BEFORE THE
POSTAL REGULATORY COMMISSION
WASHINGTON, D.C. 20268-0001
Postal Rate Commission
Submitted 12/21/2006 3:00 pm
Filing ID: 55466
Accepted 12/21/2006
_______________________________________
POSTAL RATE AND FEE CHANGES
}
_______________________________________
DOCKET No. R2006-1
INITIAL BRIEF
OF
MAIL ORDER ASSOCIATION OF AMERICA
David C. Todd
Patton Boggs. LLP
2550 M Street, NW
Washington, DC 20037
Tel: 202 457 6410
Fax: 202 457 6315
[email protected]
December 21, 2006
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TABLE OF AUTHORITIES
Postal Reorganization Act ..................................................................................................................... 5, 7, 17
H.R. 6407 ..........................................................................................................................................................10
MC95-1........................................................................................................................................................... 1, 2
MC2002-1 .........................................................................................................................................................24
R90-1........................................................................................................................................................... 29, 30
R97-1............................................................................................................................................................... 4, 7
R2000-1 ..............................................................................................................................................4, 7, 30, 40
R2001-1 .......................................................................................................................................................... 4, 7
R2005-1 ...................................................................................................................................................... 12, 34
R2006-1 ........................................................................................................................................................ 1, 36
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TABLE OF CONTENTS
I. STATEMENT OF THE CASE AND STATEMENT OF THE POSITION OF THE MAIL
ORDER ASSOCIATION OF AMERICA.......................................................................... 1
II. DISCUSSION.............................................................................................................. 2
A.
STANDARD MAIL ENHANCED CARRIER ROUTE RATES ARE EXCESSIVE ..................................2
1.
Introduction .....................................................................................................................................................2
2.
The Pricing Factors Of The Act Do Not Support The Postal Service’s Proposed ECR Rates ........................4
3.
The Testimony Of Witness Prescott Demonstrates That The Postal Service’s Approach To Pricing Standard
Mail ECR Is Erroneous ...................................................................................................................................5
a) Standard Mail ECR Prices Are Not Market-Based ..........................................................................................5
b) The Per Piece Contributions Of Standard Mail Regular And ECR Do Not Support The Proposed Rates ......6
c) The Postal Service Consistently Has Underestimated The Cost Coverage That Would Result From
Proposed ECR Rates. ......................................................................................................................................7
4.
Valpak Witness Mitchell Provides A Comprehensive History Of The Overcharging Of ECR. .....................8
5.
Conclusion.......................................................................................................................................................8
B.
WITNESS MITCHELL’S ANALYSIS OF THE RELATIONSHIP BETWEEN STANDARD MAIL
ECR AND REGULAR IS FLAWED ...............................................................................................................9
1.
The Rates For The Standard Mail ECR And Regular Subclasses Should Be Determined By An Independent
Application Of The Pricing Factors Of The Act .............................................................................................9
2.
Lower ECR Rates Should Not Be Achieved By Shifting The Entire Revenue Burden To Regular ...............9
C.
WITNESS MITCHELL’S PROPOSED ECR RATE DESIGN SHOULD BE REJECTED.....................11
D.
THE TESTIMONY OF WITNESS INGRAHAM – THE SHUDDA, CUDDA, WUDDA APPROACH –
SHOULD BE REJECTED ..............................................................................................................................13
E.
WITNESS SIDAK’S CONCLUSIONS ABOUT THE THREAT OF VOLUME LOSSES ARE
INCORRECT ...................................................................................................................................................16
1.
Witness Sidak’s Use Of His Statistical Analysis Is Not Valid ......................................................................16
2.
The Problem Of First-Class Volume Losses Would Be Compounded By Shifting The Revenue Burden To
Standard Mail ................................................................................................................................................17
3.
Witness Sidak’s Testimony Fails To Distinguish Between The Standard Mail ECR And Regular
Subclasses .....................................................................................................................................................17
4.
The Loss Of First-Class Mail Cannot Be Prevented By Lower Rates...........................................................18
5.
Summary And Conclusion ............................................................................................................................20
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F.
LOWER ECR RATES CAN BE ACHIEVED WITHOUT INCREASING THE RATES FOR OTHER
CLASSES OF MAIL .......................................................................................................................................20
1.
Lower ECR Rates can be Achieved by Reducing the Service’s Revenue Request .......................................20
2.
Recognizing The Savings That Will Result From The Reduced Use Of Dals Would Permit Lower ECR
Rates..............................................................................................................................................................20
G.
THE COMMISSION SHOULD REJECT THE POSTAL SERVICE’S PROPOSED
CLASSIFICATION CHANGES FOR CONFIRM® SERVICE .................................................................21
1.
The Postal Service’s Proposal .......................................................................................................................21
2.
The OCA Proposal ........................................................................................................................................23
3.
The Postal Service’s “Fairness” Arguments are Unpersuasive .....................................................................24
4.
The Postal Service’s Revenue Arguments are Unpersuasive ........................................................................25
5.
The Postal Service’s Arbitrage Arguments Are Unpersuasive......................................................................26
6.
The Postal Service Has Performed No Market Research To Support The Proposed Structural And
Classification Changes ..................................................................................................................................27
7.
Summary and Conclusion .............................................................................................................................28
H.
THE AMAZON.COM PROPOSED BOUND PRINTED MATTER CLASSIFICATION CHANGE
SHOULD BE REJECTED ..............................................................................................................................28
1.
The Proposed Expansion Of Bound Printed Matter Has Not Been Supported By Substantive Evidence.....28
2.
Witness Kiefer’s Testimony Shows That The Classification Change Should Not Be Adopted....................30
3.
Amazon.Com Has Not Met Its Burden Of Providing Evidence On How New Materials Would Affect The
BPM Subclass ...............................................................................................................................................31
4.
Witness Haldi’s Arguments Are Self-Contradicting .....................................................................................33
I.
THE POSTAL SERVICE’S PROPOSED BPM RATES ARE TOO HIGH ..............................................33
J.
OCA WITNESS SMITH’S CRITICISMS OF THE CITY CARRIER COSTS DEVELOPED BY USPS
WITNESS BRADLEY LACK SUBSTANCE................................................................................................34
K.
GREETING CARD ASSOCIATION WITNESS CLIFTON’S TESTIMONY IS FATALLY FLAWED
AND SHOULD NOT BE ACCEPTED BY THE COMMISSION...............................................................37
III. CONCLUSION ......................................................................................................... 42
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BEFORE THE
POSTAL REGULATORY COMMISSION
WASHINGTON, D.C. 20268-0001
_______________________________________
POSTAL RATE AND FEE CHANGES
}
_______________________________________
DOCKET No. R2006-1
INITIAL BRIEF
OF
MAIL ORDER ASSOCIATION OF AMERICA
I.
STATEMENT OF THE CASE AND STATEMENT OF THE POSITION OF
THE MAIL ORDER ASSOCIATION OF AMERICA
The types of mail that are of principal concern to the Mail Order Association of America
(MOAA) in this proceeding are Standard Mail Enhanced Carrier Route, Bound Printed Matter and
CONFIRM®. The Commission must determine the rate levels for those classes, which will require
the resolution of the price elasticities calculated by the Postal Service for Standard Mail ECR and
First-Class Mail. The Commission must also determine whether the Bound Printed Matter
classification should be changed to permit entry of CDs and DVDs; whether the Postal Service has
met its burden in proposing a drastic change in the classification and structure of the rates for
CONFIRM® Service; and the validity of the Service’s calculation of City Carrier costs.
It is the position of MOAA that the Postal Service has proposed ECR rates that are excessive,
continuing a long trend dating from the establishment of the subclass in Docket No. MC95-1. As a
result, the ECR subclass has suffered significant declines. Standard Mail as a whole is important
and will become increasingly important to the Postal Service given the volume declines in First-Class
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Mail, declines which cannot be halted by a Postal Service pricing strategy. MOAA opposes the
proposed classification changes to the BPM subclass that would permit the entry of CDs and
DVDs, a proposal that would increase the average costs of the subclass. MOAA also opposes the
restructuring of CONFIRM® service proposed by the Postal Service, a restructuring of this
fledgling service that would impede its value to mailers. MOAA supports the calculation of City
Carrier costs and the First-Class Mail elasticities that have been presented by the Postal Service.
II.
DISCUSSION
A.
STANDARD MAIL ENHANCED CARRIER ROUTE RATES ARE EXCESSIVE
1.
INTRODUCTION
The Commission issued a Recommended Decision in Docket No. MC95-1 dividing
Standard Mail into two subclasses: Regular and Enhanced Carrier Route. In that
Recommended Decision, the Commission summarized the stated goals of the Postal Service
in proposing the creation of ECR: “to protect against diversion by competition; reduce
influence of content restrictions; simplify the Schedule and postal regulations; increase
homogeneity within subclasses; reduce Postal Service costs; and pass along advantages of
efficient mail in rates.” Op. and Rec. Dec., Docket No. MC95-1, at II-32, ¶ 2095. The
Commission accepted the Postal Service’s concern with competition and expressed
sympathy with the Service’s desire to “deter incursions in areas where it is competitive”. Id.
at II-38, ¶ 2115. Unfortunately, the ECR subclass has not fulfilled its potential. ECR
volumes are today less than they were ten years ago, a result of ECR rates that have
consistently been too high.
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At the time that the ECR subclass was established, the current mail volume crisis had not
yet fully developed. That volume crisis is now obvious and all recognize that electronic
alternatives to the mail have caused a substantial loss of both existing and potential volumes
of First-Class Mail, notwithstanding the substantial growth in the U.S. population and the
resulting increase in the number of delivery points. The loss of First-Class Mail is a trend
which is not likely to be reversed and the Postal Service cannot “price” its way back into the
First-Class Mail market because the electronic alternatives are dramatically less costly than
the Postal Service. As of now, however, that is not true of Standard Mail ECR. Its price
elasticity shows that a lower price would foster the growth of the subclass. Although, it is
possible that electronic alternatives will also reach a stage of development in which it will no
longer be possible for the Postal Service to compete for advertising mail, we are not yet at
that point. It is counterproductive to continue to price ECR at an uneconomic level that will
result in steep volume declines, as will be the case under the USPS proposed rates.
