Taking Control of the Board of Governors

My first reaction to President Obama's announcement of his intention to appoint Paul Steven Miller and Dennis J. Toner to the Postal Service Board of Governors was that the appointments violated the spirit if not the letter of the Postal Accountability and Enhancement Act (PAEA). The PAEA modified the qualifications for the Board of Governors to add the requirement that at least four members Board "shall be chosen solely on the basis of their demonstrated ability in managing organizations or corporations (in either the public or private sector) that employ at least 50,000 employees." 39 US Code Sec. 202 (a)(1)  Neither of the two appointees have that experience..

Both of these proposed appointments meet all other requirerments for the Board of Governors.   They clearly have substantial experience in "experience in the field of public service, law or accounting."  

The current Board of Governors currently has one member with significant experience managing businesses or large organizations.  Louis J. Giuliano, Chairman of the Board of Governors is the former CEO and President of ITT Corp.  Retiring Governor Carolyn Lewis Gallagher was the President and Chief Executive Officer of Texwood Furniture, Inc., a manufacturer of educational furniture, but it is unclear whether Texwood had 50,000 employees.  The experience of all of the other Governors, including the experience of the two nominees, is in law or public service.  The Senate may need to ask the administration how it plans to increase the number of governors with the appropriate management experience to 4 members.

The two appointees do differ from the current board in one important respect that buttresses their case for appointment to the Board of Governors.   They have close personal and professional relationship with the White House.  Mr. Miller spent the past year working in the White House.  Mr. Toner has spent 30 years on the Senate staff of Vice President Biden including ten years as Deputy Chief of Staff.   The close ties suggest that the Obama Administration feels that it must take a more "hands-on" approach in dealing with the problems facing the Postal Service.   This is clearly different from the benign neglect that has characterized the postal policy of most Presidents since the passage of the Postal Reorganization Act.

In making these appointments, the Obama administration is taking seriously the federal government's role as the primary creditor and only shareholder of the Postal Service.   These appointments are not much different than what happened at GM, Chrysler, and AIG when the Federal Government traded loans for shares and made appointments to the boards of these companies.      Their appointments also suggest the administration may require changes in the size of the existing board in order to speed changes at the Postal Service, as a condition for changing the formula used to calculate the pension and retiree health care benefits of the Postal Service.

These appointees clearly will join the Board of Governors with the goal of putting the Obama administrations imprint on both senior management and strategic thinking at the Postal Service.   They will likely bring to the board ideas for turning around the financial position of the Postal Service, including those that require changes in the business model and regulatory framework, that were developed outside the confines of L'enfant Plaza.   It is possible that they may put significant pressure on existing senior management at the Postal Service to speed up the pace of change or risk the fate of Fritz Henderson, the former chairman of General Motors. 

In the coming weeks, Senators and their staff will vet these two nominees and eventually hold hearings on their appointment.   This process provides the Senate with a clear opportunity to determine the Obama administration's approach to postal policy and its current thinking about the Postal Service's challenges.   It is an opportunity that the Senate cannot afford to pass.

Taking Advantage of Regulated Rates

The Globe and Mail today has an article that indicates that Canadian mailers are taking advantage of lower Postal Service rates to mail letters and parcels across Canada.

"For a small but growing number of this country's eBay vendors, the cheapest path across Canada lies through the heart of America.  Canadians are showing up in increasing numbers at U.S. Postal Service outlets with parcels and letters destined for other provinces – and, in at least one case, a neighbouring town."

Later in the article, it is clear why this is happening, the rates for the Postal Service's money-losing Media Mail service are so low, it is worth it for Canadians to drive to the United States to ship books, records, CD's and DVD's.   

“If I didn't ship through the States, I'd probably have to lay all my staff off for sure and just run the store, my wife and I,” said Gary Nerman, whose Nerman's Books and Collectibles in Winnipeg employs three people. “It would probably cut our sales down by 80 per cent, 90 per cent.”

Every week, Mr. Nerman drives an hour south to Pembina, N.D., usually with between 90 and 130 books to ship. The savings are dramatic. In the U.S., a special media rate allows him to ship, say, a Stephen King hardcover to Los Angeles for less than $3. From Canada, it would cost about $10. (It's also substantially cheaper and faster to ship to Europe or Australia, through the U.S.)

Canada Post operates under financial goals and pricing strategies approved by its Board of Directors.  These financial goals have generally prevented Canada Post from offering any service below costs.   I know of only one exception.  This was an unaddressed advertising mail service that was stopped over a decade ago after objections from newspapers and others that delivered unaddressed mail prompted an external review demanded by Parliament that clearly showed that prices were both below cost and a bad business decision.  Since then, Canada Post financial management has has more power to oversee prices proposed by marketing staff to ensure that business is profitable.

The financial returns of Canada Post since the unaddressed product was dropped have been positive.  Recent changes that employ more realistic financial objectives, will ensure that Canada Post remains profitable even as many mailers switch from print to digital delivery. 

The experience with the money losing unaddressed mail profit did not change the minimal price regulation in Canadian Postal Policy.   Canada Post announces price changes on an annual basis with an opportunity for public comment.   There is no regulatory body to check costs or whether prices meet objectives of postal-policy.  More importantly for a product like Media Mail, there is no pricing objective that favors mail based on content, so shipping a book in Canada is priced no different than shipping other parcels.

The volume of mail similar to what the Globe and Mail described is likely small.    But given the Postal Service's operating losses, how long can management, the Postal Regulatory Commission, and Congress allow these pricing aberrations to continue?

Could the Budget Kill Efforts to Save the Postal Service?

In the next few days, President Obama will deliver the State of the Union Address and reveal the 2011 budget.   White House spokesman have already announced that the budget will include a freeze in discretionary spending in fiscal years 2011 through 2014.    The spending freeze creates an additional barrier on top of the normal budget scoring process to efforts to find a solution to the Postal Service's financial problems.   

The budget scoring process put the retiree health care payment schedule in place in order for the Postal Accountability and Enhancement Act (PAEA) to pass.   The budget scoring process derailed the normal legislative process as a method to deal with the Postal Service's financial problems last year.   The relief that was granted was included in last-minute legislation that did not require budget scoring.

The relief that Congress granted last year did not solve the long term problems of the Postal Service.   Congress will soon see a report from the Government Accountability Office (GAO) on potential business models and regulatory frameworks that could offer long term solutions.   It is unclear whether the GAO's mandate will cover key financial questions regarding the Postal Service's true liabilities for CSRS pensions, retiree health care benefits, and workers compensation payments which affect the viability of all business modes that the GAO is likely to consider.


The Problem with the retiree health care liability was studied by both the USPS - Office of Inspector General (USPS-OIG), and the Postal Regulatory Commission (PRC) and both studies recommended lower payment schedules than the current schedule.   Choosing either the USPS-OIG or the PRC schedules would reduce the Postal Service's payment to Office of Personnel Management (OPM) and in the budget scoring process would require cost savings in non-postal programs or other payments from the Postal Service for the change to be budget neutral.

A new report from the USPS-OIG, The Postal Service's Share of CSRS Pension Responsibility, creates even more budgetary problems if the results are accepted.   This report indicates that the Postal Service has overpaid its liability by $58.7 billion more than previously estimated.   If this overpayment is transferred to cover the Postal Service's retiree health care liability, the Postal Service's obligation for retiree health care costs would be even smaller.   Again, the primary obstacle to accepting the USPS-OIG analysis is the Congressional budget scoring process.

