BEFORE THE
POSTAL REGULATORY COMMISSION
WASHINGTON, D. C. 20268-0001
POSTAL RATE AND FEE CHANGES
REPLY BRIEF OF
TIME WARNER INC.
January 4, 2007
Docket No. R2006-1
TABLE OF CONTENTS
Page
I. THE POSTAL SERVICE HAS TAKEN A STAND-PAT APPROACH
TO PERIODICALS RATES
1
II. ABM SUBSTITUTES BLUSTER AND UNSUPPORTED ASSERTION
FOR ARGUMENT
7
III. McGRAW-HILL CHARACTERIZES THE RECORD AND COMMISSION
PRECEDENT INACCURATELY
21
IV. ABM AND McGRAW-HILL PRESENT A MISLEADING
CHARACTERIZATION OF THE IMPACT OF TIME WARNER'S
PROPOSAL ON SMALL PUBLICATIONS
29
V. TIME WARNER'S PERIODICALS RATE PROPOSAL BEST
COMPORTS WITH THE RELEVANT STATUTORY FACTORS AS
INTERPRETED BY THE COMMISSION
36
APPENDIX: METHODOLOGY FOR FURTHER TEMPERING OF
TIME WARNER'S PROPOSED RATES
41
BEFORE THE
POSTAL REGULATORY COMMISSION
WASHINGTON, D. C. 20268-0001
REPLY BRIEF OF
TIME WARNER INC.
I.
THE POSTAL SERVICE HAS TAKEN A STAND-PAT APPROACH TO
PERIODICALS RATES
In the 25 pages of its Initial Brief devoted to Periodicals rates (Section VI-G),
the Postal Service uses the word "balance" 15 times. It says that “[t]he major
concern that animates witness Tang’s rate design is a desire to achieve a balanced
proposal; that is, to avoid percentage increases well above the subclass average for
individual rate categories” (p. 361 [emphasis added]), and that its "recent rate design
philosophy for the Periodicals Outside County subclass has been to move gradually
in the direction of lower-cost preparation by providing incentives for reducing the
number of containers, and for destination entry” (p. 347 [emphasis added]).
On the other hand, the word "incentive" is used 25 times. The Postal Service
speaks with apparent approval of rates that "promote[ ] efficiency and lower costs”
(p. 343), and says that its rates would "promote more dropshipping” (p. 344),
"promote co-mailing and co-palletization” (p. 345), and "send a consistent and clear
signal to mailers, encouraging more efficient mail preparation and worksharing” (p.
344).
The Postal Service's putative commitment to these contradictory goals raises
important questions. Has its interest in "balance" constrained it from proposing rates
that would help to achieve goals that it has plainly espoused? How big must a step
be before it qualifies as being meaningful? And how much progress can be
expected from incentives that are poorly related to costs and that do not recognize
major, well-understood cost drivers? Specifically:
1.
Is a sack charge of 85¢ reasonable when some sacks cost
$4.75 to handle, and others $1.60?
2.
Is a pallet charge of 85¢ reasonable when some pallets cost
$66.70 to handle, and others $2.90?
3.
When bundles cost from 10 to 44¢ to handle, and there are
large numbers of bundles, is it reasonable to neglect these
costs and somehow average them in with the piece rates?
4.
When adjustments in the number of pieces in sacks cause
associated adjustments in the costs of bundle handling,
should the costs of bundles be ignored?
5.
When handling a 5-digit sack costs $5.60 if it is originentered and $2.30 if it is destination-entered, should the
rates simply disregard these cost differences?
See TW-LR-5 Revised (workpapers of witness Mitchell).
Plainly, the Postal Service's commitment to "balance" is stronger than its (asserted)
commitment to "incentives."
"Balance" is not an especially helpful notion unless one has a principle for
determining what should be balanced against what. According to witness Taufique
(see USPS-RT-12), balance is a tradeoff between maintaining the status quo and
making the kinds of changes that would allow meaningful progress. To him, for a
proposal to be balanced, it must lean toward the status quo, as measured by his
standard deviation; but if a proposal takes bigger steps than the Postal Service
wishes to take, it becomes "unbalanced."
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In other words, the Postal Service is saying that progress is not very
important; that those benefiting from the current rate structure, whether they be nonmachinable or a few pieces per container or something else, should be allowed to
continue benefiting; and that giving them appropriate incentives is not something
that should be done. Much less attention is given to those hurt by the current rate
structure, such as local publications and all those who believe that Periodicals costs
should be lower.
The Postal Service's guiding principle is thus one of standing pat and making
as little change as possible. If the Periodicals class and its rate structure were close
to what they ought to be, that might be comprehensible, even laudable. But it is
neither comprehensible nor laudable for a class that is widely recognized to be in the
grip of a long-term decline in its efficiency and whose rate structure is widely
recognized to be outdated in important respects.
A "balance" that places almost all of the weight on the side of maintaining the
status quo has no apparent foundation either in the policies of the Act or the
precedents of the Commission. Among the statutory factors to be considered in
setting rates is § 3622(b)(4): "the effect of rate increases upon the general public,
business mail users, and enterprises in the private sector of the economy engaged
in the delivery of mail matter other than letters." That provision neither states nor
implies a presumption that mailers should receive equal percentage increases. But
even if such a presumption were implicit in (b)(4) or some other provision of the Act,
the Commission gave fair notice in the most recent omnibus rate case that the
presumption could not be relied on in this docket, stating that “[p]arties should be
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aware that the Commission will seek to obtain economically efficient cost-based
rates [in the next proceeding].” PRC Op. R2005-1, p. 92, ¶ 5032.
A review of the Commission's opinions in Dockets No. C2004-1 and R2005-1
would lead one to think the current proceeding would be the least likely occasion for
the Postal Service to base its rate proposal on a desire "to avoid percentage
increases well above the subclass average for individual rate categories” (USPS Int.
Br. at 361) or " to limit the impact of its rate proposal on various mailers to as narrow
a range as practicable" (USPS-RT-12 at 5 [Tr. 39/13457]). The Commission's
Opinion in Docket No. R2005-1 made clear that it holds an entirely different view of
the changes that need to be made in Periodicals rates:
The Commission recommends, without change, the
set of Periodicals Outside County rates and fees identified in
the settlement proposal. The recommended rates represent
an across-the-board increase; they do not reflect application
of traditional rate design methodology. Pound charges, for
example, do not reflect the actual distribution of pound miles
in the base year. This result carries forward into the test
year; thus, in the future, some rate elements may require
larger than expected increases to realign rates with costs.
Consequently, mailers must stand forewarned that some
may face “rate shock” in subsequent proceedings.
PRC Op. R2005-1 at 146, ¶ 6104.
