BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON, D.C. 20268-0001
Postal Rate and Fee Changes, 2006
Postal Rate Commission
Submitted 12/21/2006 2:07 pm
Filing ID: 55458
Accepted 12/21/2006
Docket No. R2006-1
INITIAL BRIEF OF THE
NEWSPAPER ASSOCIATION OF AMERICA
William B. Baker
Wiley Rein & Fielding LLP
1776 K Street, N.W.
Washington, D.C. 20006
(202) 719-7255
December 21, 2006
TABLE OF CONTENTS
Page
I.
INTRODUCTION AND SUMMARY ..................................................................... 1
II.
THE COMMISSION SHOULD ADOPT RATES FOR STANDARD
ENHANCED CARRIER ROUTE MAIL PROPOSED BY NAA WITNESS
INGRAHAM ......................................................................................................... 2
A.
III.
The Postal Service’s Rate Proposal For Standard Commercial
Enhanced Carrier Route Mail Is Seriously Flawed.................................... 5
1.
The Postal Service proposed rate design fails to base the
high density flats rate on the disaggregated delivery costs of
high density flats ............................................................................ 5
2.
The Commission should recommend “base” saturation and
high density flats rates undistorted by the proposed optional
DAL surcharge ............................................................................... 7
3.
As proposed by witnesses Sidak and Ingraham, the high
density discounts in Standard ECR Mail should equal
estimated avoided costs................................................................. 9
B.
The Commission Should Recommend Approval Of A Surcharge
For Detached Address Labels ................................................................ 12
C.
Dr. Ingraham Proposed Two Improved Rate Designs For
Commercial ECR Rate Design, Differing In The Assumption Made
About Conversion Of DAL Mailings To On-Piece Addresses.................. 15
1.
Dr. Ingraham’s rate design assuming no conversion of DAL
mailings to on-piece addressing................................................... 15
2.
Dr. Ingraham’s rate design assuming some conversion of
DAL mailings to on-piece addresses............................................ 16
D.
The Postal Service Has Not Justified A Reduction In The Pound
Charge For Pound-Rated ECR Mail ....................................................... 19
E.
Witness Mitchell’s Alternative ECR Rate Designs Should Be
Rejected.................................................................................................. 22
THE COMMISSION SHOULD REASSIGN INSTITUTIONAL COSTS IN
RECOGNITION OF THE CHANGING MAILSTREAM....................................... 23
A.
The Decline Of First-Class Mail And The Emergence of Standard
Mail As the Largest Class – Soon To Be the Majority of the
Mailstream – Requires The Commission To Reconsider Institutional
Cost Assignments For Both Legal And Policy Reasons.......................... 25
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TABLE OF CONTENTS
(continued)
Page
B.
C.
IV.
V.
1.
First-Class Mail’s status as the largest and majority class
has historically been used to justify placing upon it the great
majority of the institutional cost burden ........................................ 25
2.
Electronic communication, spurred by broadband
deployment, has emerged as a major substitute for FirstClass Mail .................................................................................... 28
3.
The Commission must, for both legal and policy reasons,
reevaluate the traditional allocation of institutional costs in
light of the changed mailstream ................................................... 30
The Commission Should Relieve The Excessive Institutional Cost
Burden Borne By First Class Mail ........................................................... 31
1.
The Postal Service has proposed yet again to place the
greatest institutional cost burden on First-Class Mail ................... 32
2.
The Commission should reduce the institutional cost
coverage of First-Class Mail and fulfill its longstanding goal
of shifting a greater share of institutional costs to Standard
ECR and Regular Mail ................................................................. 35
3.
The Commission should reject proposals by Standard
Enhanced Carrier Route mailers to reduce their institutional
cost share .................................................................................... 41
Institutional Costs Should Be Applied, Consistent with Commission
Precedent, To All Attributable Costs, Not Merely Volume Variable
Costs....................................................................................................... 45
PERIODICALS RATES ISSUES
A.
The Commission Should Adopt NNA’s Proposed Alternative For
Within-County Periodicals ...................................................................... 46
B.
In Outside County Periodicals, The Proposed Container Fee
Should Not Be Assessed On Tubs And Uncontainerized Mailings ......... 47
CONCLUSION................................................................................................... 48
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BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON, D.C. 20268-0001
Postal Rate and Fee Changes, 2006
Docket No. R2006-1
INITIAL BRIEF OF THE
NEWSPAPER ASSOCIATION OF AMERICA
December 21, 2006
The Newspaper Association of America (“NAA”) respectfully submits its initial
brief in this proceeding. NAA is a non-profit trade association that represents the
interests of more than 2,000 newspapers in the United States and Canada. NAA
members account for nearly 90 percent of the daily newspaper circulation in the United
States and a wide range of non-daily U.S. newspapers.
I.
INTRODUCTION AND SUMMARY
This is the first fully-litigated omnibus rate case under the Postal Reorganization
Act since Docket No. R2000-1. And, with the recent passage by Congress of the Postal
Accountability and Enhancement Act, it may be one of the last.
Accordingly, the Commission’s decisions in this case may have consequences
for years to come. The Commission should use this opportunity to recommend rates
that reflect the modern mailstream and economic environment facing the Postal
Service, including the dramatic replacement of First Class Mail as the majority of the
mailstream by Standard Mail. In this case, the Commission also should correct a
serious error in the Postal Service’s proposed rates for Standard Enhanced Carrier
Route mail, which results in a passthrough of 2200 percent of the cost difference
between high density and saturation flats mail.
As described herein, NAA respectfully urges the Commission:
II.
•
To reduce the Postal Service’s proposed exorbitant rate difference (a 2200
percent passthrough of cost differences) between Standard Enhanced Carrier
Route high density and saturation flats by basing the discount on high density
costs, rather than aggregated basic and high density costs as proposed by
the Postal Service, and adjusting discount passthroughs consistently with
Efficient Component Pricing;
•
To recommend approval of a surcharge for the use of detached address
labels as an optional rate element that does not affect the base rate for
mailers that do not use DALs;
•
To reject the unsupported reduction in the Standard ECR pound charge for
pound-rated mail;
•
To adjust to the historic shift in the mailstream composition and the changing
nature of postal finances by relieving First Class Mail of some of its
institutional cost burden and by allocating a greater share of institutional costs
to Standard ECR and Regular mail, such as proposed in the record; and
•
To reject unwarranted increases for Periodicals In-County and Outside
County mail rates relied upon by small newspapers for circulation distribution.
THE COMMISSION SHOULD ADOPT RATES FOR STANDARD ENHANCED
CARRIER ROUTE MAIL PROPOSED BY NAA WITNESS INGRAHAM
As the Commission is aware, the rates for Standard Enhanced Carrier Route
high-density and saturation flats serve a highly competitive marketplace. Newspapers
typically use high-density (and sometimes saturation) flats rates for their Total Market
Coverage (“TMC”) programs that compete with saturation mailers in the distribution of
print advertising.
Currently, a 0.9 cent rate difference exists between the high-density and
saturation rates for flats. In this case, the Postal Service has proposed to more than
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double that rate difference – from 0.9 to 2.2 cents – by proposing the following rates for
ECR piece-rated flats:
Origin
DBMC
DSCF
DDU
Basic
0.233
0.205
0.199
0.191
High Density
0.204
0.176
0.170
0.162
Saturation
0.182
0.154
0.148
0.140
See USPS-T-36 at WP-STDECR-16 (Kiefer); NAA-T-2 at Table 2A. Corresponding
piece-charges are proposed for ECR pound-rated pieces as well. In addition, the Postal
Service also has proposed a 1.5 cent per piece surcharge for ECR saturation mailings
that use Detached Address Labels (“DALs”) for the address.
For NAA, the most important aspect of this proposal is the more than doubling of
the current difference between High-Density and saturation flats (0.9 cents) to 2.2 cents,
an increase of a whopping 144 percent and, as Dr. Ingraham showed, one which
passes through 2200 percent of the estimated cost difference. NAA-T-2 at 10. Such an
enormous rate gap would have clearly adverse competitive implications for newspapers
that use high density mail as a vital component of their Total Market Coverage
programs that compete with saturation mailers.1 Although the Postal Service has
contended that this 2.2 cent gap would be offset by the DAL surcharge, the Postal
Service has not taken into account the likelihood that the great majority of DALs will
likely convert to on-piece addressing and therefore would not pay the surcharge.
1
Tr. 28/9532-33 (Gorman) (acknowledging that newspapers that have TMC programs are part of
the saturation mail industry); SMC-RT-1 at 6-7 (Crowder).
-3-
There are three significant flaws in this aspect of the Postal Service’s ECR rate
design proposal. One, the proposed high density rate is not based on high density
delivery costs; instead, and contrary to years of precedent, it is based on an aggregated
average of high density and basic delivery costs. Two, the Postal Service proposal
improperly seems to regard the DAL surcharge, which is optional to the mailer and likely
to be paid by few, as in effect an “offset” for more than doubling of the difference
between the high density and saturation flats rates to 2.2 cents. Three, the Postal
Service proposes to passthrough 120 percent of incorrectly measured cost differences
between basic and high density flats, and between high density and saturation flats –
violating the principle of Efficient Component Pricing in two ways.
NAA witness Dr. Allan Ingraham (NAA-T-2) offers two alternative rate designs for
Standard commercial ECR mail that correct the errors in the Postal Service proposal
and are consistent with the Efficient Component Pricing principles as described by NAA
witness J. Gregory Sidak (NAA-T-1) and historically used by this Commission. Both
proposals are designed to result in approximately the same revenues as proposed by
the Postal Service.
The difference between the two is the assumption made about the conversion of
DAL mailings to on-piece addressing. Dr. Ingraham’s first alternative (NAA-T-2 at 1719) is an improvement upon the Postal Service’s proposed rates that would apply if the
Commission were to adopt the Postal Service’s unrealistic assumption that no DAL
mailings will convert to on-piece addressing despite the new surcharge.
Dr. Ingraham’s second alternative (NAA-T-2 at 19-22), in contrast, makes the
more realistic assumption that a substantial majority of DALs will convert to on-piece
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addressing in response to the DAL surcharge. NAA believes that this assumption is
much more realistic and supported by substantial record evidence; therefore, Dr.
Ingraham’s second alternative best reflects the likely Test Year reality.
A.
