requirement for uaspiratoreuas aoperator of the equipment, ensure safe and operators can safely utilize them. how are those issues going to be addressed in the future. >> senator on air worthiness, authorization bill authorized secretary to make a finding there was no need for air worthiness certificate if certain other criteria were met. those were related to speed, weight, and location of operation. what the rule does is subscribe those criteria and provide that limitation that is consistent with the statute in such a way we felt that met the expectation there would not be a need for air worthiness certification for a particular set of standards. i'm sorry, i forget the other one you asked about. >> the operator worthiness of equipment. >> so there is an operator testing requirement.

it is different from the private pilot requirements because of course, they will not have to actually manipulate the aircraft. in order to pass the the test, it will be necessary to receive some education in the standards of operating in the airspace. so we believe that the testing requirements will assure that people are competent for the purposes of operating their system. we've asked for comment. we'll be interesting to see what we'll get back from the community to see if we need to adjust those proposals in any way. >> thank you very much. mr. morris, let me change topics. in the discussing of developing a system of control over uas long distances using existing cellular telephone networks or at least existing cell towers that conversation, recognizing considerable technological hurdles out there and are telecommunication companies prepared for this task?

>> senator, we really are at the beginning of the development of kind of the commercial aviation. i'm honestly not thoroughly familiar with the use of the cell towers in connection with uas. i think that's something we would need to get back to you on. >> i would welcome that. let me switch to farm bureau. you i'm sure said this in your testimony and i wasn't here to hear it. i'd be glad to hear about uavs in kansas. how necessary beyond line of sight for agriculture purposes. >> thank you for the question. gentlemen one of my other panelist spoke about the use of the japanese and some of the uses going on in the asian countries. they are using these uass in

ways far beyond where we are now. in terms of they are not only using them for scouting but application of nutrients, things of that nature. many of those things are beyond line of sight control. presently all our uas we have, line of sight control i will to say to some other points, safety features are extremely redundant. once that vehicle exceeds the prescribed distance within the software, it automatically turns and returns to geo synchronize point, batteries run low rush to the site it started from, you lose control it comes back to where it started from. it's not like these things leave your sight and go buzzing around the countryside. they do run to where they started from all based on the information put in when they were launched. >> thank you. >> thank you.

>> senator markey. >> thank you madam chair, very much. i'm aware of the many beneficial uses of drones examining wildfires, spotting crops, monitoring traffic. while there are benefits to drone use there are risks of misuse. these 21st simplg rice eyes in the skies should not become spies in the skies. today just as we have rules of the road we're going to need rules of the skies as well. i believe we can achieve both protect privacy and give flight to this new technology that will bring jobs and economic growth to our country. unfortunately today when it comes to privacy protection for the american people we are flying blind flying and potentially spying robots. sounds like science fiction but a reality right now. their technology is getting cheaper and more accessible.

this drone here has to ram -- cameras. flying over people's house. a note planning to expedite the process so the drone can fly in the national airspace with no clear privacy rules. today operators are allowed to collect whatever information they want about you and me. they can use or sell that information however they choose. this is why earlier this month i introduced the drone aircraft privacy and transparency act. the bill requires one commercial drone operator to disclose what data they have collected, how that data is used and whether

the data will be sold and when the data will be deleted if at all. number two that law enforcement obtain a warrant before using drones except in emergency circumstances. three, faa must create publicly available website that lists where and when drones fly. as the committee continues to process the faa reauthorization, i look forward to working with my colleagues on these issues. so miss gilligan if the faa does not incorporate any federal privacy protection into the final drone licensing process and i saw a commercial drone flying over my house, would i be able to find out how the company uses the data they collect, or if they sell my private information. >> senator, we do make available the information about which operators we have authorized.

we do make available information about the airspace in which they are operating. >> would i be able to find out the data which they have collected? would i be able to do that? if i see it flying over my house, can i call the faa and can you then say provide the data over what you filmed in the backyard of that american? can you do that? >> the faa does not currently collect that information. >> would i be able to at least find out who owns or operates the drone that was flying over my house? >> as i said we do keep records about what airspace operators are authorized to operate in and that is publicly available today. >> it's on a public website right now? >> yes. >> i can find out who just flew a drone over my backyard. >> i believe that's the case, sir. i know it's publicly available. we do release it in response to foia requests. it is available. i apologize offhand i don't know if it's one you can access from your ipad here today. >> so if somebody sees this outside of their window and they

are filming their family members in the backyard that right now an individual in america could call the faa or go to a website and find out who owned that drone? is that what you're saying? >> we have the information about who has been authorized to operate in what airspace. whether or not that was an authorized operation i can't tell you right now if it was authorized. the records on who is authorized to use that airspace are available. >> are people authorized to just film families in the backyard of their homes? >> the purpose for which they are filming is not something we keep track of. >> again, that goes to the privacy issue. if families have their children in the backyard and those children are now being filmed by a drone, what can we do to protect that family if all these

nefarious individuals trying to take advantage of the advantage of real privacy rules. >> i think that's why the administration has begun the initiative that was announced and ntia is taking the lead on mr. morris described earlier. >> again what i'm saying is, in the absence of federal laws that we put on the books these drones with cameras $100 are just flying over back yards and people, parks, people all over the country. we have to put strong enforceable laws on the books that all americans know information is being gathered about their children, that it is being collected and potentially being sold and there are no rules against any of that. in the absence of us putting those protections on the books in this committee, that we're allowing all of these technologies to take off with all the values americans would

want to have being built into this new technology. that's our job on this committee. this is an inanimate object. it has no values good or bad. we're the ones that are going to have to animate with the values we believe it should have as it potentially engages in predatory activity against the families of our country. i think you, madam chair. >> senator peters. >> thank you madam chair. mr. vanderwerff, wonderful to see you here as a fellow michigander, always proud alumni of michigan university. it's great to have you here as one of the great agriculture universities in the country. i think it's important for you to be here as well the fact i think if you look at the applications of these drones and the opportunities for economic benefit is probably an agriculture sector where we can see some of the most significant increases of productivity.

that's what i want to talk to you a little about. you mentioned it in your testimony, perhaps flushed it out a little bit. i know farming changed very dramatically over the years. i've had the opportunity for a guy who didn't grow up on a farm to be on the tractors which look like computers now they don't look like tractors with gps systems and all sorts of geographic information on them. as you're dealing with the field. you talked about the way unmanned drones help in productivity. can you qualify? are there things they can do and can't do given the sophisticated equipment you have now and what is that going to mean for your bottom line? >> thank you senator for the question. the benefits of these unmanned aerial vehicles on individual farms and ranches are multi-fold and not specific to any one type of production system. everything from cattle ranchers in the western united states who are looking to find their hurds of cattle quickly to specialty

crop growers like myself. i don't know if any of you have been in a commercial apple orchard but take a city block and put rows 12 feet high it's like a labyrinth. you can lose yourself and equipment. unmanned vehicles allow us to get that bird's eye view for issues. on the grain side operation is where we're most excited about the potential of these vehicles. being able to for example fly over a corn field and look through the lens of the uav for invisible infrared signatures off the crop. we can identify plant stress. we can identify weeds. for example a patch of grat grass will give off different heat than soybeans. rather than having to walk the whole field or apply herbicide to a whole field i can identify a certain area with uav and make

determination whether or not that's going to be beneficial. we look at what's going on in the united states and overall aquifer. i have friends in neb and kansas excited about the idea they don't have to blanket apply inch of water to entire quarter section without irrigation. they can fly uav and map heat signature coming off and apply water simply where it is needed, when it is needed how it is needed. this technology is very exciting. it's going to revolutionize even more the agriculture industry we're in currently and continue to make us the most competitive agriculture country on the planet. >> based on the large area area you have to cover, regulations that limit line of sight, that's not going to work for you, is it? >> line of sight is a challenge right now. it's a matter of western united states where ground is flat, line of sight is a long way.