Even weaker than the Postal Service's response to the Commission's request
for progress towards cost-based rates in Docket No. R2005-1 has been its response
to the Commission's finding in Docket No. C2004-1 that "the Postal Service should
update and examine the Stralberg model to determine its usefulness for future
ratemaking efforts." Order No. 1446 at 30, ¶ 4034. In fact, the Postal Service has
shown no interest at all in Periodicals modeling beyond responding to witnesses
-4-
Stralberg's and Glick's identifications of specific problems with Postal Service
witness Miller's mail flow model.
In response to interrogatories, the Postal Service as an institution did provide
useful new information, obtained from a web based survey, on the flow of sacks and
pallets entered at origin facilities. Stralberg was able to use that information to
upgrade his C2004-1 model, concluding that sacks and pallets entered at origin
facilities pass through more intermediate facilities than previously believed, and
therefore incur even higher costs than his original model had indicated. In other
words, the savings caused by entering Periodicals containers closer to their
destinations are larger, and dropshipping saves more, than previously thought. The
Postal Service's complete silence regarding Stralberg's use of this new data in his
modified model suggests that it concurs with his improvements. Similarly, the Postal
Service's complete silence on the subject suggests that it does not disagree that
bundles, sacks, and pallets, as well as flats machinability, are important drivers of
Periodicals costs.
In addition, the Postal Service has expressed no disagreement, either in its
testimony or its initial brief, with Stralberg's and Mitchell's conclusions that the likely
future standard for Periodicals machinability is the same as the standard now being
applied to First and Standard class flats, namely AFSM-100 machinability (as
modified in the Postal Service's September 7, 2006 proposed rule, New Standards
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for Domestic Mailing Services).1
Stralberg's conclusion, based on an analysis of MODS and IOCS data, that
the UFSM-1000 machines are being used in a manner fundamentally different from
that assumed in Miller's model, was strengthened when Miller was forced to concede
on cross-examination that he had not understood what data Stralberg had based his
analysis on. Tr. 33/11103. If the Postal Service had any valid reason to disagree
with Stralberg's conclusions about how the UFSM-1000s are used, it could have so
stated in its initial brief. Instead, this is one more issue on which its brief is silent.
Nor has the Postal Service expressed any disagreement that the cost
differentials associated with mailer-supplied barcodes on flats, when separated from
the question of machinability, are as Stralberg's model shows them. Nor has the
Postal Service explained (other than formulaic appeals to "balance") how passing
through over 800% of such cost differentials represents "progress towards costbased rates." The silence of the Postal Service even extends to issues on which it
should have had no difficulty at all in accepting Stralberg's conclusions, such as the
demonstrated need for a more rational treatment of firm bundles.
1
71 Fed. Reg. 56588. The modifications mainly address issues of flexibility, in connection with items
such as compact disks, and have little relevance to Periodicals
-6-
II.
ABM SUBSTITUTES BLUSTER AND UNSUPPORTED ASSERTION FOR
ARGUMENT
According to ABM, "in a variety of relevant areas, what makes sense in theory
makes none in practice." Br. at 2. ABM goes on:
[T]he four witnesses for Time Warner and MPA/ANM . . .
are, by education, a mathematician, a physicist, and two
economists who, to be sure, have a world of insight into the
unique economics of postal costs, but their view is gained
from the lofty plane of theory rather than the more useful
planes of the publishing office and the printing plant. ABM
does not for a minute question their skill or their numerical,
economic or theoretical premises or conclusions, lacking the
resources even to make the attempt. But American
Business Media does question in meaningful ways the
application of their elegant yet sterile theories and
conclusions to the real world of periodicals publishing and
distribution.
Br. at 2-3.
Professor Samuelson's standard textbook on economics states that "when a
student says, 'That's all right in theory but not in practice,' he really means 'That's not
all right in theory,' or else he is talking nonsense."2 In this instance, ABM is talking
nonsense.
A postal rate case is primarily about postal costs: how those costs are
incurred, measured, attributed, and ultimately recovered through rates. Expertise in
economics and statistics is essential in studying these matters. Having printer's ink
on one's fingers does not help. ABM's position seems to be that costs are not really
important.
2
Economics, An Introductory Analysis (4th Edn.), p. 10.
-7-
The defining characteristic of Stralberg's and Mitchell's rate proposal is that it
reflects a far more realistic view of postal processing than either the current or the
Postal Service's proposed rate design. If one looks through Stralberg's testimony,
for example, one is hard put to find anything that could be described as derived
"from the lofty planes of theory" rather than from a painstaking assessment of how
mail processing is actually performed. The Commission found that this was so in
Docket No. C2004-1:
There are several options open to the Postal Service by
which it could immediately begin to better align the
Periodicals rate structure with the costs imposed on the
Postal Service by various existing mailing practices. The
Complainants have made a major contribution by identifying
and quantifying cost drivers associated with bundles, sacks
and pallets.
...........................................
There was little direct or implied criticism of
Stralberg’s model. He appears to have accurately captured
the cost causing characteristics of containers and provided
the Postal Service with a sound framework for further study.
Order No. 1446, pp. 4, 22, ¶¶ 1013, ¶ 4013.
And the Postal Service has virtually conceded that it is so in this docket. 3
Moreover, ABM tacitly concedes it is so when it accurately states that it "does
not for a minute question [Time Warner's witnesses'] skill or their numerical,
economic or theoretical premises or conclusions." Br. at 2. One searches in vain for
any statement from ABM about what is wrong with Mitchell's and Stralberg's
3
On cross-examination, witness Taufique stated: "The Time Warner proposal from what I've seen,
my understanding is it reflects all types of cost causation behavior in terms of containers, the level of
containers, the end point of containers, bundles, so the Time Warner proposal is much more
elaborate in that regard." Tr. 39/13533.
-8-
analysis. Are the costs not what they say they are? Is there an important cost driver
that mailers can respond to which Mitchell and Stralberg have overlooked? Do
mailers not have options as to how they make up their bundles or how many pieces
are in their sacks? Is comailing not really occurring? Is there something about copalletization that goes unrecognized? Are mailers not dropshipping? Do mailers not
use computers and software to presort? Do some mailers not dropship by air at
great cost? Are mailers not interested in service? Are there not local mailers? Are
there relevant cost factors that have been neglected? Are Periodicals costs under
control?
In the absence of insight on any of these questions, ABM proffers its "mud of
the marketplace" theory. It argues that the people who really know what incentives
should be built into Periodicals rates are not "ivory tower" mathematicians,
economists, and other theorists with their "numerical, economic, or theoretical
premises," but rather ABM's own ink-stained witnesses who have spent their lives
"on the front line of the constant battle to weigh postage costs." Br. at "prologue," 1,
3.4
ABM's mud-of-the-marketplace theory is open to many objections. Perhaps
the denizens of the ivory tower should have pride of place in responding to what is,
4
ABM's complaint that Time Warner's and MPA's witnesses are "a mathematician, a physicist, and
two economists" makes an interesting contrast to the following statement, over the signature of the
same counsel, from page 1 of the Initial Brief of AAPS:
AAPS, with one part-time employee, and its members are simply not in a
position to retain the highly specialized economists, mathematicians and
postal costing experts who would be necessary to take on those toiling
on behalf of the Postal Service and by [sic] those retained in bunches by
those seeking lower Standard mail rates.