The Postal Service’s Rate Proposal For Standard Commercial
Enhanced Carrier Route Mail Is Seriously Flawed
As noted above, the Postal Service’s rate proposal for Standard ECR mail suffers
from three major flaws. Taken together, these flaws result in a rate design that
unjustifiably favors saturation mailers over their newspaper competitors which rely on
the high density flats rate.
1.
The Postal Service proposed rate design fails to base the high
density flats rate on the disaggregated delivery costs of high
density flats
The Postal Service’s proposed rate for ECR high density flats is based upon
delivery costs that were aggregated (averaged) with the delivery costs of ECR basic
flats. The Postal Service has conceded that for this reason its ECR rate proposal is not
based on delivery cost differences between basic and high density rates.2
Consequently, as Dr. Ingraham noted: “This failure to base high density flats rates on
the unit delivery costs of those two tiers results in proposed rates that underprice basic
flats and overprice high density flats.” NAA-T-2 at 8.
This occurred because the Postal Service’s rate design used delivery cost data
from witness Kelley (USPS-T-30) that presented ECR flats costs in only two groupings:
Saturation and Non-saturation. The latter grouping combined the unit delivery costs of
2
Tr. 5/925 (Kiefer).
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both basic and high density flats. This averaging of basic and high density delivery
costs is a material change from the approach that the Postal Service had used in past
cases, in which it relied on disaggregated basic, high density, and saturation unit
delivery costs.3 No Postal Service witness has provided any operational or other
justification for using aggregated costs.
This aggregating of the delivery costs of high density flats with those of basic
flats results in consequences of grave concern to newspaper TMC programs that rely
on high density rates in competing with saturation mailers. This aggregation creates the
false impression that high density flats cost 1.87 cents more to deliver than saturation
flats, when the data show that the correct cost difference is less than 0.1 cent.4 (A 2.2
cent discount based on a 0.1 cent cost difference is a passthrough of some 2200
percent). This incorrect presentation of the cost difference accounts for much of the
proposed doubling of the competitively sensitive difference between saturation and high
density flats rates. As discussed in section 3 below, it also violates the principle of
Efficient Component Pricing, because it fails to pass through the reliably estimated cost
difference between high density and saturation flats.
In response to an interrogatory, Postal Service witness Kelley provided
disaggregated delivery costs for basic and high density flats. Tr. 12/3400-01. Dr.
3
Indeed, witness Kelley himself did so only last year in Docket No. R2005-1. Table 3 in Dr.
Ingraham’s testimony presents the delivery cost data relied upon by the Postal Service in the most recent
cases, starting with Docket No. R2000-1. NAA-T-2 at Table 3.
4
As filed, the Postal Service showed a 1.87 cent delivery cost difference between “Saturation” and
“Nonsaturation” flats. USPS-LR-L-67 and NAA-T-2 at 9. According to the disaggregated data provided
by witness Kelley, the delivery cost difference between high density and saturation flats is only 0.077
cents, and delivery costs for high density flats are 2.02 cents less than for basic flats. Tr. 12/3400-01. In
fact, the unit rural carrier delivery cost of high density flats is less than that of saturation flats. Tr. 12/3404
(Kelley).
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Ingraham used these disaggregated cost data in both of his alternative rate designs.
The Commission should adopt one of Dr. Ingraham’s alternatives.
2.
The Commission should recommend “base” saturation and
high density flats rates undistorted by the proposed optional
DAL surcharge
As a justification of sorts for the proposed widening of the difference between
high density and saturation flats rates, the Postal Service has suggested that
comparing the current 0.9 cent rate difference and the proposed 2.2 cent rate difference
is illusory because the proposed DAL surcharge would mitigate the effect of this
reduction in the rate of saturation flats to high density flats.5 While NAA supports the
DAL surcharge proposal as an optional rate element (see NAA-T-1 at 15-18 (Sidak)),
the amount of the DAL surcharge should not influence the “base” saturation rate paid by
all saturation mailers.
The Postal Service’s “offset” rationale is flawed as a matter of rate design theory
and misapplied even on its own terms. It is incorrect to use an optional rate element as
an offset against the base rates that all mailers pay. And, on the facts, the Postal
Service justification fails.
Even today, only about 43 percent of saturation flats mailers use the DAL
addressing option.6 Overwhelming evidence indicates that this percentage will shrink
considerably further by the Test Year. Tr. 28/9535 & 9542 (Gorman) (stating that 70 to
5
NAA/USPS-T36-14 (Kiefer). The Postal Service contends that when the DAL surcharge is
included, the rate differential would be only 0.7 cents (2.2 -1.5 cents). For the reasons presented by Dr.
Ingraham and summarized herein, that is simplistic and erroneous approach to rate design.
6
NAA-T-2 at 13 (Ingraham). Using data from witnesses Kelley and Kiefer, Dr. Ingraham calculated
that 56.3 percent of saturation flats did not use DALs in the Base Year. NAA-T-2 at 13. USPS-T-30 at 13
(Kelley); USPS-LR-L-36, WP-STDECR, “Comm Piece-Pound Dist –BY”, cell M15 (Kiefer).
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90 percent of DALs will convert if the surcharge is adopted); Tr. 5/1122G (Advo press
release announcing that it will shift to on-piece addressing). Thus, by the Test Year, the
volume of DALs will be quite small compared to today.
With a greatly reduced number of payers of the DAL surcharge, it makes little
sense to use the DAL surcharge as an “offset” of the saturation base rate that somehow
justifies widening the difference between High-Density and saturation rates from 0.9
cents to 2.2 cents. As Dr. Ingraham explained (NAA-T-2 at 13-15):
•
To do so gives an unwarranted rate advantage to on-piece address saturation
mailers, the majority of which do not use DALs today and certainly will not in
the future;
•
Doing so would dilute the Postal Service’s stated goal of encouraging mailers
to shift to on-piece addressing; and
•
Doing so would artificially increases the true disparity between saturation and
high density flats rates.
Dr. Ingraham illustrated the flaw in the Postal Service’s analysis by calculating
the proportion of saturation flats mailers that would have to use DALs for the price of a
saturation mailing to maintain, on average, the current 0.9 cent difference between high
density and saturation flats. NAA-T-2 at Table 4. Dr. Ingraham determined that more
than 85 percent of all ECR saturation flats would have to use DALs before the
differential paid by high density and saturation flats would, on average, equal 0.9 cents.
Given that the record suggests that the proportion of DALs will be LESS than 15
percent, one can only conclude that the average differential between high density and
all saturation flats (even factoring in the DAL surcharge) would likely exceed 1.6 cents
per piece, compared to 0.9 cents today, under the Postal Service’s proposal.
The error in this aspect of the Postal Service’s rate proposal is its attempt to use
a rate element for an optional feature which will be paid by only a small minority of
-8-
saturation mailers when comparing the rates for saturation and high density mailers.
This results in increasing from 0.9 cents to 2.2 cents the rate advantage enjoyed by the
majority of saturation mailers over their high density mailer competitors without their
making any changes in their addressing practices.
Dr. Ingraham’s alternative rate proposals correct this error by treating the DAL
surcharge as a optional rate element. This approach creates an appropriate incentive
for mailers to convert from DAL addresses while maintaining a more reasonable
relationship among the base rates for high density and saturation flats.
3.
As proposed by witnesses Sidak and Ingraham, the high
density discounts in Standard ECR Mail should equal
estimated avoided costs
The Commission typically applies the principle of Efficient Component Pricing
(“ECP”) when setting worksharing discounts. Opinion and Recommended Decision,
Docket No. R2001-1 at 71 (Mar. 22, 2002) (stating the Commission’s goal “of promoting
efficient component pricing”); see also Opinion and Recommended Decision, Docket
No. MC95-1 at III-27-30 (Jan. 26, 1996) (stating that discounts should not exceed cost
savings); Notice of Inquiry No. 2 at 1 (“The Commission has adhered to the principle
that within a subclass, worksharing rate differences should fully reflect the costs that the
Postal Service would avoid (or incur) if the mailer were to move from one workshared
category of mail to another.”
Using ECP in setting worksharing discounts promotes efficiency by sending the
correct relative signals regarding worksharing. NAA witness Sidak noted that this
Commission correctly “has applied ECP in setting discounts for worksharing such as
presortation and destination entry at, ideally, 100 percent of the estimated avoided cost
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of the activity whose performance the Postal Service avoids.” NAA-T-1 at 9 (Sidak). As
Mr. Sidak explained:
Under ECP, accurately measured costs avoided would be
passed through at a rate of 100 percent to each particular
category of mail responsible for those costs avoided. In this
manner, each category of mail would be charged only its
incremental costs, and the USPS would achieve break-even
pricing. A deviation of pass-through rates from 100 percent
would result in postal rates that are inconsistent with the
general principles of ECP.
NAA-T-1 at 10. The Postal Service ECR rate proposal violates ECP in two ways.7
First, as noted in the preceding section, the proposed basic, high density, and
saturation discounts are not based on reliable estimates of the delivery cost differences
between those tiers. Disaggregating the delivery costs into basic and high density
categories enables rates for all of those tiers to be designed using ECP. Dr. Ingraham’s
rate proposals for ECR mail passthrough 100 percent of the reliably estimated cost
differences between basic, high density, and saturation flats, consistent with ECP
principles.8
7
In First-Class Mail, the Postal Service proposed passthroughs of presort and shape differences of
less than 100 percent to mitigate rate shock stemming from the newly-proposed recognition of shape in
rate design. USPS-T-32 at 18 (Taufique). No corresponding concern exists in Standard ECR that would
justify a departure from a 100 percent passthrough of the worksharing differences for flats.
8
In this case, as in past cases, the Postal Service has been unable to generate a reliable estimate
of mail processing costs for high density and saturation flats. For this reason, it has again used
aggregated high density and saturation mail processing costs. The Postal Service explained that costs
and volumes of high density and saturation rate categories are combined because “Estimated costs by
shape for High Density ECR demonstrate considerable sample variation. Combined with sample
variation in Saturation ECR costs, the estimated cost difference by shape between High Density and
Saturation costs also shows considerable variation. Due to the uncertainty in the estimated difference in
costs, High Density and Saturation cost by shape are treated as having the same mail processing costs.”
Tr. 13/3610 (Talmo). In other words, the Postal Service does not possess reliable evidence of any mail
processing cost differences between high density and saturation mail. This is not surprising, given the
relatively light use high density and saturation flats make of mail processing. Instead, the Postal Service
position is that the aggregated data are more reliable, making them the proper data to use.
