BEFORE THE
POSTAL REGULATORY COMMISSION
WASHINGTON, D.C. 20268-0001
Postal Rate Commission
Submitted 12/21/2006 3:20 pm
Filing ID: 55471
Accepted 12/21/2006
___________________________________________
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POSTAL RATE AND FEE CHANGES, 2006
)
___________________________________________)
Docket No. R 2006-1
Initial Brief
Of the
American Bankers Association
December 21, 2006
Gregory F. Taylor, Esq.
American Bankers Association
1120 Connecticut Ave., N.W.
Washington DC 20036
(202) 663-5434
Robert J. Brinkmann
Irving Warden
1730 M Street, N.W. Suite 200
Washington, D.C. 20036
202-331-3037, 202-331-3029 (f)
[email protected]
[email protected]
Counsel for the American Bankers
Association
TABLE OF CONTENTS
STATEMENT OF INTEREST & POSITION................................................. 1
STATEMENT OF THE CASE ...................................................................... 3
ARGUMENT ................................................................................................ 8
I. THE COMMISSION SHOULD RECOMMEND THE POSTAL SERVICE’S SHAPE-BASED
PRICING PROPOSAL..................................................................................................................8
A. The Commission Should Recommend The Postal Service’s Proposed 55% Letter/Flat
Passthrough of Shape-Related Costs, But Nothing Less. ......................................................8
B. Congress Has Provided Definitive Guidance Concerning The Debate Over Avoided
Costs, Efficient Component Pricing, and Shape......................................................................9
II. THE COMMISSION SHOULD RECOMMEND THE POSTAL SERVICE’S DELINKING OF
BULK FIRST-CLASS MAIL FROM SINGLE PIECE FIRST-CLASS MAIL. ..............................13
A. The Postal Service Has Delinked Single Piece First-Class Mail From Bulk First-Class
Mail Because It Finally Recognized That They Are No Longer The Same Species Of Mail,
And Because Each Has Separate Cost Characteristics. .......................................................13
B. Efficient Component Pricing Principles Do Not Bar Delinking. ......................................16
III. THE COMMISSION SHOULD RECOMMEND THE POSTAL SERVICE’S FIRST-CLASS
ADDITIONAL OUNCE RATE PROPOSAL. ...............................................................................18
IV THE COMMISSION SHOULD REJECT BOTH THE OCA’S ALTERNATIVE FIRST-CLASS
RATE PROPOSAL FOR BULK FIRST-CLASS MAIL AND THE OCA’S ALTERNATIVE
PROPOSAL FOR ADDITIONAL-OUNCE FIRST-CLASS MAIL. ..............................................21
A. Under No Circumstances Should The Commission Recommend Bulk First-Class Mail
Rates That Are Higher Than That Proposed By The Postal Service. ...................................21
B. Efficient Component Pricing Principles Do Not Require Recommending Bulk FirstClass Mail Rates That Are Higher Than That Proposed By The Postal Service. ................22
C. Increasing Bulk First-Class Mail Rates Would Have A Disproportionate Effect On The
18% Of First-Class Mail Received By Homes That Is Advertising Mail, And Cause The
Postal Service To Lose 13 Cents Per Piece For Every Piece That Shifts From First-Class
To Standard Mail. ......................................................................................................................23
D. The Commission Should Reject the OCA’s Alternative Proposal for Additional-Ounce
Mail. ............................................................................................................................................24
-i-
V. THE COMMISSION SHOULD REJECT THE POSTAL SERVICE’S PROPOSAL TO
RESTRUCTURE CONFIRM PRICING AND ACCEPT EITHER OCA’S OR MMA’s
ALTERNATIVE CONFIRM PRICING PROPOSAL. ...................................................................25
VI. THE PASSTHROUGH FOR FIRST-CLASS PRESORT 3-DIGIT AUTOMATION LETTERS
SHOULD BE 100 PERCENT......................................................................................................28
A. The Passthrough For This Category Of Mail Is 80 Percent Using the Commission’s
Methods And USPS-Recommended Rates.............................................................................28
B. A 100 Percent Passthrough Is Consistent With Efficient Component Pricing. .............29
C. There Are No Compelling Reasons To Deviate From a 100 Percent Passthrough For
This Category Of Mail. ..............................................................................................................30
CONCLUSION ........................................................................................... 32
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ABA Brief
Docket R 2006-1
STATEMENT OF INTEREST & POSITION
The American Bankers Association (“ABA”) is the principal national trade
association of the financial services industry in the United States. Founded in 1875, it
has members in each of the fifty states and the District of Columbia. ABA members
include financial institutions of all sizes and types – money center, regional and
community banks, national and state chartered banks, independent and holding
company owned banks, commercial and savings banks. ABA’s members hold
approximately 90% of the domestic assets of the banking industry in the United States.
As any customer of a bank or other financial institution knows from personal
experience, the banking industry is a major postal customer. Its annual expenditures in
First-Class and Standard Mail exceeded $4.2 billion dollars in 2005. Most of the
banking industry’s First-Class Mail consists of statements for loans (credit cards,
mortgages, and other types of personal and business loans) and bank accounts
(checking, savings, money market, brokerage, and other types of personal and
business accounts).
In 2005, banks mailed more than 14.1 billion pieces of First Class and Standard
Mail, and received another 3.7 billion pieces of First-Class from their customers. By
volume, 74% of the mail posted by the banking industry is First Class and 26%
Standard. Breaking it down further, 88% of the industry’s First-Class Mail is presorted
and 12% is Single Piece. At the turn of the century, seven years ago, the ratio was only
a bit different, with 79% being presorted and 20% Single Piece.
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ABA Brief
Docket R 2006-1
The ABA very strongly supports the Postal Service’s proposal for First-Class
Rates, although the passthrough for First-Class 3 Digit Automation mail should not be
less than 100%. It opposes all other proposals to modify the Postal Service’s proposed
First-Class rate structure.
The ABA does not support the Postal Service’s proposal to restructure Confirm
pricing, but urges the Commission to adopt either OCA’s or MMA’s proposal to modify
Confirm pricing. Should the Commission adopt MMA’s proposal to include Confirm
within First Class for only a minimal cost, it should not accept the Postal Service’s
proposal to precipitously increase Confirm prices for Standard Mail.