The testimony of Mail Order Association of America witness Roger C. Prescott reviews the
reasons for the establishment of the Standard Mail ECR subclass and the subsequent rate history
and cost coverages. MOAA-T-1. A notable fact is that ECR volumes have declined by 6 percent
since the establishment of the subclass — from 34.1 billion pieces in 1998 to 32.0 billion pieces in
2005. At the rates proposed by the Postal Service, volumes are projected to drop once again, from
32 billion pieces to 29.3 billion pieces in 2008, which would represent a 14 percent decline from
1998 levels. MOAA-T-1 at 19. The decline is a result of excessive rates for this price sensitive
subclass. Valpak witness Mitchell’s testimony also reviews the extent to which past ECR rates, and
the rates that have been proposed by the Postal Service in this proceeding, do not accord with the
pricing factors of the Act and the reasons for the establishment of the subclass. VP-T-1, at 3-97.
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Additionally, under the rates proposed by the Postal Service, and accepted by the Commission in
past proceedings, there has been a consistent pattern of underestimating the cost coverages that
would result from those rates. The inaccurate estimates have been dramatic. In rate proceedings
R97-1, R2000-1, and R2001-1 the Postal Service estimated after rates cost coverages of 195 to 201
percent. The actual cost coverages for those proceedings ranged from 240 percent to 263 percent,
demonstrating that ECR rates have been excessive even assuming, arguendo, that the Service’s
proposed rates and resulting cost coverages in those cases were appropriate.
2.
THE PRICING FACTORS OF THE ACT DO NOT SUPPORT THE POSTAL
SERVICE’S PROPOSED ECR RATES
The Postal Service in this proceeding has again proposed Standard Mail ECR rates that are
excessive and counterproductive for both the Postal Service and mailers. The Postal Service’s
pricing witness, Donald J. O’Hara, recognizes that the “value of service” for ECR is low-measured
either by “intrinsic” value i.e. the apparent value of the kind of services offered to Standard Mail
ECR and “economic” value, as measured by its price elasticity. He concludes that ECR’s “intrinsic”
value of service is “relatively low” noting, inter alia, that delivery of ECR may be deferred. USPS-T31 at 28, 29. He also concludes that the intrinsic value of ECR and Regular are identical.
Tr.17/5101. The price elasticity of ECR mail, however, -1.08, is “much higher than those of
Standard Regular, First-Class Mail, letters and cards, or Periodicals, indicating a rather low economic
value of service.” USPS-T-31 at 29.
Thus, a straightforward application of the pricing factors of the Act, including value of service,
supports a cost coverage for ECR significantly below that for Regular. Despite that and the other
pricing factors of the Act, all of which would indicate that Standard Mail ECR should, at most, have
only a small rate increase, witness O’Hara proposes an 8.3 percent ECR rate increase which he
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describes with apparent approval as “very close to the overall average ….” Id. at 29. The rate
increase should be well below, not “close to” the overall average.
The pricing for ECR has been counterproductive, and in this proceeding, in which for the first
time ECR is shown to be price elastic, the damage will be accelerated. Driving away volume by
excessive prices can only exacerbate the Postal Service’s volume dilemma.
3.
THE TESTIMONY OF WITNESS PRESCOTT DEMONSTRATES THAT THE POSTAL
SERVICE’S APPROACH TO PRICING STANDARD MAIL ECR IS ERRONEOUS
a)
Standard Mail ECR Prices Are Not Market-Based
As summarized by witness Prescott, the establishment of the ECR subclass was intended to give
the Postal Service the ability to develop an overall approach to market-based pricing, consistent with
the criteria of the Postal Reorganization Act, which would help preserve or increase mail volumes
for the Third Class Bulk Rate Regular carrier route mail that became the ECR subclass. MOAA-T-1
at 7.
Witness Prescott also summarizes testimony by Postmaster General Potter, delivered before the
Congress in support of postal reform, explaining the importance of responding to competitive
pressures by setting rates that are “responsive to the market”. MOAA-T-1 at 9. The PMG was
correct in his assessment of the importance to the Postal Service of rates that are “responsive to the
market.” Unfortunately, however, neither in this proceeding, nor in prior proceedings, has the
Service proposed ECR rates that accord with market-based pricing. As recognized by the PMG, the
failure to set market-based rates is “counterproductive”. Nonetheless the Service continues to
propose “counterproductive” rates.
During the period from 1998 through 2008, the Postal Service is projecting a loss of ECR volume,
from 34.1 billion to 29.3 billion - a 14 percent decline. MOAA-T-1 at 19. This is a dismal picture
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for a subclass of mail which was established with such promise and which, if properly priced, could
make a greater contribution to the fiscal health of the Postal Service. As concluded by witness
Prescott:
Commercial ECR Mail, which has shown an increasing susceptibility
to diversion to other forms of advertising, has not grown under the
historical pricing policies. This leads to the conclusion that the
pricing policies have been counterproductive and have not produced
the best results for the USPS or ECR mailers.
Id. at 20.
b)
The Per Piece Contributions Of Standard Mail Regular And ECR Do Not
Support The Proposed Rates
The sole reason advanced by witness O’Hara to support the high ECR cost coverage is a
conclusion that “it is important to retain a reasonable contribution per piece for ECR.” Id. at 30. It
is impossible to quarrel with the proposition that there should be a “reasonable” contribution from
ECR but witness O’Hara was not able to explain why, under the pricing factors of the Act, the ECR
contribution should be as high as has been proposed. He recites the respective per piece
contributions of ECR, 9.7 ¢, and Regular, 9.9 ¢, which are “about the same”, in the same sentence
noting the drastically different cost coverages – ECR 213 percent, Regular 177 percent. Id. at 30.
Nowhere else in his testimony, however, does he attempt to justify particular rate levels on the basis
of a comparison of contributions per piece, nor should he have done so. As stated by witness
Prescott:
The importance in presenting the contribution per piece is never
explained by Witness O’Hara. Witness O’Hara’s reliance on the
contribution per piece is not valid in this proceeding for the
comparison of Standard Regular with ECR mail.
***
Witness O’Hara does not apply this per piece metric to any other
subclasses except for Standard Regular and ECR Mail. Stated
differently, the only use of his “reasonable contribution per piece”
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metric is to justify his equalizing the contribution per piece between
ECR and Standard Regular Mail.
***
This equalization, which is not supported by the pricing criteria of
the Postal Reorganization Act, results in contribution levels that are
unfair for both subclasses; i.e., ECR contribution per piece is too
high and then Standard Mail Regular is increased to the levels of ECR
mail. This is not a proper basis for developing rates.
MOAA-T-1 at 12, 13
c)
The Postal Service Consistently Has Underestimated The Cost Coverage
That Would Result From Proposed ECR Rates.
Notwithstanding a pattern of declining volumes, the Postal Service consistently has proposed
rates based upon a projected cost coverages for ECR that have been considerably lower than the
cost coverages resulting from those rates, as shown by the table presented in the testimony of
witness Prescott.
Table 2
Comparison of PRC TYAR and Actual Coverage Ratios
1.
2.
3.
PRC
Proceeding
(1)
R97-1
R2000-1
R2001-1
Year
(2)
1998
2001
2003
Coverage Ratio - ECR/NECR
TYAR
Actual
(3)
(4)
199%
240%
195 %
233%
201%
263%
MOAA-T-1, at 17
Therefore, even if the Service’s proposed cost coverages are deemed to have been appropriate, the
actual cost coverages demonstrate a consistent pattern of excessive rates. This consistent pattern
should inform the Commission in its assessment of the rates proposed by the Postal Service in this
proceeding. As concluded by witness Prescott, if the patterns that we have seen in the past were to
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persist, cost coverage ratios in the current case could range between 256 percent and 280 percent
rather than the 213 percent that has been proposed by witness O’Hara as the appropriate cost
coverage ratio. Id. at 18.
4.
VALPAK WITNESS MITCHELL PROVIDES A COMPREHENSIVE HISTORY OF THE
OVERCHARGING OF ECR.
The Postal Service on numerous occasions has expressed its view that the rates proposed for ECR
were too high and that a lower rate was not proposed due only to a variety of factors, all as
exhaustively presented by witness Mitchell. VP-T-1 at 34-42. He reviews the extent to which the
Postal Service has recognized the excessive rates that have been set for ECR since the creation of
the subclass, Id. at 34-42; the extent to which “value” pricing argues for lower rates for ECR; Id. at
42, including an example of the various benefits to the economy of value pricing; Id. at 42-56; the
adverse affects upon Standard Non Profit Mail by the excess pricing of ECR. Id. at 61-62; and the
excessive ECR markup, which includes a comprehensive review of the pricing factors of the Act; Id.
at 63-97.
Finally, witness Mitchell shows that “intrinsic value” as it has sometimes been used as a rationale
for ignoring the value of service as measured by demand should not be used in the pricing of
Standard Mail ECR or Regular. Id. 1t 76-77. As he concludes:
In the end, identifying a product’s characteristics may highlight its
features and facilitate thinking about the value mailers might place on
the product. However, the ultimate – and only relevant – question is
whether the value is actually there. The test for this is the decisions
made by customers in the marketplace, which are reflected in the
elasticity measured.”
Id. at 77.
5.
CONCLUSION
The purposes for which the ECR subclass was created have not been fulfilled because its rates
have always been too high. As a result of the rates proposed by the Postal Service in this
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proceeding, ECR volumes will decline by a further 8 percent from 2005 levels. MOAA recognizes
that with an elastic subclass of mail, any rate increase will inevitably result in some volume decline.
It may be that as a result of the other factors of the Act, there should be some increase in ECR rates.
Clearly, however, it is only sound policy to hold the rate increases for ECR mail to a minimum level.
B.
WITNESS MITCHELL’S ANALYSIS OF THE RELATIONSHIP BETWEEN
STANDARD MAIL ECR AND REGULAR IS FLAWED
1.