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Second, ECP calls for passthroughs of 100 percent of the estimated cost savings
when setting worksharing discounts. The Postal Service has proposed an excessive
120 percent passthrough for the ECR high density and saturation discounts. USPS-T36 at WP-STDECR-16 (Kiefer). Mr. Sidak observed that “pass-through rates exceeding
100 percent would be consistent with workshared mailers paying rates that are less
than the incremental costs of the category of mail in question. That result would result in
inefficient provision of worksharing by mailers.“ NAA-T-1 at 11.
The Postal Service’s justification for the 120 percent passthrough between high
density and saturation rates was to produce a rate differential “comparable to what
we’ve had in the past between saturation and high-density flats.” Tr. 5/1072 (Kiefer).9
However, the proposed 2.2 cent differential greatly exceeds the “comparable” past rate
relationship, which has ranged from 0.7 to 0.9 cents. And, as discussed in the
preceding section, even the Postal Service’s improper factoring in the DAL surcharge
produces rates that are not fairly comparable when the conversion of DAL addresses is
taken into account.
Dr. Ingraham’s proposed alternative rates correct this passthrough error by using
100 percent passthroughs for both the high density and the saturation discounts. This
9
As discussed above, this “passthrough” was based on the aggregated “nonsaturation” delivery
costs, not the high density delivery cost. Therefore, the 120 percent is an illusory number – the actual
passthrough was, as noted above, 2200 percent. The Postal Service may have used an excessive
passthrough to offset its lack of reliable mail processing data on a disaggregated basis between high
density and saturation flats, but as shown a 120 passthrough is unnecessary to achieve “comparable”
past rate differences if disaggregated delivery costs are used.
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is appropriate given the improved delivery cost data and the proper treatment of the
DAL surcharge.
B.
The Commission Should Recommend Approval Of A Surcharge For
Detached Address Labels
The Postal Service has proposed a surcharge of 1.5 cents for detached
addressed labels in ECR saturation mail. USPS-T-36 at 32 && WP-STDECR-16
(Kiefer). A DAL surcharge is supported by operational and cost considerations and
deserves a positive recommendation by the Commission. It also is unopposed by any
party, including saturation mailers to whom the surcharge would apply. SMC-T-1 at 2
(Gorman); Tr. 28/9529 (Gorman); SMC-RT-2 at 2 & Tr. 35/11767 (Crowder).
However, as discussed above in Section II.A.2. the Commission’s approval of
the surcharge for the DAL option would not alleviate the need to correct the Postal
Service’s proposal to more than double the difference (to 2.2 cents) between the high
density and on-piece saturation rates. DALs are an optional form of address that offer
convenience and other benefits to the mailers who use them, and are limited in their
availability by postal regulations to saturation flats mailers. The proper way to price
DALs is through a separate surcharge that does not distort the correct relationship
between the “base” rates for high density and on-piece addressed saturation flats. Only
by doing so can the Commission set the relationship between high density and
saturation rates in a cost-based manner.
Witness Coombs presented the Postal Service’s operational considerations
underlying the proposed DAL surcharge. See USPS-T-44 at 12-14. She testified that
DALs no longer serve their original purpose of easing (or avoiding) the casing of
saturation flats. Due to changes over time in carrier operations, “the original justification
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for the DAL is no longer applicable in today’s operating environment.” Id. Furthermore,
DALs have little purpose for the Postal Service today, because nowadays the handling
of saturation flats “is unaffected by the presence or absence of a DAL.” Id. Most
saturation flats typically are taken directly to the street and the presence or absence of a
DAL does not affect how these mailings are handled. Id.
Although no longer providing benefits, DALs do impose additional costs by
providing an additional item for carriers to handle.10 Absent a surcharge, these DALrelated costs are borne in part by non-DAL mailers.
On the other hand, the record shows that DALs have operational and financial
value to saturation mailers. SMC witness Gorman (CEO of Harte-Hanks shoppers)
testified: “DALs facilitate the time-critical production of our mail pieces and enable
mailers to meet customer expectations on lead times and timely in-home delivery.”
SMC-T-1 at 5; accord NAA-T-1 at 14 (Sidak). Using DALs allows saturation mailers to
delay finalization of the entire mailing until the last moment, giving them the maximum
opportunity to add advertising inserts. This happens because the saturation mailer is
able to place the address on the DAL “well in advance of [the] time-critical preprint
insertion and production operations” and thus “speeds the task of inserting advertising
preprints into the finished product.” SMC-T-1 at 9 (Gorman).11
10
Postal Service witness Kelley presented Base Year costs of DALs of approximately $165 million.
The Postal Service’s estimated Test Year DAL costs – based on the dubious assumption that no
saturation pieces migrate to on-piece addressing – are approximately $187 million.
11
If instead the mailer were to place the address on the wrap (the flats inserts themselves), that
step might take additional time and require the mailing package to be completed somewhat earlier in the
process..
-13-
Finally, advertising sold on the DAL can have value to saturation mailers. In the
words of SMC witness Gorman: “For many mailers, for example, the advertising
revenues from the DAL are largely offset by the cost of the DAL . . . while for some
mailers the DAL provides an important net-revenue stream.” Tr. 28/9542.
For these reasons, the primary beneficiary of the DAL addressing option today is
the saturation mailer – not the Postal Service. This justifies a surcharge for use of the
DAL option.
Both the Postal Service and Dr. Ingraham propose a DAL surcharge. The Postal
Service has proposed a surcharge of 1.5 cents for the use of DALs to “strongly
encourage mailers to put addresses directly on their mail pieces” consistent with the
Postal Service’s goal of encouraging “on-piece addressing for all mail.” USPS-T-36 at
32. Each of Dr. Ingraham’s proposed two alternative rate designs for ECR includes a
DAL surcharge. In the second of his alternatives, he assumed that 75 percent of DALs
will convert to on-piece addressing. In that alternative, Dr. Ingraham found it
appropriate to reduce the surcharge to 1.4 cents in order to avoid proposing rate
increases for flats that exceed those proposed by the Postal Service.
Treating the optional DAL as a premium product subject to a value-priced
surcharge is akin to the Commission’s treatment of Repositionable Notes. See NAA-T1 at 15-16 (Sidak). In Docket No. MC2004-5, the USPS proposed rates for
repositionable notes (RPN) that were based on the value created for the mailer, rather
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than costs. The Postal Service recognized that the added value to the mailer that can
“be separately recognized.”12 This approach is appropriate in this context as well.
C.
Dr. Ingraham Proposed Two Improved Rate Designs For Commercial
ECR Rate Design, Differing In The Assumption Made About
Conversion Of DAL Mailings To On-Piece Addresses
On behalf of NAA, Dr. Ingraham proposed two alternative rate designs for
commercial ECR mail that improve upon the Postal Service’s proposal. They differ by
the assumption each makes about the conversion of DAL addressed saturation flats
mailings to on-piece addressing.
1.
Dr. Ingraham’s rate design assuming no conversion of DAL
mailings to on-piece addressing
Dr. Ingraham’s first rate design uses the same assumptions as does the Postal
Service – including the zero conversion of DALs to on-piece addressing13 – but uses
disaggregated delivery costs and passthroughs consistent with Efficient Component
Pricing. NAA-T-2 at 17-19. He also uses the proposed DAL surcharge as an optional
feature. Dr. Ingraham’s first alternative presents the following piece charges:
12
See Docket No. MC2004-5, USPS-T-2 at 2-3 (Kaneer) (citing 39 U.S.C. §3622(b)(2), which
requires Commission to consider the value of mail entered into the postal system).
13
Although the Postal Service’s original filing had assumed a 50 percent DAL conversion rate, the
Postal Service later retracted that assumption because it had not made offsetting cost changes elsewhere
in its direct case.
-15-
TABLE 5A: PIECE-RATED RATES ($)
Basic
High Density
Saturation
Origin
DBMC
DSCF
DDU
0.234
0.190
0.189
0.206
0.162
0.161
0.199
0.155
0.154
0.191
0.147
0.146
TABLE 5B: POUND-RATED PIECE CHARGE ($)
Basic
High Density
Saturation
Origin
DBMC
DSCF
DDU
0.101
0.057
0.056
0.101
0.057
0.056
0.101
0.057
0.056
0.101
0.057
0.056
NAA-T-2 at Tables 5A & 5B.
2.
Dr. Ingraham’s rate design assuming some conversion of DAL
mailings to on-piece addresses
Dr. Ingraham’s second alternative rate design addresses the more realistic
scenario that DAL mailers will convert to on-piece addressing in response to the DAL
surcharge. In designing these rates, Dr. Ingraham assumed that 75 percent of DAL
mailings will convert to on-piece addressing.14 The reasonableness of this assumption
is confirmed by the testimony of SMC witnesses Gorman (Tr. 28/9535) (stating that the
DAL surcharge will cause a “very substantial reduction” in the number of DALs, in
excess of 70 percent) and Crowder (who stated that mailers of 87 percent of the DALs
will convert).
14
Dr. Ingraham used the Postal Service’s estimate of the number of DALs, based on the
methodology approved by the Commission in Docket No. R2005-1. See also Tr. 28/9540 (Gorman)
(estimating the collective saturation volume of SMC members as between 4.5 to 5 billion pieces, and that
“somewhere between 80- to 90-percent of that volume is mailed using DALs”). This equates to assuming
that some 4.2 billion DALs will convert, leaving approximately 1 billion DALs in the postal system.
-16-
Because the conversion of DAL addressing to on-piece addressing should
reduce postal costs, Dr. Ingraham made an adjustment to eliminate most of the DAL
costs that Postal Service witness Kelley had included in his calculation of delivery costs.
In doing so, Dr. Ingraham credited Mr. Kelley’s testimony that a substantial reduction in
DAL usage would not necessarily result in a one-to-one reduction in ECR saturation
costs. Tr. 12/3430-32 & Tr. 3512.15 For that reason, Dr. Ingraham made a
conservative, but reasonable, assumption that the Postal Service will capture 80
percent of the cost savings that would accrue from a 75 percent reduction in the number
of DALs in the system. NAA-T-2 at 20. This is consistent with the range of cost
reductions witness Kelley would expect from a reduction of that size. Tr. 12/3430 &
3515. This calculation produced an estimate of 0.751 cents as the incremental cost of a
DAL. NAA-T-2 at 22.16
15
In rebuttal testimony, SMC/Advo witness Crowder assumed that 100 percent of DAL costs would
be eliminated, an assumption contrary to the more cautious position taken by the Postal Service. Mr.