those folks, you're basically limited to how sharp your eye is. where i am in michigan, it may be only a few hundred feet before you have trees and other obstructions. that's where the gps capabilities of these technologies mr. misener alluded to earlier are so relevant to us. being able to take your ipad and geo fence the field you want to fly in. swipe your finger to map out the pattern in which you want it to fly. it will do the mapping. it will come back, land, i can upload the data into my computer and have it right there. the idea this these can take off from my home farm fly a half mile or a mile to another farm and do that mapping and return is exciting. it's simply, if we're going to allow it to exist, i believe we can do it safely and we can do it effectively. again, the technology evolves ever faster. >> thank you. ms. gilligan, the faa has

granted -- i think you mentioned in your testimony -- some 60 exemptions which is granted for some of these precision agriculture operations. as well as aerial photography. i understand there are currently nearly 600 petitions pending. does the faa have any plans to process and streamline this petition process similar to 48 -- 60 ones granted particularly as we hear about the important applications this has for agriculture? >> yes, sir. we are learning lessons as we go through this process. today, we have actually issued ten additional approvals in a process that we're calling a summary grant which means we can look at an individual petition. if it is similar enough to one that we've already fully analyzed and put out for public comment, we don't need to repeat that process again. that will increase our ability to handle these more quickly.

there are still some very unique ones and those will have to go for public comment. and analysis. to the extent we can, we are trying to link new applications with decisions that we've already made to streamline it. in addition, we, today, issued what we're calling a broad certificate of authorization for air space 200 feet and below. if the applicant can operate and meet their mission below 200 feet, they will not have to get additional approvals from the air traffic organization. so that will also shorten the process. we have a dedicated team. so they are learning as they go as well. so we're -- we're dedicated, the administrator has challenged us to move these petitions as quickly as we can. >> that's good. that should help the agriculture uses that we heard. thank you so much. appreciate it. >> thank you. >> senator booker. >> the white house drone, was that a commercial

vehicle? >> no, it was not. >> the airplane problems we've had with people flying drones to airplanes, are those commercial vehicles? >> not in most cases. >> have any of the -- mr. misener, have any of the sensational salacious exciting drone things showing up in newspapers happening because of amazon? >> no, sir. >> so we need to distinguish between commercial operations and private use. we have a problem with private use. i was happy to see my colleagues bring up private use. but the commercial usage, have you given permission to fly over large crowds of people? >> no, sir, we have not. >> no. that's not an issue. mr. misener, i am a little bit upset because when it seems like when it comes to government moving at the speed of innovation, whether in biologics, backlog of patent office or this area we are slowing this country, where

innovation is going on overseas at an extraordinary pace, and we're being left behind. forgive me, your name -- >> vanderwerff. >> you talk about the revolutionary impact allowing drones to be used could have on agriculture. those revolutions are happening overseas, correct? right now as we speak our agricultural competitors are investing in using that technology. is that correct, sir? >> it is correct, yes. >> this is what's hard for me to believe, the slowness with which this country is moving. if the actual aviation industry was regulated back in the time of the wright brothers, we may have gotten first in flight, but other people would be flying polansky, commercial passenger planes before we even got an aviation industry started here. mr. misener, it's frustrating to me -- last week faa allowed

amazon to begin testing outdoors in the united states, but it was really in a limited fashion that still puts us in america in the backseat compared to what you're allowed to do in other countries. and frankly, no mishaps, nothing -- no sensational articles nothing like that is happening with the experiments you all are doing to advance this technology. is that correct? >> yes, sir, although i will say that the faa has, i believe, turned a corner. we're at a spot now i discussed this with miss gilligan before, where things are getting better with respect to testing. where they are not getting better is with respect to planning for the future. >> let the record show that you sufficiently sucked up to the faa. [ laughter ] >> they will look at your application kindly, sir. so can you describe the work that amazon is doing in other countries in relation to what we're doing here? how about that is a better way to ask it. >> thank you, senator. thank you also for noticing that. so what we're doing in other countries, it's more flexible. we're allowed to innovate

quickly in other countries in a way we have not yet been allowed here. the jury is still out on the system set up from the grant last week will work. i think it will. i feel like the faa staff is motivated -- here i go again. they are motivated to be helpful and get us innovating here again in the country, it's just that we've not been able to do it yet. we're hoping to do it soon here. >> the faa is dedicated professionals. i have no pecuniary interest saying nice things about the faa, incredibly committed folks. my comments are in no way talking about them. administrator, i would say that you have some constraints on how well you are able to move. both the faa and the industry agree that exceptions in process too slow and allows narrow applications for companies lucky enough to be granted the exemption. so i'm asking you, what steps can congress take in the faa reauthorization to strengthen your ability -- the faa's ability to issue

exceptions more broadly and in less time? >> our administrator is also interested in how we might be able to take full advantage of whatever authorities we have. perhaps work with the committee if we need to broaden those. there is technical assistance already underway between your staff and staff here on the committee to look at these particular issues to see what more can be done. we'll certainly continue to support the committee as we review those issues. >> can the faa quickly and currently issue exemptions to safely operate uavs beyond the line of sight? that's a big issue. >> we would have the authority to issue those exemptions if, in fact, we could make the safety case. the challenge that we face with beyond visual line of sight is we don't yet have the technology standards to evaluate whether in fact we have safe enough technology to permit that to occur. >> a lot of -- this is being -- i would say to the chair.

a lot of comments are muddled. it would be great to have a private drone hearing. there are a lot of issues about anybody and their friends being able to go out and get a drone and do anything with it. commercial folks acting responsibly withholding law compared to global competitors. >> thank you, senator booker. i think you raised some very good points here in terms of some of the uses of the drones and making sure we're clear on where the misuse is happening. i would like to call in senator daines. >> certainly appreciate the comments i've heard in this hearing. certainly more requests -- questions than answers. i come from a state, state of montana, that places great value in privacy. in fact, might argue we have different individual privacy expectations perhaps than people in large urban areas. that's why people like to live in states like montana. i've also been talking with members of the state legislature

who are interested in addressing these privacy concerns at the state level. and for ms. gilligan, i think it probably relates to what's going on at the faa. certainly i commend the faa for taking action on the certification on the air worthiness aspects of these commercial unmanned systems in the notice of proposed rule making on small commercial unmanned aerial systems. i do have concerns about privacy aspects associated with remotely piloted aircraft. many of which are not being used commercially. back to what senator booker was distinguishing between commercial use and noncommercial use, and therefore not subject to the proposed rule making. so my question is, does the faa think there's an appropriate role for local regulation of noncommercial or hobbyist uses? if so, what might they be? >> senator, i'm not sure the faa

has a position on local control. what i do know is that in the last reauthorization, congress gave us very clear direction to allow model and hobbyist kinds of operations without additional regulatory restraint. we have complied with that. we're working with the modelers community to allow the use of what they call community standards and the american modelers association is taking the lead and -- and providing to their members information about how they can properly operate safely and remain recreational users of this kind of technology. >> what's your opinion as a professional, someone in it every day, knows a lot more about it than i do, do you think there would be a role in allowing the states -- do you think that's a good idea to allow the states to have the ability to regulate the noncommercial use? >> we are always concerned about local regulations that may affect the national air space system. we need a national asset in the air space.

and those who operate broadly in the air space need to know that what occurs in one location is safe and consistent with what can occur in other locations. i'm not exactly sure whether or how a state or local entity might be able to carve something out to address modelers or recreational users. they may be able to do it. but we'd want to look at it and whether and how they did that. >> let me ask mr. vanderwerff here from the american farm bureau. certainly i know some of our ag folks back home can see the value of finding a lost cow when we have more cows than people back home which i'm grateful for. in your testimony you question who owns and controls the data collected by an unmanned system. an example you used with the contractor flying the unmanned system and potentially being able to share or even sell that data with outside parties including the federal government frankly is chilling. what do you think is the best

means of regulating this data, and more importantly how can we ensure enforcement? >> thank you for the question, senator. when we speak about the issue of data privacy, i guess i would refer you to our overall stance as american farm bureau and agriculturalists. in terms of our data privacy. we are concerned about what is being collected, who potentially is viewing it, whether it was epa or a third-party environmental groups. we believe that that data ultimately belongs to the farmer who created it and that they should have the right to essentially determine who is able to use that data and for what purposes they would use it for. >> any thoughts on ensuring enforcement? >> i would refer that to the full written comments we will have with these proposed rules out in the next short time. i would have to get back with you on that one specifically.