Fixing retiree and other liabilities was critical in postal reform efforts outside the United States.   In these countries, legislatures realized that a viable national postal operator and universal service required that the postal operator not be burdened with retiree obligations at levels that would force layoffs or price increases. 

The Postal Service and nearly all stakeholders realize that the first step to solving the Postal Service's problems will involve recognizing that 1) retiree payments reflect actual obligations and 2) the payment schedule for this actual obligation should follow private sector standards for funding retiree obligations.  The National Association of Letter Carrier's Fact Sheet presents the arguments that stakeholders will make before Congress over the coming month. 

Given budget scoring, these arguments will fall on deaf ears unless stakeholders can find ways to replace the "funds" that fixing the pension and retiree health care obligations creates.   Failure in the effort to find a fix will force the Postal Service to raise rates substantially, make cuts in service beyond eliminating Saturday, and reduce the workforce faster than it has proposed to date.   

Is there a solution?  Is there a solution using a governmental business model?   My paper, Examination of Postal Business Models, tried to answer these questions in assessing potential business models and concluded that there is a solution and governmental business models did not offer one.   It is time for others looking at Postal business models, and in particular those stakeholders that want to retain a governmental model to explain how their model can solve the problem of Postal liabilities and get the changes that they envision passed by Congress. 

Complaints about management

I think I would complain about management to if I was trained by a bear.  Picture from the Postalmag gallery of Postal images. 

Regulating the USPS into Financial Stability

In a previous post, "Re-Regulating the Postal Service?", I noted that the Postal Regulatory Commission's (PRC) interest in examining the Postal Service's FY 2009 Annual Compliance Report represents the potential for a mini rate case.    Now that the PRC has chosen to proceed, this has happened.   In addition, the PRC has chosen to enter uncharted territory, examination of the Postal Service's financial and business plans by asking whether the Postal Service generated sufficient revenue in 2009 "to assure adequate revenues, including retained earnings, to maintain financial stability." [39 U.S.C. § 3622(b)(5)]

Overhanging all of the specific areas of inquiring discussed below, postal stakeholders face a concern that hangs over the entire proceeding.   If the PRC find the Postal Service to not be in compliance with any of the ratemaking rules included in 39 U.S.C. § 3622, can it force the Postal Service to file an exigent rate case to put it in compliance?

The Mini Rate Case

The scope of the PRC's mini rate case will likely focus on the following three areas:

• The rates charged for products that the Postal Service's FY 2009 Annual Compliance Report showed had attributable costs greater than revenue.
• The size of worksharing discounts.
• Computational and typing errors in the Compliance Report and accompanying workpapers.   

The first two areas could have a significant impact on mailers that now generate at least 63% of the revenue and 79% of the volume of the services covered by price regulations.

Products With Revenue Below Attributable Costs

 The Following products had revenue below attributable costs.

• Inbound single-piece international mail
• Standard flats
• Standard parcels and non-machinable flats
• All Periodical Class products
• Single Piece Parcel Post
• Bound Printed Matter Parcels
• Media Mail/Library Rate parcels

The list of products includes mostly flat and parcel shaped products.   The list includes products that have costs that are difficult to measure because the total volume handled is so low.

To the extent that the Postal Service and mailers want to address this question, they may want to address the following two questions.

• How relevant are 2009 costs for 2010 and beyond given that the handling of flats and parcels as the processing and transportation technology networks handling this mail will be different in 2010 and beyond from the networks used in 2009?  
  
• Are sampling systems capable of accurately measuring the costs of low volume products?   

The Size of Worksharing Discounts

Most of the questions contained in the Chairman's Information Request #1 focus on whether the Postal Service's worksharing discounts comply with 39 U.S.C. § 3622(e)(2).  This section sets the rules for the specific rates for all mailers sending more than 500 pieces at a time, mailers for whom 80% of the money spent on mail is spent in competitive markets for services required before the mail is handled is tendered to the Postal Service.   This section requires that worksharing discounts be no greater than cost savings with four rather limited exceptions.

1. The discount is associated with a new postal service, a change to an existing postal service, or with a new work share initiative related to an existing postal service or the discount necessary to induce mailer behavior that furthers the economically efficient operation of the Postal Service and the portion of the discount in excess of the cost that the Postal Service avoids as a result of the workshare activity will be phased out over a limited period of time.
2. The amount of the discount above costs avoided is necessary to mitigate rate shock; and will be phased out over time.
3. The discount is provided in connection with subclasses of mail consisting exclusively of mail matter of educational, cultural, scientific, or informational value.
4. Reduction or elimination of the discount would impede the efficient operation of the Postal Service. 

These exceptions indicate that the PAEA does not favor the use of market-based, or non-cost based rates for customers shipping more than 500 items at time with the exception of discounts that have a very short duration like a sale.    The section also enshrines differences in rates for editorial content in periodicals from the advertising content.   Only the last exception, "reduction or elimination of discounts that would impede the efficient operation of the Postal Service," provides a crack that might let the light of market-based into the process.

The PAEA does provide some limitation to a strict cost based approach in 39 U.S.C. § 3622(e)(3), but again the language in appears to focus on enshrining the rate relationships that existed when the PAEA was passed, and protecting the rates of single-piece mailers.  The language requires that the Postal Service prove that 1) raising rates that are lower than cost differences may indicate would reduce the volume of the products that use the product and lower the Postal Service's net income; 2) the rates do not increase rates of products that do not use the discount.   

In answering the PRC's questions on worksharing discounts, the Postal Service and mailers need to go beyond answering the computational issues, and illustrate the value of market based rates using the exceptions and limitations as the basis for their argument.

Determination of Rates Necessary for Financial Stability

In raising the question of whether rates are sufficient for financial stability, the Commission addresses the question of financial targets and financial plans.  The Commission's asked the Postal Service to "provide the Postal Service’s current plans to achieve financial stability in FY 2010 and beyond under the Postal Accountability and Enhancement Act (PAEA) to enable it to meet its principal responsibilities" in Commission Information Request No. 1.

In the old regulatory process, the question of financial targets was set in the revenue requirement.   Once the rules were set in the first few rate proceedings, the PRC's limited its analysis to checking that the Postal Service's calculations were correct.   The PRC rarely if ever questioned whether the revenue requirement generated sufficient cash to make the capital investments necessary to streamline mail operations and reduce operating costs or to reduce the postal workforce at a pace commensurate with the introduction of automation and streamlined operating and delivery networks.  

Questions of "sufficient financial returns" never were addressed.  Mailers had no interest in raising the issue, as their concern was keeping rates down, not maintaining a financially viable Postal Service.   In many ways, the PRC also tended to focus on ways to reduce the revenue requirement, even if the reductions were minuscule and based only in errors in calculation or changes in economic forecasts during the course of the 9 month rate proceeding.   

I have raised the issue of self sufficiency, a number of times in this blog and in my paper, Examination of Potential Postal Business Models.   In that paper I stated: "Given the outsized operating losses in 2008, 2009, and most likely in 2010 and the elimination of cash available for anything but absolutely critical capital spending, there are substantive questions about whether the current postal business model and regulatory framework can ever generate sufficient levels of cash to ensure long-term postal financial self sufficiency."   Postal forecasts of revenue and volume indicate that these questions could remain through the middle of this decade.