Kelley testified that if fifty percent of DALs were to convert to on-piece addressing, the cost savings might
not be linear. He stated that he was “not confident that two or three billion DALs (from a current base
year estimate of approximately four billion) could be eliminated from the delivery network without some
material possibility of such reduction causing unanticipated changes in operational processes for city
carriers and compensation implications for rural carriers.” Tr. 12/3430-32.
16
SMC/Advo witness Crowder contended that Dr. Ingraham should have taken into account the
mail processing and in-office costs associated with DALs. SMC-RT-1 at 8. If in-office costs (which Mr.
Kelley omitted) are included in Dr. Ingraham’s cost elasticity methodology, the incremental DAL cost
would increase to 1.029 cents. Ms. Crowder also identified mail processing costs (not part of Mr. Kelley’s
delivery cost analysis) associated with DALs as $10 million (which even under her methodology amounts
to about 0.25 cents per DAL, a sum which when added to Dr. Ingraham’s estimate of delivery costs
results in an incremental DAL cost of approximately 1.28 cents, still below the proposed surcharge level
even without applying his cost elasticity adjustment).
Ms. Crowder also erred by implicitly assuming that the converted flats (formerly unaddressed because
they were accompanied by the DALs) would have the delivery costs of today’s unaddressed flats, rather
than making the more logical assumption that they will have the costs of addressed flats – which is what
they will become. See AC-UDCmodel.xls, page 2, Summary TY, Row ECR, Cell P84. (That is, she
assumed that the converted flats will be handled exactly as they are today when they are unaddressed,
even though in the future they will bear an on-piece address, and addressed flats have higher costs).
Continued:
-17-
With these changes, Dr. Ingraham improved upon the Postal Service’s proposed
rate design in several ways. First, his design uses disaggregated delivery costs for the
basic and high density rates. Second, his design passes through 100 percent of those
reliably estimated cost differences, consistently with ECP. Third, it does not distort the
“base” rate relationship between high density and saturation flats; instead, it
appropriately treats the DAL surcharge as an optional rate element that does not affect
the “base” rates that all high density and saturation flats would pay.
To approximate the revenue raised by the Postal Service’s rates, Dr. Ingraham
made a minor reduction in the DAL surcharge of 0.1 cent, to a total surcharge of 1.4
cents. The net result is an increase in the minimum per piece rate of merely two-tenths
of a cent over the Postal Service’s proposal—from $0.101 to $0.103. NAA-T-2 at 20.
No piece-rated saturation DAL mailers would pay more than one-tenth of a cent more
under this design for piece-rated flats than under the Postal Service’s proposal.
Importantly, under this proposal the most common saturation flat (entered at the DDU)
would pay no more than under the Postal Service’s design.
These corrections produce the following piece rates for commercial ECR mail:
See Tr. 12/3465 (Kelley) (stating that additional costs of the formerly unaddressed flats might offset some
portion of the costs avoided by the elimination of the DALs).
-18-
TABLE 7A: PIECE-RATED FLATS RATES ($)
Basic
High Density
Saturation
Origin
0.236
0.192
0.184
DBMC
0.208
0.164
0.156
DSCF
0.201
0.157
0.149
DDU
0.193
0.149
0.141
TABLE 7B: POUND-RATED PIECE CHARGE FOR FLATS ($)
Basic
High Density
Saturation
Origin
0.103
0.059
0.051
DBMC
0.103
0.059
0.051
DSCF
0.103
0.059
0.051
DDU
0.103
0.059
0.051
NAA-T-2 at Tables 7A & 7B. In both rate designs, Dr. Ingraham also retained the
current pound charge, for the reasons discussed in the following section.
NAA believes that Dr. Ingraham’s second rate design (Table 7) most closely
reflects the record evidence and should be adopted. Either, however, would improve
upon the Postal Service’s proposal.
D.
The Postal Service Has Not Justified A Reduction In The Pound
Charge For Pound-Rated ECR Mail
With virtually no explanation – and despite proposing average increases of 8
percent or more for ECR mail (not to mention increases of as much as 33 percent for
some Within-County newspapers), the Postal Service has proposed to reduce the
pound charge component of ECR pound-rated mail from the current $0.643 per pound
to $0.641. USPS-T-36, WP-STDECR.xls at 16 (Kiefer). Coupled with a slight increase
in the piece charge, the net effect is a proposed reduction in pound-rated mail beginning
-19-
at about 6 ounces for DDU-entered saturation mail and 12 ounces for high-density
mail.17
NAA opposes this change as unsupported on the record and unfair in a case
where other mailers are facing large rate increases. See 39 U.S.C. §3622(b)(1). The
Postal Service offered no explanation for this proposed reduction in its direct case. The
ECR rate design witness was silent on the issue in his direct testimony, stating merely
that he “selected” the pound charge. USPS-T-36 at 32 (Kiefer). Nor did the Postal
Service provide elaboration during discovery. Mr. Kiefer testified that he based his rate
design solely on the cost information provided to him by witnesses Talmo and Kelley.
Tr. 5/911 (Kiefer). But neither of these witnesses provided any evidence on the effect of
weight on ECR costs.
The only explanation offered by the Postal Service anywhere in the record
appeared in an interrogatory response, which stated that the pound rate was selected
“that did not exceed the current pound rate element in order to bring greater emphasis
to the piece rate element in the overall rate” and with “consideration of how the rates
produced by the selected piece and pound rate elements related to the unit cost
information for flats.” Tr. 5/909 (Kiefer). By its terms, however, these statements refers
to a pound charge no higher than the current rate, not a reduction. Furthermore, Mr.
Kiefer did not explain why he wanted to give “greater emphasis” to the piece charge or
how his design related to the unit cost information for flats.18 Nor does the Postal
17
See Tr. 17/5173 (O’Hara); see also USPS-T-36, WP-STDECR.xls at 17.
18
In response to interrogatory NAA/USPS-1, the Postal Service filed estimated TY08 unit costs by
ounce increments for saturation letters and flats. The record contains no indication that Mr. Kiefer relied
upon, or even saw, this material. Moreover, the USPS response offered significant caveats warning of
Continued:
-20-
Service have any data as to possible revenue consequences of this change. Tr. 5/902
(Kiefer).
In Docket No. R2000-1, the Commission called upon the Postal Service “to
conduct a new analysis” of the pound charge. Opinion and Recommended Decision,
Docket No. R2000-1 at 363 (Nov. 13, 2000). Six years later, the Postal Service still has
not produced the “comprehensive study” (id. at 377) desired by the Commission. The
Commission should not further reduce the pound charge until that study is completed
and properly assessed.
Finally, although the Postal Service proposed these rate reductions for heavier
ECR mailings, it made no effort to ascertain the possible effects of its proposal on the
alternate delivery industry – the private sector that directly competes with the Postal
Service. In particular, the Postal Service has received no updates in six years on a
study on the private delivery industry performed by SAI prior to Docket No. R2000-1.
Tr. 17/5170-71 (O’Hara). Indeed, the record suggests that the only consideration given
by the Postal Service to the effect of its ECR rate proposal on the alternate delivery
industry was to look at the average rate increase for all ECR mail – without any
attention to the weight increments of competitive concern. Tr. 17/5177-5178 (O’Hara).
The Postal Service is required to do more than that.
the “appropriate use of the data,” conceding that individual ounce increments are unreliable due to
“substantial sampling variability, particularly higher ounce increments for letters and flats.” Providing
additional caveats, the Postal Service also referred to testimony from Docket No. R2000-1, in which a
similar cost distribution analysis had been presented, and similar caveats were made. Although the
response to NAA/USPS-1 is sparse, it appears that those data are based on IOCS tallies. If so, then the
data in that response do not reflect the costs imposed by pound-rated ECR flats in carrier delivery
operations.
-21-
Dr. Ingraham’s ECR rate designs used the current pound charge, rather than the
Postal Service’s reduction, and should be re commended by the Commission.
E.
Witness Mitchell’s Alternative ECR Rate Designs Should Be Rejected
Val-Pak witness Mitchell proposed alternative rate designs for both Standard
ECR and Regular mail. While there are many flaws in Mr. Mitchell’s proposal,19 in this
portion of its brief, NAA will address only one specific aspect of the ECR rate design –
Mr. Mitchell’s treatment of the high density discount for flats. Mr. Mitchell’s testimony on
ECR cost coverages is addressed in Section III.B.3.
In his direct testimony, Mr. Mitchell expressed doubt as to the disaggregated
carrier delivery costs provided by Postal Service witness Kelley discussed previously.
Although he admittedly is not an expert on carrier operations (VP-T-1 at 129), he
arbitrarily chose not to believe the Postal Service’s delivery cost data (id. at 174) despite
having no better data of his own. As a result, he arbitrarily “transferred” 1.4 cents from
the high density discount to the saturation discount (id.), in effect giving saturation
mailers the full benefit of cost reductions accruing from high density worksharing.
Mr. Mitchell’s adjustment is arbitrary and unsupported by any data. The
Commission should reject his alternative and adopt Dr. Ingraham’s rate design.
19
Just to mention one, Mr. Mitchell’s mechanistic approach did not address the effects of some of
his resulting rate increases, some of which exceeded 40 and 50 percent. See USPS-RT-11 at 21
(Kiefer).
-22-
III.
THE COMMISSION SHOULD REASSIGN INSTITUTIONAL COSTS IN
RECOGNITION OF THE CHANGING MAILSTREAM
This is the first litigated case in the history of the Postal Reorganization Act in
which First Class Mail not only no longer comprises the majority of the mailstream, but
is not even the largest class of mail. This dramatically changed composition of the
mailstream, coupled with the emergence of electronic communication substitution for
First-Class Mail driven by broadband deployment, demands a fundamental reevaluation
of the traditional allocation of institutional cost burdens in order to ensure the ongoing
financial security of the Postal Service for both legal and policy reasons.
Indeed, First-Class Mail’s loss of its leadership share and the new electronic
communication environment dramatically change the factual premises upon which
traditional institutional cost assignments were based. Therefore, the Postal Service and
Commission should reassess the relative institutional cost burdens borne by the various
classes and subclasses of mail. Such a review should lead the Commission to begin to
restructure the Postal Service’s revenue stream by shifting more of the institutional cost
burden from First-Class Mail to other classes of mail. This has long been a policy goal
and is now increasingly a fiscal necessity.