>> thank you. for mr. morris, has the ntia explored how the ownership of data will be addressed? >> so, senator, our process is really just at the very beginning. we have put out a request for comment and i certainly expect one of the issues raised will be an ownership question. we're not in a position to affect the legal rules that actually would affect ownership but certainly in terms of looking at best practices that address issues like the farmer, you know, it's a concern about data, that certainly is a topic that we expect will be discussed in our process. >> thank you. i'm out of time. >> senator heller. >> madam chairwoman, thank you. thank you for the time and i want to thank all our witnesses for being here and appreciate your expertise. i apologize for not being on time myself. we were in the v.a. committee.

so apologize if my questions overlap a little bit. i would like to address something that senator booker was talking about as far as agriculture's concerned coming from a farm myself. you failed to mention fertilizing also. maybe you did. all the things that you were talking about, again, i want to stress, are innovation that whether they're in european countries or asian countries are being used today is that correct? >> that is correct, sir, yes. >> nevada was designated one of the six unmanned air system test sites. and for that, we're grateful. we have some great facilities. renostat, nellis, go down the list, boulder city. in fact, we had a test recently with the governor of one of these unmanned air systems.

it was a wonderful experience to be part of that test and to see what they're doing in that particular facility. but here's the concern. i think it was well said by senator booker. and that is that -- that the technology can't be successful if it's hampered by regulations, overburdensome, time-consuming approval process. and that's the complaint i'm hearing today. i guess i'd ask ms. gilligan this question. there's no doubt there's privacy issues that you guys have to overcome. and i give you credit for the hard work that it's going to take to overcome that. but these first steps of just testing have become very, very restrictive. and i believe it will destroy a lot of companies and a lot of people from using some of these test sites and devoting the kind of resources that will be necessary. i guess my question to begin

with would be quite simple. if the faa weren't required by law to begin work on integrating drones into the national air space, would the agency be working on it at all? >> yes, sir. we have applicants who come in who want to fully certify their vehicles and those are under way in our los angeles office. and we building what are the set of standards that those vehicles need to meet. we have an exemption process that anyone could have applied for to authorize operations in the air space. we are as mindful as the members of the committee that this is a growing dus -- burgeoning industry and we do want to be able to support it. but we also want to make sure we've identified if there are risks that could be introduced into the system, that those are fully mitigated. >> i guess the concern is, and this is the feedback i'm getting being one of the six states, the process seems to inhibit testing. as opposed to expanding it. technology development here in the united states where other

countries have already clearly moved far beyond what we're able to do. let me give you couple examples. these hoops, the hoops they have to jump through. every time they want to change designs of their drone, it takes months to get that new design approved. if they do a test and they want to test the same design in a different manner, they have to jump through all these hoops and it takes months to get the approval in order to do that. and they're arguing it just doesn't foster innovation. that could be frustrating. that's what i'm hearing. i'm hearing that kind of frustration. i'm going to give mr. misener one more chance to push back on the faa. you said in your testimony last week that the approval for amazon was a model that was already outdated. what is it going to take from the faa for you to do the work that you guys are trying to

achieve? >> thank you, senator. i think what it will take will be a recognition that these are different kinds of aircraft than the ones they're used to dealing with. this isn't a 777. this is a little device. we'd like to be able to tweak things and move quickly and innovate. we call it iteration within amazon. that means making new changes all the time constantly improving, perfecting. i think we're almost to the spot with the faa where we can do that domestically. it's just taken a long time to get here. my biggest concern is that we're not planning for that future in which drones will be able to fly beyond visual line of sight with a high degree of automation. we're not planning like the europeans are. and we should be. >> okay. time's run out, but thank you. >> something unprecedented happened. i was -- i was designated -- >> oh, you were? >> that's my a little bit of seniority, sir. this is a shocking and unprecedented moment where i am now in charge of the hearing on drones. >> congratulations. >> very exciting thing.

i do have to say just for the record now that i am in charge that you're a pretty cool guy for someone who went to usc. >> i'll take it. >> i tend to agree with the -- i never thought i'd agree with a trojan as much as i do. but i'd like to get into another round of questioning. i don't know if you have more. >> sure, sure. >> i certainly do. if i may begin and just want to finish up with a couple questions on -- excuse me to associated administrator gilligan, if you may. if you will. can the faa make a commitment into looking into how we can begin safely testing and researching the out-of-sight ability for uass to fly. that's a big concern for me. from what i read, it puts a significant barrier to our ability to push the bounds of what's possible with this

technology. >> right. so the risk that's introduced with beyond visual line of sight operations is the fact that the vehicle itself cannot sense and avoid if it is in proximity to other aircraft. right now in the manned system, we have the pilot who plays that role. and we're looking for how we can replace that role for the unmanned system. the rtca is working with an industry group to design standards for sense and avoid. once we have those standards, then we can put that forward and determine how we can properly and safely allow for those extended operations. >> under section 333, what mr. vanderwerff had said about on a large farm with no people, no other aircrafts in the area, could you understand that an exception might be worthy for agricultural purposes where the risk of in-air collisions might be significantly, if not dramatically lower? i imagine mr. wander wev you can just nod up or down other

countries are using out of line of sight operations for their drones in agriculture. is that correct? >> that's my understanding. >> can you imagine the united states catching up to that and making that exception? >> it certainly might be something where we can make a safety case for an exception. we need to understand the other operations in the area. the u.s. has a very active general aviation community. we also have a very active manned agriculture community who have raised their own concerns about the idea of the use of drones in the air space where they are operating as well. we do need to make sure we understand what the risks are and we're mitigating them properly. >> and so you just feel like the other countries, germany, france, new zealand, they're just being for more risky than the united states? they're taking on unnecessary risks on while the united states, we're much more cautious? >> i don't know that they're taking on unnecessary risks. i do know they have far less general aviation in any of their air space. they have a much less complex air space system generally.

so that their risks are different from ours. and i assume they are addressing their risks appropriately, and we would look at doing the same. >> for areas of the country where we don't have a lot of crowded air space like i imagine the apple orchards of certain states. i know new jersey is not such a state. but there are some places out west. could you see us making more speedy exceptions to those geographic areas where there's not complex air space, especially at certain heights? i don't know if the 150 to 250 air space is that crowded in farms in, say, the midwest? >> so we're using the exemption process now to authorize visual line of sight operations -- >> and we're going to break away from this event from yesterday and take you live now to the brookings institution for a discussion on the future of the u.s. postal service. panelists include the acting chairman of the postal regulatory commission, and the current inspector general of the u.s. postal service.

