Postal Rate Commission
Submitted 12/21/2006 2:46 pm
Filing ID: 55463
Accepted 12/21/2006
BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON, DC 20268-0001
Postal Rate and Fee Changes,
2006
)
)
Docket No. R2006-1
BRIEF OF
ALLIANCE OF NONPROFIT MAILERS,
NATIONAL ASSOCIATION OF PRESORT MAILERS,
NATIONAL POSTAL POLICY COUNCIL
AND OFFICE OF CONSUMER ADVOCATE
ON PRICING OF CONFIRM SERVICE
(December 21, 2006)
Shelley S. Dreifuss, Director
Office of the Consumer Advocate
901 New York Avenue, N.W.
Washington DC 268-0001
(202) 789-6837
Fax: (202) 789-6819
[email protected]
David M. Levy
Richard E. Young
SIDLEY AUSTIN LLP
1501 K Street, N.W.
Washington DC 20005
(202) 736-8000
[email protected]
Counsel for Alliance of Nonprofit Mailers,
National Association of Presort Mailers,
and National Postal Policy Council
TABLE OF CONTENTS
Page
I.
THE COMMISSION SHOULD RETAIN A RATE DESIGN FOR
CONFIRM SERVICE THAT INCLUDES A SUBSCRIPTION TIER
WITH UNLIMITED SCANS. ...............................................................................4
A.
The Participants’ Proposals .....................................................................4
B.
Confirm Is A Critically Important Ancillary Service For Mailers,
the Public, and the USPS Itself................................................................6
C.
Eliminating the Unlimited-Scan Subscription Option Would
Damage or Destroy Confirm. .................................................................10
D.
The Postal Service Has Failed To Offer Any Credible Reason
To Eliminate the Unlimited-Scan Option. ...............................................12
1.
2.
3.
4.
5.
6.
7.
8.
The Postal Service’s Decision To Abandon the Existing
Rate Design For Confirm Was Uninformed By Any
Meaningful Effort To Determine the Views of Confirm
Users...........................................................................................14
The Postal Service’s Claim That Only a Few Mailers
Benefit From an Unlimited-Scan Option Ignores the
Benefits Which the Option Confers Indirectly On Most
Users of Confirm. ........................................................................15
There Is No Basis For the Postal Service’s Position That
the Current Rate Structure Cannot Generate Sufficient
Revenues To Cover Confirm Costs.............................................16
There Is No Credible Evidence That Recovering the
Costs of Confirm Solely Through Increased Subscription
Charges Will Overly Suppress Demand For Confirm or
Cause Customers To Move To a Lower Subscription
Tier..............................................................................................22
The Postal Service’s Concern That Recovering Revenue
Shortfall By Increasing Subscription Charges Will
Increase Arbitrage Opportunities For Third-Party
Resellers Is Unfounded...............................................................26
Eliminating the Unlimited-Scan Option Will Not Promote
Fairness and Equity Among Mailers............................................34
The Three-Tier Subscription Structure Is Not Unduly
Complex. .....................................................................................39
The Postal Service Has Failed To Establish Any
Incompatibility Between the OCA’s Proposed Rate
Design and Future Enhancements To Confirm. ..........................41
II.
EVEN IF A PER-SCAN CHARGE FOR EVERY SCAN WERE
APPROPRIATE, THE POSTAL SERVICE HAS FAILED TO SHOW
THAT A FIVE-TO-ONE PRICE DISPARITY BETWEEN SCANS FOR
FIRST-CLASS AND STANDARD MAIL IS CONSISTENT WITH THE
ANTIDISCRIMINATION PROVISIONS OF 39 U.S.C. § 403(C).......................42
CONCLUSION ............................................................................................................46
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BRIEF OF
ALLIANCE OF NONPROFIT MAILERS,
NATIONAL ASSOCIATION OF PRESORT MAILERS
NATIONAL POSTAL POLICY COUNCIL
AND OFFICE OF CONSUMER ADVOCATE
ON PRICING OF CONFIRM SERVICE
The Alliance of Nonprofit Mailers, National Association Of Presort Mailers,
National Postal Policy Council and Office of Consumer Advocate respectfully submit this
brief on the pricing of Confirm service.
INTRODUCTION AND SUMMARY
Confirm is a critically important ancillary service that provides substantial benefits
to mailers, the public, and the Postal Service itself. In May 2006, the Vice President of
the Postal Service responsible for Confirm stated that it “has become a robust
marketing and financial performance tool with wide application.” 1 After describing the
benefits of the program and the merits of the existing rate structure for Confirm, he
concluded:
Current Confirm customers have made it clear they want Confirm to
enhance their marketing efforts and customer relationships, and save
money by improving operational efficiency. By continuing to offer mailers
Confirm generated information, the USPS looks to improve customer
satisfaction with the mail.
Confirm constitutes a key step in providing a value-added service not just
in delivery of mail, but also in delivery of information. This information is
used by the USPS as a performance measurement tool and facilitates a
proactive approach to assess and correct mail processing inefficiencies.
Confirm represents a definite “win-win” for the USPS and its customers. 2
1
“Confirm Service – the Use of Barcode Technology To Maximize Effectiveness and
Minimize Cost,” presentation by Nick Barranca, Vice President - Product Development,
U.S. Postal Service, at International Conference on Postal Automation (“ICPA”), May
2006 (“Barranca Presentation”), at 1 (reproduced at 33 Tr. 11417) (emphasis added).
2
Id. at 11 (33 Tr. 11427).
Given this judgment, one would have expected some restraint from the Postal
Service in this case concerning the pricing of Confirm. Instead, the Postal Service has
proposed a radical transformation of the Confirm rate structure by jettisoning the
unlimited-scan option.
The Commission should reject this proposal.
Eliminating the unlimited-scan
option would damage or destroy Confirm by driving a wedge between the price and
marginal cost of a scan, thereby suppressing the usage of a service whose usefulness
to mailers, the Postal Service and the public depends on widespread usage.
The Postal Service has offered no evidence that such a destructive course is
necessary. The Postal Service’s profitability analysis is superficial, unsupported by the
record, and contrary to economic common sense. In concluding that the existing rate
would generate a test year revenue shortfall of $183,000, the Postal Service assumed
that the ability to track and trace individual First-Class and Standard mailpieces has no
effect whatsoever on the demand for, and contribution from, First-Class and Standard
mail service. Even a tiny resulting increase in the demand for these multi-billion dollar
services, however, would pay for Confirm many times over.
The Postal Service also ignored the likelihood that demand for Confirm
subscriptions will increase during the test year as a result of (1) growing demand for
multiple subscriptions by large resellers, (2) deployment of the four-state barcode,
(3) service enhancements by third-party resellers, (4) growing demand for quality-ofservice data resulting from the disruptions caused by the Evolutionary Network Design
(“END”) program, and (5) growth in the number of mailers, delivery points, and the
overall economy. The Postal Service also ignored the imputed value of the services
that the Postal Service receives from using the hardware and software developed for
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Confirm to support the Postal Service’s own internal service monitoring programs.
Instead of the Postal Service’s proposal, the Commission should recommend
Confirm prices akin to those proposed by OCA witness Callow. The OCA proposal
would retain the existing subscription structure, including its unlimited-scan option, while
achieving full cost coverage, even from the Postal Service’s narrow cost/benefit
perspective, by increasing some of the subscription fees.
The Postal Service’s
assertion that the modest subscription price increases proposed by OCA would send
Confirm into a death spiral of subscription downgrades and arbitrage is sheer
speculation, unsupported by any market studies or analyses, and wholly at odds with
the judgment of the mailers and third-party vendors that actually use and pay for
Confirm.
Finally, whether or not the unlimited-scan option is retained, the Commission
should reject the Postal Service’s proposal to charge five times as much for scans of
Standard mailpieces as for scans of First-Class mailpieces. This is economic price
discrimination, pure and simple: by the Postal Service’s own admission, the marginal
cost of scanning a mailpiece does not vary by class of service. The undersigned parties
take no position here on whether the Postal Service could provide a value-of-service
justification for this 5-to-1 disparity that would pass muster under the antidiscrimination
provisions of 39 U.S.C. § 403(c). The Commission need not reach that issue. The
Postal Service has not attempted such a justification, and thus has not met its burden of
proof under Section 403(c).
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ARGUMENT
I.
THE COMMISSION SHOULD RETAIN A RATE DESIGN FOR CONFIRM
SERVICE THAT INCLUDES A SUBSCRIPTION TIER WITH UNLIMITED
SCANS.
A.
The Participants’ Proposals
The current Confirm rate structure is a two-part rate design: users pay a
reservation charge (the periodic subscription price) and a volumetric charge (the perscan charge). Subscription fees are $2,000 per quarter for a Silver subscription, $4,500
per year for a Gold subscription, and $10,000 per year for a Platinum subscription.
Although all three categories of subscribers must pay the same $2,000 fee for additional
ID codes, only Silver and Gold subscribers must pay for additional scans. Platinum
subscribers, who pay the highest subscription fee, are entitled to an unlimited number of
scans, at no additional charge. See Bentley Direct (MMA-T-1) at 30; Mitchum Direct
(USPS-T-40) at 16 (Table 3).
The Postal Service proposes to eliminate the three subscription-based service
levels with a single annual user fee of $5,000, which includes 1 million “units.” As
proposed, additional “units” could be purchased in blocks of 1 million units at rates that
decrease after certain thresholds have been met. Under this “declining block user fee”
system, users would purchase the first nine additional blocks for a fee of $70 each; the
next 90 blocks would be available for a fee of $35 each; and each additional block in
excess of 99 would cost $17.50. The Postal Service also proposes fees of $2,000 and
$750 for annual and quarterly additional ID codes, respectively. Callow Direct (OCA-T5) at 5-6; Mitchum Direct (USPS-T-40) at 17.
In proposing to eliminate the unlimited-scan Confirm subscription level, the
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Postal Service stands alone. 3 The Postal Service acknowledges that “some mailers . . .
have expressed some dissatisfaction” with the USPS proposal. 14 Tr. 4157 (Mitchum).
In fact, every other stakeholder that has submitted testimony or pleadings on Confirm
pricing opposes the USPS proposal. See, e.g., Answer of GrayHair Software, Inc., et
al., to Objection of United States Postal Service to Filing of Supplemental Testimony of
Cameron Bellamy (GHS-ST-1), filed November 29, 2006, at 2 (“To the best of our
knowledge, no other participant supports the Postal Service’s proposal to eliminate the
unlimited-scan tier of Confirm service”). As we explain next, this unanimity of opposition
is well-founded.
3
The OCA proposes to retain the current three-tier subscription structure, but adjust the
current fees to achieve the Postal Service’s goal of covering the costs of Confirm. The
OCA proposes increases of 0 percent, 16 percent, and 95 percent in the subscription
fees for Silver, Gold, and Platinum subscription services, respectively: the fee for a
Silver subscription would remain unchanged, the fee for a Gold subscription would
increase from $4,500 to $5,200, and the fee for a Platinum subscription would increase
from $10,000 to $19,500. The OCA also proposes a 50 percent across-the-board
increase in the fee for a quarterly additional ID code, but would make no change in the
fees for additional scans for subscribers – including the “zero fee” to Platinum
subscribers for unlimited scans. These various fee adjustments would produce a cost
coverage of 127.3 percent, based on test year (2008) total costs. Callow Direct (OCAT-5) at 15-17. That cost coverage would exceed the 126.3 percent which the Postal
Service predicts would be achieved under its own proposal. See id. at 16 (Table 2) &
19, lines 23-24; Mitchum Direct (USPS-T-40) at 19.