Under the Postal Service’s proposal,20 First-Class Mail would pay nearly 58
percent of the non-volume variable costs of the postal system, and pay an average of
23.5 cents of contribution on a per-piece basis. Standard Mail, despite being the largest
class, would pay less than 30 percent of the non-volume variable costs, with an average
20
This discussion uses the Postal Service’s presentation, which marks up volume variable costs,
instead of the Commission’s definition of attributable costs which, as discussed in subsection C below, is
the correct basis on which to assign institutional costs.
-23-
contribution per piece of about 10 cents, less than half of that of the average First-Class
mailpiece. The contribution of all of the other classes to non-volume variable costs
would be almost insignificant.
Even when First-Class Mail was the largest class, the Commission sought to
reduce its large and disproportionate share of institutional costs. Yet concerns about
rate shock to other classes always prevented the Commission from relieving the burden
on First-Class Mail. As a result, there has been no real readjustment of institutional cost
burdens.
These fundamental changes in the nature of the mailstream have happened
relatively quickly, since 2000. As there has been no fully litigated postal rate case since
Docket No. R2000-1, the Commission has not had a real opportunity to consider these
changes and their implications for postal pricing. The Commission should revisit and
revise the unjustifiable relative institutional cost burdens that originated when the Postal
Service and the mailstream looked far different. A necessary and prudent first step
would be to reduce the burden on First Class mail and that “other classes—and, due to
its sheer size, Standard Mail in particular—must play an increasingly important role in
the funding of institutional costs both now and in the future.” NAA-RT-1 at 22 (Sidak).
Some Standard ECR mailers argue, based on selective quotations from the
Docket No. MC95-1 reclassification case and subsequent rate cases, that their
institutional cost assignments should be reduced. There are numerous reasons why the
Commission should disregard those pleas. Not only do these mailers ignore the
fundamental changes to the mailstream (as explained by NAA rebuttal witness Sidak)
-24-
that undermine the premise of their arguments, but their proposals also suffer other fatal
flaws (as explained by NAA rebuttal witness Ingraham).
Finally, as is the Commission’s long-standing practice, institutional costs should
be marked up from all attributable costs and not, as the Postal Service proposes to do,
on volume variable costs only.
A.
The Decline of First-Class Mail And The Emergence Of Standard Mail
As The Largest Class – Soon To Be the Majority of the Mailstream –
Requires The Commission To Reconsider Institutional Cost
Assignments For Both Legal And Policy Reasons
Since Reorganization, First-Class Mail’s status as a majority of the mailstream
has been used as a major justification for assigning the majority of institutional costs to
that class. As First-Class Mail loses that status – and, indeed, is replaced by Standard
Mail -- and is increasing susceptible to electronic diversion, a reevaluation of
institutional cost assignments is required both as a matter of law and as a matter of
policy.
1.
First-Class Mail’s status as the largest and majority class has
historically been used to justify placing upon it the great
majority of the institutional cost burden
There can be no denying that, historically, First-Class Mail’s status as the largest
component and majority of the mailstream has underlined the Commission’s decisions
to assign it the majority of the institutional cost burden of the postal system. See
R2001-1 Op. at ¶3022 (“Nearly 100 billion pieces, or almost one-half of all mail volume
pays either the single-piece rate or a rate derived from it. This additional revenue is
essential to the Postal Service”); Opinion and Recommended Decision, Docket No.
R90-1, V-1 (“First Class is the largest, in volume and revenue terms, of all the major
-25-
subclasses”); Opinion and Recommended Decision, Docket No. R87-1, ¶5000 (“FirstClass Mail has generally been and still is the predominant mail category”).
For that reason, the cost coverage of First-Class Mail has consistently been set
above the systemwide average and, when combined with its volume, First-Class Mail
has paid the great majority of institutional costs over the years. Indeed, the relative
burden of institutional costs (as measured by markup indices, the Commission’s
preference for year over year comparisons) borne by First-Class Mail has even risen
since 1994, with presort/workshared mail accounting for the increase. This is clear from
information prepared by Dr. O’Hara and repeated in Professor Sidak’s rebuttal
testimony as Table 1 (and replicated here):
Table 1: Cost Coverage Indexes for First-Class and Standard Mail Since 1995
First-Class Mail Cost
Coverage Relative to Average
Year
System
Average
Cost
Coverage
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
164
181
179
168
171
171
173
186
185
176
176
181
189
Total
1.09
1.13
1.16
1.17
1.18
1.18
1.20
1.17
1.19
1.19
1.22
1.21
1.21
Single
Piece
0.94
1.01
1.04
1.04
1.02
1.01
1.02
0.97
0.97
0.97
0.99
0.98
0.99
Presort
1.60
1.52
1.54
1.54
1.64
1.62
1.65
1.69
1.73
1.71
1.72
1.71
1.66
Standard Mail Cost
Coverage Relative to
Average
Total
0.98
0.93
0.91
0.89
0.91
0.91
0.90
0.94
0.93
0.97
0.99
0.98
0.98
Regular
ECR
0.83
0.80
0.76
0.78
0.79
0.79
0.79
0.82
0.84
0.91
0.92
0.93
0.94
1.38
1.30
1.34
1.19
1.28
1.36
1.29
1.41
1.32
1.16
1.18
1.16
1.14
Source: Response of United States Postal Service Witness O’Hara, VP/USPS-T31-7-9, 9.
-26-
This Table shows First-Class Mail has consistently and deliberately had markups well
above the systemwide average, and in fact its markup index has risen from 1.05 in 1994
to 1.21 in TY08 in the current proposal. Tr. 17/5123.21
This approach kept the Postal Service funded over the years because First Class
Mail volumes increased during this period. See USPS-T-7 at 43 (Thress) (volume
history). However, the Postal Service’s longstanding treatment of First-Class Mail as an
inexhaustible piggybank to fund its network expansion is based on fundamental
premises that no longer hold true.
In particular, the composition of the mailstream has changed and will continue to
change over the foreseeable future, including the Test Year. First-Class Mail itself is in
a period of decline. Volumes peaked in 2000 and have declined by 5.5 billion pieces in
the years since. Id.
Perhaps even more importantly from the perspective of ratemaking, First-Class
Mail volumes have declined relative to other classes of mail. Several years ago FirstClass Mail lost its status as a majority of the mailstream, and in 2005 it even ceded the
honor of the largest class of mail to Standard Mail. In 2005, Standard Mail totaled some
100,942,092,000 pieces, compared to 98,070,956,000 pieces of First-Class Mail.
USPS-T-7 at Tables 3 & 22. This trend will continue (or accelerate), resulting in the
volume of Standard Mail exceeding First-Class Mail by more than 15 billion pieces by
the Test Year. USPS-T-7 at 412-413 (forecasting TYAR volumes of 91.291 billion
pieces of First-Class mail and 107.168 billion pieces of Standard Mail).
21
On cross-examination, Dr. O’Hara conceded that comparisons in the table in VP/USPS-T31-9,
from which Mr. Sidak’s Table 1 is copied), are valid. Tr. 17/5197.
-27-
The Postal Service recognizes elsewhere this change in the composition of the
mailstream. Observe the following from its recently filed brief in Docket No. N2006-1:
For the duration of modern postal history until relatively
recently, the majority of postal mail volume consisted of
First-Class Mail. See, Docket No. R2006-1, USPS Library
Reference L-74, Domestic Mail Revenue and Volume
History; and Docket No. R2005-1, USPS Library Reference
K-74, Domestic Mail Revenue and Volume History. Over
time, many aspects of current postal mail processing and
transportation operations have been organized in large part
to meet the requirements of providing that service.
However, as can be affirmed by a cursory review of these
Library References, the historical trend of robust First-Class
Mail volume growth has ended and First-Class Mail volume
has declined in recent years.
Now, the dominant mail class in terms of volume is Standard
Mail, a large proportion of which is drop-shipped and enters
the mail stream at or near destination.
Initial Brief of the United States Postal Service, Docket No. N2006-1 at 2-3 (Oct. 19,
2006). Despite this recognition elsewhere, one would hardly know from the Postal
Service’s case that in the past six years First-Class Mail not only has lost its status as a
majority of the mailstream, but that it no longer is even the largest class. This change in
the composition of the mailstream means that the Postal Service and Commission can
no longer rely upon the traditional ground of First-Class Mail’s leading size for assigning
it the lion’s share of institutional costs.
2.
Electronic communication, spurred by broadband deployment,
has emerged as a major substitute for First-Class Mail
Not only has First-Class Mail lost its status as the largest class, but it also faces a
new form of completion in the form of electronic broadband communications. The
absolute decline in First-Class Mail volumes undoubtedly is due to the substitution of
electronic communication services, spurred by a boom in deployment of broadband
-28-
communications facilities. This change in the economic marketplace in which the Postal
Service operates has significant implications for the volume and pricing of First-Class
Mail now and in the future.
Witnesses Thress (USPS-T-7) and Bernstein (USPS-T-8) of the Postal Service
both recognize the fact of electronic substitution, as do Dr. Clifton (GCA-T-1) and Dr.
Martin (GCA-T-2), although they differ as to the extent. Mr. Sidak’s testimony provides
qualitative support for the same conclusion, explaining how the “rapid growth of
broadband availability and broadband penetration has contributed significantly to the
diversion of First-Class Mail to electronic communications.” NAA-RT-1 at 10-18. This
trend has lasted for nearly a decade, is likely permanent, and to date affects First-Class
Mail far more than other classes.22
As a result: “Because electronic communication is a substitute for First-Class
Mail, it is erroneous to assume that the Postal Service can continue to fund its
increasing institutional costs through First-Class Mail as it has in the past.” Id. at 13-14
(Sidak). This changed circumstance requires, as a matter of ratesetting policy, the
Commission to look at adjusting institutional cost assignments to provide a more stable
financial future.
22
Mr. Sidak observed that electronic communication may be a complement to Standard Mail, not a
substitute, a view consistent with that of the Postal Service. NAA-RT-1 at 18-20; accord USPS-T-7 at 99100 (Thress).
-29-
3.
The Commission must, for both legal and policy reasons,
reevaluate the traditional allocation of institutional costs in
light of the changed mailstream
It is a fundamental tenet of administrative law that “changes in factual and legal
circumstances may impose upon the agency an obligation to reconsider a settled policy
or explain its failure to do so.” Bechtel v. Federal Communications Commission, 957
F.2d 873 (D.C. Cir. 1992); accord American Horse Protection Association, Inc. v. Lyng,
812 F.2d 1 (D.C. Cir. 1987) (holding that subsequent developments may require
reconsideration of prior decision); Geller v. Federal Communications Commission, 610
F.2d 973 (D.C. Cir. 1979) (holding that agency can be required to initiate rulemaking if
significant predicate of a prior decision has been removed).