they'll talk about the current health of the postal service and what changes are needed in order to modernize and improve the financial condition of this government institution. live now on c-span3. >> -- one of the perhaps oldest, along with the united states army, organizations in the u.s. government. and about which there's been much written, and even a movie made. okay? or two or three. and the post office is at a particular crossroads. i will ask you to just think of the following. when is the last time any of you got a letter with a stamp on it? okay. now some of you did. i suspect those of you born after about 1980 don't even really own any stamps. just for the edification of the young people here stamps are these things that you stick on

envelopes and put in post office box and it would go to your grandmother or someone like that. so, we are at a crossroads here. there's some very big and very serious issues to be addressed. there's also been a reluctance to confront these issues in the congress. not only do they have a lot to do, but they, as you may have noticed, have a hard time doing anything these days because they disagree about so much. but, we are here to say it's time to stop kicking the can down the road, and to start having an intelligent conversation about some of these big issues. so to start us off today i'm going to call on four people who know a great deal about this. and i'm going to introduce all of them now and then they'll just speak in turn, and we'll open it up for questions from the audience.

to my left is robert taub. he was designated acting chairman of the postal regulatory commission by president obama on december 4th, 2014. he's a little bit new to the job but he was also sworn in as a commissioner in 2011 and elected vice chair in 2013. he came to the post office from the army, where he was special assistant to the secretary of the army john mchugh, and before that he served as chief of staff to u.s. congressman john mchugh for a whole decade. to his left is dr. robert shapiro. he is a president and co-chairman and founder of sonicconllc which is a highly rated economic consulting company here in washington. he's also a senior fellow at the georgetown school of business, an adviser to the international monetary fund, director of the globalization center at ndm, and

in the clinton administration he was undersecretary of commerce for economic affairs where he oversaw the statistical agencies, and the census. not at all a small job. to his left we have david williams. david is inspector general of the united states postal service. he was sworn in as the second inspector general for the post office in august of 2003, so he has a lot of years looking at this institution. he's responsible for a large staff located all over the country, and he investigates the largest civilian agency in the government. in 2011 williams was appointed by the obama administration to serve as vice chair on the government accountability -- board which will develop plans for enhanced transparency for public spending. last but not least we have gene

del polito. he is president of the association for postal commerce. he's been there for the past 31 years. and he is highly regarded within the postal community as an effective advocate on behalf of those who use mail for business communication and commerce. he has received post-com's j. edward day ward, the association's highest honor granted in recognition of distinguished service to the nation's postal community. so as you can see, we've got a power house up here of people. i don't know that they'll all agree on everything, but that's going to be the fun part. so i'd like to start by having each of them make some introductory remarks, and then we'll open it up. so go ahead robert. >> thank you elaine. good morning, everyone. i thought i'd just for the few minutes for each of us to set the table shall we say hit three issues. one to give you a thumbnail of what the postal regulatory

commission is vis-a-vis the postal service and then more importantly give you a sense of what's going on with the postal service today. particularly financially. there's bad news and good news, and i'll try to hit on both of that. then lastly hit upon what i think is an important issue for us to consider going forward, which to me is the issue of universal service. indeed, why else do we have a government institution in the postal sphere if it isn't to provide universal service to the american public at home or at work wherever you live. now the postal service itself today is a nearly $67 billion operation. almost half a million employees. it's 100% part of the government 100% part of the executive branch. it is not hybrid anything. it is not quasi-government. it is 100% part of the united states government. however, it receives no tax dollars to fund its operations. it is solely self-sustaining through the rates it charges for

the services it provides. the postal regulatory commission is the entity that polices and has final authority over the postal service's prices its products services adjudicates complaints. as elaine indicated, it's a regulatory commission like many in washington, with five commissioners appointed by the president, confirmed by the senate, and it is independent and totally separate from the postal service. the commission is the regulators, not the operator of our nation's postal system. and a key point on that, why a regulator? as i said the postal service is 1 pund% part of the government. it has one of the few agencies that every day is operating in a very commercial marketplace. and it has many captive customers who have no alternatives to use the mail. so when it comes particularly to prices and products, because it's 100% a government entity with a commercial marketplace

the idea is the commission is there to protect the public interest in these spheres. so let me move to kind of a snapshot of where things are at with the postal service today. obviously most of the attention we've seen and heard is the bad news about their financials. and it is bad news. they ended last year with a $5.5 billion net loss. it has brought their total net losses over the last eight years to $51.7 billion. just pause and think about that for a minute. $51.7 billion in net losses over eight years. last year's loss was $500 million higher than the year before, and $900 million higher than planned. and so far in 2015, their total net loss is $750 million more. now they paid $21 billion during the first five years of this eight-year period to prefund overly ambitious prefunding mandate and they've since

defaulted on that and have been unable to make any future payments into the prefunding for future retiree health benefits. they've maxed out on their borrowing authority so they have no borrowing authority available. and mail volume is continuing to decline overall. total mail volume in 2014 dropped to levels not seen since 19 7. now in the face of all that the postal service over the past seven years has reduced its workforce by about 200,000 employees. it's cut cost by about $16 billion. and they've increased productivity. today, the postal service delivers roughly the same amount of mail that it delivered in 1987, but with 173,000 fewer employees. but even with these reductions, and many more planned, they don't have the cash to pay down their debt or make much-needed capital investments into their infrastructure. they need new delivery vehicles package sortation equipment, probably about $10 billion of capital investments that's

deferred. so if a downturn in the economy, or another stressing event should affect the postal service it really is concerning about their liquidity. the postal service currently estimates they have about 21 days of liquidity. but despite all that bad news, there's good news. there's strength in the system. as i mentioned, the postal service is the one entity that touches every american whether at home or at work. the postal service literally delivers 150 million delivery points every day on a typical day, to american households and businesses. it facilitates trillions of dollars in commerce. $900 billion is the estimate of the mailing industry that the postal and delivery sector and the postal service is a key cog and part of employing nearly 8 million americans. and there are positive signs of late. the total first quarter volume and revenue has shown some good

signs on our net operating basis. that's without noncash workers comp, and the prefunding mandates that i had mentioned. the postal service has a net operating income of last quarter of about a billion dollars which is about $360 million better than planned. and while its high margin of first class mail continues to decline, they're starting to see some modest increases in revenue. particularly driven by increases in revenue and volume from a shipping and package services. fuelled by the growth in e commerce. so as elaine mentioned, this 240 year history of the postal service, despite its challenges today, there's immense strength in the system. and i would argue the postal service throughout his 240 year history has dealt with numerous disasters, numerous challenges a great depression, and despite expected calls for its imminent decline has not only continued to operate but has thrived. and i would argue postal service

despite these challenges has strength in the system that will get us through. the last point i mention is how do we deal with this larger issue, though, of the challenges, given the very scary financial news. i would argue it's this issue of universal service. why else is the postal service a government institution than to provide universal service? the postal regulatory commission back in 2008 did a study as mandated by law, to try to define what it is in the united states, what do we define universal service as? and the commission came up with seven criteria. seven attributes that would make up a definition of universal service. geographic. range of products. access to services. delivery frequency. prices. affordability. quality of service. and the seventh is users rights or enforcement. moist other nations around the

planet have very specific guidelines for many if not all of those seven attributes and they're in law, they're either regulation, or licensing. in the united states for much of our 240 years instead we have not defined it. we've expected the postal service to meet the needs of the nation, balancing its budgetary constraints, and exempt for the mandate in the annual appropriations bill since 1982 that provides six-day delivery, it's really been left to the postal service. the commission, by law, annually estimates what does this cost in universal service? our current estimate is it's about $5 billion a year. so the challenge for the postal service it seems to me is given all those other major financial challenges on its plate, how do we ensure that that $5 billion of universal service cost is continuing to get in to the postal service, so it remains self-sustaining? and where do we look for the answers to those questions? well, i would argue we have to look at ourselves.

what sit that we as the american public need from a postal service in 2015 to provide universal service? what is it that we as the americans expect for universal service? and what is the cost? and once we know that it seems to me then we can ensure that the postal service is structured in a way to ensure that money gets to the bottom line of the postal service. as elaine mentioned, congress has been trying to deal with modernizing our nation's postal laws. the last congress both committees in the house and senate moved forward bills but they didn't get enacted. the administration has had its proposal. while all of them have been helpful, i would argue none deal with this central bottom line issue of what is it that we expect from our nation's postal system. and it is that from my perspective where we should focus from the public policy debate. >> great, thank you. the second robert.