The Major Mailers Association (“MMA”) offers two proposals. Its “primary
proposal” would allow subscribers to obtain an unlimited number of scans of First-Class
mail for a fixed annual subscription fee (such as $2,000). Bentley (MMA-T-1) at 33.
Alternatively, MMA supports a rate design like the OCA proposal, including the retention
of a subscription level with unlimited scans. Id. at 34.
GrayHair Software, the only other party to submit testimony on Confirm pricing,
supports the OCA proposal, or a similar proposal that would preserve the existing threetier subscription fee structure with unlimited scans for Platinum subscribers. Although
the OCA proposal would assign “a substantially higher cost increase to the Platinum
level than to the other levels,” GHS believes that such increases are reasonable
because the unlimited scan option would be retained. Bellamy Direct (GHS-T-1) at 3.
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B.
Confirm Is A Critically Important Ancillary Service For Mailers, the
Public, and the USPS Itself.
Confirm is both critically important and beneficial to mailers, the public, and the
Postal Service. The Postal Service itself has recognized this fact. In May 2006—the
very month in which the Postal Service filed this rate case—Nick Barranca, the Postal
Service’s Vice President for Product Development, and the Postal Service official
responsible for Confirm service, stated that “Confirm represents a definite ‘win-win’ for
the USPS and its customers.” 4 The Postal Service expressed precisely the same
opinion in Docket No. MC2002-1, the docket in which the Postal Service requested and
obtained Commission approval to offer Confirm, 5 and Postmaster General Potter
expressed similar views to Congress in 2004. 6
Mailers derive significant benefits from Confirm.
Its tracking and tracing
4
Barranca Presentation at 11 (33 Tr. 11427). Witness Mitchum acknowledged that Mr.
Barranca “is the vice president under which the [Confirm] product falls.” 33 Tr. 11332
(Mitchum).
5
Direct Testimony of Paul Bakshi (USPS-T-1) in MC2002-1, at 12. See also Bentley
Direct (MMA-T-1) at 30, lines 12-15.
6
In testimony that he presented to Congress in 2004, Postmaster General Potter
stated:
To increase the use of our traditional products, we are using technology to
add value to the mail through the development of new features and
services. Our Confirm service – one of the first of our Intelligent Mail
initiatives – provides the Postal Service and mailers with a rich stream of
information about mail as it moves through our system. It helps the Postal
Service improve processing efficiency and helps mailers better achieve
their business objectives.
The Postal Service In Crisis: A Joint Senate-House Hearing On Principles For
Meaningful Reform, Joint Hearing Before the Committee on Government Reform,
House of Representatives, and the Committee on Governmental Affairs, United States
Senate, 108th Cong., 2d Sess. 70 (March 23, 2004) (testimony of John E. Potter;
emphasis added). See also 33 Tr. 3981 (Mitchum) (agreeing with the Postmaster
General’s statement).
-6-
capabilities substantially enhance the value of First-Class and Standard mail service by
enabling mailers better to manage the timing of mail entry, and enhance relationships
with customers. 7 As Mr. Barranca has stated, Confirm service “allows a degree of mail
tracking and improved delivery capability that otherwise would not exist within these
mail classifications.” Barranca Presentation at 8 (33 Tr. 11424). Mailers “can thus use
Confirm to more precisely align their business processes and resources with the actual
processing and delivery of the mail.” Mitchum Direct (USPS-T-40) at 15.
Confirm also provides objective data on the actual service performance of the
Postal Service. The tracking and tracing capabilities of Confirm transform the Postal
Service network from a “black box” into something “more like a glass box into which
customers and postal managers can look into the mailstream. This increased visibility
is well suited for an institution that seeks to maintain public trust and confidence in its
ability to perform well under all circumstances.” Barranca Presentation at 3 (33 Tr.
11419).
Users of Confirm now can monitor the adequacy of the Postal Service’s
performance from origin to destination.
See Exhibit OCA-XE-2 (14 Tr. 4148-4151)
(sample MailTrak newsletter showing timeliness of mail delivery). As the Postal Service
stated in MC2002-1, this transformation of the Postal Service into a “glass box” “is quite
an accomplishment.” 8
Confirm also provides substantial benefits to the Postal Service. First, it is a
valuable management tool for identifying and correcting deficient service. Barranca
7
Mitchum Direct (USPS-T-40) at 15, 20; Direct Testimony of Paul Bakshi (USPS-T-1) in
Docket No. MC2002-1, at 1. See also Bentley Direct (MMA-T-1) at 32.
8
See Barranca Presentation at 3 (33 Tr. 11419); Direct Testimony of Joe Lubenow
(USPS-T-2) in MC2002-1, at 1-3.
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Presentation at 11 (33 Tr. 11427).
As witness Kiefer stated in MC-2001, and Mr.
Barranca reaffirmed this past May, widespread usage of Confirm service offers the
“greatest benefits” to the Postal Service by providing “a novel view of its operations that
may lead to important performance benefits.”
See Callow Direct (OCA-T-5) at 11
(quoting Kiefer testimony in MC2002-1); Barranca Presentation at 7 (33 Tr. 11423).
This Commission similarly recognized the benefits of Confirm to the Postal Service in its
Opinion and Recommended Decision in MC2002-1, stating: “The new service is
responsive to mailers’ needs, enhances the Postal Service’s core business, and the
data collected can be used to evaluate and improve its mail processes.” 9
In view of its previous statements, the Postal Service’s contention in this
proceeding that “Confirm service itself was not and is not intended to be a performance
measurement tool” is disingenuous. See Bellamy Direct (GHS-T-1) at 20 (discussing
witness Mitchum’s Response to OCA/USPS-T40-35(a), 33 Tr. 3965-3966). Despite his
strained attempt to distinguish between “Confirm the concept” and “Confirm the
9
PRC Op. & Rec. Decis., Docket No. MC-2002-1 (July 26, 2002), at 1 (“Confirm
Decision”). See also, e.g., Direct Testimony of James M. Kiefer (USPS-T-5) in Docket
No. MC2002-1 (hereinafter “MC2002-1 Keifer Direct”) at 15 (reproduced at 33 Tr. 11429
et seq.) (“Confirm can also provide valuable information to the Postal Service by
allowing it to monitor mail flows in real time and observe where and how mail processing
bottlenecks occur”); Direct Testimony of Paul Bakshi in MC2002-1, supra, at 5, 12 (“The
Postal Service will be able to use the Confirm system to assess the length of time it
takes to process and deliver the mail once the Postal Service has accepted the mailing,”
and information from Confirm will be used by the Postal Service “as a management tool
and facilitate a proactive approach for assessing and correcting mail processing
inefficiencies”); Direct Testimony of Joe Lubenow in MC2002-1, supra, at 8 (“How can
the Postal Service benefit from the Confirm program? The mail pieces submitted by
mailers provide the USPS with an opportunity to accumulate data on how quickly mail
flows from point to point throughout the system. A matrix could fairly easily be
developed allowing internal comparisons and determination of relative efficiencies and
where bottlenecks are occurring”).
-8-
product,” Mr. Mitchum ultimately agreed that Confirm provides the Postal Service with “a
new tool for identifying and resolving mail processing flow problems.” 14 Tr. 4178-4180.
Second, Confirm increases the Postal Service’s ability to attract and retain mail
volume and revenue in the face of competition from the Internet and other alternative
methods that businesses could use to communicate with their customers. By increasing
the value of underlying mail service, Confirm gives the Postal Service the opportunity to
“cement its position as the premier service provider for businesses to reach their
customers.” Bentley Direct (MMA-T-1) at 32; see also Mitchum Direct (USPS-T-40) at
14 (Confirm Service is “an integral part of the Postal Service’s overall effort to provide
greater value to mailers”).
The public importance of the transparency and accountability offered by Confirm
was underscored earlier this month by the enactment of the Postal Accountability and
Enhancement Act, which was signed into law by President Bush on December 20,
2006. The Act requires the Postal Service to establish rules defining service standards
for market-dominant products. See H.R. 6407, 109th Cong., 2d Sess. § 301 (adding
new Section 3691 to Title 39). The Act also requires the promulgation of rules and
service standards designed, inter alia, to “enhance the value of postal services to both
senders and recipients,” “reasonably assure Postal Service customers delivery
reliability, speed and frequency consistent with reasonable rates and best business
practices,” and “provide a system of objective external performance measurements for
each market-dominant product as a basis for measurement of Postal Service
performance.” Id. (to be codified at 39 U.S.C. § 3691(b)(1)(A), (B) and (D)) (emphasis
-9-
added). 10 These provisions reflect a legislative intent to “mandate transparency of the
Service’s finances, costs, and operations.” Congressional Record, December 8, 2006,
at H9181 (remarks of Representative McHugh and Representative Davis of Virginia). In
view of the Act’s goal of transparency, and its recognition of the importance of
performance measurements, this is no time to weaken one of the few performance
measurement tools that mailers currently have available.
C.
Eliminating the Unlimited-Scan Subscription Option Would Damage
or Destroy Confirm.
Inclusion of an unlimited-scan subscription option in Confirm rate structure is
essential to the efficient and effective performance of Confirm. The marginal cost of
additional scans is virtually zero. As Mr. Kiefer testified in Docket No. MC2002-1, and
Mr. Barranca reiterated this year, “Once Confirm’s hardware and software were in
place, the cost of additional scans is extremely small. A transaction–based price then
would exceed the true marginal cost by a large factor.” Barranca Presentation at 8 (33
Tr. 11424); MC2002-1 Kiefer Direct, at 4 (reproduced at 33 Tr. 11429 et seq.). Accord,
33 Tr. 11347 (Mitchum) (agreeing that the “per usage costs” of Confirm “are
extraordinarily small, so small that they approach zero”); Mitchum Direct, USPS-T-40 at
18 (“today’s passive scans have a very low marginal cost for the Postal Service”); 14 Tr.
4192 (Mitchum) (agreeing that costs of additional scans are “extremely small” once the
confirmed hardware and software are in place). 11
10
The newly-enacted legislation provides that the Postal Service may implement an
internal measurement system, rather than an external measurement system, with the
approval of the Postal Regulatory Commission. H.R. 6407, supra, § 301 (new 39
U.S.C. § 3691(b)(2)).
11
Accord, Bellamy Direct (GHS-T-1) at 9-10; Callow Direct (OCA-T-5) at 12-13; Bentley
Direct (MMA-T-1) at 32.
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Hence, charging a price above zero for every scan drives a wedge between price
and cost, and thus encourages underutilization of service. See Bellamy Direct (GHS-T1) at 9-10; accord, Callow Direct (OCA-T-5) at 12-13; Bentley Direct (MMA-T-1) at 32.