The fundamental changes in the mailstream summarized in the preceding pages
are such changed circumstances. The historic replacement of First-Class Mail by
Standard Mail as the largest class of mail and the decline of First-Class Mail in absolute
volume create a legal obligation for the Postal Service and Commission to reevaluate
the relative institutional cost burdens borne by the largest classes of mail.
Such a reevaluation is also required by policy considerations. “The decline of
First-Class Mail and the ascendancy of Standard Mail means that the Postal Service
can no longer rely on its former business model, in which growth in the demand for
First-Class Mail was expected to pay the bulk of the institutional costs of the postal
network.” NAA-RT-1 at 7-8 (Sidak). It is necessary to reevaluate the sources of
revenue to fund the institutional costs of the system and address the future fiscal
stability of the Postal Service. This duty falls to the Commission in this case because,
for its part, the Postal Service has failed to recognize that it must do so.
-30-
Unfortunately, although the Postal Service demonstrated some awareness of the
issue in its volume forecasting testimony, its pricing testimony ignored the phenomenon.
During oral cross-examination, the Postal Service’s pricing witness admitted that he
could not identify any effect that the flattening and decline of First-Class Mail had on his
testimony. Tr. 17/5199-5200 (O’Hara). He added that the Service has yet to have “put
a lot of thought” into obtaining larger institutional cost contributions from classes other
than First-Class. Tr. 17/5201 (O’Hara). Instead, the Postal Service simply proposed to
perpetuate the longstanding over-burdening of First Class Mail and made no effort to
start spreading greater responsibility for institutional costs over other classes.23
NAA respectfully submits that legal duty and compelling policy considerations
require that the Commission reevaluate traditional institutional cost assignments in light
of these changed circumstances. More revenues for the Postal Service’s overhead
costs inevitably will have to come from other classes of mail.
B.
The Commission Should Relieve The Excessive Institutional Cost
Burden Borne By First Class Mail
This is the first real opportunity for the Commission to consider the Postal
Service’s sources of institutional cost recovery in light of the new world of electronic
substitution for First-Class Mail. Both ratemaking policy considerations regarding
sustainable revenue streams and the statutory criterion that rates be fair and equitable
(39 U.S.C. §2622(b)(1)) should lead the Commission to take this opportunity to shift
some of the institutional cost burden off of First-Class Mail.
23
Dr. O’Hara testified that it was not a goal of the Postal Service’s pricing proposals to obtain more
contribution from other classes. Tr. 17/5202.
-31-
1.
The Postal Service has proposed yet again to place the
greatest institutional cost burden on First-Class Mail
The Postal Service’s direct case proposes the following institutional cost
contributions:
First Class letters
First Class single piece
First Class presort
Standard Regular
Standard ECR
Volume
(000s)
85,749,198
37,206,438
48,542,760
75,188,113
31,864,791
Revenue
35,871,060
19,430,640
16,440,420
17,364,127
5,956,641
Total
Contribution
$20,182,675
$9,007,379
$11,175,296
$7,527,555
$3,175,698
Unit
Contribution
$0.2354
$0.2421
$0.2302
$0.1001
$0.0997
NAA/USPS-T31-1. As this table indicates, under the Postal Service’s proposal, First
Class Mail would continue to bear an excessive share of institutional costs regardless of
whether costs are measured in the aggregate or on a unit basis.
A comparison of unit contributions is telling. Indeed, the Commission has long
recognized the relevance of unit contributions as a comparative measure of institutional
cost burdens, particularly among the letter mail subclasses. For example, in Docket No.
R97-1, the Commission reiterated:
allocating institutional costs on the basis of markup alone
could fail to give adequate recognition to the benefit that
subclasses with low attributable cost derive from the
existence of a national integrated postal system. The
Commission has reviewed the unit contribution of such
subclasses and adjusted markups, where appropriate, to
assure that the factors of the Act are fairly and equitably
reflected.
Docket No. R97-1 Op. at ¶ 4084.24 The Postal Service concurs: Dr. O’Hara explained in
his testimony why unit contributions are a particularly useful measure in these days of
24
MOAA witness Prescott’s assertion that unit contributions have no role in setting postal rates
(MOAA-T-1 at 12-13) is, therefore, simply wrong.
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highly discounted mail classes, as they focus attention on the actual contributions
made.25
Under the Postal Service proposal, First-Class Mail would make after rates perunit contributions of $0.235 for single-piece letters and $0.234 for presorted letters. Tr.
16/4777 (Taufique) (TYAR 2008 unit contribution for single piece First Class letters are
23.5 cents and 23.4 cents for Presort letters, using the USPS’s volume variability
estimate); see also Tr. 16/4905 (Taufique). Using the Commission’s preferred costing
methodologies produces smaller, but still quite large, unit contributions of First-Class
single piece and presort at 20.63 cents and 22.45 cents, respectively. MMA/USPST32-7 (institutional).
By comparison, Standard Regular and Standard ECR mail would contribute only
10 cents (Regular) and 9.97 cents (ECR) under the Postal Service’s proposal, less than
half of that made by First-Class letters. Thus, the Postal Service is proposing to require
First-Class letters to pay 230 percent of the unit contribution of a Standard mail pieces.
The Postal Service’s direct case nowhere justifies a difference of such
magnitude. Although Standard Mail is more workshared (at least compared to FirstClass single-piece letters), discounts set properly using the Efficient Component Pricing
rule should leave unit contributions unaffected. USPS-T-31 at 13-14 (O’Hara); NAA-T-1
at 8-11 (Sidak).
25
As Dr. O’Hara explained, cost coverage percentages rise artificially due to greater worksharing
even while unit contributions remain constant, and such mathematics-driven percentage increases do not
reflect decisions to shift more costs onto such classes. USPS-T-31 at 13-14 (“Worksharing takes
attributable costs out of the system but leaves institutional costs unchanged.”) Thus, witnesses Prescott
(MOAA) and Mitchell (Val-Pak) are simply wrong in emphasizing cost coverages in their testimony to the
exclusion of other, more pertinent, criteria.
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A comparison of relative markups, as measured by markup indices, indicates the
same. The relative burden on First-Class Mail has consistently remained above the
systemwide average, and even increased in recent years. During the same time, the
relative markup of Standard ECR mail has fallen while Standard Mail overall has
remained comparatively level. See NAA-RT-1, Table 1.
The same story holds true in aggregate terms. The Postal Service is proposing
that First-Class mail make a contribution to institutional costs that nearly doubles the
attributable costs of all subclasses of Standard mail combined ($20 billion compared to
$12.5 billion in Standard attributable costs). This means that if First-Class Mail were to
disappear, other classes would have to assume an additional $20 billion of institutional
costs, ceteris paribus. To illustrate, if this entire quantity were borne by Standard Mail,
the average Standard Mail rate would have to rise by 18.85 cents.
No one is calling for rate changes of this magnitude, and First-Class Mail is not
going to disappear anytime soon. But the trend is clear, and the implications for the
Postal Service’s financial health are alarming if the Service continues to bet the ranch
on a declining class of mail.26
The only measure by which Standard (A) ECR mail appears to make a larger
contribution than First Class mail is the illusory one of percentage cost coverage
markups. Unsurprisingly, Val-Pak and the Mail Order Association of America
sponsored testimony that the cost coverage of Standard ECR mail is too high and
26
The Postal Service recently filed (and more recently withdrawn) a proposed negotiated services
agreement explicitly intended to encourage a shift of solicitation mail from Standard to higher-unit
contribution First-Class Mail. This might not have been necessary were the rates not so widely apart.
See Washington Mutual Negotiated Services Agreement, Docket No. MC2006-3.
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should be reduced. Cost coverages are illusory in this context because, as the
Commission has previously recognized, expressing institutional cost contributions in
percentage terms can be misleading when comparing subclasses made up of mail with
different levels of worksharing. Even if percentage cost coverages were a dispositive
consideration, workshared First-Class Mail is in far greater need of a reduction, bearing
an implicit cost coverage of some 300 percent (caused by its 23 cent unit contribution),
about 100 percent higher than Standard ECR. See USPS-RT-10 at 10 (Robinson).
These relative burdens reflect the historical pattern. But the business model that
underlies these relative burdens is collapsing from electronic substitution and the
emerging dominance of advertising mail. Under the circumstances, both legal and
policy considerations require the Commission to reassess how institutional costs are
recovered.
2.
The Commission should reduce the institutional cost coverage
of First-Class Mail and fulfill its longstanding goal of shifting a
greater share of institutional costs to Standard ECR and
Regular Mail
Section 3622(b)(3) of the Act requires each class of mail to bear the institutional
costs “reasonably assignable” to it. 39 U.S.C. § 3622(b)(3). For the many years that
First-Class Mail constituted a majority of the mailstream, burdening it with the great
majority of institutional costs was held to be consistent with this criterion. With the
changed circumstances facing First-Class Mail, such should no longer be the case.
Under the Postal Reorganization Act, the Commission may not act arbitrarily and
capriciously, and postal rates must be “fair and equitable.” 39 U.S.C. §3622(b)(1). NAA
submits that it would be arbitrary for the Commission not to modify the Postal Service’s
proposed institutional cost assignments (which, as shown above, adhered to the
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traditional relative assignments) in light of the fundamentally changed mailstream and
economic environment. Now that First-Class Mail no longer will be the majority, or even
the largest subclass, the “fair and equitable” criterion should counsel the Commission
against retaining the traditional institutional cost assignments set when mailstream
composition and the economic marketplace were quite different. The reassessment of
relative institutional cost burdens should conclude that some of the overhead burden
should be shifted off of First-Class Mail to other classes.
This outcome would also be consistent with the Commission’s oft-expressed
preferences. In past cases, the Commission has consistently stated that it would have
preferred to reduce the institutional cost burden on First-Class Mail relative to other
classes, but felt unable to do so because of concerns of rate shock in other classes that
would have had to pay more.27 The inability to achieve that goal in the past may well
have contributed to the stagnation of First-Class volumes. The need to do so has
become even more urgent with the decline of First-Class Mail.