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ABA Brief
Docket R 2006-1
STATEMENT OF THE CASE
The recently passed Postal Accountability and Enhancement Act of 2006 (the
“2006 Postal Act”) will fundamentally and irrevocably change the way the Postal Service
and the Commission conduct business, formulate priorities, and set rates. The Postal
Service, the Commission, and the mailing community thus stand on the edge of a path
to a new and very different future, and this case is the first step down that path.
Although many of the provisions of the new law are not technically applicable to
this case, they nevertheless serve as clear evidence of Congressional intent and can
provide valuable guidance to the Commission. This is particularly so since many of the
decisions the Commission will make in this case will have a profound influence on future
rates under the new regulatory scheme.1
In passing postal reform, it was the plain intent of Congress to give the Postal
Service more control and flexibility over its pricing. The new law intends that the Postal
Service, in making these pricing decisions, act more like a business. Indeed the new
law specifically creates a regulatory mechanism—a price cap—to force the Postal
Service to do just that. By requiring the Postal Service to act more like a private
business and operate under a price cap, Congress is seeking to force the postal system
to become more efficient, to eliminate cross-subsidies, and to ensure that the rates the
mailing community enjoy actually track costs and comport with the realities of the
modern business environment.
1
We presume that there will be one more rate case after this one. That assumption does not diminish the
importance of this case.
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ABA Brief
Docket R 2006-1
ABA submits that the passage of this historic legislation can and should provide
guidance to the Commission in the current proceeding because it presents a strong
indication regarding the current sense of Congress on two important issues: the
concept that the Commission should normally defer to the Postal Service with respect to
proposed rates, and the recognition that First-Class business mail is in decline.
The first point—that it is the sense of Congress that the Postal Service should be
given the discretion to set appropriate rates—lies at the core of the new legislation.
While it is true that Congress did not grant the Postal Service complete and unfettered
discretion over pricing, the clear intent of the new law is for the Commission to generally
allow pricing decisions to be left to the sound business judgment of the Postal Service,
rather than that of the Commission or any mailer, so long as the Postal Service stays
within certain parameters.
Second, and most importantly, this new law was enacted in recognition of the
fact that much of First-Class business mail—which bears the lion’s share of the
system’s institutional costs under the Postal Service’s traditional business model—is
slowly fading away.2 How the Postal Service manages that First-Class “fade” will
determine, in great part, how viable it will remain in the future.
Indeed, the rates proposed by the Postal Service in this case respond to that
phenomenon. In recognition of the changing reality of Bulk First-Class Mail, the Postal
Service has proposed rate increases for First Class that are slightly less than Standard
2
See, e.g., Statement of David M. Walker, Comptroller General of the United States Before the Senate
Committee on Governmental Affairs and the House Committee on Government Reform, March 23, 2004
GAO-04-556T(UNITED STATES POSTAL SERVICE: Key Reasons for Postal Reform) at Highlights
Sheet prior to page 1.
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ABA Brief
Docket R 2006-1
Mail, and it has provided rate increases for Bulk First-Class Mail that are slightly less
than those of Single Piece. Both these decisions are based upon the Postal Service’s
reasonable business judgment, and are key elements in its attempt to manage the FirstClass Mail “fade.” 3 Both those decisions are ones that the Commission should respect.
The Postal Service has also made the very important decision to propose
delinking Bulk First-Class Mail from Single Piece First-Class Mail. 4 That decision is
fundamental to the resulting rates structure, and it is the type of decision that would lie
well within the purview of the Postal Service’s reasonable business judgment under the
discretion provided to the Service under the new postal legislation. While several
parties, on brief, will no doubt urge the Commission to second-guess the Postal
Service’s decision in this very delicate area, the ABA urges the Commission to accept
the Postal Service’s position.
In addition to the decision to delink, the Postal Service has used its sound
business judgment to make two other very important decisions in First-Class Mail: to
give rate relief to additional ounce mailers by lowering the additional ounce rate, and to
give rate relief to single-piece mailers by creating the “Forever Stamp.” There is sound
record evidence to support the conclusion that both are shrewd moves, and no one has
3
The Postal Service’s business acumen in the First-Class area is one developed in part through its
experience in negotiating First-Class NSAs, including those NSAs that never made it past the negotiating
stage, as well as those that did make it through the negotiating process and into the Commission’s
hearing room.
4
As set forth in ABA’s Comments submitted in Response to NOI 3, the term “Bulk First-Class Mail” is
meant to refer to mail that pays the rates set forth in existing Rate Schedule 221 for “Presorted,”
“Automation Letters,” and “Automation Flats” and in proposed Rate Schedule 221 for “Presorted,”
“Automation Letters,” “Automation Flats,” and “Business Parcels.” The ABA is not suggesting that this
term is necessarily the best to use for this group of mail. The choice of the proper term to use for this
group of mail should be decided collectively by the major users of Bulk First-Class Mail.
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ABA Brief
Docket R 2006-1
opposed either proposal (although the OCA has offered an alternative proposal to the
Postal Service’s additional ounce proposal). Once again, ABA submits that with respect
to these two proposals, the Commission should defer to the business judgment of the
Postal Service.
Looking at it from a more macro vantage point, it is important for the Commission
to also realize that the decisions that it will render on the Postal Service’s rate proposal
are, ultimately, expressions of what the Commission believes to be good public policy
regarding the rate structure for the nation’s mail. Setting postal rates is not merely a
function of divining what is arguably the best or most efficient pricing model for a
particular product or service. It is much more than that—economic theory is important
to this process and informs the Commission’s recommendations, but it must be
subordinate to good public policy and good business sense.
This is particularly true when one or more parties are attempting to misuse
economic theory to obfuscate issues and direct the Commission’s attention away from
good public policy, such as the recognition of legitimate cost differences in setting
rates.5 The Commission has often noted that “cost-based rates have been the
touchstone of postal rate-making,”6 and that the rate-setting process has operated on a
“presumption that rates within a subclass should fully reflect cost differences that are
caused by such differences,” regardless of whether the cost differences result from
5
See Tr. 24/7395-99 (OCA Witness Thompson testifying that in setting rates Commission should ignore
$8.90 of a $9.00 cost difference between two products if they are in the same subclass.)
6
PRC Opinion and Recommended Decision in Docket R2005-1 at i (Summary).