THE RATES FOR THE STANDARD MAIL ECR AND REGULAR SUBCLASSES
SHOULD BE DETERMINED BY AN INDEPENDENT APPLICATION OF THE
PRICING FACTORS OF THE ACT
Witness Mitchell has recognized the need for an independent application of the pricing criteria to
the subclasses. He concludes, correctly, that the Commission has affirmed on many occasions that
subclasses “warrant an independent application of the various policies of the Act.” Id. at 64. His
testimony, however, does not accord with that policy.
Witness Mitchell’s rate proposal, to shift the entire revenue loss from ECR to Regular, represents
an implicit acceptance of the proposition that the overall institutional cost contribution of Standard
Mail should ignore the subclasses. That approach is directly contrary to ECR’s subclass status in
which the pricing criteria of the Act are to be applied independently. The pricing that has been
proposed by the Postal Service since the creation of the subclass has been altogether too much in
line with that approach, tending to treat ECR as a rate “category” rather than a subclass. Witness
Mitchell’s testimony unfortunately perpetuates the Service’s erroneous approach.
2.
LOWER ECR RATES SHOULD NOT BE ACHIEVED BY SHIFTING THE ENTIRE
REVENUE BURDEN TO REGULAR
Under witness Mitchell’s rate proposals, the rates for Standard Mail ECR would be decreased
from current levels and the rates for Standard Mail Regular increased by the amount necessary to
make up the lost revenues. Those rate proposals were driven by the possibility that this would be
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the last rate proceeding prior to the imposition of price caps. He agreed that his recommendations
should be modified if there will be further rate proceedings prior to the implementation of rate caps.
Id. at 94-97. Postal legislation has now been enacted under which the Postal Service is authorized to
file another rate case under the current statutory procedures and standards within 12 months of
enactment. H.R. 6407, § 3622 (f), as amended. Witness Mitchell’s testimony should be evaluated in
the light of that development.
Imposing a rate increase on Standard Mail Regular of the size proposed by witness Mitchell would
undoubtedly result in rate shock for mailers dependent upon that subclass. His proposed 17.5
percent average rate increase for Standard Mail Regular is larger than should be imposed upon any
class or subclass of mail unless absolutely necessary because of attributable costs or other factors. It
would be bad policy to impose such a drastic increase upon Standard Mail Regular, a subclass of
mail which together with Standard Mail ECR, is going to become ever more important to the Postal
Service in sustaining sufficient volumes to continue to provide a viable service for all mailers.
Witness Mitchell concludes that there is “little reason” for the cost coverage of Standard Regular
to be much below the cost coverage of First-Class. Id. at 95. The apparent justification for that
result is his conclusion that the elasticity of Standard Mail Regular is not “significantly lower than
First-Class.” Id. at 95. The relative elasticity of Regular, however, is nearly double that of First-Class
letters. USPS-T-31, at 11. Further, there have been considerable variations in the relative elasticity
of Standard Mail Regular over the years and it is not clear that the elasticity in this proceeding
represents a long-term trend. Finally, the Commission has made it clear that elasticity, as a measure
of the economic value of service, should not, by itself, serve to determine rate levels.
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C.
WITNESS MITCHELL’S PROPOSED ECR RATE DESIGN SHOULD BE
REJECTED
Witness Mitchell’s testimony recommends “that 100% of the cost difference [between letters
and flats] be passed through into rates, at the Basic level, in ECR”. VP-T-1, at 178. He calculates
the cost difference at 2.3 cents per piece. Witness Mitchell supports this change to the USPS’s
proposal, in part, by claiming that letters and flats “are for all practical purposes separate products.”
VP-T-1, at 178.
Witness Mitchell’s proposal is unwarranted and unsupported. His proposed letter/flat rate
differential has flaws which: 1) disrupt the rate relationship between ECR Basic and Standard
Regular Automation letters; 2) overstate the cost difference between letters and flats at the ECR
basic level; 3) fail to recognize the effect of the ECR pound rate on mail; and 4) and is based in part
upon an improper claim that letters and flats are separate products. MOAA’s witness Roger C.
Prescott, MOAA-RT-1, and other witnesses conclusively show that witness Mitchell’s proposed
letter/flat rate differential is without merit.
For ECR mail entered at the Basic level, the USPS has proposed a rate of 23.3 cents per
piece for both letters and flats (USPS Request, Attachment A, page 19). Using the Test Year After
Rates (“TYAR”) model presented by the USPS’s witness Keifer and accepting witness Mitchell’s 2.3
cent per piece rate differential, the rates for ECR Basic letters would equal 21.5 cents per piece.
MOAA-RT-1, at 12. Tr.32/10948. This adjusted rate is 0.4 cents per piece less than the rate of
21.9 cents per piece proposed by the USPS for Standard Regular 5-Digit Automation letters,
MOAA-RT-1, at 13. Tr.32/10949. At those rates, the letter shaped mail paying the 5-digit
automation rate in Regular would migrate to ECR or, alternatively, the automation mail that the
USPS has assumed would migrate to Standard Regular will not migrate at all. MOAA-RT-1, at 13.
This potential problem was addressed by the USPS when it stated that the “reduction or reversal of
the rate differential [between Basic ECR and Standard Regular 5-digit automation letters] would
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diminish the incentive for mailers to prepare larger trays of 5-digit presorted automation compatible
letters that can be directly delivery point sequenced at plants...[which is] less supportive of the Postal
Service’s letter automation goal….” Tr.5/920. Witness Mitchell’s rate design ignores the USPS’s
valid concern.
Witness Mitchell constructs a letter/flat rate differential between letters and flats entered at
the ECR Basic level of 2.3 cents per piece. This cost differential, which fails to consider differences
in weight as well as shape, is not the proper value. Witness Mitchell acknowledges that his costs for
flat-shaped mail considers flats of all weights. VP-T-1, at 179. Also, the USPS’s library reference
USPS-LR-L-135 shows that the letter/flat cost differential is only 0.2 cents per piece.
However,
even this cost differential, which reflects the average costs for all letters and flats, does not take into
account the fact that the average flat weighs 332 percent more than the average letter. MOAA-RT1, at 21.
Witness Mitchell’s rate design adopts the pound rate of 64.1 cents per piece proposed by the
USPS. VP-T-1, at 190. Witness Mitchell recognizes that some of the costs are affected by weight
as well as shape. VP-T-1, at 118. Because of his failure to adjust the pound rate, his proposed rate
design is fatally flawed. Under cross- examination, witness Mitchell agreed that modifications to the
rate structure must be looked at in their entirety. Tr. 35/11941-942. Witness Crowder also
demonstrated that witness Mitchell’s retention of the USPS’s proposed pound rate was “completely
unfounded and self-serving” (Tr. 35/11734).
No evidence was submitted to support witness Mitchell’s assertion that letters and flats are
separate products. Witness Mitchell’s theory is advanced to support a separate coverage ratio for
ECR letters and flats. MOAA-RT-1, at 14. Tr.32/10950. This is counter to past PRC precedent
and data are not available for such a calculation. Witness Mitchell has acknowledged that his
letter/flat differential assumes the same elasticities. Tr. 35/11914. Even NAA’s witness Ingraham
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recognizes that the only elasticity data submitted for ECR mail is the data presented by USPS’s
witness Thress. Tr.35/11870. Witness Thress provides the elasticity only for the ECR subclass as a
whole. Witness Crowder demonstrates that witness Mitchell’s attempt to differentiate letters and
flats as two products is “vague and inconsistent.” Tr. 35/11743. In summary, nothing in this
record supports a conclusion that ECR letters and ECR flats are different products that should
result in separate pricing.
D.
THE TESTIMONY OF WITNESS INGRAHAM – THE SHUDDA, CUDDA,
WUDDA APPROACH – SHOULD BE REJECTED
Newspaper Association of America witness Ingraham (NAA-RT-2) submitted rebuttal testimony
criticizing MOAA witness Prescott’s use of USPS witness Thress’s calculation of the elasticity of
demand for Standard Mail ECR. The argument advanced by witness Ingraham is that at a 95
percent confidence interval the actual ECR elasticity could range anywhere from -1.4 to -0736.
NAA-RT-2, at 7. Tr.35/11854. He argues that there is “sufficient statistical uncertainty” to
undermine the validity of the conclusions by either witness Prescott or Mitchell based upon the
calculated elasticity. The thrust of his testimony is that because under statistical analysis the “true”
elasticity is subject to a range of values, the calculated elasticity is without meaning. His testimony,
in layman’s terms, is really nothing more than a classic dodge of “it cudda happened” some other
way.
As a general proposition, the calculation of elasticities for the purpose of providing guidance to
the Postal Service and the Commission in the establishment of rates would be utterly destroyed by
subjecting that testimony to a “shudda, cudda, wudda” approach. The only responsible and, indeed,
feasible course for the Commission is to use the elasticities calculated by the Postal Service to
determine the relative demand for the various classes of mail. One of the factors that the
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Commission is obligated to consider in establishing the proper institutional cost burden of each of
the classes of mail is “value of service”. Witness Thress offers no help in how the Commission
should go about fulfilling that obligation by presenting statistical formulations that the true elasticity
of demand could have been higher or lower. The testimony is simply not useful.
Further, in his responses to cross-examination, witness Thress has essentially destroyed his thesis.
Specifically, he acknowledged a number of times that the use of the calculated elasticity estimates by
witness Thress for the purpose of determining volume is perfectly okay. Tr.35/11870. He labored
to establish that the use of elasticity for the one purpose, measuring value of service, is
inappropriate, while for the other purpose, volume forecasts, it is appropriate. In the real world it is
impossible to separate the two uses. The Commission must use the best available evidence. As
acknowledged by witness Ingraham, the elasticity estimates calculated by witness Thress are the best
that are available. Tr.35/11870.
Witness Ingraham argues that under a “null hypothesis” the own-price elasticity of demand for
ECR could be “say, -0.75”. Id. at 7. Tr.35/11854. Accepting witness Ingraham’s testimony at face
value, however, the own-price elasticity could also be -1.422, which if true, would entail a substantial
underestimate of ECR volumes and the resulting loss of Postal Service revenues. Thus, there is at
least as much peril associated with using elasticities for volume calculations as there is with using
them to assess value of service, which is only one of the factors that must be assessed by the
Commission in establishing rates. There is no rational basis for using elasticity estimates for one
purpose while not using them for the other equally vital purpose.