The record in this proceeding contains two concrete proposals that would reduce
the institutional cost burden on First-Class Mail. Dr. Clifton, on behalf of the Greeting
Card Association, presented two alternatives, one each for whether the Commission
chooses to “link” or “delink” single-piece and presort rates in First-Class Mail. GCA-T-1
27
See R90-1 Op. at IV 33-34 n.16 (“This is the second consecutive case in which we might have
raised First-Class rates less, and raised third-class rates more, but for the potential impact of such
increases on third-class mailers. . . . [M]ailers should be aware that the current status is consistent with
the Act only as a short-term remedy”); Opinion and Recommended Decision, Docket No. R94-1 at IV-16,
¶¶ 4044-45, 4059 (Nov. 30, 1994) (“t]he other consequences of implementing [a lower First-Class rate] in
this case would have included average rate increases of 17 percent for third-class regular rate, 24
percent for second-class regular rate, and even greater increases for the parcel subclasses in fourthclass mail” (citing rate shock concerns); R97-1 Op. at V-275, ¶ 5047 (raising First Class rates reluctantly
to avoid “imposing undue rate increases on other classes of mail”).
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(Clifton).28 Also, APWU witness Kobe also proposed to reduce the Postal Service’s
requested 3 cent increase in the First-Class single-piece rate by a penny to 41 cents.
APWU-T-1 at 9.
Serious questions exist regarding the Postal Service’s estimates of
price elasticities for major classes of mail
Dr. Clifton’s proposal is based on a thorough and detailed critique of Mr. Thress’s
volume forecasting model.29 Dr. Clifton testimony provides a valuable contribution to
the record, pointing out important reasons why the Postal Service’s estimates of price
elasticity for important categories of mail may not only be incorrect, but reversed,
reflecting their changed importance.30 Specifically, he concluded that Mr. Thress has
significantly underestimated the own-price elasticity of First-Class single piece Mail and
overestimated the elasticity of Standard Regular mail.31
Dr. Clifton pointed out that there is little reason to have confidence in the Postal
Service’s estimated price elasticity of First-Class mail. For example, the Postal
Service’s estimate of the own-price elasticity of First-Class workshared mail changed by
60 percent in one year – the estimate in R2005-1 was 253 percent higher than the in
this case. GCA-T-1 at 5 (Clifton). This has occurred during a time when the emergence
28
Conceivably, the “forever stamp” could tend to reduce First-Class single piece postage over time.
29
Professor Harry Kelejian, a highly-regarded econometrician, also submitted testimony identifying
numerous flaws in Mr. Thress’s model. GCA-T-5.
30
Dr. Clifton’s testimony did not present a calculation of the price elasticity of Standard Enhanced
Carrier Route mail, although he stated that he believes that it also is inelastic. Tr. 29/9797. However,
given the extent of the errors that he identified in the Postal Service’s estimates of the price elasticities of
First Class single piece and Standard Regular mail, it is likely that the Postal Service’s estimated price
elasticity for Standard ECR mail is also erroneous and, like in the case of Standard Regular, is too high.
31
Dr. Clifton stated: “In the face of the growth of competing electronic substitutes for First Class
single piece letters since the last litigated rate case in R2000-1, I believe Mr. Thress’ approach to
modeling those competing substitutes is fundamentally flawed and produces seriously downward biased
estimates of the own price elasticity of First Class single piece letters.” GCA-T-1 at 2.
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of the Internet would have been expected to increase, not decrease, the price elasticity
of single-piece First Class letters. Tr. 29/9806 (Clifton). The Postal Service’s estimate
of the price elasticity of workshared First-Class Mail has changed so drastically is only
one year that even Mr. Thress – the sponsor of the volume forecast – has taken the
extraordinary step of disavowing his estimated price-elasticity of workshared First Class
Mail of only last year and upon which the Commission relied just one year ago. GCA-T1 at 5-6, quoting Tr. 6/1325.32 NAA witness Sidak’s rebuttal testimony noted that Dr.
Clifton’s analysis is consistent with recent trends in the deployment of broadband
technology, which is generating extremely low cost substitutes for First-Class letters.
NAA-RT-1 at 17-18.
Actual service performance cannot justify the proposed comparative
institutional cost burdens
Price elasticity of demand is one aspect of the value of service, which the
Commission considers pursuant to Section 3622(b)(3) of the Act. 39 U.S.C.
§3622(b)(3). Actual service is another aspect of Criterion 3.33 Here, too, there is ample
reason to reduce the institutional cost burden on First Class Mail.34 The Commission
32
Dr. Clifton also pointed out that although Mr. Thress’s estimates of price-elasticity of single-piece
First-Class Mail have ranged widely, they are consistent with the case of a single competitor in the market
(here, the USPS) which refuses to compete on price. GCA-T-1 at 10. There is no dispute that the price
of electronic substitutes for First Class mail, especially single piece, has fallen substantially in recent
years. See NAA-RT-1 at 11-13 (Sidak). The problem is that the Postal Service has not attempted to
compete with this price decline in its own price of First Class letters. Dr. Martin testified how postal rates
are a “significant behavioral trigger” for electronic diversion. GCA-T-2 at 2, 25 & 54 (Martin).
33
The Postal Service has conceded that “actual service levels may constitute a relevant issue”
(Presiding Officer’s Ruling No. R2006-1/19 at 4).
34
First-Class and Standard mail often are processed and travel through the postal system together,
on an equal basis. Mr. McCrery, the Postal Service mail processing operations witness, testified that
Standard Regular letters generally are merged with First-Class Mail letters using incoming secondary
sortation. Tr. 11/3113. In addition, Standard Regular letter mail is, on occasions, merged with First Class
Mail in the outgoing primary sortation. Tr. 11/3108 (McCrery).
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has previously determined that actual service for First-Class Mail has declined since the
last fully-litigated case, and the lack of meaningful measures of service performance
can no longer justify retaining the traditional markup relationships.
First, this is the first fully-litigated case since the Commission determined, in
Docket No. C2001-3, that the Postal Service had reduced First-Class service when it
revised the two- and three-day city pairs in 2000-2001. This Commission concluded at
that time: “As a result, service resulting from the realignment cannot be said to be
sufficient to meet those needs in all areas required by sec. 403(b).” See Commission
Report, Complaint on First-Class Mail Service Standards, Docket No. C2001-3, at 1.35
For purposes of this case, this means that the level of service provided to First-Class
Mail has declined since the last fully-litigated case, which by itself justifies a reduction in
the institutional cost contribution compared to that set in Docket No. R2000-1.
Second, the Postal Service’s own limited measures indicate that First-Class Mail
does not even meet the modest (reduced) service goals set for it. See OCA/USPS-2-6
& NAA/USPS-8. The Postal Service does not measure service performance of
Standard Mail. OCA/USPS-4. On the other hand, the record indicates that often
Standard ECR mail must be delivered in a timely matter (e.g., VP-T-2 at 8 (Haldi); Tr.
17/5207 (O’Hara)), so at least significant portions of Standard mail apparently receive
quite good service.
35
Although the Postal Service denied that the changes constituted a downgrade, more volume
received a downgraded service standard than received upgrades. Commission Report, Docket No.
C2001-3, Appendix A at 2.
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Third, the conventional response is that First-Class Mail has superior
performance standards compared to Standard mail.36 Comparisons of stated
performance standards are not meaningful, however, unless there is evidence of how
well the Postal Service is achieving those standards across the classes. Unfortunately,
even the Postal Service’s measurements do not track service performance for the
majority of First-Class Mail and does not track its performance for Standard Mail at all.
Tr. 17/5087 (O’Hara).
In fact, the Government Accountability Office recently determined that Postal
Service actually measures its performance for only about 20 percent of the mail,
including portions of single-piece First-Class Mail and no bulk First-Class Mail. U.S.
Government Accountability Office, U.S. Postal Service Delivery Performance
Standards, Measurement, and Reporting Need Improvement, GAO-06-733 at 4 (July
27, 2006). The GAO concluded:
No representative measures of delivery performance—
measures that can be generalized to an entire class or major
type of mail—exist for Standard Mail (48 percent of volume),
bulk First-Class Mail (25 percent of volume), Periodicals (4
percent of volume), and most Package services (less than 1
percent of volume).
Id. In sum, the Postal Service has NO measures of its performance in meeting service
standards for the vast majority of the mailstream.
Lacking any information about actual service performance, the Postal Service
apparently has taken the position that the lack of evidence supports an assumption of
no material change. Its pricing witness testified as follows:
36
Performance Standards are accessible at www.usps.com/serviceperformance. DBP/USPS-21.
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I make the assumption, (a) the degree of underachievement
for periodicals, package services, and standard has not
changed significantly so as to call for a reexamination of
coverages on that account, and I also think that an
assumption that they are not achieved 100 percent of the
time is entirely plausible to anybody that has familiarity with
that.”
Tr. 17/5206 (O’Hara). In other words, the Postal Service is using its failure to develop
performance measurements for Periodicals, Standard, and bulk First-Class Mail as a
buttress against changes in the cost coverages of those types of mail. The failure to
collect relevant evidence is not sufficient grounds to forestall changes in institutional
cost assignments that are necessitated by other factors.
*
*
*
The Commission should use this case to begin to shift the institutional cost
burden of the Postal Service from First-Class Mail to other classes, as proposed by
witnesses Clifton and Kobe.
3.
The Commission should reject proposals by Standard
Enhanced Carrier Route mailers to reduce their institutional
cost share
Standard ECR mailers advance several proposals that, instead of facing this
issue, would leave the Postal Service even more ill-positioned for the future by reducing
their own already-small contribution to institutional costs still further. Mr. Mitchell, on
behalf of Val-Pak, proposes to shift some $1 billion of institutional costs off of Standard
ECR mail to Standard Regular. Mr. Prescott, on behalf of MOAA, argues for an
unspecified reduction in ECR contributions to institutional costs, but unhelpfully did not
suggest what classes should make up the difference.
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The proposals of witnesses Mitchell and Prescott should be rejected for a
number of reasons.37 First, their premise is wrong. Contrary to the impression in the
testimony of witnesses Mitchell and Prescott, the Postal Service has steadily decreased
the relative contribution of ECR mail in recent years. As Table 1 in Mr. Sidak’s rebuttal
testimony (replicated above) indicates, the relative contribution of Standard ECR mail,
compared to other classes, in fact has declined since the Docket No. MC95-1
reclassification.