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ABA Brief
Docket R 2006-1
“cost-saving characteristics that are the result of worksharing” or from “cost-causing
characteristics that do not result from worksharing.”7
The diversity of the ABA’s membership means that it represents postal
customers all along the spectrum of size and sophistication. Those interests are best
served when rates reflect costs. As discussed blow, the ABA generally supports the
Postal Service’s proposal as representing a good balancing of the interests at play in
this case, as well as the general public interest.
7
Notice of Inquiry 2 in Docket R2006-1 (Issued July 21, 2006) at 1, 2; accord Comments of Time Warner
Inc. In Response to NOI No. 2 and NOI No. 3 (August 17, 2006) at 3.
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ABA Brief
Docket R 2006-1
ARGUMENT
I.
THE COMMISSION SHOULD RECOMMEND THE POSTAL SERVICE’S
SHAPE-BASED PRICING PROPOSAL.
In this case, the Postal Service has created a rate structure for First-Class Mail
that builds basic distinctions between letters, flats, and parcels into the First-Class rate
structure, and sets separate benchmarks accordingly. In doing so, the Postal Service
has created a rate structure that recognizes the increasing disparity in cost differences
due to shape that automation and modern mail processing have created in the mail
sector. See Kent, ABA-RT-1 at 5. It is a change in rate design that is not only
appropriate, but long overdue.
Having drawn this distinction, the obvious question becomes how one should
recognize shape in the First-Class rate structure. In this case the Postal Service
creates a series of AADC benchmarks in First Class for letters, flats, and parcels, and
then builds discounts off of those benchmarks. As part of this approach, the Postal
Service delinks single piece First-Class Mail and bases its Bulk First-Class Mail rates on
actual CRA data. The American Bankers Association supports the approach and urges
the Commission to adopt it
A. The Commission Should Recommend The Postal Service’s Proposed 55%
Letter/Flat Passthrough Of Shape-Related Costs, But Nothing Less.
The Postal Service’s proposal does not “pass through” all of the cost differences
between letters and flats. Rather it allows part of the letter-to-flat cross-subsidy to
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ABA Brief
Docket R 2006-1
remain in place. Specifically, the Postal Service is only passing through 55% of the cost
differences and leaving 45% in place. Tr. 16/5030-31. This means that for every $1 of
additional cost created by flats, 55¢ will now be paid by flat mailers and 45¢ will
continue to be paid by letter mailers. Id.
Even though one could argue that this allocation not fair to mailers of letter-size
mail, ABA nevertheless believes that the Postal Service’s determination to phase out
only 55% of the subsidy in this case is acceptable, given the rate shock that a 100%
passthrough would create. We trust however, that the Postal Service will continue to
reduce this subsidy in the future. Were this not to happen, then the Postal Service
would have little hope of slowing down the First-Class “fade.” We trust that the
Commission understands the necessity of rapidly moving First-Class Bulk letter rates
towards a cost-based First-Class rate structure, and will not seek to undermine the
Postal Service’s efforts by reducing the letter/flat passthrough below 55%.
B. Congress Has Provided Definitive Guidance Concerning The Debate Over
Avoided Costs, Efficient Component Pricing, And Shape.
This case has been marked by a broad debate about worksharing discounts,
Efficient Component Pricing, and what are or are not “avoided costs.” A variety of
opinions have been expressed. The primary result of this debate is to compel the
conclusion that the problem with trying to apply Efficient Component Pricing to shapebased costs is that it is a little like trying to force a square peg into a round hole. It just
doesn’t always fit very well.
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ABA Brief
Docket R 2006-1
In his testimony on behalf of Pitney Bowes, Professor John C. Panzer takes the
position that any private sector activity which reduces the cost of the Postal Service is
worksharing, and thus such cost reductions can be viewed as an “avoided cost.” This
includes shape. Panzar, PB-T-1 at 7. Professor J. Gregory Sidak, on the other hand,
testifying on behalf of the Newspaper Association of America, takes the position that
there are essentially two types of costs—“avoided costs” and “other” costs, and that the
category that a particular cost falls into depends on the value of the product. Sidak,
NAA-T-1 at 11. The Postal Service seems to generally agree with Professor Sidak.
Kiefer, USPS-RT-1 at 15.
Fortunately, in the recent passage of the 2006 Postal Act, Congress has
provided both the Commission and the Postal Service with clear guidance on this issue.
Section (1) of new Section 3622(e) defines a worksharing discount for postal ratemaking purposes as a rate discount “provided to mailers for the presorting,
prebarcoding, handling, or transportation of mail, . . ..” 39 U.S.C. §3622(e)(1) (2006).
Under this section, worksharing discounts provided to mailers should be limited to
four—and only four—activities: the presorting, prebarcoding, handling, and
transportation of mail.8 If designing the shape of a mailpiece were to fall under the
notion of a workshare discount, then section (e)(1) would have to say something like “for
the design of mail” or “for the shape of mail.” It, of course, does not.
Moreover, looking at Section (2) of the new subsection (e), one sees that the
section places a limit on workshare discounts, and defines that limit in terms of the
8
The statute gives the Commission the authority to define exactly what activities falls within the definition
of each of these four enumerated activities. See §3622(e)(1).
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ABA Brief
Docket R 2006-1
avoidable costs: “cost that the Postal Service avoids as a result of workshare activity.”
It follows, therefore, that “avoided costs” for postal rate-making purposes should be
limited to costs that the Postal Service avoids in connection with worksharing as defined
by the Act, which is limited to only four activities: presorting, prebarcoding, handling, or
transportation done by the mailers. Any cost difference caused by shape and piece
design should not, under the guidance of the 2006 Postal Act, be considered an
avoided cost. Thus, shape should not be recognized in a “worksharing” discount.
Pursuant to the provisions of Section 3622(f), the provisions of 3622(e) are not
effective until some point in the future. Thus, while section 3622(e) now only provides
the Commission with “guidance” as to how it should resolve the question of worksharing
discounts, ECP, and “avoided costs,” that “guidance” becomes law at some point in the
future.9 Thus when that point is reached, worksharing discounts, and the related notion
of avoided costs will be limited—by law—to only four activities, presorting,
prebarcoding, handling, and transportation of mail.
This does not mean, of course, that “shape” cannot be recognized in the rate
structure. Such as result would be absurd.10 It simply means that, rather than
recognizing shape-based costs in a “worksharing” discount as an avoided cost, shape
9
It is a bit difficult to state the exact date at on which the provisions of §3622(e) become mandatory.