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as it pertains to them, no better than an ad hominem attack. We have seen what
Professor Samuelson has to say. Here are the comments of two of his colleagues.
First, the late Milton Friedman:
The role of the economist in discussions of public policy
seems to me to be to prescribe what should be done in the
light of what can be done, politics aside, and not to predict
what is "politically feasible" and then to recommend it.
Comments on Monetary Policy. In Essays on Positive Economics (Univ. of Chicago
Press) [1951] 1953: 264.
Second, Michael Polanyi:
Almost every major systematic error which has deluded men
for thousands of years relied on practical experience. . . .
The scientific method was devised precisely for the purpose
of elucidating the nature of things under more carefully
controlled conditions and by more rigorous criteria than are
present in the situations created by practical problems.
Personal Knowledge: Towards a Post-Critical Philosophy [1958] 1964: 163.
Evidently, the United States Congress agrees, for section 502 of the Postal
Accountability and Enhancement Act provides that members of the Postal
Regulatory Commission "shall be chosen solely on the basis of their technical
qualifications, professional standing, and demonstrated expertise in economics,
accounting, law, or public administration."
ABM's assertion that only printers and publishers can say what incentives are
needed in Periodicals rates also runs up against the problem that printers and
publishers occupy every side in this argument. They agree about only one thing
respecting Periodicals postal rates: namely, that the appropriate rates are those that
will make their own postage bills as low as possible. The Postal Reorganization Act
requires the Commission to recommend rate changes only after a full hearing, and
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only on the basis of record evidence, in part because anecdotal, impressionistic, and
unverifiable statements by self-interested participants are simply not trustworthy.
Perhaps as a fallback from its indefensible entrenchment in the mud of the
marketplace, ABM's last recourse is to beg for the Commission's protection, on the
ground that it is too small and weak and poor to defend itself. It says that it does not
question the skill or the theoretical premises or conclusions of Time Warner's
witnesses because it "lack[s] the resources even to make the attempt." This is one
of many statements in ABM's brief that finds no support anywhere on the record.
Perhaps ABM is as poor as this statement implies. Perhaps "[i]ts 290 member
companies [who] reach an audience of more than 100 million professionals and
represent nearly 5000 print and online titles" cannot muster the resources to hire a
consultant with the ability to question Mitchell's and Stralberg's "numerical,
economic, and theoretical premises or conclusions."5 If that is the case, however,
one must still wonder what accounts for the same inability on the part of the Postal
Service. Do they too lack the resources to hire experts capable of evaluating the
same evidence?
5
As of December 27, 2006, the ABM website (www.americanbusinessmedia.com) stated: "American
Business Media is the industry association for b-to-b information providers. Its 290 member
companies reach an audience of more than 100 million professionals and represent nearly 5000 print
and online titles and 1000 Trade Shows." ABM witness Bradfield presented "the results of an
American Business Media survey for the 360 of its member publications that responded to a request
for data this summer." Those publications represent 251,000,000 annual copies. Bradfield noted
that three publications which did not respond (but did respond to an earlier survey) represent an
additional 41,000,000 copies. Thus, 363 ABM publications represent 292,000,000 copies. ANM Br.
at 12-13. Those 363 represent only about 25% of ABM members' printed periodical publications (see
Docket No, C2004-1, Tr. 1804-20).
-11-
At great length, ABM does take issue with one argument. However, it is an
argument that Time Warner has never made: namely, that all or nearly all small
publications can avoid the impact of the proposed rate increases by either copalletizing or co-mailing. Rather, as the Initial Brief of McGraw-Hill correctly points
out:
Time Warner itself acknowledged in Docket No. C2004-1
that "there obviously are many small-and medium-sized
publications that for some time will remain without access to
comailing, co-palletization, and dropshipping."
P. 20, n. 20.
Time Warner's Initial Brief in the instant docket is no less candid in stating that
co-mailing, copalletizing, and dropshipping are not a universally available remedy for
higher-than-average rate increases under Time Warner's proposal:
Time Warner does not argue that all publications can
be comailed or copalletized. Clearly, many are too small for
these to be viable options. But as Stralberg’s analysis
shows, most very small publications would do quite well
under the Time Warner proposal, and many of those that
would not do well with their current mailing characteristics
would have opportunities to do much better, as discussed
above. Nor does Time Warner dispute the fact that comailing
or copalletization is not a viable option for some small and
medium-sized publications that are so time-sensitive that
their publishers find it worthwhile to airlift them to destinating
facilities. But publications entered in sacks near their
destination, assuming the sacks are reasonably full and not
“skin sacks,” will also do quite well under the Time Warner
proposal.
And for other medium-sized publications, comailing
and co-palletization are viable options that increasingly are
being adopted and will become more available with the
stronger rate incentives that Time Warner’s rate proposal
offers.
P. 55.
-12-
ABM criticizes Time Warner's witnesses for not having worked for a printer or
publisher, or sought the opinions of printers or publishers about the costs and
availability of co-mailing and co-palletization. Br. at 23. After citing witness
Bradfield's testimony that the added front-end costs paid to a printer for co-mailing
services are substantial, ABM goes on:
Yet both Time Warner and MPA/ANM ignore these
heavy, additional front-end costs in their impact discussion,
so that the naked assertion that mailers can avoid the very
large cost increases that their proposals would cause is
unsupported and not testable, even if and to the extent that
co-mailing and co-palletizing might soon become available to
some of them.
This deficiency is crucial. . . . [I]t is essential to know
the costs to the mailer of participating in these programs.
ABM Int. Br. at 22-23.
This argument suffers from serious deficiencies. First, the record
demonstrates that its factual assertions and assumptions are false. Second, its view
of what information is and is not essential to proper ratemaking is contrary to all
known authorities on the subject, including the Commission.
As just discussed, Time Warner has never made any "naked assertion" that
mailers can avoid large cost increases under its proposal through co-mailing and
copalletizing. Time Warner has discussed a variety of ways in which some
publications could mitigate or avoid large increases by changes in their mail
preparation, including changing the number of sacks they use, adopting a
machinable format, and increasing their amount of dropshipping through methods
other than co-mailing or copalletizing. Time Warner is the only party that has fought
to have data made available that would allow testing of all of these measures, as
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well as a thorough assessment of the impact of all proposed rate schedules on all
types of publications, and Time Warner is the only party that has used the data
which have become available to analyze the impact of the various elements of its
rate proposal on various kind of publications and to analyze the methods available to
various kinds of publications for reducing or avoiding large rate increases through
changes in their mailing practices.