Second, witnesses Mitchell and Prescott overlook the fact that their arguments
rely to a significant degree on assumptions that are seriously out of date, having been
made when the mailstream was much different and the postal system was based on an
older model. The mailstream has changed so significantly with the emergence of
Standard Mail as the largest class and the decline of First-Class Mail that the
statements upon which they rely no longer hold whatever validity they may once have
held.38 Financial necessity will force other classes, including both subclasses of
Standard Mail, to pick up more of the burden. As NAA rebuttal witness Sidak observed:
“given that the Postal Service has already lessened the relative cost coverage for ECR,
and given that First-Class Mail has seen considerable erosion at the hands of electronic
communications, proposals to decrease ECR cost coverage still further seem to go in
the wrong direction.” NAA-RT-1 at 22.
37
In addition, Postal Service rebuttal testimony pointed out that the Commission has considered in
past cases arguments of the nature now espoused by witnesses Mitchell and Prescott. USPS-RT-10 at
21 (Robinson).
38
In rebuttal to Mr. Mitchell, the Postal Service stated: “Changes in ECR’s rates and cost coverages
must be evaluated within the wider context of the circumstances facing the Postal Service and the
Commission in Test Year 2008. Witness Mitchell has not done this.” USPS-RT-11 at 25 (Kiefer).
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Third, witnesses Mitchell and Prescott both place an unwarranted degree of
reliance on the Postal Service’s estimated own-price elasticity of demand for ECR mail
than that estimate can bear. As Dr. Ingraham explained in his rebuttal testimony (NAART-2 at 4-7), Mr. Thress’s estimated price elasticity of -1.07 for ECR mail is subject to
substantial statistical variation and it is quite possible that the elasticity in fact is less
than one. For purposes of this case, this should suffice to caution the Commission
against making any reductions in the ECR cost coverage of the drastic nature proposed
by Val-Pak and MOAA.39
Furthermore, Dr. Clifton’s direct testimony on behalf of the Greeting Card
Association and that of Dr. Kelejian identify certain significant shortcomings in the
volume forecasting model used by Mr. Thress for First-Class and Standard Regular
Mail. If those criticisms are credited, it is also highly likely that similar problems afflict
Mr. Thress’s ECR model, which is similar to his Standard Regular model in most
significant respects. At the least, the questions about the accuracy of Mr. Thress’s
model should deter the Commission from placing weight on Thress’ estimates of price
elasticity of demand in setting institutional cost contributions.
Fourth, as Dr. Ingraham also pointed out, Messrs. Mitchell and Prescott appear
to err by conflating the concept of value of service to little more than the own-price
elasticity of demand of the marginal piece. In fact, as Dr. Ingraham explained in his
rebuttal testimony, a proper calculation of the value of service of an entire subclass
39
Dr. Ingraham also explained that neither the Postal Service nor intervenor witnesses had made a
proper statistical test to determine whether the own-price elasticity of ECR mail has, in fact, changed
since Docket No. R97-1, when it first was separately measured. Tr. 35/11868-69.
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requires consideration not only of the price elasticity of demand at the marginal piece
but also consideration of the volume. NAA-RT-2 at 9-10; Tr. 35/11885. In addition, it is
important when measuring value of service to have an understanding of the entire
demand curve, not merely the point estimate of price elasticity at a particular volume.
Fifth, that Standard ECR mail has a higher cost coverage than some other
subclasses is of no real concern, for the reasons recognized in the past by the
Commission, and as acknowledged in this case by Postal Service witness O’Hara
(USPS-T-31). Where discounts are set at either 100 percent or close to 100 percent of
avoided costs, a highly-workshared subclass will appear to have a high percentage
markup simply due to mathematics. More sophisticated analysis requires a
consideration as well of unit contributions, total contributions, and relative contributions,
including markup indices.
Using these measures, the institutional cost burden imposed on ECR mail is
modest. Its unit contribution, barely 10 cents, is less than half of that of the average
First-Class piece and, under the Postal Service’s proposal, equal to that of Standard
Regular. The Commission has noted that unit contributions are an important measure
for heavily workshared subclasses, particularly for ECR mail. Opinion and
Recommended Decision, Docket No. R97-1 at 259 (May 11, 1998).40 Furthermore, the
unit contribution of First-Class Mail has risen far more rapidly than for ECR mail. Put in
perspective, the total contribution of ECR is dwarfed by that of First-Class Mail ($20
40
The Commission noted that the ECR subclass makes disproportionately heavy use of a postal
function (delivery) that engenders significant amounts of institutional costs. R97-1 Op. at 258-59. See
also Tr. 29/9809 (Clifton) (stating that unit contributions should be used across classes and subclasses).
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billion dollars vs. $3.1 billion). It also is less than half of that of Standard Regular Mail.
In addition, as noted above, the markup index41 of ECR mail has actually declined from
1.38 to 1.14 since the subclass was created in Docket No. MC95-1.
No mailer enjoys paying institutional costs, but they must be paid. And it is a
burden that grows, as the Postal Service in this case is advancing costing
methodologies that reduce attributable costs to barely 56 percent of the total. With
First-Class Mail declining, it is certainly appropriate that its successor as the largest
class step up to the plate.
C.
Institutional Costs Should Be Applied, Consistent with Commission
Precedent, To All Attributable Costs, Not Merely Volume Variable
Costs
The Commission consistently has applied institutional cost contributions to a
base of all attributable costs, not merely volume variable costs. R97-1 Op. at IV-233
(stating that when determining the reasonableness of a subclass’s contribution to all
other costs, the Commission “must use attributable cost as a base”); R2000-1 Op. at
197 (“attributable cost serves as a floor which the Commission marks up to determine
the reasonable contribution to all other costs”): R2001-1 Op. at 39-40. The Postal
Service once again proposes to depart from this established practice, as witness
O’Hara’s testimony assigns cost coverages to volume variable costs. See USPS-T-31
at Exhibit USPS-31B & Tr. UPS/USPS-T31-2 (O’Hara) (conceding that the Postal
Service does not markup “product-specific” non-volume variable costs).
41
The Commission has stated that markup indices are superior to cost coverages as a measure of
relative burdens over time. R2000-1 Op. at 196.
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The Commission should once again reject the Postal Service’s proposal as
contrary to the statute and Commission precedent. Instead, all attributable costs should
provide the floor upon which institutional cost burdens are assigned. The Commission
has long construed Section 3622(b)(3) to require the basis for marking up institutional
costs to be all attributable costs, not merely volume variable costs, and should continue
to do so in this proceeding.
IV.
PERIODICALS RATES ISSUES
While NAA supports efforts to improve Periodicals service and costs, two
proposals in the current case are unwise and unsound. NAA joins the National
Newspaper Association (“NNA”) in urging the Commission to correct the flawed data
underlying its Within County proposal and reduce the proposed rate increase
accordingly, and to reject the Postal Service’s proposal to charge a container fee on
tubs and uncontainerized Outside County mailings.
A.
The Commission Should Adopt NNA’s Proposed Alternative For
Within County Periodicals
The Postal Service has proposed whopping increases in the rates for Within
County Periodicals mail. As NNA witness Heath testified, the Postal Service’s
requested rates will make delivery less efficient and penalize publishers who try to
reduce postal costs by presorting, dropshipping, barcoding, and using USPS-approved
software. NAA supports NNA’s proposed solution to the data problem underlying the
Postal Service’s proposal.
As NNA witness Siwek showed, the fundamental flaw in the USPS’s data is the
thinness of sampling tallies and the consequent excessive extrapolation. As a result,
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the Postal Service in truth has very limited data about In-County Periodicals costs, and
its case depends on flawed “blowing up” of a very limited dataset. Mr. Siwek concluded
that having “no data as to the real costs of Within County Periodicals, it is difficult to see
how the Commission can reach any conclusions with respect to the rate changes for the
Within County subclass” requested by the Postal Service. NNA-T-3 at 10.
To address this data problem, Mr. Siwek submitted an alternative proposal that
would use a weighted pool of the IOCS tallies from mail processing and in-office carrier
activities taken over two fiscal years. NNA-T-3 at 17-18. This would expand the tally
base and significantly reduce the wide variation in cost estimates stemming from the
new IOCS data collection method.
In short, NAA respectfully asks the Commission to reject the Postal Service’s
proposed draconian increases for Within County Periodicals as unsupported by the data
and unduly burdensome.
B.
In Outside County Periodicals, The Proposed Container Fee Should
Not Be Assessed On Tubs And Uncontainerized Mailings
NAA urges the Commission to reject the proposed container fee in Outside
County Periodicals insofar as it would apply to mailings entered at delivery units in tubs
or as loose or bundled mail. The reasons for limiting the proposed container fee in this
manner were articulated by NNA witness Heath (NNA-T-1). The container charge
should not apply to non-containerized mail, and mailers should not be discouraged from
using tubs in lieu of sacks by the container fee.
As Mr. Heath explained, the Commission should reject the illogical proposal to
charge a container fee for mailings that do not use containers. As Mr. Heath explained,
such mail is entered as bundles or pieces; there are no costs for moving or emptying
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"containers" within the postal facility because there are no containers. Postmasters in
the field prefer this option to sacks; subjecting this practice to a container fee
would create a perverse disincentive for doing so.
In addition, Mr. Heath explained that applying the container fee as proposed to
tubs and non-containerized mail would create perverse incentives and discourage
efficient mail preparation. Tubs are superior to sacks for the mailer to prepare, for the
mailer to transport, and for the Postal Service to handle. NNA-T-1 at 16. NAA supports
Mr. Heath's suggestion that the Commission reject the proposed charge on the use of
tubs, thus increasingly the incentive for mailers to abandon the use of sacks instead.
V.
CONCLUSION
For the foregoing reasons, the Newspaper Association of America respectfully
urges the Commission to recommend rates according to the positions set out herein.
NAA’s rate design proposal would set the appropriate cost-based rates in Standard
commercial ECR mail. In addition, NAA submits that the decline of First-Class Mail and
the emergence of Standard Mail as the majority of the mailstream requires the
Commission to begin to correct the historical undue reliance on First-Class Mail to fund
the institutional costs of the Postal Service. Finally, NAA joins the National Newspaper
Association in urging the Commission to correct the flawed cost estimates for Within
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County Periodicals and limit the application of the proposed container fee in Outside
County Periodicals as proposed by Mr. Heath.
Respectfully submitted,
NEWSPAPER ASSOCIATION OF AMERICA
By:
William B. Baker_________
William B. Baker
WILEY REIN & FIELDING LLP
1776 K Street, N.W.
Washington, DC 20006-2304
(202) 719-7255
CERTIFICATE OF SERVICE
I hereby certify that I have this date served the instant document on all
participants in accordance with section 12 of the Rules of Practice.
William B. Baker
William B. Baker
December 21, 2006
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