While §3622(e) became effective the moment the 2006 Postal Act became law, rates can not be changed
under the provisions of the new law (including 3622(e)) until the Commission promulgates regulations
allowing it to do so. Under §3622(a),the Commission has 18 months after enactment to draft these
regulations, but it could do so before the 18 month period expires. Once the regulations are promulgated,
the restrictions of 3622(e) are operative. Having said that, even if the new regulations are effective, under
§3622(f), the Postal Service has a period of 12 months from enactment to file a new rate case to change
market-dominant rates under the current (i.e., the old) system. Under ABA’s reading of the new statute,
the limitations of §3622(e) would not apply to the rate changes that would result from this last rate case.
10
Note that weight falls much into the same category as shape. Thus, if one took the position that only
“avoided costs” could be recognized in the rate structure within a subclass, then neither shape nor weight
could be recognized in the rate structure within a subclass.
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ABA Brief
Docket R 2006-1
should be recognized either through different rate elements or through discounts that
recognize intrinsic cost differences. The Commission has done this for years in
Periodicals Mail and Standard Mail, where different rate elements and discounts reflect
both avoided cost and intrinsic cost differences such as shape, weight, sequencing,
density, distance the mail travels, editorial content, and mail preparation. All discounts
do not have to be “worksharing” discounts, as discounts such as the editorial discount in
Periodicals and the density discounts in Standard Mail shows.
Consequently, assuming that the Commission will recognize shape in its FirstClass rate structure in its opinion and recommended decision in this docket, the ABA
urges the Commission not to consider the benchmarks that it sets for different shapes in
Bulk First-Class Mail as any sort of “worksharing” discount. Rather, those benchmarks
should simply be considered separate rate elements in the rate structure, reflecting
differences in cost due to shape and other such items. The proper role for
“worksharing” discounts, and for Efficient Component Pricing, is in recognizing true
“avoided costs” by pricing down from the benchmarks, for discounts for the presorting,
prebarcoding, handling, or transportation of mail.
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ABA Brief
II.
Docket R 2006-1
THE COMMISSION SHOULD RECOMMEND THE POSTAL SERVICE’S
DELINKING OF BULK FIRST-CLASS MAIL FROM SINGLE PIECE FIRSTCLASS MAIL.
A. The Postal Service Has Delinked Single Pieces First-Class Mail From Bulk
First-Class Mail Because It Finally Recognized That They Are No Longer
The Same Species Of Mail, And Because Each Has Separate Cost
Characteristics.
As set forth in the Comments of ABA in response to NOI 3, and as illustrated by
the testimonies of Witness Kent ABA-RT-1, Bell NAPM-RT-1, McCormack MMA-RT-1,
and Gorham MMA-RT-2, the mail industry has evolved considerably since worksharing
discounts were created thirty years ago. It is now quite complex and intensely focused
on creating mail that is easy to process. What was once “converted” single piece mail is
generally no longer “converted” mail, but mail that has been transformed into a new
species of mail, Bulk First-Class Mail.11 Kent, ABA-RT-1 at 5; see Bell, NAPM-RT-1 at
7.
That evolution has been gradual, and it is an evolution that the Postal Service
took a while to understand and accept. However, it is an evolution that the Postal
Service has finally accepted and, in response, has taken the appropriate steps to
recognize in the rate structure. As Postal Service Witness Taufique has said, “the
Postal Service’s approach to rate design in Docket No. R2006-1 puts aside past
11
Obviously there is some remnant of Bulk First-Class Mail still comes from single piece mail converting,
but it is minimal. See Bell, NAPM-RT-1 at 7. The ABA has estimated that less than 12% of banks single
piece mail is available for converting now or in the future. That means that over 88% of banks mail has
finished converting and is now a new entity. Kent, ABA-RT-1 at 5.
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ABA Brief
Docket R 2006-1
irreconcilable divisions and takes a fresh look at the recurring task of First-Class
workshare rate design.” Taufique, USPS-T-32 at 14
One of the developments that no doubt prompted the Postal Service’s formal
recognition of the evolution of this new species of mail is the fact that the First-Class
cost data clearly showed cost differences that were not caused just by “worksharing.”12
As Witness Taufique has pointed out:
The CRA and the rollforward model, which forecasts costs by using the base year CRA
as a starting point, have long reported separate, independently-derived estimates of the
costs and revenue for Single-Piece Letters and for Presort Letters. [footnote omitted] The
costs developed for these CRA line items are “bottom-up” costs, reflecting the results of
the full range of cost estimation systems and techniques used to inform the CRA (e.g.,
the In-Office Costs System, the City Carrier Cost System, TACS, etc.).
The comparison of costs as reported for Single-Piece Letters and for Presort Letters does
not simply reflect the cost avoided by the Postal Service when a mailer chooses to
perform worksharing activities . . .. Because the costs are developed in total, they reflect
the full range of differences between the two sets of mail—differences perhaps unrelated
to the actual worksharing activity but reflective of the different cost characteristics of
business-orientated mail entered in large qualities, as compared to single-piece mail. . . .
Thus, a comparison of the relative costs and rates (and resulting cost coverages) for
Single-Piece Letters and Presort Letters reflects more than simply the costs avoided by
performing worksharing activities which the Postal Service and the Postal Rate
Commission have determined are appropriately reflected in rate differences.
Taufique, USPS-T-32 at 13-14
As witness Kent has testified, the difference between the relative costs and rates
of Single Piece Letters and Presort letters is now about 18 cents, only 8 of which can be
recognized as related to worksharing discounts, thus leaving a missing dime of costs
not recognized. Kent, ABA-RT-1 at 7-8 & Appendix II. The rest—the remaining dime—
is due to a number of other costs characteristics, both of an avoided cost nature and of
12
These differences in cost are due to many things. Witness Taufique has pointed out just a couple:
“These cost characteristics may reflect such things as the number of postal facilities through which the
mail traverses, the proportion of the mail transported via air rather than ground transportation, the
readability of the mail, the proportions of the mail that are undeliverable-as-addressed, the utilization of
retail facilities for entry, etc.” Taufique, USPS-T-32 at 14
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ABA Brief
Docket R 2006-1
a non-avoided cost nature, including shape. Id. Among the other characteristics are
the number of postal facilities through which the mail traverses, the proportion of the
mail transported via air rather than ground, the utilization of retail facilities, etc. See
note 12, infra. In this case the Postal Service has proposed a rate structure which will
allow the “missing dime” of cost characteristics—regardless of where they came from—
to ultimately be recognized, based on actual CRA data. The ABA strongly supports the
proposal, and urges the Commission to adopt it.