In that paper, I further noted that postal operators outside of the United States have real financial return objectives.    Postal policy in these countries understands that universal service requires that the postal operator earn a financial return that will sustain the business.   To meet this financial objective, postal policy in these countries grants the postal operators sufficient commercial freedom to manage all aspects of the business to meet these objectives and provide universal service.   In addition, postal operators manage the business under standard business, and tax law, and employment and labor law similar to what private sector firms operate under.

Most recently, the Canadian government re-evaluated Canada Post's financial objectives and set higher targets to allow for the modernization that is necessary there.  The re-evaluation has led to higher rates on postal products, and increases of 2 cents each year from 2010 to 2012 for single piece mail.

Congress cannot act on future business models unless it has an independent assessment of the financial plan of the Postal Service under both the current law and the changes in law that it has proposed in testimony to Congress and in its paper, Assessment of U.S. Postal Service Business Model.   It is not clear whether a formal regulatory process will provide that assessment in a format that is useful for advancing postal policy changes in Congress that will ensure the Postal Service's financial stability.   Given the reluctance of postal stakeholders to suggest changes in the business model that could improve financial viability of the Postal Service without increasing rates, as well as the cost of producing those studies, the PRC will have little information on the record on alternative business plans that could meet the PAEA's financial goals.

Mailers and the Postal Service have additional immediate concerns about potential actions that the PRC could take if it determines that the Postal Service is not in compliance with postal law.   The Commission's powers and authority once such a non-compliance determination is made is unknown.   As such, much of the discussion at hearings and in documents filed with the PRC will focus on defining its authority and not the changes needed to make the Postal Service financially viable and the business model and regulatory framework that will allow that to happen.   

The Direct Mail Market: Structure and Success Factors

The Chinese Post Office currently has 20 executives touring the United States, trying to figure out how to grow direct mail industry in China.   They are interested in the United States direct mail industry because it is one of the most vibrant, if not the most vibrant direct mail industries in the world.

I was fortunate to make a presentation to lay out my thoughts on 1) the industry structure; 2) why it has been so successful; and 3) the prospects that direct mail marketing will return to a growth trajectory.    Below is a summary of some of the key ideas presented  on the first two topics.  The last topic is covered in a separate post.

In my presentation, I emphasized what is obvious to everyone in the industry, "direct mailers are focused on the financial return of the mailing."   Without a positive financial return, mail is not sent.   This is as true for Land's End as it is for the local synagogue or church.   Land's End will explicitly measure the return in sales from a particular mailing.    The local church or synagogue may do it implicitly through feedback from members or the memory of members responsible for fundraising and membership retention.  As is noted below, the recession resulted in changes in the financial return in direct mail that were noted both in direct marketer's measurement of financial returns and the experience of non-profits who cut back mailings due to budget constraints and watched the impact on membership and fund raising.

Industry Structure

The direct mail industry is highly fragmented with nearly 40,000 firms designing, printing, performing mail preparation activities, and transporting direct mail delivered by the Postal Service.  On top of that there are the firms that provide the printing and inserting equipment, and the printing management, design, and mailing software.  In looking at the data I had available, I estimated that $83 billion was spent to take direct mail from concept to delivery.  The Postal Service received $20 billion primarily for handling the last mile of delivery.

The following diagram illustrates the range of activities that are involved in producing direct mail. The diagram notes that these activities could be completed by different firms or different divisions or staff within the same firm. 

The industry appears more fragmented than it really is as most direct mail is produced by less than 1,000 firms, and most likely less than a couple hundred.  These 1,000 firms are generally fully capable of handling the whole process from concept to the hand-off to the Postal Service.  However, mailers, and in particular larger mailers may chose their own advertising agency to design the mail piece, develop mailing lists internally or purchase them on their, or mailing lists that they purchase themselves. In addition it is possible that the mailer or advertiser themselves could do much of the work.  The Internet has opened opportunities for smaller mailers who have a list they want to advertise to and the capability of doing some simple design work on their own personal computer or on line using the services of companies like Click2Mail, Premium Postcard, and cardstore.com.

Drivers of the Industry's Success

In many ways, the industry's success come from the high level of competition that exists in markets as fragmented as the direct mail market.   This high level of competition was the first factor that I believe has led to the industry's success.   Competition forced competitors to constantly strive to improve their product both in terms of cost and quality to meet market demand.   In a market as focused on the financial returns generated by sales to mail recipients, market participants had to use all of their creative, analytical and engineering skills to improve the cost-effectiveness of direct mail

 A market that is highly fragmented represents a market also suggests a market that has a customer base that has such a diverse set of needs that companies that focus on one subset of the market's customers may be lees competitive in serving other subsets.   The competitiveness of the market meant that companies that survived through 40 years of intense competition were very good at serving one or more niches of the direct mail market.   The market recognized when even well managed firms were not competitive to serve all direct mail markets

The fragmentation of the mailing market suggests that the market for purchasing the design, production, preparation and transportation of direct mail allows even small competitors can successfully compete for the business of advertisers.   In more academic terms, the economy of scale that exists in some production or sales functions of other industries is not that strong in the mailing industry.    In fact, there are numerous consultants, without any production capabilities on their own who compete successfully in this market with the sales forces of multi-billion dollar firms.    Whether the market remains as fragmented as the types of items mailers want sent as well as the printing, mail production and software technology changes remains to be seen.  

A second factor that made direct mail grow came out of the regulatory process.   By offering discounts that allowed mailers to control more of the costs  associated with the physical distribution of mail, the Postal Service and the Commission effectively deregulated most of the process of creating direct mail.   Today 80% of direct mail spending is spent among firms that compete without any regulatory oversight.   Only the last mile remains regulated,  The elimination of regulatory oversight, expanded competition and lowered mailer costs.  The lower costs increased the probability that a mailing would produce a positive financial return.   

A third factor that made direct mail grow over the past 40 years has been the increased reliability of the process from concept to delivery.   The primary improvement in service quality, as defined by mail arriving on the day required by the mailer, came from allowing the mailer, or their agent to manage the process to a point closer to the recipient.  Some of this occurred prior to the introduction of drop-ship discounts, but the introduction of the discounts created enough demand for drop shipping to allow the development of private sector transportation of mail from the last production facility to postal plants and delivery units.   While the cost savings from drop shipping are important, direct mail at lower prices would not have been as successful if worksharing did not improve service quality as well.

The final factor that I explained that drove the success of the direct mail industry was improvements in customer management software.   This software allowed mailers to better segment their customers or potential customers and target advertisements more precisely and advertise to that targeted audience in a relatively unobtrusive manner.   In the era prior to 2007 when the Internet, and high speed intenet became ubiquitous, direct mail was the most effective method of deploying this advance in customer intelligence and measuring the impact of specific advertising campaigns. 

Enshrining a Twentieth Century Postal Service

The Postal Regulatory Commission in a decision announced last week illustrates how the Postal Accountability and Enhancement Act (PAEA) freezes the Postal Service in the 20th Century.   The Commission ordered the Postal Service to terminate two non-postal services and issued guidelines for the sale of licensed CDs and DVDs.   [Press Release] [Decision]  This decision follows the requirements of the PAEA that the Postal Service not offer any non-postal service that were not offered prior to January 1, 2006.   While the PRC may have had little choice in its decision, the impact is likely to be much more significant that limited loss in revenue and net-income.  
 
The decision will stifle innovation.

