first to lower service standards as a means of reducing costs, rather than as a last resort, might prove irresistible. The balance lies with creating a clearer standard for when the Postal Service must turn to the new Postal Regulatory Board for advice, and in making such advice binding on the Postal Service when it will have a substantial and negative impact on national service standards. The Commission recommends the following approach:

When the Postal Service determines that there should be a change in the nature of postal services which will negatively affect service on a nation-wide or substantially nationwide basis, it shall first submit a proposal, within a reasonable time prior to the effective date of such proposal, to the Postal Regulatory Board requesting an opinion on the change. Proposals for opinions must be accompanied by an analysis of the impact of the proposed change indicating the percentage impact on: 1) aggregate volume for each class and subclass of mail affected by the proposed change; or 2) delivery points. Requests for opinions must be made by the Postal Service whenever a proposed change will result in a negative impact on more than 10% of aggregate volume at the class or sub-class level, or on more than 10% of delivery points. If the proposed change will impact more than 25% of aggregate mail volume for a class or subclass of mail or 25% of delivery points, the opinion of the Postal Regulatory Board shall be binding on the Postal Service; otherwise, the opinion is advisory.

The Commission believes that such an approach provides the Postal Service with an appropriate amount of latitude to manage postal operations, while setting a clear standard for when it must seek external input. It also makes clear that the Postal Service may not independently lower service standards on a nationwide basis if doing so is determined by the Postal Regulatory Board not to be in the public interest. In addition, the Commission recommends that the Postal Regulatory Board be required to prepare a comprehensive annual report assessing the Postal Service’s performance in meeting established service standards.

Oversight of Postal Monopoly

The Commission also recommends that the Postal Regulatory Board be tasked with clarifying and administering the scope of the postal monopoly. Given the Postal Service’s status both as a monopoly and a competitor, administrative authority over the monopoly should reside outside the institution. It is inappropriate for a commercial organization to decide the scope of a law that restrains its competitors. To the contrary, it is a fundamental premise of American justice that the law should be administered by persons without a financial interest in the outcome.

The Commission also believes that there must be a reasoned and impartial administrative procedure for reviewing and updating the scope of the postal monopoly. The Postal Service has itself adopted a number of administrative exceptions to the postal monopoly. [11] This process of continual review of the costs and benefits of the postal monopoly is important, but is best carried out by an independent entity. The Postal Regulatory Board should therefore be vested with authority to modernize the law by narrowing the postal monopoly if and when the evidence shows that suppression of competition is not necessary to the protection of universal service without undue risk to the taxpayer.

Settling the “Boundary Wars”

To ensure that the Postal Service adheres to its core mission — delivery of letters, newspapers, magazines, advertising mail, and parcels—the Commission further recommends that the Postal Regulatory Board be authorized to monitor services and products offered by the Postal Service and to hear complaints from those who believe the institution has exceeded its authority and entered markets outside its core mission. This opens up a complex web of questions commonly referred to as the “boundary wars.” Most would agree that every American should be able to send a letter or parcel to every other American at reasonable cost through the local post office. But should the Postal Service provide online bill payment? Or is that a service for which consumers should turn to a private vendor? By setting clear boundaries, the Postal Regulatory Board can deliver greater clarity and certainty for those who may find themselves in competition with the Postal Service.

Financial Transparency

The Commission believes that the Postal Service has a responsibility to the public to be transparent in its financial reporting. Given its important public mission and central role in the nation’s economy, changes in Postal Service economic health should not come as a surprise to those responsible for or impacted by its performance.

By engaging in more businesslike financial reporting and more aggressively allocating costs by product and service, the Postal Service will gain essential insight into all aspects of its operations. Equally important, as a prominent public institution, all Americans will have a better understanding of the financial challenges and opportunities facing their Postal Service.

Voluntarily Comply with Applicable SEC Reporting Requirements

As a public entity, the Postal Service is wholly owned by the American people. They are the shareholders of the Postal Service, and they are due a regular and full accounting of the fiscal health and/or challenges facing this vital national institution.

Unfortunately, the Postal Service today is far from this goal. Since September 2000, GAO has issued numerous reports urging greater financial transparency and expressing mounting concern that fiscal pressures were putting at risk the Postal Service’s ability to fulfill its mission. [12] The apparent catalyst for concern was the period from November 2000 through February 2001, during which Postal Service estimates of operating results for FY2001 started at a $480 million loss, and ended up, just three months later, as an estimated loss of $2 billion to $3 billion, with too little explanation for the sharp decline. [13]

As a unifying force in American commerce and society, and as a customer-financed government endeavor, the Postal Service should be setting the standard for financial transparency by which all other Federal entities are judged. While the Postal Service does, in many respects, conduct financial reporting over and above what is required today of Federal agencies, it remains behind the level of disclosure offered by its corporate peers. The Commission strongly recommends that the Postal Service be required to close the gap by voluntarily complying with applicable provisions of the major SEC reporting requirements (quarterly (10-Q), annual (10-K), and “significant event” (SK-8) reports).