Despite all of the hypothetical postulations submitted by witness Ingraham, the fact remains that
the best estimates of price elasticities, and the estimates which should be used by the Commission in
considering the pricing factors of the Act, are those that have been calculated by witness Thress,
including the elasticity of Standard Mail ECR.
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14
that must necessarily be made by the Postal Service in establishing rates for a $72 billion enterprise,
uncertainty inevitably exists. Those uncertainties should not, and cannot reasonably, be used to
justify a failure to use the best evidence that the Commission has before it for the purpose of
making its rate recommendations.
Witness Ingraham cites the testimony by Greeting Card Association witness Clifton, GCA-T-1 to
buttress his case that the elasticity of demand calculated by witness Thress for Standard Mail ECR
and Regular may be unreliable. It is evident, however, that witness Ingraham did not closely examine
witness Clifton’s testimony. As shown by the testimony of USPS witness Thress (USPS-RT-2),
witness Clifton’s testimony is so replete with errors that it is unusable for any purpose. Witness
Thress’s testimony systematically discusses the numerous deficiencies in witness Clifton’s testimony
and MOAA submits that it is entitled to no weight by the Commission in reaching its decisions, as
discussed in part K of this brief.
Finally, witness Ingraham contends that both witnesses Prescott and Mitchell have placed undue
reliance upon ECR elasticity of demand while ignoring other factors. Witnesses Prescott’s and
Mitchell’s recommendations were based upon a much broader examination of Standard Mail ECR, a
subclass of mail in which volume has shrunk significantly. See witness Prescott, MOAA-T-1, and
Mitchell Valpak-T-1.
The apparent conclusion of witness Ingraham is that the Commission should ignore the clear
evidence that Standard Mail ECR is highly price sensitive, has lost volume and is the type of mail
which the Postal Service will need to encourage in order to attract sufficient volumes to support
universal service for all mailers. The dead end road which witness Ingraham has urged the
Commission to travel should not be taken.
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E.
WITNESS SIDAK’S CONCLUSIONS ABOUT THE THREAT OF VOLUME
LOSSES ARE INCORRECT
1.
WITNESS SIDAK’S USE OF HIS STATISTICAL ANALYSIS IS NOT VALID
NAA witness Sidak, NAA-RT-1, presents testimony summarizing the increased use of the internet
as a result of an increase in the availability and use of broadband service, and other factors. He also
concludes, however, that this threat is not one which applies to Standard Mail. Although he is
undoubtedly correct with respect to the diversion of First-Class Mail, he is undoubtedly incorrect in
concluding that Standard Mail, and in particular, Standard Mail ECR, does not face a similar threat.
One instance of his peculiar approach is his convoluted reasoning supporting his conclusion that
there is no threat to Standard Mail ECR posed by the internet. He criticizes USPS witness Thress
for his conclusion that ECR faces a threat from the internet. He opines that Thress’s result was
“not statistically significant at the 95 percent confidence level” and concludes “one cannot reject the
statistical proposition that internet advertising does not affect the demand for ECR mail.” Id. at 19.
This is similar to the convoluted reasoning displayed in the testimony of NAA witness Ingraham.
Both witnesses Ingraham and Sidak invite the Commission to accept a fundamentally cockeyed
approach to the evaluation of the evidence. The Commission is faced with a large number of
calculations, the “true” value of which, on the basis of statistical analysis, could be either above or
below the calculated value. The Commission cannot approach the use of the various calculations
made by the Postal Service on the basis of a proposition that “one cannot reject the statistical
proposition that internet advertising does not affect the demand for ECR mail.” Rather, the
Commission should sensibly assess the evidence for what it is, and use it as it is intended to be used,
i.e. as a valid indication of the threat posed to Standard Mail volumes by the internet.
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2.
THE PROBLEM OF FIRST-CLASS VOLUME LOSSES WOULD BE COMPOUNDED BY
SHIFTING THE REVENUE BURDEN TO STANDARD MAIL
No observer of the Postal Service doubts that the Service faces a serious dilemma of declining
volumes and increasing costs. This should not, however, lead the Commission to the unreasonable
and disastrous course of pricing Standard Mail without regard to its price sensitivity for the purpose
of giving rate relief to First-Class Mail. The net result of such an approach would be additional
volume losses to the detriment of all mailers. First-Class Mail is declining as a result of a diversion
to alternatives which cannot be prevented by Postal Service pricing. That is not true of Standard
Mail and acceptance of the counsel of either witnesses Sidak or Ingraham could only lead to further
volume declines to the detriment of all mailers.
Witness Sidak expresses concern about what he characterizes as the inframarginal users of FirstClass Mail i.e. those mailers who by reason of education or income find it difficult if not impossible
to convert to internet use. He states that “one can reasonably argue that a downward spiral by
which the remaining consumers of First-Class Mail would be forced to pay continually increasing
cost coverage would be inconsistent with” the fair and equitable provisions of the Postal
Reorganization Act. Id. at 15. There may be a threat of a downward “spiral” but the spiral will
occur if the Commission adopts pricing for Standard Mail that prevents volume growth. Standard
Mail is the only class of mail that promises sufficient volumes to permit the continuation of postal
services as they exist currently.
3.
WITNESS SIDAK’S TESTIMONY FAILS TO DISTINGUISH BETWEEN THE
STANDARD MAIL ECR AND REGULAR SUBCLASSES
Witness Sidak fails to distinguish between volume trends for Standard Mail ECR and Standard
Mail Regular. Id. at 20 ff. He fails to acknowledge that ECR volumes have declined since 1998.
MOAA-T-1 at 19. Witness Sidak stated that his testimony is not intended to rebut the Postal
Service’s proposed cost coverage for Standard Mail ECR. Tr. 32/10848. In his testimony, however,
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he presents a diagram that combines the ECR and Regular subclasses for commercial mail. Given
the dramatically different volume patterns of ECR and Regular, that creates a distortion in the actual
behavior of both subclasses, and in particular, ECR. Although his testimony focuses on threats to
mail volumes, he was not even aware that MOAA witness Prescott had presented the volume
history of Standard Mail ECR subclass from its beginning to date. He stated “I don’t recall” having
seen that testimony. Id. at 10194. He was even unwilling to concede the necessity of evaluating the
price elasticities of ECR and Regular, separately, only grudgingly admitting “it’s fine, I don’t know if
it’s necessary or not.” Tr./32/10916.
Witness Sidak’s failure to distinguish between Standard Mail ECR and Regular presumably results
from the fact that NAA’s only concern is with the rates for ECR. It is ECR with which the
newspapers compete and it is ECR rates which the newspapers seek to increase. It is notable that
even the Greeting Card Association witness Clifton, upon whom Sidak relies, recognizes that
increasing Standard Mail ECR rates would be unwise. Witness Clifton’s proposal to shift the
revenues lost by a decrease in the First-Class single piece rate to Standard Mail Regular implicitly
recognizes that there is no basis for imposing any increased revenue burden upon Standard Mail
ECR.
4.
THE LOSS OF FIRST-CLASS MAIL CANNOT BE PREVENTED BY LOWER RATES
In any event, the loss of First-Class volumes about which witness Sidak expresses concern cannot
be stemmed by lower rates. When asked about whether demand for the horse and buggy could have
been influenced by lowering prices, witness Ingraham attempted to avoid the obvious conclusion.
Tr.32/ 10854-56. The diversion of First-Class Mail from the Postal Service to electronic alternatives
cannot be avoided by Postal Service pricing, just as it would not have been possible to stop the
conversion to automobiles by the pricing of horse and buggies. That point was made by one Mr.
Sidak’s colleagues. In Docket No. R94-1, Professor Daniel Stulber testified as follows:
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Technological and market changes are increasing the benefits and
reducing the cost of electronic transmission. These factors are
responsible for the rapid expansion of electronic transmission.
Id. at 10875.
He went on to conclude:
These ongoing and fundamental changes are entirely independent of
postal rates. They can no more be diverted or slowed by a change in
postal rates than a reduction in the cost of feeding horses would have
halted the development of the automobile.
Id. at 10876.
The testimony of witness Thress also explains why First-Class Mail is not subject to any
significant price elasticity. The vast majority of bills and financial statements are still presented
through the mail, and more importantly, the advantages of the internet will not be affected by postal
rates. Tr.38/13144-45. Internet transactions “are extremely low cost or are essentially free” and
that it is “impossible” that “a two or a three cent increase in the price of First-Class, either
workshared or single piece letters is going to significantly change” the use of electronic alternatives.
Tr.38/13145. First-Class Mail, “will continue to erode for the foreseeable future.” Tr.38/13146.
He concludes that First-Class rates have “nothing to do with the long run diversion of that mail to
electronic alternatives,” a diversion that will continue regardless of postal rate levels. Tr.38/13147.
In sum, all observers agree that First-Class Mail volumes will continue to erode, an erosion that
cannot be prevented by postal pricing. That presents a serious dilemma for the Service and mailers
with which they will be grappling in the years ahead. The worst possible response, however, would
be to attempt to “cure” the problem by shifting the institutional costs to Standard Mail, a step that
would not only fail to arrest First-Class erosion, but also lead to a loss of Standard Mail volumes,
particularly ECR volumes. Tr.32/10915-16.
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5.
SUMMARY AND CONCLUSION
All in all, witness Sidak’s testimony has little value given the fact that he failed even to attempt to
take account of the elasticity and volume growth differences between the Regular and ECR
subclasses and gave no attention to the extent to which either subclass is subject to electronic
diversion. First-Class Mail has been and will continue to be subjected to diversion to electronic
alternatives. To date, neither Standard Mail ECR nor Regular has thus far been subject to diversions
to the same extent. Nevertheless, it would be exceedingly bad policy for the Commission to fail to
recognize the potential diversion that might occur for Standard Mail, particularly the ECR subclass.
F.