The Commission determined that products that employed innovative uses of Postal Service human capital, physical capital, and intellectual assets violated the PAEA.  The decision will make the Postal Service think twice about making any change in its product offerings.  From this point forward, the Postal Service will consider first every reason why the PRC might reject a new innovative idea to generate increased revenue.   Even ideas that pass muster with marketing and operations staff will face the challenge of the Postal Service's lawyers who will use their knowledge of PRC precedent to further narrow what is actually offered in order to minimize the risk of objections from the Public Representative of firms in the private sector.
 
The Commission's decision prevents innovative ideas developed by APWU President Burrus, authors of papers on new postal business models, and witnesses at a recent House hearing from seeing the light of day.   The decision will reinforce the culture that discourages innovative ideas to generate revenue and innovation generally.
 
Representative Connolly showed his understanding that the Postal Service needs a culture of innovation in his questioning of former Deputy Postmaster General Coughlin at the last House hearing on the Postal Service.   A culture of innovation that will ensure the Postal Service's future is described in Richard Foster's book: Innovation: The Attacker's Advantage. He recommended that firms in the Postal Service's position must be close to ruthless in cannibalizing their current products and processes just when they are most lucrative and begin the search for new products and processes again, over and over.    As long as the Postal Service works within a regulatory framework that discourages innovation and prevents the development of products that did not exit prior to 2006, this cannot happen.
   
The decision illustrates how much US postal policy differs from policy in other countries. 

Outside the United States Postal operators operate within a public policy framework that understands that limiting the post to just what was done before policy reforms will not ensure the financial viability of the country's mail industry and universal service.    The business models and regulatory frameworks in all of these countries reflect this policy framework.

Postal operators outside the United States are using the commercial freedom granted by the postal policy framework in their country to expand far beyond the limited set of services that the Postal Service can offer.   Outside of the United States, postal operators generate no more than 70% of their revenue from letter mail and for many posts, less than half.    The Postal Service generated 84 % of its revenue from letter mail services and it is not higher because letter mail revenue shrank faster than the decline in parcel shipping in 2009.

Restrictions in commercial freedom are only some of the differences between the Postal Service's business with the business models of foreign posts.   Foreign posts operate under fairly limited regulatory restrictions, standard private sector business law, employment law, and increasingly tax law.   In no country do these differences prevent the national post from continuing to offer universal service.  In many cases, the differences allow the national post to offer universal retail access, and especially retail access in rural areas at levels far greater than what exists in the United States.

The decision illustrates the limitation of governmental models for the Postal Service.


Nearly all of the governmental models proposed by the Postal Service and other authors of papers on business models included changes in the Postal Service's charter to allow it to compete more openly with the private sector in a way that would allow it to offer the services terminated. They all argued that the Postal Service needed the additional competitive ability in order to replace revenue from declining mail volumes. The change in law required would require Congress to allow the Postal Service, operating as a government entity, to go into direct competition with the private sector.  The Commission's decision, and in particular Pitney Bowes's active participation shows that private sector firms have a real interest in keeping the Postal Service from gaining an expanded competitive mandate.   The nature of the debate over a public health care option illustrates that passage of a charter that allows the Postal Service more room to compete with the private sector is highly improbable as long as the Postal Service remains a part of the Federal Government.

The decision has adverse inflationary and economic growth impacts.

The Commission's decision restricts entry by the Postal Service into markets that it could serve profitably.  In its decision, it cited both concerns of private sector competitors and the public representative that argued for terminating products that the Postal Service offered.

The theoretical impact of restricting entry in postal markets have been studied and published in numerous papers over the past 20 years.   The impact on economic growth is less clear but given that most mailers require a positive economic return on their mailing expenses, regulations that restrict entry and raise prices should raise the probability that a mailing would not meet the return hurdle that would allow for a mailer to print and mail.

The Commission's decision requiring the Postal Service to terminate two products is reminiscent of decisions of the Interstate Commerce Commission under trucking regulation. In particular, objection by competitors could derail proposes to expand the geographic area served by a trucking company.  Entry restrictions in transportation and other markets have been shown by economists as having both inflationary and economic growth slowing impacts.   Numerous economic studies were sponsored by the U.S. Department of Transportation, and a number of books were published on the topic including:

• Regulatory Industries and the Economy by Paul W. MacAvoy
• The Economic Effects of Surface Transportation Deregulation, by Clifford Winston, Thomas M. Corsi, Curtis M Grimm, and Carol A Evans
• Regulation of Entry and Pricing in Truck Transportation by Paul W. MacAvoy and John W. Snow
• Deregulating Freight Transportation, by Paul Eric Teske, Samuel Best and Michael Minstrom
  

The Decision Hurts Postal Labor.

 The Postal Service's workforce faces tremendous strain due to the need to cut costs as volume and revenue declines.   Any regulatory decision that limits the Postal Service's ability to fully utilize its human, physical or intellectual assets will require that reductions in the workforce come more swiftly and cut more deeply than might otherwise be necessary.   Restrictions on entry also reduces the sources of potential cash to cover transfer and retraining costs, retirement incentives and severance pay that accompany a downsizing process.

The Decision Illustrates the Political Challenge of Changing the Postal Service's Business Model.

Changing the Postal Service's business model and regulatory framework will affect nearly all stakeholders.   Those stakeholders who could lose a favored position by a change in the business model and regulatory framework will oppose those changes.    Those that would benefit from change are less likely to actively pursue change as the benefits of change are less clear to them than the risks are to those who currently enjoy a favored position.

Trucking deregulation illustrates a successful change in regulatory model that forced changes in business models in dozens of firms over the objections of business, labor and regulatory stakeholders. In particular, during the early days of regulatory reform the Interstate Commerce Commission (ICC) focused on protecting its regulatory responsibilities and the due process rights of those that would be hurt by entry and pricing freedoms that the Ford administration promoted. A combination of pressure from the Ford Administration and appointments of new commissioners and ICC chairman resulted in an ICC that actively supported the deregulation of trucking and the elimination of much of the ICC's regulatory responsibilities.

A review of politics of policy reform for the trucking is instructive in trying to understand the politics of policy reform for the Postal Service and in particular the risks and opportunities available for governmental officials that believe a new business model and regulatory framework is needed.  In that regard, I recommend the following books:

• Regulation, Organizations and Politics: Motor Freight Policy at the Interstate Commerce Commission by Lawrence S. Rothenberg
• The Politics of Deregulation by Martha Derthick and Paul J Quirk
• Braking the Special Interests: Trucking Deregulation and the Politics of Regulatory Reform, Dorothy Robyn
  

Leaving the Mailstream (Follow-up)

The previous post, Leaving the Mailstream One Customer at a Time, discussed Netflix's plan to switch from a DVD distribution company to a content streaming company.   Advertising Age just published an article describing the wider implications of streaming media for legacy broadcast, cable, and satellite modes for distributing video content.

While the readers of this blog may ask, why should I care if people get their videos over the Internet rather than through a cable box?   The answer is, every customer that switches from cable or satellite to the web reduces the number of customers that receive cable or satellite bills, the number of bills paid by mail, and mail advertising from cable and satellite companies as the return on advertising diminishes.  The switch may force cable, satellite and fiber optic telecommunication services to shift to an opt in mailed bills from the opt-out standard today.

The previous post noted another of factors that will determine how fast the switch to streaming video occurs.  It is clear from the article, that content providers expect the switch to come, they just have not figured out yet how they can make money from providing content and still pay the salaries now paid to those producing video content.