>> thank you, elaine. it's always a pleasure to be back at brookings. i'm not here to either praise or demean the postal service. i'm here to try to describe how economists thinks about these questions, and the conclusions economic thinking brings to this problem. you know almost all governments have compelling reasons to communicate with their subjects or their citizens so some form of postal service has been a public good that most governments provide for a very long time. now, businesses and individuals also want to communicate with each other, and private companies prepare to compete with postal services for at least a piece of their business, when allowed to, by the law, for example delivery of packages in the united states. they've also been around for a long time. the spread of advanced technology, information, communications technologies, as

elaine noted, is only intensified that competition since internet communications have increasingly displaced the central monopoly of most postal systems, which is the monopoly over the near universal delivery of letter mail. we all used to get our bills in the mail. and not so often anymore. now, this subject always draws a lot of attention. i.e. all of you who showed up today, because most people and most businesses still need dependable postal service. mail service. and providing that service on a universal basis costs a lot of money. and when a public, or semipublic entity receives subsidies for providing a public service, there's a danger of those subsidies being leveraged into a competitive market. one of the -- one of the singular characteristics of the postal service is that it exists

simultaneously in a monopoly market where no one can compete, is allowed to compete, and in a competitive market, with pretty intense competition. before addressing those issues, i recently studied the subsidies themselves, which the postal service receives, and in the context of the cost that congress imposes on the postal service, as robert suggested. for example congress requires the postal service to maintain residential delivery six days a week. and the prc under robert is estimated that reducing deliveries to five days a week, which most of the public would support, would save the postal service about $2.2 billion per year. congress mandates discounted rates for religious, educational, charitable political, other nonprofit organizations, which the prc figures costs the postal service more than $1.1 billion every

year. every time i say prc i think of china, i'm sorry. congress also directs the postal service to provide a special mailing rate for periodicals restricts the ability to close inefficient post offices, they estimate that costs about $300 million a year. and all tolled, as robert suggested, prc estimates that legal and regulatory requirements cost the postal service around $4.5 billion a year. now this happens to correspond roughly to the postal service average reported deficit over the last decade $5.5 this year but $4.2 billion average over the last decade. and to the commission's estimate of the total value of the postal service special privileges. including its monopoly on delivering letters its

exclusive access to residential and business mailboxes, and the exemption from a lot of state and local taxes and fees. so by this accounting the postal service is effectively self-sufficient financially. an economist approaches it differently and comes to a different accounting. which suggests that the subsidies are substantially greater. i estimate worth about $18 billion per year. rather than $4.5 billion. for example. the commission estimates that the postal service monopoly on access to residential and business mailboxes worth about $810 million in the 2013 fiscal year. now this is a very interesting provision, and one that i was not aware of until i became immersed in the research for this.

it says that the postal sfrks and only the postal service can leave a letter or package in a residential or business mailbox. whether it's a curbside mailbox or one in a central mail room. everybody else that makes deliveries, u.p.s., fedex, dhl, whomever, individuals, has to leave them at the front door. of the residence or business. that's a substantial burden in a large apartment house, or business. or office building. the postal service itself estimated that in 2008, that ending the current bar on private delivery companies accessing mailboxes would cost the postal service $1.5 billion to $2.6 billion per year. and that was after all, 2008. so that's seven years ago. and is two to three times the estimate of the value of the

subsidy. it's going at it a different way. i'm not saying that there was any problem in the accounting. it's the way you approach it. how you conceptualize the subsidy. this is how an economist would conceptualize it, and that is that you would look at the volume of mail delivered to curbside mailboxes and centralized mail rooms, and the cost of doing so compared to delivery to each customer's door. because that's the privilege they get as compared to the requirement for private companies. by that accounting, the mailbox monopoly saved the postal service $14.9 billion in fiscal 2013. which is another way of looking at the additional burden on private delivery companies. the commission also valued the postal service's legal exemption

from state and local property and real estate taxes. at about $315 billion in 2006 last time it was done, adjusted for inflation, that would be about $370 million today. but this estimate is based on the financial statements issued by the postal service, which value its real estate holdings at $27.5 billion. but, as the inspector general reported recently, this valuation represents the historical cost of the property. not their fair market value. which is how property taxes are applied. using the fair market value those properties were worth in 2012 $85 billion not $27.5 billion. and if we use an average property tax rate, that's what economists do of 1.8% that

exemption from taxes actually provides a subsidy of about $1.5 billion. in 2012, it would be a little bigger today. again, a different way of approaching the problem of the value of this. and of course this is only one of a number of exemptions the postal service enjoys from state and local requirements including vehicle registration fees, road tolls, state sales taxes on fuels, parking tickets. imagine, no parking tickets. there are also some other subsidies which have not been reported and calculated for. but which from an economic point of view are pertinent to this discussion. for example the postal service borrows from the treasury through the federal financing bank up to $15 billion, they've hit that limit but it does so at very highly subsidized interest rates.

currently it has $15 billion in debt. its legal limit it pays on average a very below market interest rate of 1.2%. that cost is $184 billion in interest last year. if they had to borrow at commercial rates, and as a aaa credit risk, as its competitors do, its interest payments would have been $600 million to $675 million. so that creates another subsidy from an economic point of view of between $415 million and $500 million. there's also the special arrangements for the federal income tax on the profits that the postal service generates from selling competitive goods and services. and its competitive side it has to pay taxes on the profits that it earns from delivering packages where it's competing with fedex and u.p.s.

but there's a very interesting arrangement. i wish i could pull it off. the treasury credits those tax payments to the postal service fund. the postal service fund is a special revolving fund that at the treasury which the postal service draws on to cover any expense. so the federal tax payments circulate back to the postal service. that's a subsidy worth $850 million last year. finally, and this is really where we get into the economics of it, the postal service -- the monopoly over letter mail has created what economists call major economies of scale and scope. protected from competition and its monopoly area it maintains this huge network of post offices and postal workers that reaches, as congress requires, and as robert noted, $153 million

delivery points six days a week. however, the postal service can leverage these economies of scale and scope to cut its cost in its competitive markets for package delivery and express mail. in the most consequential example, the postal service's core function of delivering letter mail to most homes and businesses on a daily basis means it can pick up and deliver packages to or from any home or business at little additional cost. this produces what economists call a network advantage since a private competitor's cost to pick up and deliver a package exceeds the postal service's christian emtal cost to pick up and deliver the same package along with its normal service. at the same time the monopoly is the main reason the postal service needs subsidies. think of it this way.