LOWER ECR RATES CAN BE ACHIEVED WITHOUT INCREASING THE
RATES FOR OTHER CLASSES OF MAIL
1.
LOWER ECR RATES CAN BE ACHIEVED BY REDUCING THE SERVICE’S
REVENUE REQUEST
MOAA joined with other parties in sponsoring the testimony of Larry Buc demonstrating that the
revenue requested by the Postal Service should be reduced. DMA, et al,-T-1. MOAA has also
joined DMA and other parties in a brief on that issue. For the reasons stated in that brief, the
Service’s revenue request should be reduced, a reduction that would permit lower ECR rates without
increasing the rates for any other class or subclass of mail.
2.
RECOGNIZING THE SAVINGS THAT WILL RESULT FROM THE REDUCED USE
OF DALS WOULD PERMIT LOWER ECR RATES
Saturation Mailers Coalition and Advo, Inc witness Crowder has presented testimony showing
that the conversion from DALs to on piece advertising will result in cost reductions that have not
been taken into account by the Postal Service. SMC-RT-1 at 5-19. Tr.35/11723-37. Witness
Crowder has made a conservative assumption that 50 percent of Saturation DAL flats will convert
to on piece addressing. Id. at 12, 13. Tr.35/11730-31. That will result in cost reductions of nearly
100 million. Id. at 13. Tr.35/11731. Witness Crowder also adjusts rates to account for the fact that
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4.86 percent of High-Density flats will be subject to the DAL surcharge. Id. at 13. Tr.35/11731.
Additionally, witness Crowder has developed the correct on-piece addressed saturation flat delivery
cost. Id. at 12. Tr.35/11730.
Witness Crowder has developed alternate ECR rates based upon the above corrections and other
modifications; de-averaged High Density and Basic-Rate and flat delivery and mail processing costs,
retaining the Postal Service rate designs for Automation letters and eliminating DDU drop-ship
discounts for ECR letters, while retaining the ECR institutional cost contribution proposed by the
Service and preserved the equal rates for Basic rate letters and flats for the Service’s policy reasons.
Id. at 17, 18. Tr.35/11735-736.
The adoption of those corrections would result in substantially lower ECR rates than have been
proposed by the Postal Service as shown by the Schedule presented in witness Crowder’s testimony.
Id. at 19. Tr.35/11737. Most importantly, it would result in a reduction of the pound rate from the
64.1 cents proposed by the Postal Service to 60.3 cents. As stated by witness Crowder, the
proposed rates would “align ECR rates more closely to their underlying costs ….” Id. at 19.
Tr.35/11737.
G.
THE COMMISSION SHOULD REJECT THE POSTAL SERVICE’S PROPOSED
CLASSIFICATION CHANGES FOR CONFIRM® SERVICE
1.
THE POSTAL SERVICE’S PROPOSAL
USPS witness Drew Mitchum has proposed drastic changes in the rate structure and classification
of CONFIRM®. USPS-T-40, at 14-21. As explained by witness Mitchum, there are two types of
CONFIRM® service: destination CONFIRM® for outgoing mail and origination CONFIRM® for
incoming reply mail. MOAA’s interest is in destination CONFIRM®.
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Witness Mitchum accurately testifies that the service “can help mailers better manage their
businesses .…” Id. at 15. Mailers can use the service “to more precisely align their business
processes and resources with the actual processing and delivery of the mail.” Id. at 15. An
additional important element of CONFIRM® is to determine the actual level of Postal Service
performance and the extent to which that performance coincides with stated goals. CONFIRM®
permits mailers, and in particular nationwide mailers, to determine particular areas in which the
Postal Service’s performance is consistently sub-par and enables them to attempt to work with the
Postal Service to cure service problems. This information is valuable not only to the mailers, but
also is of equal value to the Postal Service. It provides an accurate means for the Postal Service to
assess its level of performance, at the mailers’ expense. Thus, one would expect that the Postal
Service would be interested in maximizing use of the CONFIRM® service, particularly since it has
already incurred the cost of establishing the service and has acknowledged that “today’s passive
scans have a very low marginal cost for the Postal Service ….” Id. at 18. Witness Mitchum made it
clear that this “low marginal cost” is very low indeed. He concurred that the marginal costs of an
additional scan is “approaching zero.” Tr. 33/11347.
As a preliminary issue, it also should be noted that although CONFIRM® is valuable to mailers,
and its use should not be limited by the changed fee structure proposed by the Service, it is not
nearly as complete as services offered by Postal Service competitors in the parcel market such as
UPS and FedEx. Those competitors offer a comprehensive service in which shippers can determine
the precise location of a given parcel. Those services are offered at no additional cost to the shipper,
i.e. the costs are built into the rate base. Although the possibility of moving to that approach is
beyond the scope of this proceeding, it is an issue which should be considered by both the Postal
Service and the Commission at a future time. This is particularly true given the fact that
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CONFIRM® is in its infancy with total revenues amounting only to approximately $1.5 million, an
insignificant amount within the context of a $72 billion enterprise.
2.
THE OCA PROPOSAL
OCA witness James F. Callow, OCA-T-5, has submitted testimony opposing the classification
changes proposed by USPS witness Mitchum. He proposes to maintain the existing fee structure
and to increase the fees as necessary to meet costs and make a reasonable contribution to the
institutional costs of the Postal Service. The fees proposed by him would produce revenues
“consistent with the Postal Service’s proposal while preserving the benefits of the existing
‘subscription-based’ fee schedule – that of encouraging the expanded use of CONFIRM® service
for use in promoting service and performance measurement.” OCA-T-5 at 3.
As demonstrated in witness Callow’s testimony, the Postal Service’s proposal produces widely
differing rate increases or decreases for particular mailers depending upon the nature of the mailer’s
use of the service. For example, for Platinum subscribers the schedule proposed by the Postal
Service would result in fee increases ranging from 50 percent less for one million scans to 585
percent more for one billion scans. Id. at 8. There are similar wide variations in the rate increases or
decreases for all mailers regardless of the service level used. Witness Callow correctly concludes that
the overall effect of the change in structure will be to depress the use of CONFIRM®. Such a result
would be bad policy serving to reduce the value of the service to mailers and depriving the Postal
Service of valuable information which it should have in assessing the quality of its performance.
The Postal Service’s proposed structure differs radically from the structure that was established
for the service in Docket No. MC2002-1. Witness Callow quotes USPS witness Kiefer’s testimony
in the MC2002-1 proceeding noting that the new proposed service “may lead to important
performance measurement benefits.” Id. at 11. Witness Callow also quotes the testimony of witness
Kiefer that a transaction-based fee schedule, such as that now proposed by the Postal Service, would
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restrict mailer usage resulting in a seeding approach, the net result of which would be to diminish
the value of the service to mailers and critically impair the value of the service as a means of
measuring operational performance. The Postal Service had it right the first time and in this
proceeding has offered no valid reasons for proposing such a totally different approach. Id. at 13.
Witness Callow’s testimony convincingly demonstrates that retaining the existing classification and
rate structure will better meet the pricing criteria of the Act than the change that has been proposed
by the Postal Service. Further, his testimony demonstrates that the increases proposed by the OCA
will meet the revenue target that has been established by the Postal Service. Id. at 15-18.
3.
THE POSTAL SERVICE’S “FAIRNESS” ARGUMENTS ARE UNPERSUASIVE
Witness Callow argues that the existing fee structure is unfair because it can and has resulted
in “grossly different costs per scan … between customers in the same tier.” USPS-RT-13 at 17.
Tr.33/11301. He concludes that the OCA proposal has “ignored the disparate treatment afforded
to small and large users under the existing structure ….” Id. at 18. Tr.33/11302. Witness Mitchum
provides various examples of circumstances in which, depending upon the level of use, the existing
fee structure results in a smaller volume user incurring higher fees per scan than a larger volume
user. Id. at 19. He makes much of the fact that many subscribers to the service at the Platinum level
would be better off financially by using the Gold level. Id. at 20-22. Tr.33/11304-306.
Witness Mitchum’s “fairness” argument is peculiar. The users of this service are large volume
mailers. It should not require extensive argument to establish the proposition that such mailers can
be expected to use the options presented to them in the most cost-effective manner, and in any
event, that a failure to do so is no cause for concern. There can be no reasonable argument that
“fairness” can support a structural change to CONFIRM® to protect mailers against themselves.
Why some mailers have chosen to subscribe at the Platinum level when apparently it would have
been more cost effective to have subscribed to a lower level is not shown in the record. One can
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speculate that mailers concluded that the flexibility offered by the Platinum level was sufficiently
valuable to pay for that level notwithstanding the fact that less expensive alternatives were available.
Again, however, regardless of why such decisions were made, there is no reason for any concept of
“fairness” to be used to support a change in a simple, easily understood fee structure. Mailers of a
size to be using the service need not be protected against their choices, whether they be rational or
irrational.
4.
THE POSTAL SERVICE’S REVENUE ARGUMENTS ARE UNPERSUASIVE
Further, the “fairness” argument advanced by witness Mitchum is totally at odds with the
arguments made that witness Callow’s proposal will fail to produce sufficient revenues. While
acknowledging “customer overpayment” and arguing that it is unfair, he also argues that with an
increase in the fees mailers would be more likely to downgrade their level of service, e.g. from
Platinum to Gold. UPS-RT-13 at 7-13. Tr.33/11291-297. No empirical evidence of any kind is
advanced by witness Mitchum in support of his contention.
Even, however, if the Postal Service’s stated fears prove to be correct, the risk to the Postal
Service can only be described as miniscule. Under witness Callow’s proposed rates, he calculates
that the fees would produce Test Year revenues of $1,529,050 and a cost coverage of 127.3 percent
based upon Test Year 2008 costs of $1,200,890. OCA-T-13 at 15. Let us suppose that the
calculation of revenues is wrong by as much as 25 percent which would appear to be the outer limits
of possible error. That would result in total revenues of approximately $1,147,000 or an amount
approximately $53,000 below TY2008 attributable costs. The risk to the Postal Service is so small as
to escape measurement. The Postal Service has proposed and this Commission has adopted rates
for various classes of mail over the years which after the fact have been shown to produce revenues
that fall below attributable costs by tens of millions of dollars. MOAA does not argue that the rates
for CONFIRM® should not meet its attributable costs, and does not believe that fees that have
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been proposed by the OCA will have that result. The attempt by the Postal Service, however, to
bolster its arguments for a change in fee structure based upon the fear of a failure to meet costs
should be recognized for what it is, a make weight argument that has no weight whatsoever.