What I found most striking in the article is both how fast the number of households with Internet connectivity to the home entertainment center has grown.  The numbers suggest that this phenomenom has grown beyond early adoptors and is very close to becoming mainstream.  The following table is published in the Advertising Age article and illustrates where we are now.  For more information about this phenomenon, Advertising Age is promoting a new white paper, The Economics of Online Video, that may be worth reading for those whose business will be affected by the transition from legacy cable broadcast, cable, and satellite to online video distribution.

By the numbers

Number of Xbox consoles connected to the web: 20 million (Microsoft) Peak number of Xbox users simultaneously online: 2.2 million (Microsoft) Percentage of U.S. households with gaming console that can stream movies: 39% (InStat) Average price consumers paid for digital cable Q3 2008: $79 a month (Centris) Average price Q3 2009: $70 a month (Centris) Number of Boxee users: 850,000 (Boxee) U.S. digital-cable subscribers: 42.1 million (NCTA) U.S. basic-cable subscribers: 62.6 million (NCTA) Number of Netflix subscribers: approximately 10 million (Netflix) Number of web-connected TVs sold by 2013: 80 million (Park Associates)

Leaving the Mailstream One Customer at a Time

In an interview with All Things Digital, Netflix CEO Reed Hastings stated that its DVD by mail business will continue until around 2030.  The importance of the mailed DVD will rapidly diminish over the next 20 years.  “Pretty soon, we’re going to be a streaming business that rents some DVDs,” Hastings told the All Things Digital reporter.  

There are numerous signs that the end of the mailed DVD is coming.   Netflix has already put the "Watch Instantly" tab first so to encourage Netflix to try the download service.   Netflix has announced that all three major game consoles, the Sony PlayStation 3, Microsoft Xbox 360 and Nintendo Wii, can all stream Netflix movies.  A limited number of Blue-ray disc players and HDTV's now have the capability of streaming Netflix content as well.   By next Christmas, this feature should become a standard feature in consumer electronics.  At the just concluded Consumer Electronics Show in Las Vegas, Netflix announced that nearly every manufacturer of high definition televisions and Blue Ray disc players will introduce integration of Netflix streaming functionality as a standard feature of their products.    Even store brands at Best Buy and brands sold at mass marketers like K Mart, Target, and WalMart will have this feature next year.

While Netflix Chairman announced 2030 as the year that mailed DVD service will end, it is clear that his projected date is but a rough estimate.   Consumer behavior could move that date forward or back by as much as a decade.  The key drivers include:

• Introduction of computer capabilities and wired and wireless network streaming in the living room.   Currently, streamed video exists to computers with broadband connections.   In most cases the content is streamed to a desktop or laptop computer for viewing by one person.   For family viewing, and in particular viewing on high quality HDTV's, a consumer most often needs to connect a networked computer to his audio and video entertainment center.   This is not a particularly elegant solution and often involves purchasing a computer with far greater capabilities than is required for high quality streaming of audio and video content.
  
  Netflix's deals with consumer electronics manufacturers should allow consumers to get streaming content to their audio and video entertainment centers at a much lower cost.  The speed at which consumers add streaming capable audio-video receivers, Blue ray players, game consoles, or HDTV's will depend on the life of the thousands of HDTV's and other devices just purchased in response to the introduction of digital television.   It is not unreasonable to think that it could take ten years for recent HDTV purchases to be replaced.  In the meantime, streaming Blue Ray players and game consoles costing well under $200 should be available by next Christmas to fill in the gap. 
  
• Improved reliability and speed in broadband service and in-home wireless speeds.   One of the annoying parts of using Netflix's streaming service is the problem that changing downloading speeds cause for viewing.  Movies can stop in the middle and a screen refresh is required to restart the film where it stopped.   There can be many causes of this interruption but two issues stand out, the quality of the broadband connection, and the quality of the home wireless or wired network.   Introduction of streaming video from hundreds of websites including websites that are dedicated to streaming content like YouTube and Hulu and sites that post both original and re-posted content puts great strain on the capacity of broadband networks. 
  
  Current cable, DSL, and satellite broadband networks were not designed to handle the volume of downloaded media content they are now handling.   New fiber-optic networks are just being installed and it will take between five to ten years until plans of private and public investments for this installation to be complete.   (Australia is spending $31 billion Australian to lay fiber-optic cable nationwide in a project that will take five years.)  Then the governments and companies that install the networks have to convince customers to replace existing land-line phone and broadband service with the new fiber-optic service, which will be an expensive and time intensive effort.
  
  At home, there is a similar problem.  With the exception of a limited number of new homes and major reconstruction, homes are not built to handle computer network wiring.   Using wireless networks solves the problem.   Most homes with wireless networks still have equipment using the wireless G standard which works find for most web-based activities.   However, heavy video streaming, like what is required when streaming movies may require more capabilities. The newer wireless N standard offers faster wireless speed and greater coverage, but requires purchasing and installing a new router, something that many homeowners find daunting.   While wireless N routers designed for streaming video are relatively inexpensive, under $150, the replacement cycle on routers is quite long and may be tied to decisions of homeowners regarding switches from one broadband supplier to another or their eventual purchase of fiber-optic telephone/broadband service.
  
  
• Expanded Choice and Capacity to Stream Movies.  Even Netflix has to deal with the challenge of streaming the thousands of movies that customers may want to watch.  It is possible that bottlenecks may exist in Netflix's computer and networking capability that causes problems in streaming video today.  Expanding the computer and networking capability to handle projected customer need will take time, but the switch from mailed DVDs to streaming videos will have less to do with Netflix staying a step ahead of customer demand than the other factors that currently retard steaming demand.      
  

Currently Netflix is one of the Postal Service's most important customers.  While First Class mail has declined for a decade, Netflix mail volumes have grown. The Chicago Tribune reported that in Netflix's Carol Stream warehouse processes 60,000 DVD's a day, producing 120,000 individual First Class mail pieces (1 piece in each direction.   With 58 similar warehouses, Netflix may generate around 2.5% of all First Class mail volume or 2 billion pieces annually.   The Postal Service can ill afford to lose this business but there is nothing it can do to stop the loss.

Netflix is not the only example of a customer abandoning the mail stream.   Info Week announced today that it is eliminating another 8 print editions and will produce 24 printed and 12 digital only editions this coming year.    The loss of mail volume from Info Week, and other trade journals should be a particular concern as most of the issues are delivered to high volume, and highly profitable stops at businesses and other non-households.   The lost revenue and volume from Netflix, Info Week and other customers is unlikely to be replaced by other letter or flat mail. 

The decline in business from Netflix and Info Week suggest that the Postal Service needs to better track demand of individual customers or customer segments in order to understand how secular, cyclical, and price trends, affect the rate at which the switch to electronic alternatives will occur.   The Postal Service has collected this information for a sufficent period to begin developing market segment or customer specific demand forecasts.  It may even be possible to use these forecasts to provide operating planners information on how the actions of specific customers will affect demand for sortation and transportation capacity at particular facilities or regions.  Finally, these customer and customer segment forecasts may help strengthen the Postal Service's understanding of how it can best use its pricing freedom to increase, revenue, volume, and net income through the use of sales, and incentive specific contracts that are designed for specifc customers or customer segments.      

The detailed forecasting effort described above is a much greater than the effort, developed and modified in 40 years of regulatory filings, that is now included as part of filings to the Postal Regulatory Commission and used in forecasts  presented to the Board of Governors and published in public presentations and reports.   Without this effort, the Board of Governors, Congress and others trying to ensure the future of the Postal Service and mail service in the United States will all find that they have too little information to make a credible plan for the future.  