As discussed later in this brief, some of the new information developed in this
docket runs counter to the conventional wisdom espoused by ABM and McGraw-Hill.
For example, the assumption that most of the many thousands of very small
publications in Periodicals class are similar to medium-size business-to-business
publications of the type published by most ABM members–just smaller and even
more likely to be made worse off by rate de-averaging–turns out to be completely
untrue. In fact, those very small publications, most of which appear to be directed
primarily to a local readership, have characteristics fundamentally different from the
mostly nationally distributed, medium-size, requester publications that ABM
represents.
It is notable also that ABM and its witnesses have resolutely refused to
provide any solid facts about these "crucial" issues, but instead rely on the highly
general, impressionistic, and undocumented opinions of their witnesses. Unlike the
Postal Service, ABM cannot be criticized for lacking boldness. For example, its
assertion that methods of avoiding large cost increases through changes in mail
preparation are "not testable" is arrestingly bold, considering that ABM and its
witnesses have gone out of their way not to test them and have done everything in
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their power to make certain that they would not be in a position to test them. In that
respect, ABM has endeavored in this docket to replay its litigation strategy in Docket
No. C2004-1. In that docket, ABM witness Bradfield stated: "[M]y testimony is based
upon my experience in the industry, not 'analysis'"; and "This testimony is based on
my experience, not any analysis." Tr. 6/1675, 1679. ABM witness Cavnar testified:
"My statement is not based upon analysis of any particular titles but upon my own
experience in the industry." Tr. 6/1714. And ABM witness McGarvy provided the
following responses to interrogatories:
Q Please confirm that your testimony does not report the
results of any study, by yourself or others, of the ability of
any publication or group pf publications to adapt their mailing
practices in response to the proposed rate changes.
A Confirmed.
Tr. 6/1759.
A I can confirm that my testimony does not identify a single
mailer who would not be able to avoid large, crippling rate
increases under the rates proposed.
Tr. 6/1766.
In this docket, ABM has presented the same witnesses, who have provided
the same amount of useful or verifiable data (none), conducted the same amount of
testing, study and verifiable analysis (none), and repeated the same conclusions.
When asked early in this docket by Time Warner whether it had collected any recent
mail.dat-type data from its membership that would make it possible to evaluate the
impact of the contending rate proposals in this case, ABM responded that it had
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not.6 When asked on cross-examination of his direct testimony whether ABM had
made any further progress in evaluating the impact of the three contending
proposals, witness Cavnar replied that they had not. Tr. 30/10234. Only in the
rebuttal stage did witness Bradfield present some alleged analysis (but not the
underlying data that would permit its verification).
ABM and its witnesses provided nothing like hard data on printers' or
publishers' costs, which they assert is "crucial" and "essential" information for
evaluating the rate proposals. The extreme degree to which they are unwilling to
part with such information was perhaps best exemplified during witness McGarvy's
hearing, when she and ABM's counsel refused to say whether it costs more to airfreight publications to their destination than the pallet discount which is forgone
because pallets cannot fit onto the planes, claiming that such information is
proprietary. Tr. 35/12195-97.
The information on the non-postal costs to mailers of participating in
worksharing opportunities that ABM describes as "essential" and "crucial" is not
without value in the ratemaking process. It is helpful in determining the probable
impact of particular elements of a rate design on particular customer segments in a
regulated market. If a refined calibration of the welfare effects of rate changes on
individual customers were the goal of regulation, such information might assume
considerable importance. But the goal of regulation is to set rates that approximate
Response to TW/ABM-4 (designated into evidence by Presiding Officer’s Ruling on Commission
Designation of Responses to Interrogatories for Inclusion in the Evidentiary Record [POR No. R20061/100], issued November 2, 2006, but apparently not transcrivbed).
6
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what rates would be in a competitive market and that maximize total consumer
welfare. To achieve that goal, the only necessary cost information concerns the
costs of the regulated enterprise.
ABM is therefore unable to cite anyone more authoritative than Mr. Bradfield
for the proposition that it is essential to know about the mailer's non-postal costs in
order to correctly price a worksharing discount, because in fact no such authority
exists. All leading authorities on the economics of rate regulation (e.g., Vickery,
Baumol, Kahn, Panzar, Schmalensee, Sherman, Kleindorfer, Ordover, and Sidak)
agree that the opposite is the case. The Postal Service also agrees.7 Also, the
Commission itself has weighed in. Its Opinion in Docket No. R2000-1 states:
The Commission bases worksharing discounts on avoided
costs. . . . 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. . . . An important virtue of ECP
is that the mailer will perform the workshared 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 provider does the work resulting in the lowest cost to
society). Because ECP also lowers the real cost of mailing,
volume should increase in response to lower effective prices.
PRC Op. R2000-1, p. 390, ¶¶ 5034-35.8
7
See, for example, Tr. 7/1828 and generally 1818-33.
8
See also PRC Op. MC95-1 at III-29-30, ¶¶ 3074-75:
From the inception of worksharing discounts, the Commission has been
concerned with both equity and economic efficiency. It set the first such discount
at clearly capturable avoided costs. This provided a rate incentive to mailers
which would allow cost-based decisions on whether to engage in the worksharing
activity. In effect, the Commission was setting discounts in conformity with what
later became known as efficient component pricing. The discount approach led to
the lowest cost producer providing the service. This, in turn, minimized the cost
[footnote continues on next page]
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Although ABM casts scorn on any possible role for theory in guiding
ratesetting, it also acknowledges that “rate design changes to promote the
presentation of less costly mail are appropriate,” and it reiterates witness Cavnar's
statement that “American Business Media recognizes that some changes in the
existing rate design to provide both incentives and rewards for worksharing by
Periodicals mailers are inevitable and, in fact, in many respects desirable.” ABM Int.
Br. at 1, 6. However, the bulk of its brief is given over to a meandering discussion of
various aspects of co-mailing, co-palletizing, dropshipping, and shifting mail from
sacks to pallets, with the focus on whether existing incentives are "adequate."
Time Warner contends that the most that can be done and the best that can
be done is to identify important cost drivers to which mailers can respond, and to
reflect these drivers in rates. It has proposed to do just this, with tempering. Its goal
is not to bring about co-mailing, co-palletization, and dropshipping for their own
sake, and no level of these or other worksharing activities is deemed a priori to be
appropriate or adequate. The goal is to align rates with Postal Service costs, so
that when mailers decide to workshare or otherwise change their mail preparation, or
not to do so, the result will be as efficient as the circumstances permit.
Similarly, Time Warner's focus is not on getting mailers to shift from sacks to
pallets. Under appropriate rates, that will occur, but it is not in itself the goal.