Further, the Postal Service has assumed that volumes will be reduced 10 percent by the adoption
of its proposed changes. A 10 percent reduction in volume is huge, greater than the reduction
forecast for any of the classes of mail, even Standard Mail ECR, an elastic subclass of mail. The
postulation of such a large decline in volume under its proposal utterly undercuts the Postal
Service’s position that the fee structure should be changed. It is hard to believe that there could be
any greater loss of volume or revenues if the existing fee structure is maintained. MOAA maintains
that quite the opposite would be the case. By continuing the existing structure for this new service
and assuring mailers that it will not be disturbed before there has been a chance for it to be fully
implemented by mailers, use of the service will increase; rather than decrease.
Additionally, that which witness Mitchum advances as a virtue i.e. the assumption that the
structure and fees proposed by the Postal Service will result in a ten percent reduction of demand; is
in fact a vice. USPS-RT-13 at 13, 14. Tr.33/11297-298. If accurate, it is yet another reason to
reject the proposed change. As discussed above, and as was advanced by the Postal Service in
testimony used to support the establishment of CONFIRM®, no steps should be taken that would
reduce use of the service. The service has value to mailers and hence its availability enhances the
overall value of the Postal Service. At a time of grave concern about mail volumes, the last thing
that should be done is to take any step that would have the effect of diminishing the value of
services offered to mailers.
5.
THE POSTAL SERVICE’S ARBITRAGE ARGUMENTS ARE UNPERSUASIVE
Witness Mitchum also makes the argument that retaining the existing rate structure, but increasing
prices, would encourage arbitrage and lead to fewer CONFIRM® subscribers and a failure to meet
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costs. He develops an elaborate rationale in support of his proposition, all without any market
research or any attempt to determine the manner in which customers would behave. USPS-RT-13
at 14-17. Tr.33/11298-301. The entire argument is unconvincing. The Postal Service is
simultaneously advancing the argument that the price structure is unfair because mailers are paying
more than they would need to, while at the same time expressing the fear that if the service is
continued in its current structure mailers will begin to conduct themselves in a manner which will
more closely coincide with obtaining the service at the lowest possible cost. The Postal Service has
presented no evidence to support that proposition and it is illogical to believe that such a result will
occur.
6.
THE POSTAL SERVICE HAS PERFORMED NO MARKET RESEARCH TO SUPPORT
THE PROPOSED STRUCTURAL AND CLASSIFICATION CHANGES
The Postal Service concedes that no market research was performed to support its proposal to
drastically change CONFIRM®. Tr.33/11374. Witness Mitchum only made vague allusions to the
fact that “product development” had conversations with mailers and a contact by “a subscriber.”
Tr.33/11374. There are only a small number of subscribers to CONFIRM®, a service in its infancy
with small revenues and limited users. The participants in this proceeding would lead to the
conclusion that virtually all users oppose the changes proposed by the Postal Service. It is peculiar
that the Postal Service, having proposed CONFIRM® to enhance the value of the mail to its
customers, should now be proposing drastic changes without having obtained the views of the small
number of mailers using CONFIRM®, a step that could easily have been and should have been
taken. Had the Postal Service discussed this matter with the small customer base it would have
discovered the almost universal opposition to the proposed change.
The Postal Service from time to time may choose to make changes in a type of service despite
mailer opposition, but one can think of no reason why the Postal Service should choose to do so for
CONFIRM®. It costs little, its costs can be recovered readily through appropriate fees and it is
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utterly irrational to propose changes which threaten to shrink or drastically curtail the growth of a
service which is of such enormous potential value to both mailers and the Postal Service.
7.
SUMMARY AND CONCLUSION
The Postal Service has failed to provide any sound basis for the drastic CONFIRM® classification
changes proposed, and the changes should be rejected on that basis alone. Further, the unanimity of
CONFIRM® users in opposition to the Postal Service’s proposal appearing to account for all but a
small fraction of all users, should lead the Commission to reject the proposed changes. Adoption of
the Postal Service’s proposals for this service which is in its infancy would serve to kill the baby in
its crib. The Commission should reject the classification changes proposed by the Postal Service as
unwise and wholly unsupported by any persuasive evidence. The rate increases that have been
proposed by OCA witness Callow under the existing classification and fee structure should be
adopted by the Commission.
H.
THE AMAZON.COM PROPOSED BOUND PRINTED MATTER
CLASSIFICATION CHANGE SHOULD BE REJECTED
1.
THE PROPOSED EXPANSION OF BOUND PRINTED MATTER HAS NOT BEEN
SUPPORTED BY SUBSTANTIVE EVIDENCE.
Witness Haldi, in testimony presented on behalf of Amazon.Com, has proposed a drastic change
in the definition of Bound Printed Matter (BPM) in order to permit CDs and other forms of
electronic media to be mailed as BPM. AMZ-T-1. The proposal has not been supported by any
substantive evidence and should be rejected.
Witness Haldi provides a history of the BPM subclass, which was originally a “catalog” subclass.
Id. at 7-10. Those mailers seeking to change the definition of BPM in order to make particular types
of mail eligible were attracted by the low costs and rates for the subclass. The general approach of
those mailers has been to contend that if we call a duck an eagle, it will begin to behave as an eagle
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i.e. if mail with different cost characteristics is classified as BPM, it will magically absorb the cost
characteristics of BPM.
As witness Haldi correctly observes, in Docket No. R90-1 the Commission, for the first time,
allowed into the subclass books containing no advertising. While doing so, the Commission also
recognized as “MOAA’s legitimate concern that their rates not be affected by expanding the
eligibility of the subclass to items which might have higher costs characteristics ….” PRC Op. and
Rec. Dec., Docket No. R90-1, at V-377, ¶ 6510. In that same Decision, the Commission
recommended a rate category for catalogs to determine whether there were cost differences between
catalogs and the balance of the subclass, a change rejected by the USPS Governors.
In Docket No. R2000-1, the Commission recognized that as a result of the decision in Docket
No. R90-1, expanding the subclass by permitting the entry of books, “unit costs have increased”,
reflecting the “impact of the migration of books into the subclass.” Op. and Rec. Dec Docket No.
R2000-1 at 503, ¶ 5882. In that decision the Commission also stated that it “is sympathetic to
MOAA’s concerns” about the increase in unit costs. Id. at 11157. The Commission stated that it
“encourages the Postal Service to study the distinct cost differences of books and catalogs mailed as
BPM.” Id. at 504, ¶ 5885. Alas, despite the Commission’s encouragement, the Postal Service has
never collected data separately for BPM books and catalogs.
Witness Haldi testifies that it is not “anticipated” that permitting electronic media into the
subclass “will increase BPM costs.” Id. at 13. He also opines that the “inclusion of books in the
BPM subclass does not appear to have increased subclass unit costs for other mailers ….” Id. at 13.
The fact is, however, that those costs have been increased and certainly we do not know whether
witness Haldi’s “anticipations” about once again permitting entry into the subclass of a wholly
different type of mail matter would increase average costs. Witness Haldi’s anticipations are an
insufficient basis to permit a substantive change in the materials eligible for entry into the subclass.
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Amazon.Com is attempting to repeat history by yet another expansion of the subclass. Even if
correct in its contention that it’s non-bound, non-printed matter will exhibit the same costs as the
books already in the subclass, itself a dubious and unproven assertion, the entry will cause a further
increase in unit costs because of a further dilution of the catalog portion of the subclass. Catalog
mailers have been disadvantaged by an unwise expansion of the subclass based upon the specious
arguments of book publishers. That damage should not be compounded by accepting the even
more specious arguments of Amazon.Com as propounded by witness Haldi.
2.
WITNESS KIEFER’S TESTIMONY SHOWS THAT THE CLASSIFICATION CHANGE
SHOULD NOT BE ADOPTED
USPS witness James M. Kiefer’s testimony demonstrates that witness Haldi’s proposed
classification change is not based upon sufficient evidence for it to be adopted by the Commission.
USPS-RT-11. As concluded by witness Kiefer “Haldi’s testimony is wholly inadequate and cannot
be relied upon as the basis for making such a sweeping change in the definition of an important
parcel subclass.” USPS-RT-11, at 27. Tr.33/11137. Witness Kiefer systematically rebuts the
arguments presented by witness Haldi in support of the classification change.
A glaring flaw in witness Haldi’s presentation is that it ignores the fact that there would be no
difference in the cost of a piece of mail now carried as Media Mail if it were to be entered as BPM.
The processing and delivery of similarly presorted bulk Media Mail and BPM is identical and
therefore the costs would be identical. The migration into BPM would necessarily result in a
reduction in the net revenue position of the Postal Service, i.e. the Postal Service would receive less
revenue for a piece of mail costing the same as it currently costs when entered as Media Mail. Id. at
28, 29. Tr.33/11137-138. Additionally, the ratio of costs to revenue, i.e. cost coverage, of BPM
would deteriorate.
Witness Haldi has not even attempted to demonstrate that Media Mail carried as BPM would cost
less than its costs entered as Media Mail. As stated succinctly by witness Kiefer, simply “because
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migrating pieces are mailed using a subclass with lower unit costs does not mean that these pieces
will be processed and delivered at lower cost ….” In other words, calling a duck an eagle does not
transform the duck into an eagle. Inevitably, allowing more parcels into BPM “would increase
average unit costs, eroding the low average cost characteristics of BPM.” Id. at 29. Tr.33/11138.
Further, witness Kiefer demonstrates that witness Haldi’s claim that the de-averaged characteristic
of BPM means that there would be no harm in allowing the subclass to be expanded is in error. He
observes that “the BPM rate structure is in evolution and has by no means arrived at the blissful
state of (near) perfect cost and rate de-averaging that witness Haldi praises”. Id. at 30. Tr.33/11138.