Witness Kiefer recognized this fact in Docket No. MC2002-1, where he testified that
establishing a price for Confirm which substantially exceeded marginal cost “would be
economically inefficient pricing.” MC2002-1 Kiefer Direct, at 4 (reproduced at 33 Tr.
11429 et seq.).
He explained that such pricing “would likely produce several
undesirable outcomes”:
Id.
•
It would lead some potential customers to restrict usage by barcoding
only some mailings or by just “seeding” barcoded pieces within a larger
mailing. Limiting the number of barcoded pieces both diminishes the
value of the information received by the customer and, more critically,
impairs use of the Confirm product for measuring operational
performance.
•
It would also increase administrative costs since each transaction
would have to be tracked and billed.
•
It would increase the difficulty of projecting Confirm revenues, since
they would fluctuate depending on customers’ potentially volatile
needs.
Mr. Barranca made precisely the same points this past May.
Presentation at 8 (33 Tr. 11424).
See Barranca
See also 33 Tr. 11348, lines 10-15 (Mitchum)
(conceding that setting price for additional scans above zero is likely to drive off
potential demand from mailers for whom the value of an additional scan is greater than
zero, but less than the per-scan charge); 33 Tr. 11349, lines 10-16 (Mitchum).
The effectiveness of Confirm depends on its widespread usage.
Barranca
Presentation at 7 (33 Tr. 114223); MC2002-1 Kiefer Direct, at 3 (reproduced at 33 Tr.
11429 et seq.). Imposing a per-scan charge on every scan will suppress usage, and
therefore make Confirm data much less comprehensive and useful. MC2002-1 Kiefer
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Direct, at 4 (reproduced at 33 Tr. 11429 et seq.); Barranca Presentation at 7 (33 Tr.
114243); Bellamy Direct (GHS-T-1) at 9-10; Callow Direct (OCA-T-5) at 12-13; Bentley
Direct (MMA-T-1) at 32; Response of GHS Witness Bellamy to USPS/GHS-T1-2 (21 Tr.
7479-7481) (listing multiple benefits of Confirm that depend on continued existence of
unlimited-scan option). 12
D.
The Postal Service Has Failed To Offer Any Credible Reason To
Eliminate the Unlimited-Scan Option.
The Postal Service asserts that the unlimited-scan option should be eliminated
because: (1) only a few Confirm subscribers can or do benefit from the unlimited scan
option; (2) the current rate structure, with its unlimited scan option, has failed to cover
the full costs of Confirm service; (3) merely adjusting the existing rate structure for
Platinum subscribers would substantially reduce demand for Confirm, or cause such
subscribers to move to a lower subscription tier; (4) recovering the revenue shortfall that
Confirm currently experiences by increasing subscription fees for the Platinum tier
would increase opportunities for arbitrage by third-party resellers; (5) retaining the
existing rate structure with increased fees for Platinum subscribers would be unfair to
smaller users of Confirm, who pay substantially higher costs per scan under the existing
rate structure than do users of a large number of scans; (6) the current three-tier rate
structure is complex, whereas the Postal Service’s proposed rate structure would create
only one level of subscribers, all of whom would pay the same amount for the same
number of units; and (7) the existing rate structure does not facilitate the introduction of
12
An unlimited-scan option also makes economic sense because it enables the Postal
Service to build a large “critical mass” of subscribers. Such a pool of users creates
opportunities for the Service to develop new “intelligent mail” services that can produce
additional revenue and increase quality of service. Bellamy Direct (GHS-T-1) at 16-17.
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future enhancements to Confirm or other information-based services. See Mitchum
Direct (USPS-T-40) at 18-21; Mitchum Reb. (USPS-RT-13) at 5-24 (33 Tr. 1128911308).
These rationalizations are totally at odds with the consistent public position of the
Postal Service, as recently as May 2006, that the three-tiered subscription rate
structure, including the unlimited scan option, is the proper rate structure. They are at
odds with the view of the Service in Docket No. MC2002-1 that transaction-based
pricing would produce “several undesirable options” and that the subscription-based
structure that was adopted “would better meet the goals established for the Confirm
product.” MC2002-1 Kiefer Direct, at 4-5 (reproduced at 33 Tr. 11429 et seq.) They are
also at odds with the views of the Postal Service’s own management—most notably, the
views expressed in the May 2006 presentation of Mr. Barranca, whose duties as Vice
President for Product Development include management of the Confirm program. See
Barranca Presentation at 8-9 (33 Tr. 11424-11425) (making same points concerning
pricing as the 2002-1 Kiefer testimony); 33 Tr. 11332 (Mitchum) (acknowledging that
Barranca is the “vice president under which the product [Confirm] falls”). Tellingly, Mr.
Mitchum admitted that he had never even seen Mr. Barranca’s presentation before
being shown it during cross-examination earlier this month. 33 Tr. 11333 (Mitchum).
While the Postal Service is entitled to change its views if changed circumstances
warrant, the consistency of its previous support for an unlimited-scan subscription tier
imposes a particularly heavy burden of proof on those who would eliminate this price
structure. This burden has not been met. The reasons offered by the Postal Service for
abandoning the unlimited scan option are poorly reasoned makeweights, uninformed by
any serious effort to find out what its customers and other stakeholders actually thought
- 13 -
about this change.
1.
The Postal Service’s Decision To Abandon the Existing
Rate Design For Confirm Was Uninformed By Any
Meaningful Effort To Determine the Views of Confirm
Users.
In contrast to MC2002-1, the Postal Service conducted no market survey or
market research of Confirm customers before filing the present rate case. See 14 Tr.
4155 (Mitchum); 33 Tr. 11337, 11374 (Mitchum); cf. MC2002-1 Direct Testimony of
Beth B. Rothschild (USPS-T-4). Witness Mitchum admitted that he never talked with
any Confirm customers about the Service’s proposal. 14 Tr. 4161, 4175 (Mitchum); 33
Tr. 11329-11330 (Mitchum). Although he believed that someone in the Postal Service’s
product design team had talked with “some” Confirm customers about the Postal
Service proposal, he could not say whether the number of such customers was even
five. 33 Tr. 11330 (Mitchum). Equally important, he acknowledged that the Postal
Service had never asked any customers how they would respond to the obvious
alternative of raising subscription fees but preserving the existing unlimited scan
option—the alternative proposed by OCA and supported by the users of Confirm in this
case. 33 Tr. 11337-11338 (Mitchum). And GHS, the largest reseller in the industry,
was not consulted at all. Bellamy Direct (GHS-T-1) at 4-5.
The specific grounds asserted by the Postal Service for eliminating the unlimitedscan option merely underscore how out of touch is the current rate proposal with the
interests of Confirm stakeholders. We discuss each justification in turn.
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2.
The Postal Service’s Claim That Only a Few Mailers
Benefit From an Unlimited-Scan Option Ignores the
Benefits Which the Option Confers Indirectly On Most
Users of Confirm.
Witness Mitchum argues that the availability of unlimited scans provides value to
only the 23 current Confirm subscribers who use more than 92 million scans; the
remaining customers would save money under the current fees by selecting a Gold
subscription and buying additional blocks of scans as needed. Furthermore, he asserts,
the number of potential direct end-user subscribers that can benefit from unlimited
scans is limited, because most of the mailers with First-Class permits do not enter
enough pieces to require a Platinum subscription. Mitchum Reb. (USPS-RT-13) at 2022 (33 Tr. 11304-11306).
This argument ignores the real world. Even if only a few mailers benefit directly
from the unlimited scan option, most mailers benefit indirectly through the resale of
Confirm. As Mr. Mitchum acknowledged on cross-examination, “Smaller mailers could
share the benefit of a platinum subscription by using it through a value-added reseller.”
33 Tr. 11365 (Mitchum). “Today, most resellers add value to the raw Confirm scans a
direct subscriber would receive” and “assist[] firms without the technological expertise or
mail volume that might permit them to be direct subscribers” of Confirm. Mitchum Reb.
(USPS-RT-13) at 10 (33 Tr. 11294).
The Postal Service also benefits indirectly from the unlimited-scan option.
Witness Kiefer testified in Docket No. MC2002-1 that Confirm “can provide valuable
information to the Postal Service by allowing it to monitor mail flows in real time and
observe where and how mail processing bottlenecks occur.” MC2002-1 Kiefer Direct, at
15 (reproduced at 33 Tr. 11429 et seq.). Similarly, Mr. Barranca recently stated that
information from Confirm “is used by the USPS as a performance measurement tool
- 15 -
and facilitates a proactive approach to assess and correct mail processing
inefficiencies.” Barranca Presentation at 11 (33 Tr. 11427).
3.
There Is No Basis For the Postal Service’s Position That
the Current Rate Structure Cannot Generate Sufficient
Revenues To Cover Confirm Costs.
Equally without foundation is the Postal Service’s claim that the existing rate
structure will not cover Confirm’s costs in the test year. Even by the Postal Service’s
own calculations, existing rates fall short of expected costs of Confirm by only about 15
percent, or about $183,000, in the Test Year.
Mitchum Direct (USPS-T-40) at 19;
Bellamy Direct (GHS-T-1) at 3.
Moreover, the assumptions underlying this analysis grossly understate the
benefits derived by the Postal Service from Confirm. First, the Postal Service assigns
no value to the increased postage revenue that it receives as a result of the greater
demand for underlying First-Class and Standard mail service that Confirm stimulates.
Witness Mitchum acknowledged that he did not consider this factor in his analysis. See
33 Tr. 11315, 11330 (Mitchum). In fact, he professed ignorance about whether Confirm
has any positive effect on demand for postage at all. Id. at 11330-11331 (Mitchum).
The notion that Confirm has no effect whatsoever on the revenue and
contribution generated by First-Class and Standard Mail is completely at odds with the
statements made by Mr. Kiefer in Docket No. MC2002-1 and by Mr. Barranca in his
presentation earlier this year. Mr. Kiefer, for example, predicted that the existing fee
structure “will encourage mailers to use Confirm on more mailpieces” and will “generate
higher revenue, thereby enhancing the financial stability of the product and providing a
greater contribution toward the Postal Service’s institutional costs.” MC2002-1 Kiefer
Direct, at 11-12 (reproduced at 33 Tr. 11429 et seq.). Mr. Barranca stated this year that
- 16 -
“USPS’ greatest benefits were expected to flow from widespread usage of” Confirm,
that the existing fee structure has “resulted in even greater customers using Confirm,”
and that “[s]ubscriptions have continued to increase over the past two years.” Barranca
Presentation at 7, 9 (33 Tr. 11423, 11425).
Omission of the associated postage revenue from the mail classes that use
Confirm renders the Postal Service’s cost recovery analysis meaningless. Confirm is an
ancillary or derivative service: no one would use Confirm without mail. Presorted FirstClass and Standard mail generate tens of billions of dollars in contribution to the Postal
Service. Mailers buy Confirm service because it increases the value of these classes of
mail. 21 Tr. 7489 (Bellamy). Even a tiny resulting increase in the demand for Presorted
First-Class and Standard mail caused by its greater value would more than cover the
$183,000 revenue shortfall that the Postal Service claims to incur from Confirm.