Incentives to use sacks efficiently and to use pallets efficiently are just as important
as incentives to change from one to the other. And appropriate dropship discounts
of the workshare activity to society as a whole.
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for sacks and pallets cannot be given without separate rates for each that depend on
their makeup and their entry point.
All of these things–presorting, dropshipping, co-mailing, co-palletization,
adjustments in the use of containers, adjustments in bundle makeup, and changing
from one container to another–will occur in varying degrees under decisions by
mailers given appropriate rates, and the changes will bring about increases in
efficiency, but the goal is to set appropriate rates, not to provide incentives for
specific changes.
There have been a great many suggestions in this case, chiefly from ABM
and McGraw-Hill, that the proposed changes would be unfair, punitive, and broadly
destructive to some Periodicals publications because they cannot adopt more
efficient mailing practices. The same parties argue that the proposed changes are
unnecessary because so many publications are already adopting more efficient
mailing practices without superfluous rate incentives for doing so.
ABM and McGraw-Hill portray a world in which periodicals are divided into
two groups: those that are incapable of adopting more efficient practices no matter
what the incentive; and those that have already adopted or are fast adopting more
efficient practices and need no further incentive.9 The group that is unrepresented in
that portrayal—and exceedingly difficult to identify with particularity—is the large
population of Periodicals publications that would adopt more efficient practices,
lowering their own postage rates and the exorbitant costs of Periodicals mail, in
9
See Tr. 35/12062, 12099-100 (Bradfield), 12180, 12190 (McGarvy).
-19-
response to the incentives that Time Warner has proposed. Experience teaches
that this population will be large, even if it cannot readily be identified before the
fact.10
10
See Tr. 37/12712, where witness Mitchell discusses the dramatic increase in the efficiency of
Standard mail after rates that had been uniform nationally were changed in Docket No. R90-1,
consistent with principles of efficient component pricing, to allow lower rates for mail entered at
destination BMCs, SCFs, and delivery units.
-20-
III.
McGRAW-HILL CHARACTERIZES THE RECORD AND COMMISSION
PRECEDENT INACCURATELY
McGraw-Hill's brief seeks to establish that the Postal Service proposal does,
and the Time Warner and MPA/ANM proposals do not, "reflect[ ] the guidance and
expectations expressed by the Commission in Docket No. C2004-1" (a position that,
significantly, neither ABM nor the Postal Service has seen fit to assert). McGraw-Hill
Initial Br. at 11, 17. But the cause is hopeless. In attempting to establish that a
proposal which defines itself as a continuation of the status quo follows the guidance
of a Commission order which in fact concludes that "progress towards a more costbased structure is both possible and necessary," which "urges the Postal Service to
proceed forthwith to develop a rate design for Periodicals that better serves the
needs of all interested stakeholders," and which the Commission states "should not
be read as a ringing endorsement of the status quo,"11 McGraw-Hill is trying to
square the circle. McGraw-Hill is able to reach its conclusion only by resorting to
misleading characterizations of what the Commission said in Order No. 1446.
McGraw-Hill's central thesis is that, of the "three general alternatives to full
implementation of the Time Warner et al. proposal" described by the Commission in
Order No. 1446, the Commission recommended "(2) a 'piecemeal' approach of
gradually making changes over time," and that the Postal Service proposal is an
example of that approach. McGraw-Hill is incorrect on both counts. McGraw-Hill
states that:
11
Order No. 1446, at 5, ¶ 1013; App. B at 7, ¶ 13; and App. B at 14, ¶ 28.
-21-
the Commission appeared strongly to encourage the Postal
Service to adopt the piecemeal approach, declaring that the
Postal Service "should . . . evaluate the impact of potential
rate changes on various categories of Periodicals mail[] and
suggest incremental changes that will foster efficient mailer
practices without undue disruption."
Br. at 9-10 (emphasis added by McGraw-Hill).
McGraw-Hill suggests that by using the word "incremental" here, the
Commission was indicating its preference for the "piecemeal" approach and that
what the Commission had in mind by the "piecemeal" approach was something like
what the Postal Service has proposed. It should be noted, first, that in its discussion
of the three approaches, the Commission made a positive recommendation as to
only one of them: "The Commission recommends that the Postal Service consider
the opt-in approach for Outside County Periodicals" (Order No. 1446, at 49, ¶ 5012).
Second, all three of the approaches contemplate incremental changes: that is the
sense in which they constitute "alternatives to full implementation of the Time
Warner et al. proposal" (Order No. 1446 at 47, ¶ 5005). And third, an examination of
the full passage from which McGraw-Hill takes its quotation shows that what the
Commission meant there by "incremental changes" bears no resemblance to the
glacial pace of change proposed by the Postal Service:
[1015] The Commission sees many possibilities for
positive action that should not cause undue disruption. For
example, the proposed machinability distinctions in piece
charges would recognize the additional costs of processing
nonmachinable mail. These distinctions exist in other
classes and as flats automation progresses they will become
more important. They should be seriously considered within
the context of changing operations. The proposed presort
levels refine existing presort elements by creating additional
divisions. The additional dropship incentive would give
-22-
mailers the option of entering publications at BMCs. Each of
these elements have considerable potential.
[1016] The cost analyses that have been the focus in
this case reflect processing practices that are now somewhat
out of date. The Postal Service should update these
analyses, evaluate the impact of potential rate changes on
various categories of Periodicals mail, and suggest
incremental changes that will foster efficient mailer practices
without undue disruption.
Order No. 1446 at 5.
It is only by staying at a high level of generality that McGraw-Hill is able to
sustain the impression that Order No. 1446 and the Postal Service's proposal are
mutually compatible. A fair evaluation of whether the Postal Service's proposal
"reflects the guidance and expectations expressed by the Commission in Docket No.
C2004-1" (MH Br. at 11, 17) would pay some attention to the Commission's specific
recommendations and would ask what the Postal Service had done to implement
them. Among the recommendations in Order No. 1446 that McGraw-Hill fails to
mention (and that the Postal Service failed to pursue) are the following:
The Postal Service should review each of the rate design
features in the context of the current and planned processing
and transportation network for Periodicals mail. The focus
should be on quickly incorporating the most promising and
least disruptive components. [P. 6, ¶ 1019.]
[T]he Postal Service should provide Periodicals mailers with
notice that pieces that are nonmachinable will become
subject to rates that reflect higher processing costs. [P. 7, ¶
1019.]
The Commission encourages the Postal Service to
investigate the feasibility of incentives for entering
Periodicals mail at destination BMC facilities in terms of both
internal operations and service considerations, but also to
identify any potential physical impediments to widespread
BMC entry point use in this manner. [P. 7, ¶ 1019.]
-23-
The Commission recommends that the Postal Service
consider, and confer with a broad cross-section of
Periodicals mailers, concerning the potential benefits of
implementing a bifurcated opt-in rate schedule for Outside
County Periodicals. [P. 7, ¶ 1019.]