Finally, one of the major controversies in the past has centered on the notion of
Bulk Metered Mail or BMM, a hypothetical construct that now has little to do with reality.
Bell, NAPM-RT-1 at 2-7. The only real evidence to the contrary is the statement of
USPS Witness Abdirahman who has said that he has “seen” BMM in postal facilities as
he has toured them. Abdirahman, USPS-RT-7 at 5. However, as NAPM’s Witness Bell
(an expert on the presort industry) points out, that mail is trays is most probably mail
that has come in from a presort bureau and is not really BMM since it most probably has
been processed by presort bureaus. Tr. 38/13001; see Bell, NAPM-RT-1 at 6-7.
The beauty of the Postal Service’s proposal is that it puts aside the
disagreements over the nature of this hypothetical type of mail, and instead relies on
actual data, as Witness Taufique has point out. Taufique, USPS-T-32 at 13-14. For that
reason alone, the Commission should accept the Postal Service’s delinking proposal,
and not use BMM as any sort of benchmark. It is always better to use actual data rather
than hypothetical data.
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ABA Brief
Docket R 2006-1
B. Efficient Component Pricing Principles Do Not Bar Delinking.
As noted above, the concept of “avoided costs” in postal rate-making will be
limited at some point in the future by law to only those costs associated with mailer
presorting, prebarcoding, handling and transporting mail. Thus, unless a cost
characteristic of Bulk First-Class Mail is part and parcel of one of those activities, it will
not legally be able to be considered an “avoided cost,” or part of a worksharing
discount. However, as pointed out above, the fact that a cost characteristic is not an
“avoided cost” characteristic clearly does not mean that it cannot be recognized in
setting rates. If such “non-avoided” cost characteristics could not be recognized in
setting rates, then neither shape nor weight could be recognized in setting rates, and
much of the Standard Mail and Periodical Mail rate structure would be called into
question.
In order to comply with the intent (and soon to be mandate) of the recentlypassed 2006 Postal Act, the Commission simply must ensure that any “non-avoided”
cost characteristic that is recognized in setting rates is clearly acknowledged as such
and appropriately documented. There are at least three different ways the Commission
could do this.
First, it can recognize the “intrinsic” costs differences of “non-avoided cost”
characteristics by creating separate rate elements (such as the shape-based
benchmarks proposed by the Postal Service) that are not “worksharing discounts.
Second, the Commissions can create different discounts based on intrinsic costs
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ABA Brief
Docket R 2006-1
differences rather “avoided costs” difference. The Commission has already done this in
Periodicals and Standard Mail. Third, the Commission could determine, when
recommending a particular discount, that the discount is not a worksharing discount
(even if it was labeled such in the past) but rather is a hybrid worksharing/non
worksharing discount based partially on “avoided costs” and partially on other intrinsic
costs. In doing so, the Commission should carefully point out that the portion of the
discount based on avoided costs passes through only 100% of the avoided costs,
unless it wishes to rely on one of the new exceptions to Section 3622 (e) found in that
section.
Reliance on any one of the exceptions is not necessary to recognize non-cost
avoided costs in a hybrid discount, so long as the Commission makes it clear that the
non-worksharing part of the discount is based on intrinsic and not avoided costs, such
as weight or shape, and labels and documents it accordingly. Should the Commission
decide to pursue this later course, then it would be prudent to calculate two
passthroughs for each hybrid discount—one calculating the passthroughs of avoided
costs and one calculating the passthroughs of the intrinsic, “non-avoided costs.”
—17—
ABA Brief
III.
Docket R 2006-1
THE COMMISSION SHOULD RECOMMEND THE POSTAL SERVICE’S
FIRST-CLASS ADDITIONAL OUNCE RATE PROPOSAL.
For years, the Postal Service has used the First-Class additional ounce rate as a
pricing mechanism to generate additional institutional cost contribution. This has
resulted in a level for the First-Class additional ounce rate that has been artificially
higher than it would have otherwise been. See Taufique, USPS-T-32 at 4. The Postal
Service has portrayed this phenomenon as setting the additional ounce rate in a way
that covers the cost of additional weight as well as the costs associated with different
shapes in First Class. Id.
As noted above, the Postal Service is specifically recognizing in its First-Class
rate design the costs caused by shape. Consequently, as the Postal Service has said,
keeping the First-Class additional ounce levels at an artificially high level is no longer
necessary Id. at 4-5. The question then, is whether the rate should be lowered.
The Postal Service has come to the conclusion that the First-Class additional
ounce rate should be lowered. The ABA agrees with that assessment, for a number of
reasons.
First, rates generally should track costs, unless there is some good reason not to
do so. Kent, ABA-RT-1 at 8. In this instance, there is none, as the dearth in the record
of any opposition or even comment on this issue demonstrates.
In the absence of other compelling factors, the Commission has consistently
advocated rates that closely track costs, on the grounds of economic efficiency. See
page 6-7 infra. In this case, lowering the additional ounce rate would result in rates for
heavier First-Class Mail that comes closer to meeting the goals of the Efficient
—18—
ABA Brief
Docket R 2006-1
Component Pricing theory. As discussed in the testimony of DFS & MSI Witness
Resch, improved cost-based rates for heavier pieces would allow business First-Class
Mailers greater freedom to make efficient choices in allocating their resources for
statements and advertising to mail versus other media, such as the Internet.
Additionally, business mailers would be better able to optimize their use of the mail
among the various options, such as one-ounce First Class, extra-ounce First Class, or
Standard Mail.
Second, as the undisputed testimony of Witness Resch shows, lowering the
additional ounce rate will mean that mailers will no longer have the incentive to “mail to
one ounce.” Resch, DFS & MSI-T-1 at 3-6. Rather, mailers will have the incentive to
increase the weight of statement mail by adding advertising pieces. As Witness Resch
testified, this should lead to an increase in the volume of additional ounce mail. Given
that the proposed additional ounce rates not only cover all the costs of the additional
ounce mail, but also yields a nice “profit” for the Postal Service, any increase in
additional ounce volumes thus will also mean an increase in institutional cost
contribution.13 Id.