The Postal Service’s revenue/cost analysis of Confirm is akin to the logic of a
sandwich shop that refused to provide free napkins and straws to customers who buy
food and drink, on the theory that the provision of napkins and straws must stand on its
own legs. In the real world, however, sandwich services provide these ancillary goods
without charge because the additional contribution that their “free” availability generates
by stimulating additional purchases of food and drink outweighs the cost of the napkins
and straws. 33 Tr. 11319-20 (Mitchum). As Mr. Mitchum conceded, this “seems” to be
a “rational way for a restaurant to think.” Id. at 11320. What is true of napkins and
straws and food and drink is equally true of Confirm—including its unlimited-scan
option—and the contribution from First-Class and Standard mail.
Mr. Mitchum argued that he assigned no value to the increased postage
revenues that the Postal Service receives as a result of the availability of Confirm
- 17 -
because 39 U.S.C. § 3622(b)(3) requires consideration of Confirm’s costs and revenue
in isolation from the underlying mail services which they enhance. 33 Tr. 11316-11318,
11320 (Mitchum). That argument, however, is unsupported by the statute. The cost
coverage requirement of Section 3622(b)(3) applies to each “class of mail or type of
mail service” as a whole, not to each individual component or ancillary service provided
in conjunction with the class. Thus, for example, while First-Class mail as a whole must
(and obviously does) cover its attributable costs, it is well-accepted that Section
3622(b)(3) does not bar the Postal Service from offering ancillary services such as
return of undeliverable-as-addressed First-Class mail free of charge, and therefore at a
loss if viewed in isolation. See 33 Tr. 11317 (Mitchum) (acknowledging that USPS may
offer return of unavailable-as-addressed First-Class mail without additional charge
“because it’s covered by the overall price of a first class stamp”). Accord, 14 Tr. 4138
(Mitchum) (“the sender of an item mailed at the First-Class mail rate does not receive
free physical return of the mail piece, but rather pays for that service through First-Class
mail postage”); 33 Tr. 11322 (Mitchum) (“As long as the product covers its costs, I don’t
think it [offering free scans for First-Class mail] would be violating the act.”).
While any price scheme of this kind obviously must be evaluated on its merits,
the outcome turns on economic and policy considerations, not on Section 3622(b)(3).
Indeed, Mr. Mitchum himself pronounced “intriguing” MMA’s alternative proposal to offer
unlimited Confirm scans to users of First-Class Mail without any per-scan charge at all.
See Mitchum Reb. (USPS-RT-13) at 26 (33 Tr. 11310); 33 Tr. 11321-11322 (Mitchum).
If Mr. Mitchum’s reading of the statute were correct, the necessary description of the
proposal would not be “intriguing,” but “illegal.”
Second, in arguing that the existing rate structure does not cover costs, the
- 18 -
Postal Service ignores the likely increase in demand for multiple subscriptions (ID
codes) by resellers during the Test Year.
Individual Confirm subscribers often buy
multiple Confirm subscriptions. Bellamy Supp. (GHS-ST-1) at 7; Response of GHS
Witness Bellamy to USPS/GHS-T1-2 (21 Tr. 7481). Growth in demand for multiple ID
codes is driven by customer security requirements, which are likely to continue to
increase as Confirm users such as resellers grow in the market. This will generate
demand for more codes. Bellamy Direct (GHS-T-1) at 7.
For example, GHS, the leading reseller of Confirm services and a Platinum
subscriber, projects that under the OCA proposal for pricing Confirm service (which
would retain the unlimited-scan option), its annual expenditures would increase by more
than $30,500 to acquire additional IDs as may be required for current customers, and
additional IDs necessary to accommodate anticipated sales increases from growth in
the market. That additional $30,500 in expenditures represents more than 75 percent of
the total amount that GHS paid the Postal Service for Confirm service during the last
complete fiscal year. See Response of GHS Witness Bellamy to USPS/GHS-T-1-4 and
1-15 (21 Tr. 7484, 7494-7495).
Witness Mitchum admitted that he did not factor the trend of increasing demand
for ID codes into his cost/revenue analysis. Although he testified that he “considered”
the issue, he initially denied that the number of IDs has been increasing. 33 Tr. 11329
(Mitchum) (“the number of additional IDs has been decreasing, as people have figured
out ways to get around buying them”). Later, however, he declined to express a view
on the issue. 33 Tr. 11388, lines 7-10 (Mitchum).
Third, the Postal Service’s analysis of cost coverage Ignores the increasing
demand for Confirm, and thus increasing revenues for the Service, that is likely to be
- 19 -
stimulated by the deployment of the four-state barcode, a new barcode format that
includes far more digits than existing barcode designs, and other new barcode-related
products that the Postal Service is likely to introduce in the test year. See Bellamy
Direct (GHS-T-1) at 15, line 24, to 16, line 6; Bellamy Supp. (GHS-ST-1) at 5-6;
Response of GHS Witness Bellamy to USPS/GHS-T1-9 (21 Tr. 7488). As Mr. Bellamy
testified:
The OneCode ACS program in particular can be expected to have a
synergistic effect on Confirm. By developing the capability to use One
Code ACS, which requires use of the four-state code, a mailer is also
removing a barrier to the use of Confirm, namely the need to put two
barcodes, POSTNET and PLANET, on the mail piece. It is reasonable
that mailers seeking to use OneCode ACS may also elect to use
OneCode Confirm.
Bellamy Direct (GHS-T-1) at 16, lines 1-6; see also Bellamy Supp. (GHS-ST-1) at 5-6.
The Postal Service did not consider the effect of these products on Confirm
revenues in estimating “Before Rates” revenue from Confirm.
See Bellamy Supp.
(GHS-ST-1) at 6, lines 6-8. Mr. Mitchum simply assumed, for purposes of his analysis,
that the deployment of the four-state barcode and OneCode ACS would not make the
use of Confirm more attractive.
33 Tr. 11325, lines 21-24 and 11326, lines 11-18
(Mitchum). He did not ask the Postal Service or any third-party vendor whether these
assumptions were true. See id. at 11325, line 25, to 11326, line 10, and 11326, lines
19-25 (Mitchum).
Fourth, the Postal Service ignores the possibility that service enhancements by
third-party resellers will stimulate additional demand for Confirm during the Test Year.
33 Tr. 11322-11133 (Mitchum). Mr. Mitchum admitted on cross-examination that he did
not know whether third-party vendors have made such service enhancements within
past year, and had not investigated the issue. Id. at 11323. Nor did he talk to any third-
- 20 -
party vendors about the possibility that third-party enhancements would increase
revenues for Confirm. Id. at 11325.
Fifth, the Postal Service failed to consider the possibility that the Evolutionary
Network Design (“END”) program might stimulate increased demand for Confirm by
mailers concerned about potential delivery delays arising from END-related operational
changes. Witness Mitchum acknowledged that he had not asked anyone involved in
the END process whether the changes in service standards occasioned by the
implementation of END would have such an impact.
33 Tr. 11327, lines 1-17
(Mitchum).
Sixth, the Postal Service made several “no-growth” assumptions that have no
basis in fact. For example, witness Mitchum assumed that there would be no growth in
the number of mailers during the Test Year, and no growth in aggregate economic
activity in the United States during the test year. 33 Tr. 11327-11328 (Mitchum). He
also assumed that there would be no growth in the number of postal delivery points in
the United States during the Test Year, even though he personally believes that the
number will not remain constant. Id. at 11329 (Mitchum).
Seventh, the Postal Service assigned no value to its own use of the Confirm
system for internal performance measurement.
Although the Postal Service uses
Confirm in “seeding” mail by itself, and “benefits greatly from Confirm from the mail
pieces that [it] seed[s],” the Service asserts that it is proper to assign no value to these
benefits because none of the costs of the hardware and software used for internal
performance measurement are borne by mailers, the relevant assets having already
been “fully depreciated.” 33 Tr. 11335, 11398 (Mitchum). This argument misses the
point. Regardless of whether the assets are fully depreciated on the Postal Service’s
- 21 -
account books, the assets are clearly not fully depreciated in economic reality, because
the USPS is still using them. If it is using them, it is getting value from them. If Confirm
were discontinued and the assets were scrapped, the Postal Service would either lose
the benefits it obtains from using them, or would be forced to incur additional costs to
replace them. In either case, the Postal Service receives value from the assets used to
provide Confirm.
In response to a question from the Chairman, witness Mitchum stated that the
Postal Service “does not charge itself for use of its own postal services,” and “revenue
for each subclass does not include Postal Service use of that subclass.” See Response
of USPS Witness Mitchum (USPS-RT-13) To Question Posed at the November 30,
2006, Hearing (filed December 7, 2006), at 2. Thus, the revenues calculated by the
Postal Service for Confirm service “do not include any revenue from the Postal
Service’s seeding of mail.” Id. This approach is nonsensical. When the Postal Service
receives value from the use of its own assets or facilities, a rational cost/benefit analysis
of those assets or facilities must include the imputed value of those services.
4.
There Is No Credible Evidence That Recovering the
Costs of Confirm Solely Through Increased Subscription
Charges Will Overly Suppress Demand For Confirm or
Cause Customers To Move To a Lower Subscription
Tier.
Witness Mitchum also testified that elimination of the existing fee structure is
necessary because increasing subscription charges under that structure (as proposed
by OCA) will cause a decrease in demand. In his view, the OCA’s proposal to retain the
existing structure but increase fees for Platinum subscribers from $10,000 to $19,500
would cause Confirm subscribers either to use fewer scans (by seeding mailings) or
migrate to a lower subscription tier. Mitchum Direct (USPS-T-40), at 19; Response of
- 22 -
USPS Witness Mitchum to OCA/USPS-T40-16 (14 Tr. 3937); Mitchum Reb. (USPS-RT13) at 5-14 (33 Tr. 11289-11298); 33 Tr. 11336-11337 (Mitchum).
These predictions are sheer speculation. Mr. Mitchum never “discussed with any
mailer” whether the $19,500 subscription price for Platinum proposed by OCA would
cause any mailer to terminate that level of subscription.
33 Tr. 11353 (Mitchum).
Indeed, no one at the Postal Service seems to have asked its Confirm customers how
they would change their behavior if the OCA pricing proposal were adopted. Id. at
11337-11338 (Mitchum).
Nor did the Postal Service ever ask the customers who
currently “overpay” (i.e., buy a higher subscription tier then their level of usage requires)
why they do so. Id. at 11339 (Mitchum). The Postal Service thus does not “really know
what motivates customers to overpay,” and thus has “no idea what the economic value
of the reasons for the customers to overpay is.” Id. at 11340 (Mitchum). 13
In reality, it is the elimination of the unlimited-scan option that is likely to inhibit
use of Confirm. The Postal Service’s proposal would increase the aggregate costs of
Confirm by 460 percent for a customer that uses one billion scans per year—as
GrayHair Software plans to do in 2006—and by 338 percent for a customer using 750
million scans annually. Bellamy Direct (GHS-T-1) at 16, lines 7-10; Response of GHS
Witness Bellamy To USPS/GHS-T1-4 and USPS/GHS-T1-15 (21 Tr. 7484, 7495);
Callow Direct (OCA-T-5) at 8; 14 Tr. 4144 (Mitchum). For other users of Confirm, the
cost increases would range from 215 percent (for users of 500 million scans) to 14
percent (for users of one million scans). 14 Tr. 3923 (Mitchum). The average cost
13
The rate design proposed by OCA overlooks the additional revenue generated by
demand for multiple IDs from individual Confirm subscribers, and thereby understates
the expected revenues from Confirm. Bellamy Direct (GHS-T-1) at 7; Response of GHS
Witness Bellamy To USPS/GHS-T-1-2 and 1-15 (21 Tr. 7481, 7494).