Purely on the basis of costs, it is clear that “encouraging migration of higher cost parcels from Media
Mail to BPM would be, at best, premature and, at worst, potentially disastrous for BPM.” Id. at 3031. Tr.33/11138-139. It is impossible to argue with witness Kiefer’s conclusion that “bringing
pieces with cost characteristics on the high-cost side of the average into the BPM mix would
definitely cause lower-cost BPM mail to suffer increased rates ….” Id. at 31. Tr.33/11139.
3.
AMAZON.COM HAS NOT MET ITS BURDEN OF PROVIDING EVIDENCE ON
HOW NEW MATERIALS WOULD AFFECT THE BPM SUBCLASS
Witness Haldi presents no estimate of the impact of bringing in relatively low-density CDs and
DVDs into a subclass that consists largely of high-density books and catalogs. In cross-examination
of witness Kiefer, an attempt was made to demonstrate that the density of CDs is close to that of
the density of books and other materials in the subclass. The use of hypothetical, anecdotal
examples in cross-examination attempting to show that in certain circumstances the density of CDs
and DVDs might be the same as those of the materials now included in BPM is simply no substitute
for an adequate analysis of the kind of material that would actually shift to the BPM subclass if the
Haldi proposal were to be adopted. The attempt to shift, from Amazon.Com to the Postal Service,
the burden of demonstrating that the classification proposed by witness Haldi will not damage the
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cost characteristics of BPM should not be accepted. The burden of proving the reasonableness of
proposed classification changes lies with the proponent of the change; a burden that cannot be met
by a line of hypothetical, anecdotal illustrations attempting to show that, well maybe, the cost
characteristics of DVDs and CDs would not differ from those of the bound and printed materials to
which the subclass is now limited. That is particularly the case when, as here, Amazon.Com’s
anecdotal evidence is limited to the parcels of a single mailer.
Finally, witness Haldi’s argument that it is illogical to prevent the shift of CDs and DVDs to
BPM, because the new material would not differ in character from the content of the subclass as it
now exists, is entirely specious. A CD or a DVD may contain material that communicates in a
manner that may or may not be similar to the kind of communication that occurs from either a
“book” or a “catalog” but that makes no difference. Initially, what is now BPM was defined entirely
on the basis of its content, i.e. advertising, and entry limited to catalogs. Now, however, it has been
expanded to include both catalogs and other printed material. Whatever else may be true of DVDs
or CDs, they clearly are neither printed nor bound and therefore have fundamentally different
characteristic than the materials now eligible for mailing as BPM.
As concluded by witness Kiefer:
His proposal would likely lower contribution in the short run, and in
the longer run would increase the rates of high-density bound printed
matter already in the subclass. Witness Haldi’s proposal would bring
significant undesirable impacts to BPM. Witness Haldi has done no
concrete analysis of these impacts and there is nothing on the record
to even demonstrate how these impacts might be reasonably
estimated.
USPS-RT-11 at 32.
In sum, Amazon.Com has not provided anything approaching an adequate record upon which to
base a major change allowing an entirely different type of product into BPM. This is a subclass
which was created to serve the needs of catalog mailers and there is no basis for such a modification
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in the absence of the kind of evidence that would be needed to demonstrate the kind of materials
that would migrate and the cost characteristics of those materials. Witness Haldi has failed even to
attempt to provide such evidence and his theoretical explanations of why there might not be
differences in the cost characteristics of new types of mail does not even approach meeting the
burden that should be met before altering the eligibility for entrance into the BPM subclass.
4.
WITNESS HALDI’S ARGUMENTS ARE SELF-CONTRADICTING
Witness Haldi also argues that the classification change that he has proposed can be accomplished
while “observing the statutory mandate to preserve Media Mail.” AMZ-T-1, at 19. If witness Haldi
is correct that the proposed classification change will allow material to be mailed at BPM rates that
have the cost characteristics of BPM, the net result inevitably will be to harm the Media Mail left
behind. If the mail which he claims to have very low cost characteristics is stripped out of Media
Mail, the necessary result would be to increase the average cost of Media Mail.
I.
THE POSTAL SERVICE’S PROPOSED BPM RATES ARE TOO HIGH
MOAA’s interest in BPM is restricted to catalogs, i.e. material that consists wholly of advertising.
Nevertheless, this Commission has recognized that because the majority of the materials carried in
BPM have ECSI value, the cost coverage should be lower than it might otherwise be. The cost
coverage proposed in this case is excessive. The Postal Service has presented no evidence to
support a cost coverage for BPM that is so much in excess of the cost coverage for parcel post,
which does not have ECSI value. Therefore, MOAA supports the lowering of the cost coverage for
BPM to the same as Parcel Post, a position consistent with past decisions by the Commission.
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J.
OCA WITNESS SMITH’S CRITICISMS OF THE CITY CARRIER COSTS
DEVELOPED BY USPS WITNESS BRADLEY LACK SUBSTANCE.
In docket number R2005-1, the Commission accepted the results of a study of city carrier street
time submitted by the Postal Service. The Commission, however, stated that it had a number of
concerns about that study and urged the Postal Service to address the issues raised in the Decision.
USPS witness Bradley has explained that, because that decision was issued only one week before the
development of city carrier costs for the purpose of this proceeding, there was not sufficient time to
refine the costing study to respond to the criticisms by the Commission. USPS-T-14 at 10.
Initially, it is unclear from witness Smith’s testimony whether he is recommending changes in the
analysis of city carrier street time that should be adopted by the Commission in this proceeding or
rather only recommending and presenting to the Commission areas that should be explored in
future proceedings, a recommendation that would accord with the testimony of USPS witness
Bradley. For example, as outlined in witness Crowder’s testimony, witness Smith has made a
number of comments that suggest that he fully recognizes the inadequacy of the testimony he has
presented and that there is a need for further work on the issues that remain. As concluded by
witness Crowder, witness Smith seems to recognize that there was “the need for much more
exploration of city carrier costing data and modeling issues.” MPA-RT-1 at 12, Tr.34/11651.
Witness Smith criticizes the Postal Service’s carrier cost study on the grounds that it improperly
includes a “density variable”. OCA-T-3 at 3-8. Witness Bradley’s rebuttal testimony convincingly
demonstrates that the Smith criticism is ill-founded. USPS-RT-4, at 1-9. Witness Bradley marshals
an impressive array of authority to demonstrate “the importance of density in understanding street
time costs.” Id. at 3. Tr.34/11556. As he concludes:
In sum, the use of a density variable in an econometric study of
delivery has been widely accepted by the premier researchers in the
field. It is included because it is an important potential driver of
carrier out-of-office cost. Thus, for Dr. Smith to simply assert that
“from a theoretical viewpoint the use of the density variable is
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wrong” is surprising and apparently reveals a lack of familiarity with
previous research in the area.
USPS-RT-4, Tr.34/11558
Witness Bradley also tellingly summarizes the extent to which Dr. Smith’s treatment of “density”
is inconsistent and may well stem from a misunderstanding of a proper definition of “density” as
applicable to the Postal Service. Even under the formula used by Dr. Smith, “density is a function
of the number of delivery points in a zip code divided by the number of square miles in that zip
code.” Id. at 7, Tr. 34/11560. Under that definition, density is unrelated to the number of routes in
a zip code. Thus, Dr. Smith’s criticisms have no validity.
Witness Bradley presents a practical example of the importance of density by demonstrating the
real world difference between zip code delivery areas of widely differing geographical size, resulting
in widely differing driving times needed to serve the delivery points. As concluded by witness
Bradley, “there are both theoretical and operational reasons why density should be included in an
the econometric analysis of city carrier delivery time.” Id. at 9. Tr. 34/11562. Witness Bradley also
refutes the criticism by Smith that the model used by the Postal Service to estimate city carrier street
time costs is not based upon sound economic analysis. Id. at 10-13, Tr.34/11563-566. He
concludes that “I followed established economic theory and econometric practice in estimating the
delivery time equations in Docket No. R2006-1. Id. at 13. Tr. 34/11566.
Witness Bradley demonstrates that Dr. Smith’s suggested changes in the Postal Service’s 2005
model is in error both as a matter of theoretical specification and econometric practice. Dr. Smith’s
model does not measure postal density despite the fact that the data that should be used, the number
of delivery points in a zip code, is readily available. Witness Bradley gives a number of concrete
examples showing how the approach used by Dr. Smith leads to errors. Id. at 17, 18. Tr. 34/11570,
571. He also shows that Dr. Smith has failed to indicate how costs are to be allocated in the mixed
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shape cost pool and that without resolving that issue the result is not usable. Id. at 19. Tr. 34/11572
Dr. Smith’s combination of two types of parcel delivery produces faulty results. The combination of
large parcels and small parcels into a single variable represents a “miss-specification of the
equation”. As concluded by witness Bradley, “his estimations are contaminated with specification
errors and, as a result, his variants are inferior to the recommended specification.” Id. at 20. Tr.
34/11573.
Witness Bradley agrees with Dr. Smith’s conclusion that the data from the Delivery Operations
Information System (DOIS) could yield valuable results, but “his analysis is not at the level required
by Postal Rate Commission standards.” Id. at 21. Tr. 34/11574. Witness Bradley presents an
extensive listing of the important information not known by Dr. Smith and without which it is
impossible validly to use the DOIS data in the manner proposed by Dr. Smith. Id. at 21-27.
Tr.34/11574-580.
The testimony of witness Crowder also demonstrates that DOIS data cannot be used in the
manner attempted by Dr. Smith. MPA et al -RT-1 at 1-3. Tr. 34/11640-642. Witness Crowder
recognizes the potential for using DOIS data to provide better estimates of City Street Time
variability but shows that the data are not now usable, and certainly not as used by Dr. Smith. Id. at
13, 14. Tr. 34/11652-653. Additionally, she points out that existing DOIS data are subject to
serious deficiencies including the lack of a differentiation between types of parcels, the failure to
recognize that Priority Mail is composed of mixed shapes, the lack of collection volume data, the
lack of accountable volume data and the lack of information on the quality of the basic data
(recognized in part by Dr. Smith’s own quality control procedures, which eliminated one third of the
route-day observations). Id. at 14, 15. Tr. 34/11653-654. As she concluded, without curing those
data problems all DOIS City Carrier models will remain tainted. Id. at 18. Tr.34/11657.