in the absence of any legal monopoly the postal service would face full competition from private companies and be forced to undertake the strategies and investments necessary to match the productivity of the private sector in this area. it happens we can quantify that. because, the bureau of labor statistics found that from 1987 to 2012 the postal service productivity, labor productivity, grew at an average annual rate of 0.7%. per year. private companies in the business of shipping warehousing, storage and delivery the basic functions of the post office recorded average annual productivity gains at 2.5% for a year over the same years. so if the postal service had not enjoyed its monopoly position over this 25-year period, it would have been forced to be as productive as its private sector counterparts

and by 2012 that higher productivity would have reduced its 2012 costs by $20 billion. that's a lot of money. that's even greater than the subsidy, the value of all the subsidies if you approach it as an economist would. it's much greater than the deficits that the post office endures. now this is technically not a subsidy. but it represents an economic burden on everyone who uses the mail, and taxpayers, that arises directly from the monopoly position, and in addition, to the -- in addition the subsidies, the effective economic subsidies associated with that position which reinforce the need to not compete. now, the higher salaries and benefits that postal employees enjoy and the larger number of employees relative to some but not all private delivery firms

account for less than half of those additional costs. the other half reflects the weak competitive pressures on the postal service to become more efficient and innovative which ultimately lead to less effective management practices, investments, and operating procedures. this is not a criticism of the postal service. this is the way any subsidized monopoly responds. it is inherent in the position, and the problem is the position. and those costs are certainly grounds, i think, for a serious discussion about reforming the arrangements of the postal service. thanks. >> thank you, robert. david? >> thanks, elaine. the postal service is the largest link in a worldwide communications and logistics infrastructure value chain. like all infrastructures, our role is to provide common

solutions to problems that cannot be reasonably solved individually. we're complemented by adjacent infrastructures that are both traditional and digital. and the suddenly faster and global environment. so what are the new respective roles of the infrastructures? and should the postal infrastructure adapt to this new speed of light ecosphere and what are the rules of the road for the road ahead? the first rule i would say is keep up, no matter who you are. if you're a key player it's critical that you keep up. the world is turning at the speed of blur. and when key players can't keep up, it creates distortions in the landscape. it's like trying to drive a car wearing magnifying glasses, for the rest of us. when one of us can't keep up. you individually of course, need to keep up as well. because no matter how young you are in this room your world is

disappearing. it's passing around the bend in the river of time. this is true whether you're a mailer, great customers, the postal service and its unions customs that are constantly in the way these days, congress, purposefully slow and deliberative to avoid sort of being ruling the country by the roar of the mob. and the universal postal union whose stodgy rules are designed to assist developing nations long after they cease to be developing nations. so keep up for god's sake don't find yourself in the way or clumsily picking winners or losers by your inaction. the second rule, i would say, is velocity doesn't really matter without focus. focus on the new end game. would everybody reach in their pocket and pull out a $1 coin and hold it up? they're very efficiently made,

very cheaply produced. that's great. but nobody wants them. now you have a silver dollar, that's very impressive. the road ahead is not about encouraging consumption of efficiently managed but unwanted manufacture, but unwanted goods. it's about customer value creation. third, enjoying the systems of the world and enable their value to your users. we shouldn't define the postal service literally as envelopes and parcels and traditional post offices. we need to define the postal service conceptually as an enabler of communications and logistics services. in an age of great upheaval and advancement, an age that left us with amazing gifts but unanticipated restraints. the last great disruptive wave for the postal service was the

near simultaneous development of railroads and the telegraph. the postal service at that moment didn't continue plodding along the postal roads that they built, because that's who they were literally five seconds ago. it was the first one to the railroads and the first ones to the air carriers, greatly helping both of those fragile, infant industries. and as the value of mail increased it was also the first ones to the new highway system in america. history shows that the postal service rapidly adapts, as they're allowed and as it identifies better ways to serve americans so how should it adapt now to serve the emergent human and commercial needs of this new century. act as an intermediary enabling seamless navigation between people's digital and physical lives. gain an essential american neighborhood role in providing inputs to smart mega cities of the future.

be sure to equip our trucks and our carriers and our post offices to become a mobile sensor net collecting and uploading data to customers, and to the smart city infrastructures. should be testing wi-fi and cable strength in the neighborhoods, air quality, gas leaks, conduct meter readings, we should become neighborhood cohort centers for electricity reserves for the power grid 3-d print centers, we should build wi-fi towers on post office roofs. did you ever think of that? gene suggested that. microwarehousing for people and small businesses. i guess rule five is we should act to protect the continuity of commerce during the coming supply chain wars. as the world becomes more digital and global the supply chain is being disrupted. from the design and manufacture of goods all the way to the last mile delivery of the products

supply links are going digital and middlemen are becoming embrittled and disappearing leaving behind residual services that cannot become digital and they cannot finance the middlemen any longer. here are a couple of examples. 3-d printing, and customers as creators of disturbing assembly lines and mass production with point of use manufacturing. that changes everything. chinese manufacturers are leaking over the entire supply chain. take goods straight off the assembly line and send them straight to your residence, nothing in between. amazon seeking to provide a one-stop shop for the entire supply chain. we're also seeing the rise of peer-to-peer commerce for products and services. that also leaps all the way over the supply chain. foreign shoppers in an increasingly global marketplace are often unable to buy u.s. goods without a u.s. delivery address.

sixth, mediate disruption of the banking industry that blocks transactions for citizens and adds friction to commerce. mobile banking has put a bank branch in everybody's palm. even before this began one out of twelve americans did not have a bank account. bank branches may shrink from where they are today 100,000 down to 10,000 bank branches remain. high cost payday loans and currency exchanges have stepped in to that vacuum that is rapidly growing. many americans can't engage in e-commerce. just at the time that brick and mortar commerce is disappearing. the postal service could provide financial services platform, and front office services where there are no banks. today, 59% of our post offices, 17,000 locations, are located in zip codes where there are no

banks or a single bank in the entire zip code. post offices could provide financial instrument exchange at a time when their instruments are proliferating. prepaid and debit cards which could cash checks, money orders and we could become a loan mart platform. seventh, become a network matter stream. we're seeing the end of a very peculiar world war that went on for ten years. between the very cool bits and the stodgy atoms. i think kids in the future are going to be laughing at what we're doing today. we're doing virtual work in a brick and mortar office. the worst of both worlds. we've been seeing digital as an end instead of a means. we've been insisting the digital communications are a passing fad in some instances, including at the postal service early on. anyway, that's all sorted out now. we are after all atomic

structures and packages don't beam themselves off the assembly line to your home. so digital matter streams are finally anatomically incorrect. operating as the network matters stream. so know how to optimally map citizens to those data streams into the internet of things. and to network matter streams. and the postal service needs to continue to integrate its network matter stream with its users data streams to enable e-commerce, e-health, mobile banking, e-government and soon e-learning. we also have the huge burden of the universal service obligation that you've heard about today. it would be great if we could turn that liability into a wonderful asset for americans, and for the postal service. we need to understand the impact of digital communications on the uso. we shouldn't be fearing and viewing them as competitors but, in fact, digital communications can lighten the

load with the immense burden of universal service. we could provide seamless visibility to senders and recipients of items traveling through the fulfillment value chain from smart postage and packaging, to intelligent mailboxes and to virtual p.o. boxes. in short we need to ask ourselves who are we now? and not become distracted by the literal artifacts of yesterday. this evolution will also add to our viability and will be profitable and maybe very profitable. but while we're updating our role of vital infrastructure, being fuelled by this, we can't forget we have an additional responsibility, one additional to the universal service obligation. we must take friction out of commerce and we have to minimize transaction costs as we finance this immense infrastructure without taxpayer dollars. we're the largest of the world

postal networks, 40%. we're the engine of the global network effect. the postal service doesn't perform this mission because it chooses to, or because it's a business. it's our duty to you. we're sentinels for a system that incentivizes innovation meritocracy. we're conflict free in keeping the playing field level in supporting efficient market forces in the united states. thanks. >> thank you. gene? >> well, i've been in this industry for 31 years, and here we are once again at the brookings institution going about probing the nation's postal soul. and rather than sit up here and try to act as a social engineer i'd rather sit around and talk to you from my view of things for those specific prism and that is from the perspective of the people that i help whose