- 23 -
increase per subscriber, according to the calculations of Mr. Mitchum, would be 53
percent for Platinum subscribers and 26 percent for Gold subscribers. Response of
USPS Witness Mitchum to POIR No. 12, Question 6 (19 Tr. 6792).
For Silver
subscribers, the increases in fees could be as high as 190 percent. Callow Direct
(OCA-T-5) at 7.
The Postal Service estimates that its proposed rate structure would generate a
49 percent increase in Confirm revenues. 14 Tr. 3920 (Mitchum); see also Response of
USPS Witness Mitchum to POIR No. 12, Question 6 (19 Tr. 6790). As OCA witness
Callow states, an increase of this magnitude is “exceedingly high compared to the
average proposed increase of just 8.5 percent” and “exceedingly high for a new service
still in its infancy.” Callow Direct (OCA-T-5) at 31.
These disproportionate increases will cause a significant reduction in Confirm
usage. Bentley Direct (MMA-T-1) at 31; Bellamy Direct (GHS-T-1) at 9, 11-12, 18.
Existing Platinum subscribers who face double and triple-digit increases under the
Postal Service’s proposal are already considering curtailing or eliminating their use of
Confirm as a result. Callow Direct (OCA-T-5) at 31 & n.19. Elimination of the unlimited
scan tier would particularly suppress demand from mailers who are primarily interested
in container tracking.
Bellamy Direct (GHS-T-1) at 18.
But even Silver and Gold
subscribers would reduce their usage in response to the changes in the rate structure
proposed by the Postal Service. See Bellamy Direct (GHS-T-1) at 9 and 11, line 13, to
12, line 2; Bellamy Supp. (GHS-ST-1) at 6, line 16, to 7 line 4; Callow Direct (OCA-T-5)
at 7-9. Even witness Mitchum agrees that “a significant increase in fees will result in a
decrease in demand.” Mitchum Reb. (USPS-RT-13) at 13, lines 20-21. (33 Tr. 11297).
The Postal Service’s assumption that the decline in usage would be only 10
- 24 -
percent, far from being “conservative,” is sheer speculation. Cf. Mitchum Reb. (USPSRT-13) at 13-14 (33 Tr. 11297-11298). As noted above, the ten percent estimate is “not
based on any market research.”
33 Tr. 11342 (Mitchum). 14
Instead, Mr. Mitchum
simply “felt it was better to assume some decrease in demand rather than to ignore the
possibility.” 33 Tr. 11341, lines 17-20 (Mitchum). 15 On cross-examination, he ultimately
conceded that ‘it’s not a certainty” that the Postal Service’s proposal would cover the
costs of Confirm. 33 Tr. 11391 (Mitchum).
Perhaps the best rejoinder to the Postal Service’s argument regarding reduction
in usage comes from the Postal Service itself. As previously discussed, in Docket No.
MC2002-1, USPS
witness
Kiefer
testified
that
when
transaction-based prices
substantially exceeded marginal costs (as would be the case under the Postal Service’s
current proposal), such “economically efficient” pricing would have the “undesirable
outcome” of “lead[ing] some potential customers to restrict usage by barcoding only
some mailings or by just ‘seeding’ barcoded pieces within a larger mailing,” which would
“diminish[] the value of the information received by the customer and, more critically,
impairs use of the Confirm product for measuring operational performance.” MC-2002-1
14
Although witness Mitchum belatedly contended during cross-examination that he had
a conversation with one subscriber who stated that it did not believe that the Postal
Service’s proposed rate structure would impact its decisions (33 Tr. 11342), his
testimony is simply not credible. The Postal Service did not disclose the alleged
conversation in any of its responses to the numerous discovery requests from the
intervenors and other participants. Moreover, Mr. Mitchell gave no details of the
conversation, and could not even recall when it took place. See 33 Tr. 11342-11343
(Mitchum) (“I’m guessing late October – early or late October”).
15
Moreover, the ten percent estimate is “across the board” and therefore fails to
distinguish between the revenue effects from loss of First-Class and Standard mail
volume. This is a significant omission because the Postal Service proposal would
charge five times as much for a Standard mail scan as for a First-Class scan. See
Response of USPS Witness Mitchum to POIR No. 12, Question 7 (19 Tr. 6793).
- 25 -
Kiefer Direct, at 4, lines 5-12 (reproduced at 33 Tr. 11429 et seq.).
When confronted with Mr. Kiefer’s testimony, witness Mitchum attempted to
dismiss it as representing views that have been “abandoned or rejected” by the Postal
Service. 33 Tr. 11345 (Mitchum). Witness Mitchum, however, had no response to Mr.
Barranca’s May 2006 presentation, which adopts almost verbatim Mr. Kiefer’s prior
views. See 33 Tr. 11345-11346 (Mitchum). 16 Mr. Mitchum ultimately conceded that if
the value of a scan for a mailer exceeds the marginal cost of the scan, but is less than
the price that the Postal Service is charging for the scan, “the mailer is likely to forego
that scan.” 33 Tr. 11348 (Mitchum). On redirect examination, the Postal Service did not
ask any questions of witness Mitchum about this issue, although it did ask questions
about a different issue. See 33 Tr. 11442-11443.
5.
The Postal Service’s Concern That Recovering Revenue
Shortfall By Increasing Subscription Charges Will
Increase Arbitrage Opportunities For Third-Party
Resellers Is Unfounded.
The Postal Service argues that because the Platinum subscription provides
unlimited scans as part of the subscription fee, seeking to recover additional revenue
16
In his presentation, Mr. Barranca stated, in pertinent part:
A transaction-based price then would exceed the true marginal cost by a
large factor. This would be economically inefficient pricing, and would
likely produce several undesirable outcomes:
•
It would lead some potential customers to restrict usage by
barcoding only some mailings or by just “seeding” barcoded pieces
in larger mailings. Limiting the number of barcoded pieces would
diminish the value of the information received by the customer but,
more critically, impair use of the Confirm product for measuring
operational performance.
See Barranca Presentation at 8 (33 Tr. 11424).
- 26 -
solely from subscription fees would lead to “arbitrage,” which witness Mitchum defines
as “the process by which someone purchases a commodity and then resells the
commodity so as to profit from a pricing discrepancy.” Mitchum Reb. (USPS-RT-13)
at 14 (33 Tr. 11298). Under this scenario, the Postal Service would lose revenue for
each actual or potential Confirm subscriber who switched to a reseller. Id. at 14-16 (33
Tr. 11298-11300).
Further fee increases implemented in an attempt to recoup the
losses from such customer defections would reinforce the cycle until “almost all
customers are resellers, with the fees prohibitively high for any new direct subscribers.”
Id. at 14-16 (33 Tr. 11298-11300). 17
These concerns are unsupported by any evidence that third party resellers
currently engage in pure arbitrage, or would do so if the Commission adopted the OCA
rate proposal.
Moreover, changing the rate structure to inhibit resale could have
seriously anticompetitive implications and violate the requirement of 39 U.S.C. §§ 3621
and 3622(b)(1) that rates be “reasonable,” “fair” and “equitable.”
First, there is no evidence that third-party resellers are currently engaging in
arbitrage.
To the contrary, the record indicates that all resellers combine scan
information with additional value-added services.
GrayHair Software, the leading
reseller of Confirm services, provides numerous value-added services to its customers,
17
Presiding Officer’s Information Request No. 12 (August 24, 2006), expresses similar
concerns. Specifically, Question 5 of the POIR asked the Postal Service: (1) whether,
under a specified scenario involving three hypothetical users of Confirm services with
Gold subscriptions, the potential for arbitrage would exist; (2) how the potential for
arbitrage by resellers by Confirm services entered into the Postal Service’s analysis
underlying its rationale for assuming that high-volume and low-volume Confirm users
would respond to its proposed fee schedule with equal percentage reductions in scans;
and (3) whether the risk of arbitrage is greater under the existing or the Postal Service’s
proposed fee schedule. See POIR No. 12 at 3-4, Question 5 (19 Tr. 6784-6785).
- 27 -
including data storage capacity substantially greater than what the Postal Service
provides, and general and customer-specific reports which go beyond what the Postal
Service has offered. Bellamy Direct (GHS-T-1) at 4, lines 4-18; Bellamy Supp. (GHSST-1), at 3-4. 18 Whatever success GrayHair has had in attracting and retaining
customers is due to the value-added features that it provides, “and not to any form of
arbitrage such as might be available to any subscriber qualifying by volume for lower
prices.” Id. at 4. GrayHair “has never engaged in this sort of arbitrage, and has no
plans to do so in the future.” Id. at 2.
Other resellers also add value in various ways. For example, some resellers
combine advanced linguistics capability with near real-time tracking on an aggregate
basis, while others add proprietary data to Confirm observations to create unique
information capabilities of use to direct marketers. Bellamy Direct (GHS-T-1) at 6-7. In
addition, some resellers have built systems designed to protect clients against any
likelihood of inadvertent mixing of data. Id. at 7. GrayHair, the leading reseller of
Confirm services, is unaware of any competitor that has engaged in pure arbitrage. See
Bellamy Supp. (GHS-ST-1) at 2. In short, “arbitrage has played little or no role in the
actual behavior of Confirm subscribers and users, who succeed or fail based on the
added value they provide to their customers.” Id. at 4, lines 8-10.
The Postal Service concedes that “arbitraging is not currently a major problem for
18
Other value-added services provided by GHS to its customers include: implementation
and coordination of client systems to create and monitor production of PLANET and 4state customer barcodes; customer software programs that assign PLANET and 4-state
customer barcodes using statistical models to ensure valid, reliable results; inspection
of every single scan to detect data quality problems; results of data quality control sent
to the Postal Service; aggregated delivery reporting depicting results for a particular
client versus all others; and a weekly free electronic newsletter displaying composite
delivery data for the prior week. See Bellamy Supp. (GHS-ST-1) at 5-6.
- 28 -
Confirm service,” and that resellers provide substantial value-added services to their
customers. 19 USPS witness Mitchum concedes that the absence of pure resale is
telling, for the Postal Service would have no direct customers of Confirm if pure resale
were a viable business model:
If arbitrage were the sole business plan being pursued by the
intermediaries, it is unlikely that the Postal Service would have any direct
(non-reseller) subscribers. Intermediaries are providing a value added
service by providing either basic or detailed analysis of the customers’
scan data. Additionally, “each reseller must find a way to distinguish itself,
adding more choices in the market offerings” (GHS-T-1, page 5, lines 2022) to maintain their market share. This should benefit all Confirm users.
