The House of Representatives subcommittee responsible for Postal Service oversight held
a hearing on May 12 entitled "The Price is Right, or is it? An examination of USPS
Workshare Discounts and Products that Do Not Cover Their Costs." The hearing tackled
a complex and technical topic that is usually discussed at the Postal Regulatory

Subcommittee Chairman Stephen Lynch (D-MA) opened the hearing by pointing out that
the Postal Service is in dire financial condition, on track to lose over $7 billion by the end
of this fiscal year. The Chairman said "much of the Postal Service's recent financial
difficulties can be attributed to rise of electronic communications and the corresponding
dramatic declines in mail volume, as well as the nationwide economic downturn, and in
some ways, statutorily imposed prefunding of future retire health benefit obligations."

Mr. Lynch then turned to reports that have "identified several pricing areas that should be
revisited and further explored as opportunities to generate more revenue." That led to the
hearing to discuss "pricing issues relating workshare discounts and products that are
currently considered not covering their costs." He pointed out that the Fiscal Year 2009
Annual Compliance Report of the Postal Regulatory Commission "found that 30
workshare discounts exceeded their avoided costs." Further, according to the PRC, "17
of these discounts were justified, while the remaining 13 were not properly justified and
should be realigned at the next general price adjustment."

The Chairman noted that approximately 80% of all mail is now workshared, and "it is
crucial that workshare discounts be priced to maximize revenue and efficiency of the
entire postal industry, especially during such bleak financial times."

The other primary topic of the hearing dealt with postal products that are thought not to
cover their costs. Citing reports by the PRC and the General Accountability Office, Mr.
Lynch said "the Postal Service lost, in the aggregate, $1.7 billion in FY 2009 due to some
14 postal products not covering their costs. Although some of these products might be
appropriately priced below cost for public policy reasons, many stakeholders have begun
to call for more accurate pricing of these mailings, especially given the current financial
status of the Postal Service."

Testifying on behalf of the Alliance and a host of other mailer organizations was Larry
Buc, one of the Alliance's economists. Mr. Buc explained that the goal of worksharing is
to ensure that mail is produced and delivered at the lowest possible combined cost. In
doing so, worksharing benefits society.

Mr. Buc referred to studies that showed the introduction of worksharing discounts
resulted in huge mail volume growth----in fact worksharing is responsible for almost half
of all Postal Service volume. That means in FY 2009 "mail volumes would have been
closer to 90 billion pieces than to 180 billion pieces" had there been no worksharing
discounts. Further, if worksharing discounts were eliminated or reduced, "there is little
reason to believe that history would not just run backwards."

The problem of excess capacity in Postal Service operations was also noted by Mr. Buc.
He pointed out that excess capacity "has two significant implications for postal costing.
First, Postal Service costs are higher than they would otherwise be, which is a burden on
all mailers and the entire nation. Second, since there is no reason to believe that excess
labor is spread equally across postal functions, the added cost may not be evenly spread
to all products: some products may be disproportionately burdened with the cost of
excess capacity."

Another witness, John Waller of the Postal Regulatory Commission, spoke to the issue of
Postal Service cost control issues noting that the Service has "long standing cost control
problems" in handling flats. Of the $1.7 billion lost from products not covering their
costs in 2009, $1.5 billion came from three products, Periodicals, Standard Mail Flats and
Standard Mail Non-Flat Machinables and Parcels. All of these are flat mail.

The costs of handling flat mail are driven up through expensive manual sortation by
postal employees. And although the Postal Service has made attempts to move flat mail
away from manual sortation as it has with letter mail, the results have not been great. Mr.
Waller said that AFSM 100 sorting equipment was introduced and subsequently
upgraded by the Postal Service to address the expensive manual sortation problem but it
has not produced needed results. And while the latest flats sorting equipment, Flats
Sequencing System, is being slowly rolled out, Waller said "we'll have to wait and see"
if it adequately addresses the high cost problem.

A long-standing critic of worksharing, William Burrus, President of the American Postal
Workers Union, again strongly argued that worksharing has hurt the Postal Service, not
helped. He said that discounted rates are too steep and major mailers are paying postage
rates that are too low. Mr. Burrus said "this is not only illegal, it is self-defeating: It
deprives the USPS of revenue that is essential to maintain the nation's mail network."