The Commission . . . urges the Postal Service, with the
cooperation of mailers, to develop a profile of all Periodicals
mail with information along the lines requested by Time
Warner et al. in interrogatories directed to witness Tang.
See, e.g., id. at 2199. This profile, along with the information
used to develop Periodicals mail preparation characteristics
(Docket No. R2005-1, USPS-LR-K-92) would be very useful
in Periodicals rate design. [P. 12, ¶ 2010.]
[S]ince the Byrne study is over 20 years old, the Postal
Service should consider measuring current productivities for
this operation [pallet cross-docking productivities]. [P. 21, ¶
4010.]
[T]he Postal Service should update and examine the
Stralberg model to determine its usefulness for future
ratemaking efforts. [P. 30, ¶ 4034].
The Postal Service should review each of the rate design
features in the context of the current and planned processing
and transportation network for Periodicals mail. The focus
should be on quickly incorporating the most promising and
least disruptive components. [P. 30, ¶ 4035.]
Mailers should expect the Postal Service to develop
additional machinability standards as technology evolves
and additional automated equipment is deployed. The Postal
Service therefore should look toward a rate structure that
recognizes the machinability of Periodicals mail, along the
lines suggested by Complainants. . . . As more Periodicals
mail becomes automated, savings should accrue and a rate
structure for recognizing cost distinctions should be available
to provide appropriate incentives for mailers. . . . [T]he Postal
Service should provide Periodicals mailers with notice that
pieces that are nonmachinable will become subject to rates
that reflect higher processing costs. [Pp. 34-35, ¶ 4045-46.]
The Commission recommends that the Postal Service
consider the opt-in approach for Outside County Periodicals.
[P. 49, ¶ 5012.]
-24-
There is ample evidence that supplemental mailings are
more costly to process than main file mailings. It is also the
case that supplemental mailings exhibit characteristics
similar to those of low-circulation publications. The Postal
Service should examine these mailings to determine the
extent to which witness Mitchell’s allegation that they are
below cost is true. The Postal Service may find it feasible to
develop classification language or a partial restructuring of
Periodicals rate design to treat these mailings in a different
manner than main file mailings. [Pp. 52-53, ¶ 5017.]
The Postal Service could begin to create an environment for
Periodicals that would encourage more efficient mailing
practices by conducting the study required to implement the
opt-in system. [App. C, p. 11, ¶ 20.]
McGraw-Hill's account of the Commission's conclusions and
recommendations in Order No. 1446 thus ends up being fundamentally misleading.
Its assertion that "the rate structure proposed by the Postal Service in this docket
largely reflects the guidance and expectations expressed by the Commission in
Docket No. C2004-1" (Br. at 11) is simply not correct.
McGraw-Hill's brief also presents a less than forthcoming characterization of
the record on another important matter, the standards for machinability in
Periodicals. McGraw-Hill states:
MPA/ANM witness Cohen . . . testified that she did not
propose in this case any rate differential for non-machinable
Periodicals mail because
looking at the difference between the AFSM 100
and the FSM 1000, knowing that the FSS
system is going to be coming into play if
machinability criteria are almost identical to the
1000, so since we are in a period of changing
definitions and this would be an entirely new
rate element, I didn't think that this was a good
time to put that in. . . .
Tr. 30/10175-76.
-25-
McGraw-Hill concurs with this reasoning.
Br. at 21.
McGraw-Hill does not mention that the same subject was discussed during witness
Stralberg's hearing on the next day:
Q Do you have an estimate or a feeling for what percentage
of publications that are machinable only on the FSM 1000
that are likely to be machinable on the FSS machines?
A First of all, I should mention the Federal Register notice
that came out on September 27 where the Postal Service
essentially summarizes the standards for implementing what
they're proposing in this rate case. They essentially are
addressing first class flats and standard flats and not
periodical flats at this time, but basically they're saying both
for first class flats and for standard flats that their criteria for
machinability from now on will be AFSM 100 machinability.
Let's see if I can see what they're saying for the standard. It
purportedly includes a new, not flat machinable NFM
classification for rigid flatsized pieces and for pieces that are
currently automation compatible only by meeting UFSM
1000 standards. In other words, they are proposing to
characterize those flats as nonmachinable. Now, they're not
doing this for periodicals yet.
Q You said from now on. Forever or until the FSS becomes
operational?
A Well, I don't know about that. I assume the Postal Service
wouldn't restrict their standard for machinability if they
thought pretty soon everyone will be machinable. The
standard for UFSM 1000 machinability now is basically that it
must be a flat. There really isn't much that's not UFSM 1000
machinable, and that is because that machine can work in
two ways, either with an automated feeder, which basically
takes the same type of mail that the AFSM 100 takes, or
flats can be keyed manually.
Tr. 31/10627-28.
Witness Cohen cited no source for her impression that machinability on the
FSS might be defined similarly to machinability on the FSM 1000, and Time Warner
-26-
has been unable to discover any indication by the Postal Service, either on or off the
record, that this is the case. In what may be an oblique allusion to Stralberg's
comments, McGraw-Hill declares that "[m]achinability standards and rate elements
for other mail classes are not necessarily germane to Periodicals," citing witness
McCrery's rebuttal testimony (USPS-RT-14) at 8-13 as its authority. But those
pages discuss flexibility standards and the exclusion of items such as CD's from the
machinable category. They do not say anything that makes it less improbable that in
two years time the Postal Service will either (1) fundamentally change the
machinability standards it is only now implementing in First and Standard classes or
(2) employ a fundamentally different standard for Periodicals flats, which will be
sorted on the same machines as First and Standard class flats.
As the Commission stated in Order No. 1446 (at 33, ¶ 4040):
The rate structures for First-Class Mail, Standard Mail, and
Package Services mail already contain rate elements for
mail that is more costly to process because of physical or
other characteristics that prevent machine processing.
Periodicals mail is the only traditional class in which
machinability is not explicitly recognized in the current rate
schedule.
The Commission concluded that the Postal Service "should look toward a rate
structure that recognizes the machinability of Periodicals mail, along the lines
suggested by Complainants." Id. at 34, ¶ 4045. Needless to say, Time Warner
agrees. Non-machinability imposes a heavy cost burden on the Periodicals class. It
is unfair to the vast majority of periodicals which are machinable (including 94% of
-27-
the very small publications, according to Loetscher's data12 [cite]) that they should
continue to bear these costs, most of which might disappear after machinability is
recognized in the rate structure.