Third, lowering the First-Class additional ounce rate could ameliorate the “fade”
of Bulk First-Class Mail to electronic delivery. This is because adding an additional
marketing component to the mailing of statements would give a mailer of statements a
reason to stay in the mail. This could have a noticeable effect on electronic diversion.
13
At one point, Commissioner Goldway raised a question of whether increasing advertising in the
additional ounce area would lead to a diminishing of advertising mail in any other area. As witness Resch
testified, the dynamics of the pricing should “create new alternatives for marketing messages that would
not otherwise have mailed.” Resch, DFS & MSI-T-1 at 6.
—19—
ABA Brief
Docket R 2006-1
Thus, as Witness Resch testified, the net effect of the Postal Service’s proposal would
be to:
give bill and statement mailers an economic incentive to keep statement
mailings in the mail. This is because, for each statement that would be
diverted to electronic delivery, the company would lose the ability to mail a
marketing piece for 15.5¢, a much smaller investment than mailing a solo
mail piece at Standard-Mail rates (23.5¢) or First-Class Rates (33.1¢).
Id. at 7-8.
For these reasons, the Commission should approve the Postal Service’s
proposal to lower the First-Class additional ounce rate.
—20—
ABA Brief
IV
Docket R 2006-1
THE COMMISSION SHOULD REJECT BOTH THE OCA’S ALTERNATIVE
FIRST-CLASS RATE PROPOSAL FOR BULK FIRST-CLASS MAIL AND THE
OCA’S ALTERNATIVE PROPOSAL FOR ADDITIONAL-OUNCE FIRST-CLASS
MAIL
A. Under No Circumstances Should The Commission Recommend Bulk FirstClass Mail Rates That Are Higher Than That Proposed By The Postal
Service.
Both the OCA and the APWU have set forth proposals that are designed to “help”
Single Piece mailers by driving up Bulk Mail rates. When one looks at how the benefits
of this case are spread across the mailer spectrum one easily can come to the
conclusion that the single piece First-Class mailer gains more from this case than any
other mailing interest. This is because the “Forever Stamp” gives the single piece
mailer the ability to send mail in the future at today’s rates. This is an attractive pricing
strategy that should find strong support with small business mailers, and the ABA
wishes it were available in Bulk First-Class Mail.
For this reason, the ABA suggests that the interests of the Single-Piece Mailer
(including small businesses) have been more than adequately taken into account in this
proposal, and respectfully suggests that the Commission should not accept other
proposals seeking to further lower Single Piece First-Class Mail Rates or favor Single
Piece First-Class Mailers over others, including the proposal set forth by GCA.
In terms of the specific proposals of the OCA and the APWU, the record
evidence shows that the larger-than-proposed increases contained in both proposals
would have an adverse affect on Bulk First-Class Mail revenues. This adverse affect
would hurt the Postal Service and flies in the face of the need to carefully manage FirstClass Mail volumes in order to minimize First-Class Mail “fade.” See Taufique, USPS—21—
ABA Brief
Docket R 2006-1
RT-18 at 4-5; McCormack, MMA-RT-1 at 9; Gorham, MMA-RT-2 at 9-11; ABA crossexamination of Gorham, Tr. 38/13212-13216; see also Bell, NAPM-RT-1 at 9. See
generally Carey H. Baer, “First-Class Volume Is Slip-Sliding Away” DM News, October
23, 2006 at 13 (Postal Service not doing enough to retain First Class).
Indeed, Congress made it perfectly clear in the passage of the 2006 Postal Act
that Bulk First-Class Mail volume decline was a critical issue that the Postal Service
should address. That message has been generally reinforced in every confirmation
hearing that the Senate has convened in recent years, including those within the last
several months. Increasing the Bulk First-Class Mail rates more than has been
proposed by the Postal Service would have a negative effect of First-Class volumes,
and would be inconsistent with that Congressional concern.
B. Efficient Component Pricing Principles Do Not Require Recommending Bulk
First-Class Mail Rates That Are Higher Than That Proposed By The Postal
Service.
OCA Witness Thompson states that discounts should be based on the costs
avoided by the worksharing activities of mailers, not incidental cost differences that are
wholly unrelated to worksharing. She says that discount levels set by the Commission
at avoided costs levels send correct price signals, while those resulting from the
uncritical application of all CRA cost differences will simply produce unwarranted cost
shifts to single-piece mail. Id. Rate discounts set in such an uneconomic manner create
an inequitable rate schedule, says Thompson. See OCA Trial Brief at 6.
Such a proposition flies in the face of this Commission’s oft repeated dictum that,
“cost-based rates have been the touchstone of postal rate-making for 35 years,” and the
—22—
ABA Brief
Docket R 2006-1
fact that the rate-setting process has operated on a “presumption that rates within a
subclass should fully reflect cost differences that are caused by such differences,”
regardless of whether the cost differences are the result of “cost-saving characteristics
that are the result of worksharing” or of “cost-causing characteristics that do not result
from worksharing.” PRC Opinion and Recommended Decision in Docket R2005-1 at i
(Summary); Notice of Inquiry 2 in Docket R2006-1 (Issued July 21, 2006) at 1, 2; accord
Comments of Time Warner Inc. In Response to NOI No. 2 and NOI No. 3 (August 17,
2006) at 3. See page 6 infra.
As noted above, the Commission recognizes “non-cost avoided” cost differences
in both Periodicals and Standard Mail. It should also do so in First Class.
C. Increasing Bulk First-Class Mail Rates Would Have A Disproportionate Effect
On The 18% Of First-Class Mail Received By Homes That Is Advertising
Mail, And Cause The Postal Service To Lose 13 Cents Per Piece For Every
Piece That Shifts From First-Class To Standard Mail.
Roughly 18% of First-Class Mail is advertising mail.14 While we have no
elasticity studies for this type of mail, common sense suggests that has to be highly
sensitive to price changes, given the ease of simply taking a mailing that was planned
for distribution via First-Class rates and distributing it via Standard Mail rates, after
making any necessary content adjustments.