Improve Cost-Allocation Safeguards Against Cross-Subsidization

Where the Postal Service participates in markets also served by private industry, effective oversight is essential to ensure that monopoly revenues are not manipulated to the benefit of the Postal Service’s competitive offerings. For this reason, the Commission recommends that the Postal Service periodically report on the allocation of costs among all products and services in accordance with form, content and timing requirements determined by the Postal Regulatory Board.

While the Postal Service should become more businesslike, it remains a government entity. Private carriers have no U.S. Treasury to borrow from at favorable rates, no monopoly markets to reliably generate more than 75% of operating revenues and no government exemption from most taxes and laws imposed on private enterprises. Given that distinction and the Postal Service’s presence in contested markets, it has a special duty to ensure it does not wield its monopoly and government privileges unfairly against companies that have no such advantages. To guard appropriately against cross-subsidization, the Commission recommends that the Postal Service significantly improve its cost-allocation system. Beyond addressing the legitimate concerns of private carriers, aggressive reforms in this area would greatly support the shift to a more streamlined ratemaking process. This approach would also enhance public confidence that postage rates reflect actual processing costs and do not unfairly shift burdens among the various classes of mail and, thus, categories of customers.

Included in the Postal Service’s break-even requirement today is a specific mandate that each class of mail essentially pay for itself—covering both its direct and indirect costs and an appropriate percentage of overall institutional costs (costs that are not attributed to any one category of mail). This requirement has resulted in a two-tiered cost-allocation process whereby direct and indirect attributable costs are tallied for each category of mail and institutional costs are divided among the various categories based on eight determining factors. Historic preferences for certain categories of mail, such as periodicals and non-profit correspondence, are also provided. The system is not without controversy, due primarily to the fact that more than 40% of costs fall into this general category of institutional costs. Testimony on this topic was contradictory. While the Postal Service claims that significant improvements are not feasible, one leading private-sector carrier noted it had a procedure for achieving 100% cost allocation. [14] The Commission feels that the appropriate target for the Postal Service lies somewhere in between. While the Commission hesitates to prescribe a percentage, there is a strong consensus that an attribution level of less than 60% is far too low, and would not be considered acceptable in similar private-sector ventures.

The Commission strongly encourages the Board to make this issue a top priority in order to ensure the system is fair, adequately protects the postal market from the distorting effects of cross-subsidization, and ensures the Postal Service has real insight into the success and failure of its various products and services. The Commission also believes that existing preferences for favorable rates for the mailing of periodicals and non-profit correspondence should be maintained.

Procedures

In its recommendations, the Commission has vested much authority in the Postal Regulatory Board. In order to exercise these authorities, the Postal Regulatory Board should also be authorized to establish appropriate procedures. In carrying out its regulatory functions, such as reviewing the scope of the Postal Service’s universal service obligation and monopoly, the Postal Regulatory Board should employ an appropriate regulatory-style process that ensures input from those affected by its determinations. When reviewing complaints, such as whether the Postal Service has entered a market outside the scope of its mission, the Postal Regulatory Board should employ a process similar to that recommended for conducting complaint-based reviews of postal rates: the procedures should be limited to the review of written submissions and should be completed promptly, perhaps in as few as 60 days.

Postal Service Viability and Risk to the Taxpayer

In addition to SEC-like reporting, the Commission recommends that the Board of Directors be required to submit annually a detailed report to the Postal Regulatory Board on the financial viability of the institution, providing both significant financial insights as well as adequate explanation of related trends. The report should adhere to the “no surprises” rule, ensuring that any major changes to the fiscal health of the institution are widely understood in advance, so appropriate responses can be anticipated and generated. The Commission further recommends that this report be made available to the public.

Exhibit 4-3

Source: USPS un-audited FY 2003 Third Quarter Report on Financial
Conditions and Results. As of May 16, 2003, the Postal Service had
outstanding debt of $7.275 billion; the Postal Service can borrow an
additional $7.725 billion before reaching its statutory borrowing cap.

Debt Ceiling

The Commission recommends continuing the current debt ceiling of $15 billion, so the Postal Service continues to have ample latitude to cushion itself in down-cycle years and cope with the volatility and uncertainty created by electronic diversion. The Commission also recommends repealing the sub-limits on annual borrowing for capital and operating needs within the existing $3 billion annual limit on borrowing.