In addition to the discussion on worksharing discounts and postal product cost coverage,
Ranking Republican Congressman Jason Chaffetz (R-UT) questioned whether preferred
nonprofit postage rates should be continued. Asking how much subsidy is provided
nonprofit postage rates, Mr. Chaffetz urged the Subcommittee to revisit the special rates
provided nonprofit organizations. He said it could be time to reduce or eliminate special
nonprofit rates.

Chairman Lynch then said it might make sense to revisit specific nonprofits to determine
whether they are worthy and entitled to the preferred rates.

Postal Service Financials Continue in the Red
The Postal Service has released its unaudited financial results for March that show a loss
of over $381 million for the month. Coupled with the first five months of FY 2010, the
Postal Service has now lost $1.9 billion for the year.

The good news is that the March loss is less than the $491 million loss in March 2009,
but the bad news is that the loss is greater than the Postal Service had planned, $353
million. Total revenue in March was slightly higher than the planned $5.84 billion, but
total expenses of $6.36 billion were higher than the planned $6.18 billion.

Total personnel compensation and benefits, the large majority of Postal Service expenses,
were 4.4 percent higher than the plan and 1.9 percent above the same period last year.
Conversely, total non-personnel expenses in March were 2.4 percent below plan and 3.8
percent lower than the same period last year.

Postal Marketing Leader Resigns After Two Years
In a surprising May 12 press release, the Postal Service announced that Robert Bernstock,
president of mailing and marketing services, will resign effective June 4. Mr. Bernstock
joined the Postal Service in June 2008 in a move intended to inject private sector
marketing expertise into the organization.

Mr. Bernstock's private sector resume included leadership positions with Campbell's,
Vlasic Fooks International, Atlas Commerce Inc., the Dial Corporation, and Scott's
Miracle-Gro. His arrival at the Postal Service was applauded by the mailing community
and members of Congress that have urged the Service to be more creative in pursuit of
needed revenue growth.

He broke new ground with the Postal Service's Summer Sale that successfully generated
incremental mail volume and increased revenue. Mr. Bernstock is also credited with the
highly successful Priority Mail Flat Rate Box integrated marketing campaign, "A Simpler
Way to Ship."

Postal Regulatory Commission Finalizes New Rules
The Postal Regulatory Commission recently announced its final rules for Postal Service
periodic reporting requirements on service performance and customer satisfaction. The
new rules require the Postal Service to provide quarterly service reports for each market
dominant product and an annual report on aspects of service performance and customer

PRC Chairman Ruth Goldway said "these reporting requirements are an important step
forward that can help maintain and improve the quality of mail service and customer
satisfaction provided to the American people while enhancing Postal Service
transparency and accountability."

This new reporting requirement is the "fourth step for incorporating service measurement
into a modern system of rate and regulation for market dominant products. The previous
steps established service standards, identified service performance measurement systems,
and elicited performance goals," according to the PRC.

Closing Some Post Offices Makes Sense
by David M. Levy and Ian D. Volner
(Published in the Federal Times on May 23, 2010. Courtesy of the Federal Times.)
The U.S. Postal Service has recently made public - with extraordinary media coverage
- what policymakers and business mailers have long known: USPS faces severe,
unprecedented threats to its continued operation.

The causes are clear. USPS suffered a $3.8 billion net operating loss in the fiscal year
ending Sept. 30, 2009, expects to lose between $6 billion and $7 billion this fiscal year,
and projects losses exceeding $25 billion over the next 10 years. This desperate state is
due to the recession and, more important, the loss of business to electronic channels of
communications that are sexier, cheaper and faster.

Postmaster General John Potter announced that major reforms are needed to restore
USPS' financial health and enable it to operate for "centuries to come." Most of these
proposals are controversial; many should not be.

USPS is the largest civilian employer in the U.S. after Walmart, and has 36,000 post
offices - roughly equivalent to the number of outlets operated by Walmart, Starbucks
and McDonald's combined. With volume and revenue sinking, closing some of these
outlets is an obvious need. USPS would love to close underutilized outlets, but voters and
politicians object whenever USPS tries, proclaiming their local post office a "community
center," not a retail outlet.