Such sensitivity suggests that any increase above that proposed by the Postal
Service would have a particularly heightened effect on First-Class Advertising Mail, and
result in less contribution to overhead being received by the piece, a point that Witness
14
According to the 2005 Household Diary, Households receive 58.8 Billion Pieces of Advertising Mail.
2005 Household Diary at 1. Of that, 10.5 are stand-alone advertising, which is 18%.
—23—
ABA Brief
Docket R 2006-1
Kobe conceded on cross-examination. Tr. 20/7181-85. As was pointed out during the
cross-examination of Witness Kobe, every time an advertising piece shifts from FirstClass to Standard Mail, the Postal Service loses 13 cents per piece. Id. The loss of this
contribution has not been factored into either the OCA or the APWU proposal, and
provides an ample reason to reject both.
D. The Commission Should Reject the OCA’s Alternative Proposal for AdditionalOunce Mail.
The OCA has proposed that the Commission recommend, in place of singleounce First-Class additional-ounce rates, a system of quarter-pound rates, i.e., a single
rate for all First-Class single-piece letters (up to 4 ounces); only three rate cells for
single-piece flats; and only three rate cells for single-piece parcels. OCA Trial Brief at 6.
It is the ABA’s understanding that the Postal Service opposes this proposal. So
does the ABA. Given the nature of the recently enacted 2006 Postal Act, the ABA does
not see how the Commission could recommend such a drastic change unless the Postal
Service accepted it.
The Commission should reject the OCA’s additional-ounce proposal.
—24—
ABA Brief
V.
Docket R 2006-1
THE COMMISSION SHOULD REJECT THE POSTAL SERVICE’S PROPOSAL
TO RESTRUCTURE CONFIRM PRICING AND ACCEPT EITHER OCA’S OR
MMA’S ALTERNATIVE CONFIRM PRICING PROPOSAL.
In several places in this brief, the ABA has urged the Commission to accept the
judgment of the Postal Service, and pointed out that the new law confers a great deal of
discretion upon the Postal Service. This is particularly true when dealing basic,
fundamental issues. However, the Postal Service’s recommendations regarding its
Confirm program presents a bit of a different story for two reasons. First, it is not a
basic and fundamental rate design matter, but a very small issue—a mosquito on the
back of an elephant, as one postal wag has put it. Second, it is arguably necessary for
the Postal Service to have a well-functioning confirm program under the new law. Thus,
we urge the Commission to reject the Postal Service’s proposal.
OCA’s Witness Callow opposes the classification changes proposed by the
Postal Service for Confirm. He argues that by eliminating the “start the clock” electronic
notice requirement and abandoning the unlimited scan pricing design (for Platinum
subscribers) currently in place, the Postal Service is retreating from any program to
measure its provision of services to First-Class workshared mail, Standard Mail, and
Periodicals mail. Callow, OCA-T-5 at 23; see OCA Trial Brief at 7.
While the OCA’s conclusion that the Postal Service is retreating from any
program to measure service might be a bit harsh, the point is still well-taken. As the
mailing community has argued for years, the Postal Service should strive to make its
system transparent to all mailers, so that mailers know where in the system their mail is.
The ABA submits that the Postal Service’s proposal goes the wrong way, and in some
—25—
ABA Brief
Docket R 2006-1
ways conflicts with the service standard provisions in the recently-enacted Postal
Accountability and Enhancement Act of 2006.15 In its trial brief the OCA said that “it is
inexcusable that it [the Postal Service] is attempting to impose lethal changes on the
one tracking/performance tool (imperfect as it may be) that is operable today – the
Confirm system.” OCA Trial Brief at 8. Again, while the rhetoric is a bit strong, the point
is well taken and is particularly relevant in light of the service standard language in the
postal reform legislation. The Commission should reject the Postal Service’s Confirm
proposal.
In its place the Commission should recommend either OCA’s or MMA’s Proposal.
OCA Witness Callow proposes Confirm prices that keep the current Confirm rate design
and retains the Silver, Gold, and Platinum service levels. Callow’s proposal preserves
the subscription-based “internet” pricing model, maintains Silver prices at current levels,
increases increasing Gold by 16 percent increase, Platinum fees by 95 percent,
produces a cost coverage for Confirm that is slightly higher than that proposed by the
Postal Service, and retains retaining the “start the clock” electronic notice requirement.
OCT-T-5 at 14-18; see OCA Trial Brief at 7. That proposal is acceptable to the banking
industry.
MMA Witness Bentley argues that the Postal Service’s proposal to “revamp the
rate structure for Confirm Service is ill-conceived, unreasonable and should be
rejected.” Bentley, MMA-T-1 at 36. We agree. Moreover, Witness Bentley’s point that
15
Sections 301 and 302 of that Act require that the Postal Service, in order to increase accountability, to:
1) establish a set of service standards for market-dominant products within a year, 2) provide “a system of
objective external performance measurements for each market-dominant product as a basis for
measurement of Postal Service performance,” and 3) develop a plan to meet those standards. See
Postal Accountability and Enhancement Act of 2006, §301, §302, 39 U.S.C. § 3691 (2006).
—26—
ABA Brief
Docket R 2006-1
“In view of the minimal costs associated with Confirm, this service should be provided
as a service enhancement to First-Class workshared mailers, subject only to payment of
a reasonable annual fee” has a great deal of merit. Id.
In the banking industry, numerous banks are now using Confirm for some
purposes in First-Class Mail, and about many are increasing their use of it in Standard
Mail and for other purposes in First Class. Keeping Confirm at reasonable prices will
increase the industry’s use of Confirm, make the Postal Service more accountable, and
overall help the Postal Service maintain its credibility among customers
The ABA urges the Commission to adopt either the OCA’s or MMA’s alternative
for Confirm pricing in lieu of the Postal Service’s proposal. Should the Commission
adopt MMA’s proposal to include Confirm within First Class for only a minimal cost, it
should not accept the Postal Service’s proposal to precipitously increase Confirm prices
for Standard Mail. That would be counterproductive. Standard Mail, as much as FirstClass Mail, needs a good service-tracking system, and it does not need the rates for
that service increased precipitously.
—27—
ABA Brief
VI.
Docket R 2006-1
THE PASSTHROUGH FOR FIRST-CLASS PRESORT 3-DIGIT AUTOMATION
LETTERS SHOULD BE 100 PERCENT.