Response of USPS Witness Bellamy To Presiding Officer’s Information Request No. 12,
Question 5, at 5-6 (19 Tr. 6788-6789). 20
Second, there is no evidence to support the Postal Service’s claim that the
19
Mitchum Reb. (USPS-RT-13) at 15 (33 Tr. 11299). See also id. at 10 (33 Tr. 11294).
(“Today, most resellers add value to the raw Confirm scans a direct subscriber would
receive”); 33 Tr. 11350, lines 8-13 (Mitchum); id. at 11322-11323 (Mitchum)
(acknowledging that some resellers offer value-added services to Confirm, and that
“those enhancements increase the attractiveness of the Confirm service itself” to
customers); Response of USPS Witness Mitchum To Presiding Officer’s Information
Request No. 12, Question 5, at 3 (19 Tr. 6786) (“I don’t think that arbitrage plays much
of a role for Confirm intermediaries (resellers)”; id. at 2 (19 Tr. 6785) (“Confirm
intermediaries are often providing value-added services to their customers by providing
them with reports based on the analysis of the scans their customers’ mailpieces
receive . . . As such, I think that their customers are not choosing to use an
intermediary to receive a discounted price, but instead are using the intermediary for the
value added services provided.”); Bellamy Supp. (GHS-ST-1) at 2 (quoting Response
of USPS Mitchum to Presiding Officer’s Information Request No. 12, Question 5).
20
Witness Mitchum did not even mention arbitrage (much less cite the potential for
arbitrage as a justification for the Postal Service’s proposed elimination of the unlimitedscan option) in his direct testimony, which discussed the proposal and the reasons for it.
See Mitchum Direct (USPS-T-40), at 14-21. Only in his rebuttal testimony (after POIR
No. 12 had been issued and witness Bellamy had responded to Question 5 of that POIR
regarding arbitrage) did he cite arbitrage as a justification for the proposal.
- 29 -
economic viability of pure arbitrage would increase dramatically if the current revenue
shortfall of Confirm were met entirely by increases in subscription fees. Mr. Mitchum’s
testimony to this effect is pure speculation.
As noted above, the Postal Service’s
predictions about how customers would respond to the OCA proposal are unsupported
by any market survey of Confirm customers. 33 Tr. 11337 (Mitchum). As Mr. Mitchum
conceded during cross-examination, if the Postal Service asked any Confirm customers
how they would respond to the OCA proposal, “I’m not aware of it.” Id. at 11337-11338
(Mitchum).
Moreover, the costliest subscription fee under the OCA proposal, the $19,500 fee
for a Platinum subscription, would still limit the maximum gain for a pure arbitrageur to
that amount. A margin of $19,500 is insufficient to make pure arbitrage viable. Bellamy
Supp. (GHS-ST-1) at 2-3.
Furthermore, and in any event, the viability of pure arbitrage is undermined by
the inability of most mailers to use the raw Confirm scan data supplied by the Postal
Service. These data provided “require aggregation, manipulation, or analysis to be
useful.” Mitchum Reb. (USPS-RT-13) at 15, lines 12-13 (33 Tr. 11299). These tasks
are beyond the capability of small and mid-size mailers, as the Postal Service noted
stated this past May:
Because Confirm provides raw scan data to the customer, it is the
customer’s responsibility to transform it into meaningful information that
the company can employ in making business decision. This requires
additional programming resources which are often difficult to justify for
small to mid-size companies. These challenges led some companies to
decide to use an outside vendor having expertise in developing reports
and in-depth understanding of postal processing systems in order to
analyze Confirm data.
- 30 -
Barranca Presentation at 7 (33 Tr. 11423). 21 See also Bentley Direct (MMA-T-1) at 33
n.21.
Third, adoption of a rate structure that inhibited resale of Confirm scans would be
anticompetitive and contrary to 39 U.S.C. §§ 3621 and 3622(b)(1). Value added resale
is a form of downstream competition that benefits consumers and contributes to the
attainment of the lowest combined costs across the value chain. Because there are
multiple resellers of Confirm, each reseller must find a way to distinguish itself by adding
more choices in its market offerings and by seeking economies of scale. This results in
lower prices and better services to consumers.
Bellamy Direct (GHS-T-1) at 5-6;
Bellamy Supp. (GHS-ST-1) at 2.
Many authorities hold that rate structures or rules that restrict or preclude resale
in circumstances like those here are per se unjust and unreasonable. The Federal
Communications Commission (“FCC”), for example, has required carriers to offer
unlimited (i.e., unrestricted) resale of certain telecommunications services because any
restrictions on resale would impair competition.
Thus, the FCC has required the
unlimited resale of private line services, and required common carriers to provide such
services to resellers on the same terms that such services are provided to the carriers’
own end-users. See National Communications Assn. v. AT&T Corp., 238 F.3d 124, 125
(2d Cir. 2001); Regulatory Policies Concerning Resale and Shared Use of Common
Carrier Services and Facilities, Report and Order, 60 F.C.C.2d 261 (1976) (“FCC
Resale Order”), aff’d sub nom. AT&T Co. v. FCC, 572 F.2d 17 (2d Cir. 1978). 22 The
21
Witness Mitchum, when confronted with Mr. Barranca’s statement, admitted that he
had “not seen that statement before anywhere.” 33 Tr. 11352 (Mitchum).
22
Private line service is a special type of telephone service that typically gives the
customer the right to use telephone facilities between two or more pre-selected
(footnote continued on the next page)
- 31 -
FCC found that unlimited resale and sharing, regardless of whether the resellers “added
value,” would result in numerous public benefits, including the creation of pressures on
carriers to provide their services at rates that are more closely related to costs. See
FCC Resale Order, 60 F.C.C.2d at 298-303 (¶¶ 75-83). 23
In 1983, the FCC extended its ruling requiring unlimited resale to all domestic
public switched network telephone services. See In the Matter of Regulatory Policies
Concerning Resale and Shared Use of Common Carrier Domestic Public Switched
Network Services, Report and Order, 83 F.C.C.2d 167 (“MTS/WATS Order”). Like the
FCC Resale Order, the MTS/WATS Order found that resale, including arbitrage, would
produce a number of public interest benefits, including a lessening of the opportunity of
a then-dominant carrier like AT&T to engage in price discrimination, and the creation of
pressures that would reduce rates for these services to consumers. Id. at 168-171,
174-177 (¶¶ 2-6, 15-20). 24
locations on a full-time basis. Telephone companies make this type of service available
in bulk, at rates below those for normal long-distance service, to customers such as
businesses and governmental agencies with substantial communications needs. AT&T
Co. v. FCC, supra, 572 F.2d at 20.
23
In the FCC Resale Order, the FCC expressly refused to require that a reseller show
that it “added value” to the resold service before it would be allowed to enter the market
and/or be exempt from tariff restrictions on resale. Citing the various benefits that it
expected to occur as a result of resale entry (including downward pressure on prices
and the development of new services by resellers), the FCC stated: “Insofar as the entry
of new resellers will duplicate services of existing resellers, we find this fact not to be a
barrier where the public interest will be served.” FCC Resale Order, 60 F.C.C.2d at 310311 (¶ 106).
24
Similarly, the FCC found in another proceeding that it had “significant problems” with
a provision in an AT&T tariff that would have required a reseller to provide at least 12
months’ notice before it could discontinue the service from the providing carrier,
because such a requirement would discourage resale and arbitrage. “Arbitrage, in the
Commission’s regulatory scheme, is seen not as a means of developing vested
interests, but as a way of bringing rates into line with competitive pricing patterns.” The
(footnote continued on the next page)
- 32 -
The FCC’s policies reflect a recognition that arbitrage produces benefits for
consumers.
The FCC has found that entry of resellers into the market creates
downward pressure on rates, to the ultimate benefit of consumers. See, e.g., AT&T
Corp. v. FCC, 86 F.3d 242, 244 (2d Cir. 1996) (FCC’s prohibitions of restrictions on
resale reflects its policy that “resale serves the public interest by putting competitive
pressure on carriers’ pricing”); In the Matter of American Telephone & Telegraph Co. –
Revisions To Tariff F.C.C. No. 2 Wide Area Telecommunications Service (WATS),
Memorandum Opinion and Order, 4 F.C.C. Rcd. 5389, 5391 (¶ 22) (1989) (“The growth
of resellers brought the lower prices of WATS service to individual customers”). 25 In
addition, the FCC has found in numerous contexts that arbitrage and resale can, and
do, lead to the development of new services. 26
FCC made clear that it expected AT&T to propose a “substantially shorter period that
would partially accomplish its marketing goals without unduly interfering with
Commission policy.” In re Application of American Telephone and Telegraph Co. for
Authority Under Section 214 of the Communications Act of 1934, as Amended, To
Install and Operate Packet Switches at Specified Telephone Company Locations in the
United States, Memorandum Opinion, Order, and Authorization, 94 F.C.C.2d 48, 61-63
(¶¶ 28-30 & n.33) (1981). (emphasis added).
25
See also In the Matter of Motion of AT&T Corp. To Be Reclassified As a Dominant
Carrier, 11 FCC Rcd. 3271, 3304 (¶ 61 & n.172) (1995) (entry by resellers into interstate
long-distance market “can put downward pressure on price if AT&T attempts to charge
a supra-competitive price”; even if AT&T is not holding prices above the competitive
level, reseller arbitrage would be profitable if “there is a large enough difference
between the price AT&T charges one group of customers and another [group]”).
26
See, e.g., In the Matter of Policy Statement on International Accounting Rate Reform,
Policy Statement, 11 F.C.C. Rcd. 3146, 3149 (¶ 21) (1996), (new market entrants have
taken advantage of price arbitrage opportunities to offer new, innovative services to
consumers; many such services, such as itemized billing, offer additional value to
consumers); In the Matter of Southern New England Telephone Co. – Petition for
Review of Accounting Orders Imposed in Tariff Investigations, Memorandum Opinion
and Order, 4 F.C.C. Rcd. 8542, 8543-8544 (¶ 15) (1989) (competitive pressures of
WATS resale and competition have encouraged development of many new services
and options available to smaller customers).
- 33 -
The statutory ratemaking provisions under which the FCC acted, 47 U.S.C. §§
201(b) and 202(a), are the direct counterparts of 39 U.S.C. § 3621 (which requires that
postal rates be “reasonable and equitable”) and § 3622(b)(1) (which requires that the
postal rate schedule and “fair and equitable”); and the competitive concerns underlying
the FCC’s actions are clearly analogous to the concerns about downstream competition
raised by any scheme to suppress the value-added resale of Confirm scans. These
concerns weigh heavily against any scheme to eliminate the unlimited-scan subscription
tier of Confirm, a change in rate design that is likely to suppress downstream
competition among resellers, and increase the effective cost of Confirm for small and
medium mailers.
6.
Eliminating the Unlimited-Scan Option Will Not Promote
Fairness and Equity Among Mailers.
Witness Mitchum contends that the Postal Service’s proposal to eliminate the
existing rate structure for Confirm would produce a fairer and more equitable rate
schedule, because all customers would face a single fee schedule under which all
customers who use the same number of scans would pay the same fees. Mitchum
Direct (USPS-T-40) at 20; Mitchum Reb. (USPS-RT-13) at 17-19 (33 Tr. 11301-11303).