businesses are tied in one way or another to the use of mail as a vehicle for the transaction of business communication and commerce. now we're in the process of talking about postal reform and you've heard others talk about the definition of universal service obligations and so on. and i hope that my comments today might crystallize for you what mailers genuinely believe should be part of a postal reform package and what also should be part of their aspect of the definition of universal service. i'm not going to be talking about universal service from the perspective of the individual customer who is out there. i'm going to be talking about it specifically in terms of the way businesses would do it. i don't choose to talk about the world the way that i would like it to be or the way that i would believe it to be. i have to talk about the world the way that it is. and when you take a look at the mail today and you look at business communication business-to-consumer communication,

consumer-to-business communication, and tally it all up, what you come to is the reality that 95% of all mail carried by the postal service today is business transaction, really. only 5% of the mail that the postal service carries is actually what you would characterize as personal communications. for the past several years we should quickly have realized that facebook has all but supplanted mail as that vehicle by which grandma and the grand kids get together, talk to each other, exchange birthday greetings, and also share pictures with one another. from the business' perspective, considering that 95% of all mail is business transaction related i find it compelling to conclude that when you look at mail, you have got to say, it is an important part of the nation's

economic infrastructure. now when we talk about infrastructure, it's all too easy to lapse into the social engineer's perspective talking about whether it's good or it's bad, it's fair or it's unfair. none of which matters. when you talk about infrastructure, the only thing that matters is does it work? if you talk about electrical infrastructure, i don't care how you get the electricity here all i want to know is that when i hit the light switch the lights will come on. when i turn the faucet the water will come out. the same thing is also true with the mail. when i put the mail inside of the postal system i expect the mail to be delivered in a specific way. for us, the way that we judge the quality of this infrastructure is does it or does it not facilitate the transaction of commerce? if you're using it for commercial purposes then obviously it should set itself up in a way that it facilitates using it for those particular kinds of purposes.

now if you had to take a look at the postal system and say well, okay, how are you going to know that it's doing that? first of all there are two key criteria as far as business nailers are concerned. without a question, someone in the business of using the mail as a communication vehicle mail service has got to be reliable, it's got to be consistent, and it's got to be predictable. because i am building other elements of my business around the belief that certain things are going to happen at a certain time. how will i be able to prove that? well, clearly in order to be able to do that i must have how mail is provided in a system that is transparent and accountable. i should be able to confront data that clearly says when you see these figures when you see these facts, you clearly can make a determination that mail

is being consistent and reliable and predictable. the second thing is, is, i must be assured the costs upon which all mail services are based are accurate, complete, and transparent. and when i say the costs of all mail services, i'm not just talking about market dominant services. i'm talking about competitive services, as well. you know in the days when paf was past we recast gaul into two parts, market dominant and competitive. we subjected the market dominance with specific regulatory regime for a reason and that is because you could not have competition within the market dominant area, you must take steps to be absolutely sure that there was not going to be this illegal, unwise subsidy going to competitive services for market nom nance. the only way you can do that is to be assured that the costs

upon which the postal service bases its prices and all of its other activities are accurate complete and transparent. the whole day of being able to go to the postal regulatory commission and finally got there when you asked for the costs of competitive services you find everything redacted should be long gone. i, as a user of market dominant services have an absolute right to be assured that when i pay a price for that particular service, that price is covering the cost of my service, not the cost of somebody else's. so we're looking for a way in which we can actually say that we've got an ability to measure the costs in a way so that we're sure that they're accurate, complete and transparent. now the postal service to its own benefit is beginning to move very quickly for the implementation of its intelligent mail system which gives us the tools that are necessary to actually make those kinds of measurements, and make them apparent. but i should not have to be able to go over to the postal

regulatory commission and when i look for the data i'm required to burrow down from 15 different spreadsheets to hopefully find what i want to see. it should be there. it should be transparent, it should be discernible. so that everybody who is using this system, and has to pay the costs associated with the system, knows exactly what is being done. now let me make this really, really clear. from the mailer's perspective we don't care how the postal service goes about structuring its work rules. we don't care how it goes about compensating its workers. we don't care how it ends up dealing with its employee relations. and we couldn't care less whether congress likes it or not. all of these matters are of no concern to mail users. the only thing that matters is does the post system satisfy the mission that it was given as part of the nation's infrastructural system?

if it does, and if we get from it those reliable services, based on costs that are accurately transparent we have received everything that we need to get to make postal need to get from a postal system today and we can leave to choose to worry about the other aspects to handle those aspects itself. here are some of the realities people need to keep in mind. the entire cost of operating this nation's postal system is paid for by the people who use the mail who send the mail so that 95% element of the business transaction related that's necessary in order to be able to make this thing go. we have talked about the division between market. dominant and competitive. we have talked about the fact that it's subjected to a regulatory regime. again, it's subjected to a regulatory regime because it has

not one monopoly, but two monopolies that control within what happens over the mail. also the deposit of mail in mail receptacles receptacles. now, i haven't said anything about prices. the only thing i'm going to say is before the enactment the postal service was proud in itself in saying we have always been able to operate by keeping postal prices within the ranges of inflation. no one thought that was going to be different the day the act was passed. we ended up going through a deep recession that had some structural impacts on just about every business that there was in america. but what's the problem when you see that the costs of operating the system are exceed inging the revenues that you're now able to gain because of the transformation in terms of the way we do business. it's not because you're being

overly regulated. it's because your costs have not been reduced to the level of the changes that have been going on within your own business. we believe generally that mail services still should be offered roughly within the context of inflationary limits. do we mean to say that they have to be as defined by today, limited by cpi constraints applied at the class level? maybe that's not necessarily so and maybe that's what the commission needs to take a look at as it goes forward. but maybe it was wrong taking a look at that kind of constraint but the manner in which it's defined. we continue to define mail services today exactly the way we did even before postal reorganization had taken place. we talk about first class mail

we talk about periodicals we talk about advertising mail, we talk about packages. why? those elements are not at the heart of what drives the postal service's business. the elements that are at the heart of what the postal service does and what drives this business are determined by the shape of the mail pieces. so perhaps if we redefine classes in accordance with the way the postal service actually processes mail within the system, we might find that instead of having a grouping of costs and packages and services that we might be able to define them a little more homo genously to apply the limits. >> thank you very much. this is a lively discussion. i want to take some questions from the audience. i'm going to start off by talking about four things that i've heard here.

one is david you really laid out a vision of all sorts of things the post office could be doing in the future. and so i want -- and many of those are very intriguing. some of you know the post office is already doing a lot of experimentation getting into the business of grocery delivery, their partnership with amazon for sunday delivery, so there's a lot of thought and entrepreneurship going on. my first question is does the postal service, as currently organized, have the capacity to actually develop competitive products? second, and it's related to this and related to rob's discussion, okay, if the post office get. s into these how do we deal with the subsidies that the post office enjoys from the federal government? because as the post office moves

into new territory, it is obviously going to compete with existing businesses and entities. so how should we think about that? what should congress think about that? third, maybe for you, maybe for the whole group, there's this weird $10 million limit on the market test products, which seems kind of ridiculous given that every other number we're talking about here is billions and the entrepreneurial side of this is limited to millions. so should that be changed. and finally, how should we think about the monopoly post office, which rob describes, and the competitive post office, which i think you really described david. should they be separate entityies entities? what should we do with those two pieces of the business?

so those are just a couple things that i'm thinking about. i made four questions into one and let's open it up. >> sure, thanks. i think it's helpful as we look at those questions to just quickly give a little context as to where we are today. until 1970 the post office department was a cabinet level agency. the postmaster general usually had been the campaign manager r for the president and was appointed the postmaster general at the time, and the postmaster general sat in the president's cabinet. 1970 came along because of all the financial challenges for the postal service and created this business-like entity that we have today. so it really removed a lot of the political involvement. a key part of that was the postal service no longer had its rates set by congress but it was created to set rates.