Changing Culture and Contracting Violations

The Federal Times reported today on three sole source contracts issued by the Postal Service's Shipping Service to three consultants that had close professional links to Robert Bernstock, the president of the shipping services division.   The story reads like the standard government employees wasting taxpayer money story that most reporters covering the Federal Government can write blindfolded.

The reporter, however, missed the real story which is how difficult it is to change the culture of the Postal Service, and in particular the culture at the Postal Service's headquarters.   In the private sector, if a new division president is hired, and in particular hired to grow a moribund business that should have great growth prospects, he would have brought in an entire new staff with him to

• develop a new strategic plan to position products in the market place,
• develop a new marketing plan designed around the new market position of products,
• develop new approaches to selling services, and
• evaluate the financial prospects of potential business partners.  The existing employees would have been let go.   

This is not an option at the Postal Service where even the $90,000 salaries cited in the article are far below those of marketing and financial professionals who have successfully transformed other companies.  Recruitment of replacements is difficult and civil service rules make lay offs simply to change organizational culture unheard of.  

Without the option of hiring new staff, the Postal Service has no choice but to hire consultants.   Employees are left with nothing to do because they rose to their position as part of the old culture that allowed the shipping services to increasingly become uncompetitive to services offerred in the private sector. In many ways these headquarters employees sitting idol while contractors are doing the work, are like those clerks placed in "standby rooms."   Management does not want to use them, but cannot get rid of them. 

The change in culture also means a change in the mix of consultants that do the work.   The Postal Service has a number of large consulting firms that can do strategic and marketing consulting under contract.   Many of these firms have worked for the Postal Service for decades, and some since its founding.   While using these consultants would have caused no contracting issues, it is not unreasonable to think that their advice would not represent a break from the strategic and marketing direction that existed in the provision of shipping services prior to the hiring of Mr. Bernstock.

The need for a new culture in the shipping services and the way it thinks about its strategic position and marketing approach is clear.   For years the continuing loss of market share of shipping services was hidden by high margins and relative unimportance to the Postal Service, especially during years when advertising mail was growing rapidly.   This changed when advertising mail plunged in 2008 and 2009 and the long-term decline in First Class Mail accelerated.

The future of Mr. Bernstock as president of Shipping Services may depend on the outcome of the investigation of the Inspector General of the three sole source contracts.  More importantly, this investigation will further illustrate why the current business model cannot make the changes in culture that are necessary to ensure that a self-sustaining Postal Service serves customers first

UPS Cuts Jobs without Public Hearings

Today UPS announced that it is eliminating 1800 jobs nationwide bu closing 2 regional offices and 26 regional offices.   In a story about the closing of the district office in Cincinnati,  the Cincinnati Business Courier reported that the city will lose between 40 and 60 jobs.

Norman Black, director of global media services for UPS, told Business First of Louisville, a sister paper of the Courier, that the Kentucky and Indiana districts, which include the lower third of Ohio, will be combined into one Indianapolis-based district, the Ohio Valley District.

The number of jobs that UPS is eliminating in each city is a lot more than what the Postal Service eliminates when it consolidates its processing plants.   UPS announced the plan of action in communications with employees first, and then with the investment community and national and local business press.  It will complete this restructuring without local public hearings or letters from members of Congress asking why the office in their district or state was closed.  Finally, UPS has complete discretion in choosing the management and administrative employees that it will retain without worrying about employees with seniority bumping employees with greater ability and potential.  

It is time that someone should examine the impact on the Postal Service of not being able to rightsize its network, management and labor using the same employment rules that apply in the private sector.

Cutting Management at UPS

In announcing its expected strong earnings in the fourth quarter of 2009, UPS also announced significant cuts in its management structure.  

"Effective in April, UPS will reduce its U.S. Regions from five to three and its U.S. Districts from 46 to 20. As part of the realignment, UPS will expand its outreach to customers by strengthening local sales and marketing efforts.  The restructuring will eliminate approximately 1,800 management and administrative positions across the country. Normal attrition will minimize some job displacements, and approximately 1,100 employees will be offered a voluntary separation package. In addition, other impacted employees will receive severance benefits and access to support programs based on length of service."  [Emphasis Added]  (UPS Press Release)

The cuts are severe and the highlights above illustrate that the cuts will are deep and most likely will have significant one time costs for UPS.   The following bullets recast the information contained in the press release to illustrate how significant UPS's actions are

• UPS is cutting its regional management by 40%.
• UPS is cutting its district management by 57%.  For example, the reductions in the number of districts will put the corridor from Philadelphia to Washington DC into a single district.
  
• The number of employees laid off will depend upon attrition and the number of employees taking voluntary separation packages.
• The cost of this action for UPS will likely be between $100 and 300 million depending upon the number of people who leave under normal attrition and the cost of transfers for managers that are retained.  UPS expects that the charge will be offset by cost savings initiatives in its domestic ground delivery business.
  

Dow Jones  quoted UPS spokesman Norman Black explanation of the cuts as follows: "We're talking about adopting a leaner management structure for the domestic business," [The latest cuts have] "nothing to do with the economic recession." 

Mr. Black's comment illustrates how competition in the US domestic market has forced UPS to make cuts in its management structure.  UPS has few options in consolidating terminals as its existing terminal network has been honed using optimization models for the past 25 years.    It will likely have some excess capacity in a number of terminals, particularly terminals in the industrial Midwest where declining populations and economic activity most likely generates lower package volume than the network in that region was designed to serve.    

The scale of UPS's actions suggests the seriousness that it takes cost cutting, and its need to remain cost competitive with domestic competitors.  The scale of UPS's actions also reflects how information technology has changed the need for hands-on management which was the hallmark of UPS's culture since its founding.  

The scale of UPS's actions should provide a hint as to the changes in management structure that should occur at the Postal Service if it is to become financially self sufficient.    If UPS can manage its business with 3 regions, could the Postal Service do the same?   Could the Postal Service manage its business with half the districts that it now has?  Does the Postal Service have the cash necessary to cut its management to the extent that UPS did?  Could the USPS tell its shareholders and customers that its network is sufficiently streamlined to meet service commitments at the lowest possible cost?   All of these questions need answering.  Given the projected losses, the answers are needed now.

Re-regulating the Postal Service?

Yesterday the Postal Regulatory Commission established Docket No. ACR2009, "to consider matters raised by the Postal Service's FY 2009 Annual Compliance Report."    The specific request of the PRC, and in particular its reference to those sections of the U.S. Code relating to ratemaking requirements and objectives that remained virtually unchanged with the passage of the PAEA, suggests that its review of the Annual Compliance Report could become the equivalent of a "rate case light."

The PRC asked the Postal Service and others parties to comment on whether the Annual Compliance Report shows that postal rates and fees comply with the pricing requirements and objectives.   While the PRC cannot force the Postal Service to change its rates to be in compliance, it could use this proceeding to determine that certain rates are not.   If the PRC draws the conclusion that certain rates are not in compliance, it will base it on nearly 40 years of ratemaking precedence and the pricing framework developed in what Congress saw as a failed ratemaking process in its decision to pass the PAEA.

A PRC decision that the Postal Service's rates are not in compliance with the ratemaking requirements and objectives of 39 U.S.C. could have consequences beyond a public embarrasment of the Postal Service.  Private parties could take the PRC's ruling to court to deal with the conflict between the price cap design and the ratemaking requirements and objectives.   It may be possible that a court could force the Postal Service to raise rates in order to comply with its ratemaking requirements and objectives.