This viewpoint is absurd. While postal statutes describe USPS' mission as "binding the
nation together," that cannot mean a stand-alone post office in every city block,
subdivision or hamlet. Birth announcements, wedding invitations and postcards sent from
the bottom of the Grand Canyon represent a tiny fraction of mail, and the nation does not
need 36,000 offices to mail or pick up this correspondence.

The first step in slicing away the gloom that envelops the Postal Service is to let go of the
romantic myths that have too long swaddled it. USPS can no longer afford to preserve an
oversupply of undersized offices that the public admires in the abstract but is no longer
willing to pay for. USPS is an economic enterprise that imposes real costs on our citizens.
As such, it should have a relatively free hand to decide when and where to place its
stores, without micromanagement by Congress or regulators.

The alternative to cutting USPS' costs is to raise prices, which would only make matters
worse. The postmaster general and others have floated the idea of raising rates to offset
or at least reduce current and anticipated deficits. But price increases would only hasten
the death spiral. They would quickly drive more mail from the system, making additional
increases necessary. Unchecked, the process would repeat until the postal system

USPS recognizes the inherent risks of a rate increase: The postmaster general has said
that any rate increase must be "judicious." However, there is no way to know in advance
how large is "judicious." USPS lost 4.5 percent of its total volume in 2008 and another
12.7 percent in 2009. Some of this may be a temporary effect of the recession, and the
volume may return when the economy recovers. But there is no way to know how much
of the lost volume was captured by the Internet, or how much of the remaining volume is
close to bolting, too. If the USPS overestimates how big a price increase mailers will
tolerate, the volume and revenue lost to electronic channels will likely be gone forever.
Trying to achieve financial solvency by soaking commercial customers is a bet USPS
cannot afford to take.

The famous inscription on the main post office in Manhattan proclaims that the gloom of
night and nasty weather will not stay USPS from the swift completion of its appointed
rounds. The current outlook is certainly dark and gloomy. But USPS may yet continue
its appointed rounds if we unshackle it from its burdensome mythology and shun quick
fixes that fix nothing.
David Levy and Ian Volner are partners in the law firm Venable LLP. Their clients
include business mailers, nonprofit organizations and postal trade associations.

Irish Post Creativity With Product Diversification
In a recent vacation to Ireland, Alliance Executive Director Tony Conway couldn't resist
visiting a few post offices to see how they compare with those in America. He does this
on trips to foreign countries, a practice his family finds amusing.

It was a Friday afternoon around 4:00 when Conway and his wife entered the downtown
post office in Killarney to purchase stamps. The post office retail configuration was
similar to that of an American post office, with a line of customers waiting for an
available clerk.

On the wall where customers first got in line were brochures for Irish Post savings
accounts. The tri-fold brochures provided information about the security of the accounts
and contained an application form to start a savings plan.

The United States Post Office Department used to offer savings accounts that were
established by an Act of Congress in 1911. The U.S. Postal Savings System continued
until March 1966 when Congress passed legislation to discontinue the program.

While waiting in the line of about 20 customers for the three available postal clerks, there
was opportunity to browse through a display of greeting cards for sale. The cards were
for birthdays, anniversaries, weddings, etc. The United States Postal Service recently has
begun offering greeting cards for sale in their retail lobbies.

The line was not moving very fast because only two of the three window clerks were
serving more than one customer. The third clerk remained engaged with a single
customer that had provided the clerk with a partially completed form in need of more
work. As Conway neared the front of the line he was finally able to hear the discussion
between the clerk and customer.

The clerk asked the customer the age of the applicant and the customer responded 4. And
the sex? A male. That's it, thought Conway, a savings account application for a
youngster. After nearly 40 years in the world of postal, Conway can size these things up
faster than the average customer. But then came the next question from the clerk. And
the breed of dog? A mixed breed the customer explained, it recently had been adopted at
the local shelter.

We don't recall that the United States Postal Service has ever sold dog licenses but
maybe it should be considered. Dogs, unlike mail, are not migrating to the electronic
medium and their volume is not declining. Further, dog owners will spend readily when
it comes to their pets.

A lost dog with an official USPS license tag on its collar could be found and returned to
the owner by one of the thousands of letter carries that serve everyone, everywhere. It
may sound a little far fetched, but these are desperate times that require a new breed of