so until 2006 that was the law we operated under, and generally speaking, whenever the postal service felt the need to change rates and needed more money, it would come to the commission and the commission would gear up and over a year-long process would set the rates. the o postal service had a sole authority to set its own revenue requirement, so if it needed $5 billion, it would generally get $5 billion. the issue was would first class pay more than second class or third class. jump ahead to 2006 after 12 years of effort, the postal laws were changed. the postal enhancement act one of the key areas that was focused on was trying to modernize the rate setting. instead of this year-long process before they could change any rate, give the postal service more modern flexibility to change its prices. but as we have talked about because there's customers in the

market dominant side, this postal rate commission was turned into. the regulatory commission, more powers and authorities to get the data, ensure that it was all out there and that the postal service wasn't violating an inflation rate. but there's also a recognition in the debate that resulted in the law of 2006, there's this whole competitive category of products. it's relatively speaking much smaller in volume than the market dominant side. they shared that customers on the market dominant side were subsidized in the market. so regulatory regime was set up to say on the competitive side would be regulated unlike a price cap with ways to ensure that subsidies are occurring. every competitive product has to cover its cost. every product collectively have to kick into the overhead at a percentage that the commission sets. and the commission looks at that not only regularly, but

annually. at the end of the this week we have an annual compliance report. are rates and fees setting law. are service standards being met? we report on that and can order the postal service to take corrective action. as part of that separation the law said on these competitive products, they are operating in a commercial marketplace and the commission needs to provide protection for information of a competitive nature as the commission gets it, set up rules, much like a federal court would do. the commission set the rules up. . about 2008 they took effect. the commission has been operating under that can it be improved? sure thing and the commission has a role now to deal with a lot of these issues whether cost can be improves, 45 years from the 1970 law of how costing has been refined. the postal service puts a lot of money in it. the commission is ordering and

looking at improvements and any party at any time can come to the commission and start a rule making to improve this process. so the good news is on this score, we don't necessarily need to have an act of congress. we have a vibrant regulatory system set up from 2006 that can handle it. my last point to go to what you had raised was these areas of new products. the law set up the commission is the one that calls the balls and strikes on can the postal service get into new products. the law made a decision in 2006, for better or for worse that the postal service could only offer postal products. nonpostal were barred by law. that would take an act of congress to change. within that framework of what's postal, there's a lot of flexibility and the postal service, as they have, have come to the commission and can continue to do so.

i would add if the laws change, we now have what we didn't have in '06, a regulator that has been in place looking at these things. if congress were to say let's broaden what they can get into, you can now put that into a process where a regulator can look under whatever criteria that the law would look at fair e competition issues, things of that nature. but i would argue that gets us off from we should first look at what is it that we need from this institution to provide us a government agency. that should inform what then are the other things that should be done to do that. >> anybody else? >> i fortunately only have to operate under the laws of economic and not under the laws of congress. from an economic point of view, a single organization that's providing monopoly public

service is always problematic. it's inherent it is built into the structure and it is pervasive and significant. we're doing a new study of that where we're try to lay that out. but just think about the example of delivering a package at the same time you're delivering the mail. the incremental cost of delivering that package given that you already had these enormous economies of scale and scope based on the monopoly product, we would be very uncomfortable if we said that the military could have a private business for. private security forces. i don't see any difference frankly. second, you know the congress at least as robert just noted, has limited the activities of

this government agency in the private market to postal products. we heard from our friends proposals for a whole line of new products. it this would only compound the problem. the notion that the postal service has the expertise to handle banking services and financial services, to me in the 1970s the oil company hs a lot of money because oil prices are skyrocketing and said we are all going to become conglomerates and they started buying businesses that had nothing to do with the oil business. ten years later they had sold off virtually all of them at a loss because of the managers from harvard business school and engineers and scientists who ran exxon mobile and shell and

chevron had no experience in the refrigerator business. no business in financial services, which they also got into. we have a very vibrant and effect and efficient market in all of those services. i was once advising a very wealthy family who were thinking of getting into the private equity business because they thought they had all this money, how should they spend it this would be fun. the first question you have to answer is on what basis can you -- do you believe that you can do this better than all the people who are already doing it? because that's the only justification. otherwise you should invest in them. this is the same issue with respect o to after all the

investment ultimately comes from all the people who use the mail who would have to provide the resources to get into banking, et cetera. e we need to think of it in exactly the opposite way. . we need to think of it in terms of a public service function, which is separate, entirely separate from and unable to subsidize the private sector business. otherwise, we undermine the innovation and effectiveness of what is a r very effective private sector in delivery. >> david? >> you can tell robert and i have a slight different view of the road ahead. i'm pleased that when you said friend you didn't put that in air quotes. a very valuable useful study of world posts and they looked as a

subset of the world post that first began to emerge from the devastating blow of social networking and the economic downturn and so forth that had so devastated postal services. they said all of the winners had three aspects. they were lean i would certainly give the u.s. postal service pretty good grades for that. they have undertaken an enormous effort to become smaller and more lean. smart, efficient the postal service is embarking down that road. the third is they are entrepreneurial and they are diversified, which the u.s. postal service is not. they are saying those are the three key essential ingredients to survive in today's world as a postal service.

i think one of the keys to staying out of trouble, if we do begin to enter the area of diversification is to enable not to compete, with commerce. e we certainly have many ways to do that. as far as who would do this, i agree and understand that we have a traditional workforce that has been narrowly focused on mail and parcels in the past but the postal service has the longest tradition of all the federal departments and probably within the world of creating effective partnerships with the private sector. first of all we're the long pole in the tent. of the postal industry, a trillion-dollar industry. we have had a long tradition of discounts to achieve the lowest combine. ed cost for delivery of services. competition with the other

carriers has been very effective where we use their air transport and they use our last mile delivery. it's been a long rich history of combine combining with the private sector to expand into areas where the expertise lies. but there's value, as i said, in a common infrastructure particularly in industries that are being severely disrupted. the supply chain and the banking industry are two examples. we need to be there. we can't leave with everybody else. there won't be those essential services that are left behind and abandoned and cannot go digital. there needs to be some infrastructure left for the american people if for commerce. >> i'm old enough to remember the days of watergate. if you remember the key saying was follow the money.

if you want to know how a postal system that is owned and operated by the a government under a monopoly is going to function, you have to ask yourself to what are the incentives? if you follow the incentives, you'll understand how it will behave. if you look at the private u sector, the incentives are to maximize your gains and minimize your costs. those inentcentives do not exist in a bureaucracy. to translate those into human term terms, we might say the incentives are to maximize pleasure and minimize pain. if you just look at the way the postal system today functions, it is not trying to maximize pleasure, but it's doing everything it can to minimize its pain. so consequently, how it will function is going to determine result is and it is what you would expect to e see of an

enterprise that truly can exist within a competitive environment. >> i think it's time. this is a complicated issue. i think it's time to open it up to the audience. >> the thing i learned about running an organization, even though it's a nonfor profit, we need a revenue. and the limits on revenue seems to be the heart of the problem. we talk about businesses -- i don't know any business that restricts its price increases to how they -- to some other criteria other than what the market would bear. if the market needs lower prices, they lower the prices. if they need higher prices, they raise the price.

i think one of the big problems with the new regulatory regime is congress has limited them to external inflation as the limit on how much you can raise total revenue. at the same time it has mandated above inflation costs to the system. until you fix that, there's absolutely no way you can get 50 new banks or products, you're still not going to be allowed to raise the revenue and the system is going to fail. can you comment on that? >> you hit on a key point, referencing a system that by law mandates that it's market dominant products, which is where you have the captive customers needs to be regulated under a cpi system. the law did say after ten years the commission