The PRC's notice highlights the rates that could cause it to issue a determination of non-compliance.

Rates for market dominant products that are below the product's measured attributable costs  

• Periodical Mail lost $642 million in FY 2009, "earning revenues that were only 76 percent of attributable costs;"  
• "Regular flats, Standard Regular parcels and NFM's together lost $830 million.  Flat [revenue] was roughly 82 percent of attributable costs and revenues for parcels and NFM's were roughly 75 percent of attributable costs.
• Among package services products, only Bound Printed Matter flats and Inbound Surface Parcel Post covered their attributable costs.
• Four Special Services failed to recover their attributable costs—Registered Mail, Stamped Cards, International Ancillary Services, and Confirm.
• International Inbound Single-Piece First-Class Mail failed to cover its costs, earning revenues that were approximately 60 percent of attributable costs.

 Worksharing discounts granted to products that are larger than avoidable costs. 

• The Postal Service provides a discussion of the competing policy considerations that impact workshare discounts and the reasons a substantial number of workshare discounts may have exceeded avoided costs in FY 2009.

Rates for competitive products that are priced below attributable costs 

• These products are Inbound International Expedited Services 1 and 2; Inbound Surface Parcel Post at Non-UPU Rates; International Money Transfer Service; Competitive Registered Mail; Competitive Insurance; Competitive Return Receipt; and Competitive International Business Reply Service negotiated service agreement contracts.

Stakeholders that are concerned that the PRC could issue a statement of non-compliance should take this proceeding very seriously.    In particular, stakeholders should consider the following costing, pricing and policy issues that the Commission's request raises.

• What is the role of the ratemaking objectives and requirements when the Postal Service has the option of using price caps to adjust rates?
• What is the role of the ratemaking objectives and requirements when the Postal Service is trying to lower costs in order to become profitable under a price cap regime?
• What implications for postal policy and Postal Service self sufficiency does the requirement that worksharing discounts be limited to differences in costs have? 
  
• How does the collection of revenue, volume, and cost data using sampling systems affect the reliability of cost estimates and determination of cost coverage for low volume products?   Cost estimates of low volume products have a large variance around the estimate of costs refleccting the interaction of variances associated with estimates generated by all of the Postal Service's sample based costing , volume and revenue measurement systems.
  
• What impact do preferential rates for products such as periodicals and non-profit mail have on the issue of compliance with ratemaking objectives and requirements?   
• Is the potential non-compliance of the identified Standard rate categories related to the proportion of non-profit mail in those categories?
  
• If preferential rates cause the non-compliance, should the Postal Service provide an estimate of the lost revenue due to preferential rates and seek payment from Congress for the legislated preferences?
• How should the process of moving periodicals 2010 be changed to reduce costs? See Dead Tree Edition for some suggestions.
• Are there problems in cost models for periodicals that cause an overestimation of their costs?   See "Periodicals, The Postal Service’s Math Doesn’t Add Up."
• Is there value in handling Periodicals at cost or below cost to improve the value of advertising mail? 
  
• How relevant are FY 2009 costs for 2010 rates for flats given that they are based on costs determined in production processes and a processing network that is being replaced by a network designed around automated flat sorting machines?
• How relevant are any FY2009 costs for estimating compliance given expected changes in operating, delivery, and transportation networks as the Postal Service consolidates facilities, and continually optimizes delivery routes?
  
• Do piggyback factors based on the use of labor to process mail distort the distribution of facility related costs given that the costing theory used to create these piggyback factors date back to the time that mail was sorted manually?   
• How do the legal requirements for workshare discounts distort the prices of workshared and non-workshared products?
• How does the continued linkage between single piece First Class and bulk first class rates affect non-First Class rates and in particular the rates of single piece parcel products?  Are Parcel Post rates, and in particular Parcel Post rates under 2 pounds constrained by the level of First Class rates which are themselves constrained by workshare discount requirements and precedent relating to ratemaking objectives?
  
• Would market-based rates for mail produce rates significantly different than what Commission precedent would generate?   In particular, what rates would the Postal Service charge if its rates were "rational?"  (In this context, rational is used in the way that investment analysts describe transportation prices that allow firms in the industry to earn competitive rate of return.   Generally, firms with pricing freedom, price irrationally when they are willing to charge prices below cost just to hold onto the business.   This often occurs when a market has significant overcapacity.   Currently, analysts are describing the recent pricing decisions of FedEx and UPS as rational as capacity has been cut sufficiently to match current demand levels.   Analysts are still concerned about irrational pricing in the less-than-truckload and truckload markets where significant overcapacity still exists.)

Negotiating Changes in Retiree Health Payments

This blog has repeatedly noted the impact of Congressional legislation on postal operations and its ability to be financially viable.   In the Conference Report accompanying HR 3288, an appropriations bill covering the Departments of Transportation, Housing and Urban Development and related agencies, Congress lays out specific instructions to the Postal Service, the Postal Regulatory Commission, Office of Personnel Management (OPM), the Office of Management and Budget (OMB), and the Government Accountability Office (GAO).   Two of these instructions are new and significant and are in bold below.

First, OMB, OPM and thethe Postal Service are directed to "develop a fiscally responsible legislative proposal, for consideration by the appropriate congressional committees, that would grant a limited measure of relief from the PAEA requirements to pre-fund retiree health benefits."  There is no time period identified for this negotiation but it makes sense that the results of the negotiations would be included in the President's next budget proposal.

Second, GAO is directed to update its previous studies on network restructuring.  GAO has 6 months to complete the study.   The request for this study, like Congress's request to the PRC, appears to be focussed more on the process and the impact on employees and communities than on the potential financial impact of network restructuring.


UNITED STATES POSTAL SERVICE PAYMENT TO THE POSTAL SERVICE FUND (pp. 935-937)

The conference agreement provides $118,328,000 for a payment to the Postal Service Fund, of which $89,328,000 is an advance appropriation for fiscal year 2011 to continue free mail for the blind and for overseas voting materials, and of which $29,000,000 is for the annual repayment of revenue foregone as required by law. These provisions are the same as proposed by both the House and the Senate.

The conference agreement includes provisions directing that mail for the blind and for overseas voting shall continue to be free and that six-day delivery and rural mail delivery shall continue at not less than the 1983 level. Further, it includes language prohibiting use of funds in this Act to charge a fee for providing information to child support enforcement programs or to consolidate or close small rural and other small post offices. All of these provisions were also contained in the House and Senate bills.

Closings of Postal Facilities.-Numerous concerns and criticisms have been brought to the attention of the conferees regarding Postal Service plans to close or otherwise consolidate various retail and mail handling facilities. The conferees believe that the Postal Regulatory Commission is an appropriate forum for evaluating these proposals and the attendant concerns and have urged that the Commission take appropriate action to do so in language included under that heading.

In addition, the conferees direct the Government Accountability Office to update its previous studies regarding Postal Service initiatives to realign its mail processing network, including proposed closures or consolidations of area mail processing facilities, and to report to the Committees on Appropriations and other appropriate congressional committees not later than 6 months after enactment of this Act. GAO’s study should address the criteria used in selecting facilities for closure or consolidation, whether those criteria are being applied reasonably and consistently in particular cases, the adequacy of efforts to communicate and consult with affected communities and stakeholders, and the quality of efforts to evaluate the results of closures and consolidations.