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As a result of the numerous problems associated with Dr. Smith’s attempt to adopt a different
approach to City Carrier delivery costs than that adopted by the Postal Service, witness Crowder
concludes that there is no basis for Dr. Smith’s, claim that the DOIS results that he has presented
are superior to the approach used by the Postal Service. She appropriately recommends that “the
Commission reject both of Dr. Smith’s recommended models and accept the results that the Postal
Service has proposed for this case.” Id. at 19. Tr.34/11658
Witness Crowder also demonstrates that Dr. Smith has not satisfactorily used data from the 2002
City Carrier Street Time Survey (CCSTS). Notwithstanding the fact that the data have been available
since it was introduced in the 2005 rate proceeding, Smith has not taken the necessary steps to make
that data usable and the results of any manipulation thereof are not valid. Id. at 6. Tr.34/11645.
Dr. Smith’s own testimony recognizes that his model is not superior to that used by witness Bradley.
Id. at 11, 12. Tr.34/11650, 651.
K.
GREETING CARD ASSOCIATION WITNESS CLIFTON’S TESTIMONY IS
FATALLY FLAWED AND SHOULD NOT BE ACCEPTED BY THE
COMMISSION
The rebuttal testimony of USPS witness Thress (USPS-RT-2) examines and thoroughly discredits
the testimony of GCA witness Clifton which attempts to demonstrate that the elasticity estimate of
witness Thress for First-Class single piece letters is in error. As concluded by witness Thress:
My testimony here will show that Dr. Clifton’s estimate of the ownprice elasticity for First-Class single-piece letters is fatally flawed and,
as such, is significantly less reliable than the estimated own-price
elasticity presented in my direct testimony. I will also show that Dr.
Clifton’s criticisms of my “approach to modeling … competing
substitutes” are without merit and suggest confusion regarding both
economic as well as econometric principles on the part of Dr.
Clifton.”
USPS-RT-2 at 2. Tr.38/13011.
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Witness Clifton’s analysis of the “payments” market and the Service’s place within that market is
in error. He premises much of his testimony upon an analysis of the bill payment market which
witness Thress shows to be fundamentally erroneous. Rather than having a market share that is
under 50 percent, as calculated by witness Clifton, the Postal Service’s market share within the
household bill payment delivery market was 66.7 percent in 2005. USPS-RT-2 at 7, Tr.38/13016.
Further, witness Clifton has failed to define the “price” of payment delivery leading to a
fundamentally skewed and overestimated elasticity for bill payments. Id. at 8, 9. Tr.38/13017-018.
Witness Clifton further undermined his position by recognizing that bills must be paid regardless of
the cost of doing so. Witness Thress appropriately concludes that “it seems highly likely to me that
the market price elasticity for the overall market for payment deliveries is, in fact, very close to
zero.” Id. at 10. Tr.38/13019.
Regardless of what the “bill payment” elasticity may or may not be, and as noted, there is no
logical basis for concluding that there is any significant elasticity for that market, witness Clifton has
provided no basis for a conclusion that the elasticity calculated by witness Thress of -0.184 is
inconsistent with the underlying economic realities. This is because the “price” of bill payment must
necessarily include all of the costs associated with paying a bill by mail. Witness Clifton points to a
number of improvements including adhesive-backed postage stamps and the availability of postage
by mail over the internet, and otherwise, that have made it easier for the Postal Service to appeal to
consumers and to remain competitive in the payment delivery market. Id. at 12. Tr.38/13021.
Contrary to the claims of witness Clifton, witness Thress has shown that in a market that has
become bifurcated i.e. payment by mail or payment via the internet, the price elasticity of those
remaining with the original market, here payment by mail, may well be even lower than previously.
Id. at 13. Tr.38/13022.
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The econometric analysis of the payments market made by witness Clifton, as shown in Table 3, is
flawed. There are severe data problems. Witness Clifton had available only data from the Federal
Reserve payment study for years 2000 through 2003. Rather than limiting his analysis to those years,
however, he made his own estimates in 2002 from which “no proper conclusions can be drawn ….”
Id. at 17. Tr.38/13026. Additionally, he limited his analysis to checks processed by the Federal
Reserve without recognizing that total checks processed does not equal the total number of checks
paid, because there are multiple transactions per check paid when more than two financial
institutions are involved. Of more importance, not all checks are processed by the Federal Reserve
and limiting the analysis to the Federal Reserve “has no relevance to the number of bill payments
delivered by mail.” Id. at 18. Tr.38/13027. Witness Clifton has misused the data found in the
Household Diary Study by equating bills, invoices and premiums received per household to
payments per household. The two are not the same. Id. at 18, 19. Tr.38/13027-028.
In his Table
3, witness Clifton simultaneously assumes that the cross price elasticity shown in his Tables are due
solely to changes in the First-Class single piece letter price whereas own price elasticities have to
assume that the changes are due to the price of competing electronic substitutes. Both of the
assumptions cannot be true which serves to destroy the usefulness of the Table. Id. at 25, 26.
Tr.38/13034-035.
Witness Thress also demonstrates that witness Clifton is wrong in his analysis of the affect of the
extra ounce rate upon First-Class volumes. There is no basis for concluding that fewer checks will
be written if the Postal Service raises the extra ounce rate. That is a cost to the bank, not to the
person writing the check. Id. at 32. Tr.38/13041. The number of checks processed by the Federal
Reserve cannot reasonably be explained or have been influenced by the rate for extra ounces.
Witness Clifton attempted to show that actual versus predicted volumes using witness Thress’s
models support the proposition that the elasticities calculated under those models are too low. He
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did this by looking at data from a single rate case, R2000-1, but as concluded by witness Thress,
there is no “evidence to suggest that my econometric demand equation is the least bit problematic in
terms of explaining First-Class single-piece letters volume either around rate cases or at any other
time.” Id. at 35. Tr.38/13044.
Witness Thress has demonstrated that the approach used by witness Clifton to develop estimates
of First-Class single piece own price elasticity is flawed. He has instead “developed a First-Class
single price letters equation that is inconsistent with basic economic theory, exhibits serious
econometric shortcomings, and is clearly inferior to the First-Class single-piece letters demand
equation which I present in my testimony.” Id. at 37. Tr.38/13046. A decrease in the average FirstClass “worksharing discounts” should lead to an increase in First-Class single piece volume because
of a reevaluation by mailers of the value of performing the work and incurring the cost necessary to
qualify for the discounts. Id. at 38. Tr.38/13047.
Witness Thress demonstrates a convincing basis for his conclusion that there will be a continuing
conversion from single piece to workshared mail contrary to the allegation by witness Clifton that
this is merely an untested presumption. Id. at 38, 39. Tr.38/13047-048. The very fact that witness
Clifton recognized that there are some areas of the country that are not yet served by presort
bureaus suggests that there is a further opportunity for additional conversion from single piece to
workshared mail. Id. at 40. Tr.38/13049. The “single-piece letters equation” used by him is
consistent with a further conversion from single-piece to workshared mail. The equation used by
witness Clifton appears to demonstrate that increasing single piece rates, while holding worksharing
rates constant, will lead to an increase in single piece volumes, a result that “makes no economic
sense at all.” Id. at 42. Tr.38/13051. Additionally, under his model a one cent decrease in both the
single piece and workshared mail rates would result in a decline in single piece volume, a result that
“makes no sense and any model which produces such a result must be seriously, indeed fatally,
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flawed.” Id. at 43. Tr.38/13052. Witness Thress points out that witness Clifton’s single piece letters
equation has serious economic problems including his approach to the autocorrelation correction
methodology, his choice of a linear specification and by a failure to adjust his internet variable by
inappropriate methodology. Id. at 43-50. Tr.38/13052-059.
Witness Thress also effectively rebuts the criticisms of his approach as found in the testimony of
Greeting Card Association witness Kelejian, GCA-T-5. Witness Thress effectively shows that his
model is better than a “Box-Cox” specification. Id. at 55. Tr.38/13064. Witness Thress’s testimony
discussing the imposed symmetric condition similarly demonstrates that, adopting the different
procedures would not result in a significant difference in the calculated values. Id. at 55-57.
Tr.38/13064-066. As concluded “neither Dr. Kelejian nor Dr. Clifton indicated which, if any, of the
alternative models which I presented in LR-L-65 would have been a better model than the equation
which I finally presented in my testimony.” Id. at 61. Tr.38/13070. The other technical criticisms
made by witnesses Clifton and Kelejian to his approach are of no significance. Id. at 61-63.
Tr.38/13070-072.
In sum, witness Thress convincingly demonstrates that witnessClifton’s conclusion that there
must be increasing elasticity because of the changes in postal rates and the availability of
substitutes has not been supported. As stated by witnessThress:
In conclusion, Dr. Clifton, in GCA-T-1 in this case, fails in his stated
objective. Not only does he not present a better own-price elasticity
estimate for First-Class single-piece letters than the estimate in my
direct testimony, but he does not even present a usable own-price
elasticity estimate at all. In addition, Dr. Clifton’s analysis of the bill
payments market and the Postal Service’s position within this market
is deeply flawed and his criticisms of my First-Class single-piece
letters equation are completely without merit.
Id. at 67. Tr.38/13076.
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III.
CONCLUSION
For the reasons discussed above, the Commission should decrease the proposed Standard
Mail ECR and Bound Printed Matter rates, reject the Postal Service’s proposed rate structure
and classification changes for CONFIRM® service, reject the Amazon.Com proposal to
change the classification of Bound Printed Matter to permit alien materials, neither bound
nor printed, and reject the First-Class Mail elasticities calculated by witness Clifton.
Respectfully submitted,
_______________________
David C. Todd
Patton Boggs. LLP
2550 M Street, NW
Washington, DC 20037
Tel: 202 457 6410
Fax: 202 457 6315
[email protected]
Counsel, MOAA
December 21, 2006
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