By contrast, he alleges that the existing fee structure and the OCA proposal are not fair
and equitable, because: (1) “With the unlimited scan option, grossly different costs per
scan can exist between customers in the same tier”; and (2) even for the other tiers,
Confirm subscribers who use a small number of scans pay much more per scan than
subscribers who use a large number of scans. Mitchum Reb. (USPS-RT-13) at 17-18
(33 Tr. 11301-11302). He opines that the OCA proposal would “exacerbate” these
differences, and therefore make the existing rate structure even more unfair and
inequitable. Id. at 18-19.
- 34 -
These arguments are without merit. First, the Postal Service has exaggerated
the volume taper in the OCA rate design by assuming that lower-volume users would
buy needlessly large subscription tiers. Witness Mitchum suggested, for example, that
the OCA proposal would require a Confirm subscriber using 51 million scans to pay an
average price of $382.35 per million scans – more than three times the price ($118.90)
per million scans that a subscriber using 164 million scans would pay. See Mitchum
Reb. (USPS-T-40) at 18 (Table 2) (33 Tr. 11302). As witness Mitchum admitted on
cross-examination, however, his calculations assume that the lower-volume customer
would be a Platinum subscriber – even though a Gold subscription would provide the
same number of scans at a lower net cost. 33 Tr. 11359 (Mitchum). If the customer
obtained the 51 million scans with a Gold subscription, the cost per million scans would
be approximately $117, not the $382.35 assumed by Mr. Mitchum. 33 Tr. 11359-11360
(Mitchum). The tendency of mailers to buy larger-than-needed subscriptions may be
due to foolishness, a deliberate decision to minimize transaction costs or cement
relations with the Postal Service, or some other business reason not disclosed on the
record. Whatever the reason for this behavior, however, the additional costs of such
voluntary mailer decisions are hardly the stuff of which discrimination claims are
made. 27
Second, the notion that there is something inherently unfair or discriminatory
about a volume taper is flatly at odds with the Postal Service’s position in Docket No.
27
Similarly, although witness Mitchum asserted that the fee span disparity between the
largest and smallest users “can be very large,” he acknowledged on cross-examination
that ratios of average costs per million scans for smaller-volume users to those for
larger-volume users under the existing rate structure – which the Commission
previously found to be fair and equitable – are approximately the same as those under
the OCA’s proposal. 33 Tr. 11406-11407 (Mitchum).
- 35 -
MC2002-1, where it proposed the very rate structure that it now assails as unfair. 28 The
Postal Service specifically represented to the Commission that the rate structure and
the other changes it requested “conform to the criteria of 39 U.S.C. § 3922(b)”—which
includes the “fairness and equity” requirement of Section 3922(b)(1) (“Criterion 1”). 29 In
support of that representation, the Postal Service offered the testimony of Mr. Kiefer,
who testified that the rate structure was fair and equitable within the meaning of Section
3622(b)(1). 30 Consistent with these representations, the Commission found in Docket
No. MC2002-1 that the proposed fees “are in accordance with the policies set forth in
title 39, United States code, and the factors set forth in §§ 3622(b) and 3623(c).” 31 The
Commission expressed no concern that the rate structure might be unfair or inequitable
to users of small volumes of scans.
Third, the Postal Service’s posture in this case is also inconsistent with the Postal
28
See Docket No. MC2002-1, Request of the United States Postal Service For a
Recommended Decision on Classification and Fees For Confirm, filed April 24, 2002, at
Attachment B (proposing three-tiered subscription fee structure for Confirm service,
including unlimited scans for Platinum subscribers).
29
at 2.
30
Witness Kiefer stated:
My proposed fees for Confirm reflect a balanced consideration of all
relevant criteria. Confirm provides a valuable enhancement to users of
certain mail classifications at a price that covers all expected costs and
makes a reasonable contribution to the Postal Service’s institutional costs.
The proposed pricing will not affect rates seen by the general public and
does not impose any significant additional complexity on potential
customers.
Confirm will enhance the attractiveness of the Postal
Service’s core mail products while having no undue adverse impact on
other mail classes or on private sector delivery services. In sum, my
proposed pricing is fair and equitable (Criterion 1).
MC2002-1 Kiefer Direct, at 20 (reproduced at 33 Tr. 11429 et seq.) (emphasis added).
31
Confirm Decision, Recommended Decision at 1-2 (¶ 2).
- 36 -
Service’s
current
position
(and
controlling
Commission
precedent)
on
the
reasonableness of declining block volume discounts in negotiated service agreements
(“NSAs”) with individual mailers. 32 Declining block volume discounts, like the declining
block aspect of the existing Confirm rate design produced by the existence of an
unlimited-scan tier, by definition tend to offer service at lower effective rates per unit at
higher volumes than at lower volumes.
The Postal Service, when asking the
Commission to recommend NSAs with declining block discounts, has argued
consistently that they satisfy Section 3622(b), including the “fair and equitable”
requirement of Section 3622(b)(1). 33
In its decisions recommending these NSAs, the Commission has likewise held
that declining block volume discounts are not discriminatory (and thus are fair and
equitable) if they have a reasonable justification and are offered to all mailers. 34 In
Bookspan, for example, the Commission found that:
The Commission finds that the Agreement will benefit other users of the
mail by increasing contribution to the Postal Service without an
32
See, e.g., MC2005-3 PRC Op. & Rec. Decis. (May 10, 2006) (“Bookspan NSA
Decision”), at 23-24 (¶¶ 3034-3035); MC2004-5 PRC Op. & Rec. Decis. (Dec. 17, 2004)
(“Bank One NSA Decision”), at 14, 16 (¶¶ 3001-3004, 4003-4004); MC2004-4 Op. &
Rec. Decis. (Sept. 30, 2004) (“Discover NSA Decision”), at 9, 14-15; MC2002-2 Op. &
Rec. Decis. (May 15, 2003) (“Capital One NSA Decision”), at 1, 3-4 (¶¶ 1001-1002,
2001-2004).
33
See, e.g., Initial Brief of the United States Postal Service filed April 3, 2003, in the
Capital One NSA proceeding (Docket No. MC2002-2) at 16-18 (arguing that declining
block rates will encourage additional volume and increase overall contribution to the
Postal Service) and 31 (arguing that the NSA meets the criteria of Section 3622(b)(1));
Direct Testimony of Michael K. Plunkett (USPS-T-2) in Capital One NSA proceeding at
10:3-9 (testifying that the NSA meets the requirements of Section 3622(b)(1)).
34
See Bookspan NSA Decision at 34-44 (¶¶ 4004-4021); Bank One NSA Decision at
80-82 (¶¶ 6117-6124); Discover NSA Decision at 45-46; Capital One NSA Decision at
157-160 (¶¶ 8032-8047) and Recommended Decision at 1 (¶ 1a).
- 37 -
unreasonable likelihood of having an adverse effect on the rates of other
mailers. Further, there is no indication that the Bookspan NSA rates will
cause any competitive harm to other users of the mail, especially given
the ability of similarly situated mailers to obtain functionally equivalent
agreements.
Bookspan NSA Decision at 44 (¶ 4021). The same reasoning applies with equal force
to the existing Confirm rate design, which the OCA proposes to retain. As noted above,
the OCA proposal will generate additional contribution from Confirm; the existence of
Confirm generates additional contribution from First-Class and Standard mail; and the
declining block rate characteristics of Confirm resulting from the existence of an
unlimited-scan tier have encouraged the adoption of Confirm and benefited small and
medium-sized mailers by promoting the growth of the value-added resale industry.
On cross-examination, witness Mitchum disavowed any claim that the existing
rate structure, or the variant of that rate structure proposed by OCA, violated the “fair
and equitable” standard of 39 U.S.C. § 3622(b)(1). 33 Tr. 11355-11356 (Mitchum).
Instead, he retreated to the position that the OCA ‘s proposed rate design is not
“superlatively fair,” and the new USPS rate proposal is “vastly superior”. Id. at 11356,
11407 (Mitchum). “Superlative” and “superior,” however, are not relevant ratemaking
concepts under Section 3622(b)(1).
As noted above, the case law recognizes the
lawfulness of volume discounts in appropriate circumstances.
When those
circumstances are met, the notion that a smaller rate taper is “superior” to a bigger
taper, let alone “superlatively” so, has no legal basis.
Finally, it is telling that no mailer, or intervenor representing the interests of
mailers, has joined the Postal Service in arguing that the existing rate structure and the
OCA proposal are unfair and inequitable to smaller mailers. The reason is obvious:
small and medium-size mailers benefit from the existing rate structure because it
- 38 -
provides incentives for value-added resellers to serve those mailers.
7.
The Three-Tier Subscription Structure Is Not Unduly
Complex.
Witness Mitchum argues that Postal Service’s proposed rate structure is simpler
and less complex than the OCA proposal, which would retain the existing three-tiered
subscription structure. See Mitchum Reb. (USPS-RT-13) at 20 (33 Tr. 11304); 33 Tr.
11362 (Mitchum). He asserts that the OCA proposal is “more complex” because its
three subscription tiers “can apparently encourage a new subscriber to over-project its
expected use of Confirm service,” and therefore might cause a subscriber to purchase a
Platinum subscription when, in retrospect, a Gold subscription would have sufficed. By
contrast, witness Mitchum opines, the Postal Service’s proposed rate structure has
“simplicity” because it eliminates the possibility of overpayment and “places all
subscribers on a level playing field, as all subscribers pay the same amount for the
same number of units.” Mitchum Reb. (USPS-RT-13) at 20 (33 Tr. 11304).
This argument is without merit. First, the OCA’s proposed rate design is no
more complex than the existing rate design that the Postal Service itself proposed, and
this Commission approved, in Docket No. MC2002-1. 33 Tr. 11362-63 (Mitchum). 35 No
mailer has complained to the Postal Service that this design is too complex. 33 Tr.
11363 (Mitchum).
Second, elimination of the unlimited scan tier would make the Confirm rate
design more complex, not less. The OCA proposal, like the current rate design, would
35
See, e.g., Confirm Decision, Recommended Decision, at 1-2 (¶ 2) (finding that
proposed Confirm fees were “in accordance with the policies of title 39, United States
Code and the factors set forth in §§ 3622(b) and 3623(c)”); id., Opinion at 11 (settlement
agreement among parties, including the Postal Service, stipulated that Postal Service’s
proposed fees satisfied Sections 3622 and 3623).
- 39 -
not require Platinum subscribers to keep track of the number of scans to make sure that
they are being billed (or having their deposit accounts debited) correctly by the Postal
Service. 33 Tr. 11364 (Mitchum). By contrast, elimination of the unlimited scan option
would require former Platinum subscribers to start counting the number of scans used
to ensure that the Postal Service is charging them for the correct amount. In 2002-1,
Mr. Kiefer cited this very fact as a reason for the Postal Service’s decision to offer an
unlimited-scan option).
Specifically, a transaction-based price would “increase
administrative costs since each transaction would have to be tracked and billed” – a
result that he called “undesirable.” MC2002-1 Kiefer Direct, at 4 (reproduced at 33 Tr.