Regulator Should Have Subpoena Power

For the Postal Regulatory Board to ensure financial transparency and make fully informed determinations on issues ranging from rate ceilings to cross-subsidies, it must have access to the most reliable and current information possible. For this reason, the Commission recommends that the Postal Regulatory Board have the authority to request accurate and complete financial information from the Postal Service, including through the use of subpoena powers, if necessary, to obtain a thorough and reliable snapshot of Postal Service operations.

Ensuring Pay Comparability

The Postal Service is required by law to provide compensation to its employees compa-rable to that offered by the private sector. As discussed in detail in Chapter 6, the Commission received a great deal of testimony claiming the existence of a compensation premium. Rather than take a firm position in this debate, the Commission recommends that the Postal Regulatory Board be tasked with making an impartial determination as to whether there exists a compensation premium over the private sector. If the Postal Regulatory Board determines that a premium exists, then it should be authorized to take immediate binding and corrective action for prospective new hires, once the comparability analysis is complete. The Postal Regulatory Board also should establish a reasonable timeline for corrective action for existing employees, which management and the postal unions would be required to achieve over time in their collective bargaining and arbitration proceedings. On the other hand, if the Postal Regulatory Board determines there is not a compensation premium, then it should say so and effectively end the debate.

Conclusion

For the Postal Service to operate in a more businesslike fashion, its managers must have greater freedom and accountability for the daily operations and management of the institution. For that to happen in an appropriate way, the Postal Service needs a strong, independent Postal Regulatory Board with broad authority over matters ranging from appropriate ceilings on rates, to the scope of the postal monopoly, to the level of detail required in rigorous new financial reporting requirements. In doing so, this entity will play an important role in ensuring the financial viability of the Postal Service, protecting the health of the nation’s public-private postal network, and preserving the quality and sustainability of the services upon which the American people and the U.S. economy rely.

Once an independent regulatory entity is in place, Postal Service managers must have broader latitude to modernize a vast and outdated postal network to produce substantial gains in service quality and costs. Maximizing the benefits of this endeavor will require a fundamental transformation of how the Postal Service does business: elevating the performance of the nation’s postal network, taking full advantage of new partnerships and aggressively pursuing leading-edge cost-savings and productivity strategies. If pursued in tandem and as part of a comprehensive effort, such an endeavor could utterly transform the value, service and operations of the Postal Service to the benefit of its customers and the U.S. economy as a whole. Its time has come.

Endnotes

11. Reisner, Robert A.F., Global Insight, “Price Caps and the U.S. Postal Service: Prospects, Perils and .......the Public Interest,” 2003.

12. Christensen, Dr. Laurits R., Chairman, Laurits R. Christensen Associates, Inc., Hearing Before the .......Subcommittee on the Postal Service of the Committee on Government Reform and Oversight, .......House of Representatives, One Hundred Fifth Congress, First Session on H.R. 22 to Reform the .......Postal Laws of the United States, Apr. 16, 1997, p. 250.

13. Ibid., p. 251.

14. Ibid., p. 253.

15. P.L. 108-18 (April 23, 2003), at section 3.

16. Buchanan v. United States Postal Service, 508 F.2d 259, 262-263 (Cir. 5, 1975).

17. Buchanan, 267.

18. Bradley v. United States Postal Service, 554 F.2d 186, 187 (Cir. 5, 1977).

19. United States Postal Service, Transformation Plan, Apr. 2002, Appendix N, p. 10.

10. Buchanan, 263.

11. 39 CFR Part 310.

12. For example, “U.S. Postal Service: Enhancements Needed in Performance Planning and .......Reporting,” GGD-00-207, Sep. 19, 2000; “U.S. Postal Service: Transformation Challenges Present .......Significant Risks,” GAO-01-598T, Apr. 4, 2001; “U.S. Postal Service: Financial Outlook and .......Transformation Challenges,” GAO-01-733T, May 15, 2001; “U.S. Postal Service: Deteriorating .......Financial Outlook Increases Need for Transformation,” GAO-02-355, Feb. 2002; “U.S. Postal ......Service: Moving Forward on Financial and Transformation Challenges,” GAO-02-694T, May 13, .......2002; “U.S. Postal Service Actions to Improve its Financial Reporting,” GAO-03-26R, Nov. 13, .......2002; and “Major Management Challenges and Program Risks: U.S. Postal Service,” GAO-03-118, .......Jan. 2003.

13. GAO-03-26R, p. 1.

14. Holsen, James, Vice President, Industrial Engineering, United Parcel Service, Response to .......Questions Following Testimony Before President’s Commission on the United States Postal .......Service, May 28, 2003.

Forward • Executive Summary
Chapter 1 • Chapter 2 • Chapter 3 • Chapter 4 • Chapter 6
Conclusion