A. The Passthrough For This Category Of Mail Is 80 Percent Using The
Commission’s Methods And USPS-Recommended Rates.
According to his direct testimony, witness Taufique proposed rates for First-Class
Presort Mail that resulted in a 100 percent passthrough for 3-Digit automation letters.
Taufique, USPS-T-32 at 29-30. However, further discovery revealed that witness
Taufique’s rate design did not take into consideration the in-office delivery costs avoided
by First-Class Letter Mail, which are normally reflected in the Commission’s cost
avoidance estimates along with mail processing costs. In the USPS response to ABANAPM/USPS-T32-9, a table is provided that shows the revised unit cost savings and
passthroughs for the First-Class Presort automation letter categories, using PRC
costing methods and USPS-proposed rates. Tr. 18B/5443. That table shows a revised
passthrough for 3-digit automation letters of 80.0 percent.16 Id.
It should be noted that 3-Digit automation letters is a major market component
within the First-Class business mail stream. Its test year after rates volume is projected
to be 23 billion pieces, which makes it the largest single presort category, with 48
percent of First-Class Presort letter mail. For this reason, it is especially important that
this mail be priced efficiently to reduce the overall cost of mail service to society.
16
A similar table showing cost savings and passthroughs for the First-Class Presort automation letter
categories using the USPS costing methodology and USPS-proposed rates is provided in the USPS
response to ABA-NAPM/USPS-T22-2. That table also shows a passthrough of 80.0 percent for 3-Digit
automation letters. Tr. 16/4792
—28—
ABA Brief
Docket R 2006-1
B. A 100 Percent Passthrough Is Consistent with Efficient Component Pricing.
The Commission has frequently advocated the use of the economic principle of
Efficient Component Pricing (ECP) when establishing discounts that are just based on
cost avoidance. For example, in a discussion of worksharing discounts in its Opinion
and Recommended Decision in Docket No. R2000-1, the Commission explained:
[5535] This approach to worksharing discounts is called “efficient component
pricing” (ECP) in the economic literature. The theory requires the discount to be
100 percent of the cost savings. The Commission tries to achieve 100 percent
passthrough of the worksharing savings, but again it may frequently depart from this
standard for a variety of reasons. An important virtue of ECP is that the mailer will
perform the worksharing activity (e.g., presort) when he can do so at a lower cost
than the Postal Service. This leads to productive efficiency (i.e., the most efficient
mailer does the work resulting in the lowest cost to society).
ECP applies in areas where “worksharing avoided costs” are the driving factor in the
particular rate element being examined. That is, of course, not necessarily the case
when comparing First-Class Single Piece mail with First-Class Automation mail, for
some of the cost differences there are not “avoided costs” and have nothing to do with
worksharing, as noted earlier in this brief
Here, however, all the costs at issue are “avoided costs.” Hence, a 100 percent
passthrough for First-Class Presort 3-digit automation letters is consistent with the
principle of Efficient Component Pricing.
—29—
ABA Brief
Docket R 2006-1
C. There Are No Compelling Reasons to Deviate from a 100 Percent Passthrough
for this Category of Mail.
As the Commission noted in its Notice of Inquiry No. 2 at 2 in the case,
occasionally there are circumstances where strict adherence to the 100 percent
passthrough policy is not appropriate:
Rates that fully reflect avoidable costs (rates that pass 100 percent of the
differences in avoidable cost through to the mailer) satisfy the cost recovery and
fairness policies of the Postal Reorganization Act. Occasionally, subordinate
statutory policies have justified worksharing rate differences that fail to pass through
100 percent of avoidable cost. In such circumstances, the Commission has
explained variations from 100 percent passthroughs with reference to the non-cost
rate setting criteria of section 3622(b).
These exceptions to 100 percent passthroughs have typically been made to promote
rate simplification, to allow for a more rational set of rate relationships, or to prevent rate
shock.
The table below presents the current rates, USPS-proposed rates and
percentage increases for the First-Class Presort automation letter categories.
First-Class Presort Automation Letter Rates
Category
Current Rate
Proposed Rate
Mixed AADC
$0.326
$0.346
6.1%
AADC
$0.317
$0.335
5.7%
3-Digit
$0.308
$0.331 ($0.330)
5-Digit
$0.293
$0.312
—30—
Percent Change
7.5% (7.1%)
6.5%
ABA Brief
Docket R 2006-1
As shown in the USPS response to ABA-NAPM/USPS-T32-9, the total unit mail
processing and delivery cost savings for 3-Digit mail is $0.005, using the PRC costing
methodology. Tr. 18B/5443. In the above table, the first entry in the Proposed Rate
column of the 3-Digit row is the unadjusted USPS-proposed rate, while the highlighted
second entry is the ($0.330) rate based on a 100 percent passthrough of the $0.005
savings. Similarly, the highlighted percentage in the corresponding Percent Change
column is based on the 100 percent passthrough rate.
As mentioned above, the purpose of this brief is not to advocate a particular set
of rates, including those shown in the above table. The purpose of the table is rather to
show the effect of using a 100 percent passthrough for 3-Digit mail on a typical set of
rates that reflects a 3-Digit passthrough of less than 100 percent.
Introducing a 3-Digit rate based on a 100 percent passthrough does not cause
any rate shock, nor does it cause any awkward rate relationships, nor does it result in
any additional rate complexity. Thus, the non-cost factors of the Act do not justify a
deviation from a 100 percent passthrough for 3-Digit mail.
—31—
ABA Brief
Docket R 2006-1
CONCLUSION
For the reasons stated above, the Postal Rate Commission should accept the
Postal Service’s First-Class Rate Proposal with a 100 recent passthrough for 3-Digit
mail, and reject the OCA and APWU’s alternative First-Class Rate Proposals.
Moreover, the Commission should reject the Postal Service’s Confirm proposal but
accept either the OCA’s or MMA’s Confirm pricing proposal.
Respectfully submitted,
/S/ Robert Brinkmann
Gregory F. Taylor, Esq
American Bankers Association
1120 Connecticut Ave., N.W.
Washington DC 20036
(202) 663-5434
December 21, 2006
Robert J. Brinkmann
Irving Warden
1101 17th Street, N.W. Suite 605
Washington, D.C. 20036
202-331-3037, 202-331-3029 (f)
[email protected]
[email protected]
Counsel for the American Bankers
Association
—32—