Financial Condition of the Postal Service.-The conferees are concerned about the financial condition of the Postal Service. In fiscal year 2009, the Postal Service posted a net loss of $3.8 billion that would have totaled $7.8 billion, had Congress not reduced the Postal Service’s retiree health benefits payment by $4 billion.  Significant declines in mail volume, exacerbated by the struggling economy, have contributed to the most recent Postal Service financial crisis.

The conferees applaud the Postal Service for its efforts to reduce costs. In fiscal year 2009, the Postal Service reduced its operating expenses by $6.1 billion. These cost-cutting efforts must continue in close coordination with stakeholders and with careful consideration of the effect proposed cuts may have on service and volume.

Despite cost-cutting efforts, the financial condition of the Postal Service remains dire. The conferees understand that the Postal Service has requested legislative relief from the requirement that the Postal Service pre-fund a significant portion of its future retiree health benefits through the end of fiscal year 2016. Congress reduced the fiscal year 2009 payment from $5.4 billion to $1.4 billion.
The Postal Service continues to seek a reduction or elimination of future mandated payments.

The conferees understand that both the Postal Service Inspector General (IG) and the Postal Regulatory Commission (PRC) have reviewed the payment stream under the Postal Accountability and Enhancement Act of 2006 (PAEA). The IG concluded that the current schedule would result in an overpayment to the retirement fund by the end of fiscal year 2016, and the PRC study concluded that the unfunded liability would not be as high as originally estimated.

Because some experts, including OPM, have expressed concerns about the assumptions made in the Postal Service IG and PRC reports, the conferees urge the Postal Service to coordinate with OPM and OMB to develop a fiscally responsible legislative proposal, for consideration by the appropriate congressional committees, that would grant a limited measure of relief from the PAEA requirements to pre-fund retiree health benefits. These proposals should consider: (1) whether the PAEA-mandated stream of future payments overfunds through fiscal year 2016 the anticipated liability of the Postal Service for future retiree health benefits, (2) whether modifications to the mandated payments could meet the unliquidated liability goals contained in the PAEA, and (3) whether a decrease in mandated payments will reduce the incentive of the Postal Service to continue to cut additional costs.


POSTAL REGULATORY COMMISSION SALARIES AND EXPENSES (INCLUDING TRANSFER OF FUNDS) pp. 923-924

The conference agreement provides $14,333,000 for the salaries and expenses of the Postal Regulatory Commission, as proposed by both the House and the Senate. It does not include language proposed by the House requiring any unobligated balances remaining at the end of fiscal years 2009 and 2010 to be transferred back to the Postal Service Fund.

Proposed Closings of Postal Facilities.-The conferees are aware of considerable public concerns about plans by the Postal Service to close or consolidate retail post offices and other mail facilities, and believe that the Postal Regulatory Commission has an important role to play in evaluating those concerns and fostering well-informed decision making. The conferees commend the Commission for undertaking its current investigation of the national service implications of the Postal Service ‘‘Station and Branch Optimization and Consolidation Initiative’’ and urge the Commission to initiate such other proceedings as appropriate to fully evaluate the effects of proposed closings and consolidations on service levels, costs, postal employees, and the affected communities. Among other issues, the Commission should examine whether Postal Service actions, including notification and appeal procedures, are in accord with applicable law.

Paying Postal Executives

In today's Washington Times, there appears to be a scandalous story about the income of Robert F. Bernstock, President of the Postal Service's competitive shipping services.   The article notes that Mr. Bernstock income included:

• $232,500 salary
  
• more than $270,000 in cash and other compensation combined in fiscal 2008 by serving on the corporate boards for weight-loss giant Nutrisystem Inc. and Pantry Inc., which runs the Kangaroo Express convenience store chain; and
  
• $85,000 retention bonuses for 2008 and 2009.  

The scandal here is not Mr. Bernstock's compensation, nor is it his positions on outside board of directors.   The scandal here is that if the Postal Service needs a new senior management team to turn it around, it cannot easily hire from the entire executive talent pool available.  The compensation limits and Washington political environment severely limits the choices available to the Board of Governors.

There is a secondary scandal here and that can be found in the comment that Pete Sepp, vice president of Policy at the National Taxpayers Union, a conservative advocacy group made to the Washington Times.   "Postal customers have every right to ask if they're getting a full-time employee who can devote the time to help keep Postal Services from crumbling even further."  His comment illustrates how interest groups can and will use the Postal Service to forward their political positions with little understanding of the mail business, or the need for a broader solution to the Postal Service's problems.

Stakeholders who are concerned about competition in the parcel industry and the future of the mail industry need to talk to Mr. Sepp and others at interest groups from the far right to the far left and help educate them about the real issues facing the Postal Service.  Then, when he is called to make a comment to a reporter, he can comment with a least enough knowledge to keep the Postal Service from becoming a political football.

* * * * * *
For those readers in the Washington, DC area, the Washington Redskins are in the process of replacing of its entire coaching staff, after hiring Bruce Allen as General Manager.   In replacing Jim Zorn, the Redskins, are free to hire the best available coaching staff to try to turn around what is now a miserable team.  

The Redskins decision shows what happens in the private sector when an organization fails to deliver.   Fortunately, there are no restrictions on who it can hire to improve the team.  If the owner does not interfere, the new general manager and coaching staff can make rational decisions necessary to rebuild the team from scratch.

While the Postal Service may not need to be rebuilt from scratch, the status quo is no longer acceptable for it just like it is not acceptable for the Redskins.   The post above shows how much more difficult it will be for the Postal Service to hire a management team to turn it around than it will be for the Redskins.

The Postal Service, President Obama, and the Budget

In the next sixty days, President Obama will have two opportunities to lay out administration policy regarding the Postal Service.  These opportunities are the State of the Union address and the President's budget for FY2011.

Up to now, President Obama has mentioned the Postal Service only to illustrate the fact that private firms can compete with a public health care plan last summer.   His comments suggested that the financial problems of the Postal Service were serious enough to generate the attention of the White House.

Unless there is some economic miracle, the Postal Service will have a negative impact on the Federal budget and budget deficit for at least the next three years.   The financial challenges of the Postal Service was not recognized in last year's budget and the adjustment to the retiree health care payments were made in such a way that budget scoring was not required prior to passage.  This year, the need for adjustments to the retiree health plan payments before the end of at least the next two fiscal years is known prior to the writing of the budget.  Therefore, the budget should recognize this fact.

The Postal Service's need for an adjustment to its retiree health payments forces the Obama administration to find cost reductions in other programs in order to meet budgetary goals, and in particular begin the wind down of the stimulus related spending.  This shift in priorities from spending to stimulate the economy to reducing the deficit will likely be the theme of the President's budget and a major theme of the State of the Union Address.


The Postal Service's negative budgetary impact should force the Obama administration to enter the debate about the future of the Postal Service in the budget documents submitted to Congress, and possibly as a mention in the State of the Union address  In particular, the President's budget should recognize that the Postal Service is in serious trouble and lay out both how far the administration is willing to go to help the Postal Service deal with its immediate financial troubles and how the administration wants to approach the process of finding a new business model and regulatory framework for the Postal Service to ensure that the Postal Service becomes truly self sufficient.   Now is the time for stakeholders who would like to see Presidential leadership in setting a future for the Postal Service, postal customers, and postal employees to ensure that this happens.