Time Warner is also aware, of course, that recognition of the costs of nonmachinability accounts for many of the larger percentage increases that would occur
under its proposed rates. Time Warner does not support recognizing less than the
full costs of non-machinability. However, as stated in our initial brief, Time Warner
believes the most important issue is whether a more appropriate Periodicals rate
structure is put in place. The Appendix describes methods by which the
Commission could adjust Time Warner's proposed rates to mitigate the charge for
non-machinability, or other components of the proposed rates, if it believes that this
is necessary to make such a rate structure possible at this time.
12
See Response of Time Warner Inc. Witness Stralberg to Questions Posed at Hearing By McGrawHill (filed November 20, 2006, designated for inclusion in the evidentiary record by Magazine
Publishers of America, Inc., and Alliance Of Nonprofit Mailers Designation of Response Filed After
the Appearance of the Witness [filed December 13, 2006]), at 9.
-28-
IV.
ABM AND McGRAW-HILL MISLEADINGLY CHARACTERIZE THE IMPACT
OF TIME WARNER'S PROPOSAL ON SMALL PUBLICATIONS
According to ABM, "[o]f the three proposals, the Time Warner proposal
creates the greatest benefits for the largest mailers . . . and the greatest penalties for
the smallest." Int. Br. at 6. According to McGraw-Hill:
Assuming that the sample [data on 259 publications
provided by the Postal Service in response to POIR No. 19]
is valid, some 3000 small publications (of the roughly 30,000
members of the subclass) would incur rate increases of 20%
or more under the MPA/ANM proposal. [¶] The results are
even grimmer under the Time Warner proposal. Some 17%
(5000) of the small and medium-circulation publications
would incur rate increases ranging from 25% to 59% . . . .
Int. Br. at 20-21.
McGraw-Hill's statement is either disingenuous or extraordinarily careless,
because the record makes it entirely clear in a number of places not only that the
sample referred to is not valid but that there was no effort by the Postal Service to
make it statistically valid. When witness Tang provided the original version of the
data in Docket No. C2004-1, she testified that "[t]he 251 observations . . . were
randomly drawn to evenly populate the six size/density groups." Docket No. C20041, Tr. 6/2221.13 In its response to POIR No. 19 in the current docket, the Postal
Service, for various reasons, had to replace 87 of the publications used in Docket
Tang’s size/density scheme includes a breakdown of each size category into “high density” and
“low density.” But nowhere on the record in either docket has she specified the number of
publications, or the number of pieces, that are respectively classified “high density” or “low density”
within each size category. Such information would be essential in order to properly weight the
different publications in the POIR 19 data set. Tang’s definition of high and low density is not the
same as that used in witness Loetscher's LR-L-91.
13
-29-
No. C2004-1.14 In his response to POIR No. 19, Stralberg stated that "[b]ased on
data from the more comprehensive survey described in LR-L-91, particularly the
data provided by witness Loetscher in response to Time Warner interrogatories," the
percentage of very small publications "identified as non-machinable" in the updated
Tang data "is not likely to reflect accurately the characteristics of very small
publications." Tr. 31/10604.
Counsel for McGraw-Hill attempted on cross-examination to challenge
Stralberg’s conclusion that the LR-L-91 data are from a more comprehensive and
rigorous study than the POIR 19 data and that the former should be given greater
weight in determining the percent of non-machinability among publications of
different sizes. During the exchange that followed, Stralberg pointed out not only
that the selection of publications for the POIR 19 sample was less rigorous than for
the LR-L-91 study and was not designed to be statistically representative of the
Periodicals population, but also that the process of determining whether a
publication was machinable was much less rigorous, particularly for small
publications:
Q I mean, if you don't know how many publications he
[Loetscher] surveyed how can you be certain it's a more
comprehensive survey?
A Well, let's look at it this way, okay? The Library
Reference No. 91 was the main data set that the Postal
Service collected to support their periodicals proposal in this
Revised Response of the United States Postal Service to Presiding Officer’s Information Request
No. 19 [Errata] ( filed October 17, 2006). A count of the entries marked as “RPL” in the final version of
the Postal Service’s POIR 19 data indicates that 87 publications were introduced that were not part of
the C2004-1 sample.
14
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case. They had considerable time to do it. It was
supposedly a scientifically well-designed sample that he
used and his testimony documents how he did it, okay?
They had a whole year to do it. As I understand it the
mail.dat information they collected wasn't just for a single
publication, but over an extended period. Some of what I
say in here is in fact confirmed by the Postal Service's
answer to this recent Interrogatory No. 7, parts (c) and (d).
We asked them if they applied the same criteria of
machinability here as they used in the LR- 91. Their answer
is yes, but - - okay. Let me read this. This is on page 2 of
the Postal Service's answer. In LR-L-91 for publications with
annual circulation less than 15,000 pieces BMEU clerks
were asked to determine if the piece met AFSM 100
machinability standards and provide actual measurements of
length, height and thickness of the publication.
Then they go on to describe all the other checks they made
to make sure that this really was correct. In order to come
up with this data that they provided now [the updated Tang
data] they couldn't do that. They had to get some data in a
hurry and they just called people and asked them what they
remembered about such and such publication.
So in other words the rigor with which they collected the LR91 data seems to have been quite a bit larger.
Q In the portion of the interrogatory response that you just
read it refers to publications with annual circulation less than
15,000 pieces.
A Right. Uh-huh.
Q That would be a small publication under Witness
Loetscher's definition, correct?
A Well, he used several size criteria. I think 15,000 was one
of the borders. He also had an under 5,000 category and a
5,000 to 15,000 category. Then we asked for data
specifically for the publications under 1,000 circulation.
Q But that's not data that he had surveyed specifically. You
simply asked him to break that out of -A His original size category was zero to 5,000. Because in
the complaint case Witness Tang had provided data
-31-
specifically for publications under 1,000, so we asked him to
break that out which he did and that is that Table 15, I
believe it should be 15, that you asked about.
Q But again, he didn't set out as you understand it to survey
very small publications defined as having mailed circulation
of less than 1,000?
A He set out to survey publications of all sizes from very
small to very large. Then he divided them into strata for the
purpose of aggregating. Now, we asked him to break up his
smallest strata which was zero to 5,000 and to break it up
into publications under 1,000 and those from 1,000 to 5,000.
Tr. 31/10644-45.
In the Response of Time Warner Inc. Witness Stralberg to Questions Posed
at Hearing By McGraw-Hill (at 9), Stralberg addressed this subject again. He
provided a table, based on Loetscher's data, showing "Machinability Of Outside
County Flats Per Circulation Size," and then commented:
The above numbers are, as discussed above, based on a
rigorous examination of machinability and a scientific
stratified sampling approach as described by witness
Loetscher (USPS-T-28). I was therefore particularly
surprised to find that among the 42 very small publications
on which the Postal Service provided data in response to
POIR 19, twelve, or 28.6%, rather than the 6.6% indicated
for this stratum in Table 4, are identified as non-machinable.