11429 et seq.). See also Bellamy Direct (GHS-T-1) at 10, lines 9-10 (quoting Kiefer
testimony). Mr. Barranca made the same point only six months ago, using the same
language as Mr. Kiefer.
Barranca Presentation at 8 (33 Tr. 11424).
Mr. Mitchum
himself conceded on cross-examination that the Service’s proposal would require
former Platinum subscribers to start keeping track of number of scans if they wished to
“make sure that they were being billed correctly.” See 33 Tr. 11363-11364 (Mitchum);
see also id. at 11415-11416 (Mitchum)
Furthermore, as Mr. Kiefer testified in Docket No. MC2002-1, eliminating the
unlimited-scan option and substituting a transaction-based price structure would
“increase the difficulty of projecting Confirm revenues, since they would fluctuate
depending on customers’ potentially volatile needs.” See MC2002-1 Kiefer Direct, at 4
(reproduced at 33 Tr. 11429 et seq.). See also Bellamy Direct (GHS-T-1) at 10, lines
12-13 (quoting Kiefer testimony).
Mr. Barranca made the same point, in identical
language, last May. Barranca Presentation at 8 (33 Tr. 11424).
Finally, and perhaps most important, witness Mitchum has admitted that he is
- 40 -
unqualified to offer an opinion on the relative complexity of the competing rate designs
for Confirm proposed by the OCA and the Postal Service. On cross-examination, he
ultimately conceded that he could not say whether the current USPS proposal would be
simpler to administer than the existing rate design: “I wouldn’t be the right person to ask
that.
I’m not in the product management group and I’m not in the accounting
department either, so I don’t have that area of expertise there. Sorry.” 33 Tr. 11380
(Mitchum). His testimony on the purported “complexity” of the OCA proposal should be
disregarded for this reason alone.
8.
The Postal Service Has Failed To Establish Any
Incompatibility Between the OCA’s Proposed Rate
Design and Future Enhancements To Confirm.
The Postal Service contends that the OCA’s proposed rate structure, like the
existing rate structure, does not facilitate the introduction of other information-based
services by the Postal Service. This rate structure, the Postal Service opines, “does not
offer the flexibility to differentiate among the various types of information and the relative
cost of gathering and distributing that data,” or pricing of other uses of scans, including
the possible use of the Confirm infrastructure to facilitate the dissemination of
information originating from sources other than passive scans. Mitchum Reb. (USPSRT-13) at 23 (33 Tr. 11307). By contrast, the Postal Service’s proposal, by basing fees
on units rather than scans, will better “accommodate the possibility of using Confirm to
disseminate information about, for example, container scans.” Id.
This rationalization borders on the frivolous. The only concrete example that
witness Mitchum could offer of an “incompatibility” between the OCA proposal and
future enhancements to Confirm is the supposed need to write additional software if
scan prices for containers are expressed in dollars and cents (as contemplated under
- 41 -
the OCA proposal) rather than in units (as the Postal Service proposes). 33 Tr. 1136811369 (Mitchum).
On cross-examination, Mr. Mitchum was unable to estimate the
costs, “even within an order of magnitude,” of modifying the software to express prices
in dollars and cents rather than units. 33 Tr. 11370-11371 (Mitchum). In any case, Mr.
Mitchum’s example lends no support to his position, because the Postal Service has not
even announced a roll-out date for scanning of containers.
33 Tr. 11366-11367
(Mitchum). Finally, if the Commission somehow concluded that rewriting the Postal
Service software to handle prices in dollars and cents would be unduly costly, the rate
structure proposed by the OCA could readily be restated in terms of units.
For a
Platinum tier subscriber, the units required for a scan would be zero.
II.
EVEN IF A PER-SCAN CHARGE FOR EVERY SCAN WERE APPROPRIATE,
THE POSTAL SERVICE HAS FAILED TO SHOW THAT A FIVE-TO-ONE
PRICE DISPARITY BETWEEN SCANS FOR FIRST-CLASS AND STANDARD
MAIL IS CONSISTENT WITH THE ANTIDISCRIMINATION PROVISIONS OF 39
U.S.C. § 403(c).
In addition to imposing per-scan charges on all scans, the Postal Service would
depart from the existing rate design by introducing inter-class price discrimination. For
First-Class mail, each scan would cost one unit. Scans of Standard mail, however,
would cost five units. Mitchum Direct (USPS-T-40) at 17; Callow Direct (OCA-T-5) at 6,
9. Scans of Standard mail would also be five times costlier than scans of First-Class
Mail in dollars-and-cents terms. Callow Direct (OCA-T-5) at 9, lines 9-16. 36
This disparity in price is not justified by any disparity in the cost of a scan: as the
Postal Service concedes, the marginal costs of scanning a piece of Standard mail and
36
Witness Mitchum has confirmed that the calculations regarding this issue in witness
Callow’s testimony are correct. See Response of USPS Witness Mitchum To
OCA/USPS-T-40-14 (33 Tr. 3934); Callow Direct (OCA-T-5) at 9, lines 12-16.
- 42 -
an otherwise-identical piece of First-Class Mail are the same. See Response of USPS
Witness Mitchum To OCA/USPS-T40-13 (14 Tr. 3933); Bellamy Direct (GHS-T-1) at 12,
lines 5-7. 37 Accordingly, the five-to-one price disparity constitutes substantial economic
price discrimination (sometimes described by the Commission as differential pricing).
The Commission has made clear that price discrimination of this magnitude
cannot be upheld without satisfying the ratemaking criteria of the Act, including the
antidiscrimination provisions 39 U.S.C. § 403(c). 38 For example, in its decision in the
Repositionable Notes Provisional Service Change proceeding (Docket No. MC2004-5),
the Commission declined to recommend on a permanent basis “value-based” prices
proposed by the Postal Service for repositionable notes (“RPNs”) because the Postal
Service had failed to show that the rates would satisfy the requirements of Sections
403(c), 3622 and 3623. 39 Other participants had challenged the proposed RPN rates—
0.5 cents for an RPN affixed to a First-Class mailpiece, and 1.5 cents for an RPN
affixed to a Standard or Periodical mailpiece—not only because the service was
37
See also Callow Direct (OCA-T-5) at 9-10; Response of USPS Witness Mitchum to
OCA/USPS-T40-30(a) (14 Tr. 3933) (confirming that for First-Class mail and Standard
mail letters with very similar mail piece characteristics (aside from markings and
postage), “differences in unit revenue, cost coverage and service standards for FirstClass Mail and Standard Mail letters have no bearing on the passive cost per scan
generated pursuant to the Confirm special service”).
38
Section 403(c) of the Act, 39 U.S.C. § 403(c), provides:
In providing services and in establishing classifications, rates, and fees
under this title, the Postal Service shall not, except as specifically
authorized in this title, make any undue or unreasonable discrimination
among users of the mails, nor shall it grant any undue or unreasonable
preferences to any such user.
39
See Repositionable Notes Provisional Service Change, MC2004-5 Op. & Rec. Decis.
(Dec. 10, 2004) (“RPN Decision”).
- 43 -
costless (thereby singling out users of RPN to shoulder an extra share of institutional
costs beyond that borne by other mailers), but also because the proposed surcharge for
Standard and Periodicals mail was three times as high as for First-Class mail. RPN
Decision at 3, 22-23. The Commission, while recommending the proposed surcharges
on a provisional basis, found that “The record support for [the Postal Service’s]
conclusions would not be adequate to support a set of permanent RPN rates.” RPN
Decision at 23.
The courts have similarly required that the Postal Service show “some
reasonable ground for differential treatment” before rate disparities will be held to satisfy
the antidiscrimination requirements of Section 403(c). See, e.g., National Easter Seal
Society For Crippled Children and Adults, 656 F.2d 754, 762 (D.C. Cir. 1981) (“National
Easter Seal Society”). In National Easter Seal Society, for example, the D.C. Circuit
set aside a classification decision of the Board of Governors which implemented a
presort discount immediately for commercial third-class mail, but phased in similar
discounts for nonprofit third-class mail over a period of several years. The court held
that the Commission and the Governors had erred in failing to consider whether this
inequality of treatment violated Section 403(c)’s prohibition against undue or
unreasonable discrimination. 40 “Absent some reasonable ground for differential
treatment, section 403(c) forbids discriminatory phasing of discounts to only one class
of mailers.” Id. at 762. Because the Governors had not analyzed the phasing schedule
“in those terms,” the court remanded the case for reconsideration. Id.
40
The Governors had declined to address the Section 403(c) issue because they
believed that they were bound by Section 3626 of the Act to phase in the discount. The
D.C. Circuit held that the Governors’ reliance on Section 3626 was erroneous. National
Easter Seal Society, 656 F.2d at 760-761.
- 44 -
Under these rulings, the Postal Service is required to show that there is a
reasonable ground for a five-to-one disparity between Standard Mail and First-Class
Mail in the pricing of Confirm scans. The Postal Service, however, has not even begun
to explain why the five-to-one ratio satisfies the criteria of Section 403(c), beyond the
unexceptionable observation that First-Class mail generally has a higher value of
service than Standard mail. See Callow Direct (OCA-T-5) at 9, lines 17-18; Response
of USPS Witness Mitchum To POSTCOM/USPS-T1-40-7 (14 Tr. 4131) (“One of the
characteristics of Standard Mail is that it has fewer options for additional services. Like
other features and services, Confirm could have been limited to First-Class Mail only”).
But if the greater value of First-Class mail sufficed to justify a 5-to-1 price disparity vis-àvis Standard mail, the same fact could equally justify a disparity of 50-to-1, 500-to-1, or
5,000-to-1—and for any class of mail or type of service, not just Confirm. Bellamy
Direct (GHS-T-1) at 12-14.
The undersigned parties take no position here on whether a defensible argument
could be offered for a price discrimination of this magnitude. Our position is simply that
no such justification has been offered here; hence, the Commission must find that the
Postal Service has failed as a matter of law to meet its burden of justifying the proposed
five-to-one disparity under Section 403(c). See National Easter Seal Society, 656 F.2d
at 761 (setting aside Governors’ approval of disparate treatment among mailers with
respect to phasing-in of discount, because “the resulting record does not enable us to
determine” whether “sufficient reason exists to permit phasing in the discount for
nonprofit mailers only”).
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CONCLUSION
For the reasons stated, the Commission should reject the radical restructuring of
the Confirm pricing structure for Confirm proposed by the Postal Service. To the extent
that the Commission believes that adjustments to the existing fees for Confirm are
necessary, it should adopt the alternative pricing proposal submitted by the OCA.
Respectfully submitted,
Shelley S. Dreifuss, Director
Office of the Consumer Advocate
901 New York Avenue, N.W.
Washington DC 268-0001
(202) 789-6837
Fax: (202) 789-6819
[email protected]
David M. Levy
Richard E. Young
SIDLEY AUSTIN LLP
1501 K Street, N.W.
Washington DC 20005
(202) 736-8000
[email protected]
Counsel for Alliance of Nonprofit Mailers,
National Association of Presort Mailers,
and National Postal Policy Council
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