The Initial Brief of the Postal Service did not comment on Stralberg's conclusions
regarding the representativeness of Loetscher's data and the unrepresentativeness
of Tang's.
The difference between the 28.6% and the 6.6% referred to by Stralberg is
highly significant, because, as he demonstrated in his POIR 19 response, almost all
machinable publications with circulation below 1,000 would pay less postage under
the Time Warner proposal than under the Postal Service’s proposal, in many cases
-32-
much less. If indeed only 6.6% of such publications are non-machinable, as the LRL-91 data indicate, it follows that the vast majority of the more than 15,000
publications with circulation below 1,000 would be better off with Time Warner’s rate
proposal. This is a very different conclusion from those presented in the briefs of
ABM, McGraw-Hill, and the Postal Service.
Of the 30 “very small” publications identified by the Postal Service as
machinable in its POIR-19 response, only four were found to have higher increases
under the Time Warner proposal. In each of those four cases, Stralberg identified
the unique circumstances that would cause the high increase, circumstances that in
all likelihood would change if the more cost-based Time Warner rates were to be
implemented.15
McGraw-Hill’s false assertion of statistical significance is not the end of its
and ABM’s mischaracterizations of the likely impact of Time Warner’s proposal.
ABM’s claim that Time Warner's proposal would be the best for the large
publications and worst for the small ones (Br. at 6) is also not true. Assuming no
The four publications were numbered 194, 197, 201 and 258 in Stralberg’s response. The first
three are “high density” very small publications that, for unknown reasons, are entered far from their
destination. The most extreme example is No. 194, which enters all of its copies in Zone 6, i.e.,
between 1,000 and 1,400 miles from their destination. Response to Questions Posed at Hearing, at
17-18. Producing a publication so far from all its readers and expecting the Postal Service to absorb
all the extra transportation and handling costs will lead to higher postage under cost-based rates.
Stralberg identified another publication, very similar to No. 194 except that its copies are entered
locally. It would experience a decrease in postage under Time Warner’s proposal. Similarly, No. 197
is also small and high density but enters all of its volume in Zone 4 and would therefore pay more
under cost-based rates.
15
The last of the four, publication No. 158, uses three sacks for 20 pieces. Its postage would increase
44% under the USPS proposal and 46% under the Time Warner proposal. As witness Taufique
pointed out during his cross-examination, the 20 pieces are the Outside County residue from an InCounty publication, which would pay much lower rates for its In-County copies.
-33-
change in mail preparation or entry practices, the medium-sized business-tobusiness publications represented by ABM would be more likely to experience a
higher increase under Time Warner’s proposal than would either very large or very
small publications. One reason for this appears to be that the percentage of nonmachinability is highest for medium-sized publications. See Response to Questions
Posed at Hearing, Table 4.
But Stralberg's response to the questions posed by McGraw-Hill at his
hearing also described in detail a number of other factors affecting impact. The fact
that Stralberg provided a realistic discussion of the many ways in which publications
might change and likely would change in response to a different set of price signals
is ignored completely by ABM and treated as a defect by McGraw-Hill, which states:
The greater adverse rate impact under the Time Warner
proposal has no clear antidote for many mailers, not even
co-mailing.12
12
The rate impact of the Time Warner proposal appears to be driven by
diverse factors, including machinability, presort level, pre-barcoding,
number of bundles, and use of firm bundles, in addition to palletization,
dropshipping and number of mail pieces per container.
Br. at 14 & n. 12.
But all these factors have a role in determining the impact of Time Warner’s
rates because Stralberg and Mitchell recognized that all these factors affect the
Postal Service’s costs and set out to design rates that would help reduce those
costs, to the benefit of all members of the Periodicals class. It is true that there is no
single “antidote,” certainly not co-mailing, that will fix all problems. However, as
Stralberg points out, in the case of ABM's mostly medium-sized member
publications, especially the large majority that are not time-sensitive, co-mailing may
-34-
really be promising. For those that are non-machinable for any reason other than
excessive weight, adopting a machinable format that is consistent with the Postal
Service’s future automation plans may be the most promising way of reducing their
costs to the Postal Service and, under a properly cost-based rate structure, reducing
their postage costs as well.
Time Warner fully supports the tempered Periodicals rates proposed by
witness Mitchell in TW-T-1 and does not advocate any further tempering of the
recognition of costs. For reasons explained above, we believe the vast majority of
small publications will adapt to and benefit from these more cost-based rates. The
rates we propose will also lead to a healthier Outside County subclass, benefiting
the Postal Service and all mailers.
-35-
V.
TIME WARNER'S PERIODICALS RATE PROPOSAL BEST COMPORTS
WITH THE RELEVANT STATUTORY FACTORS AS INTERPRETED BY
THE COMMISSION
ABM, McGraw-Hill, and the Postal Service all assert that the Postal Service's
rate proposal is "the most compliant with [the] statutory factors" (ABM Int. Br. at 5),
but none of them discusses those factors in any but the most cursory way. ABM's
position ultimately comes down to the following:
The rate preference long provided to periodicals is to
promote a broad and diverse periodicals class, so care must
be taken to assure that, to the best of the rate setter's ability,
rate changes do not produce disproportionate increases for
small publications, or widely dispersed publications, or, for
that matter, for very large publications.
Br. at 7.
This is essentially the position taken by the Postal Service and McGraw-Hill as
well.16 But it lacks any support either in the Act or in logic. If rates are not currently
well aligned with costs, the only way to get the two into alignment is through
"disproportionate" increases. The Act may rightly be read to discourage unfair
increases, but there is nothing inherently unfair about "disproportionate" increases,
and there is nothing in the Act that discourages "disproportionate" increases.
Indeed, the statutory factors that involve consideration of something other than
"proportionality" (which is to say, all of them) have the natural tendency to produce
disproportionate increases.
16
See Tr. 39/13525 (Taufique); McGraw-Hill Int. Br. at 23.
-36-
A similar flaw in reasoning underlies the Postal Service's assertion (Br. at
359) that "[b]ecause the Periodicals cost coverage is so close to 100 percent, only
the most effective discounts can be added." The truth here would instead seem to
be something like: since coverage is so close to 100%, every failure to recognize
cost avoidance in the rates means that some mail will be carried below cost at the
expense of other mail in the class, so that all potential discounts that are justified by
demonstrated cost avoidance should be put in.
A similar inattention to the actual factors enumerated in the Act, and the
Commission's precedents interpreting those factors, lies at the heart of witness
Taufique's argument that because the cost coverage of Periodicals is so low, "The
rate design for [P]eriodicals should not have the variety of impacts, of significant
impacts, that we're looking at in standard mail." Tr. 39/13525. Rather, as the
subclass markup approaches zero, the probability will approach 100% that any
individual component of the rate design that fails to reflect costs will result in some
mail in the subclass having a negative implicit markup and being subsidized by other
mail.
It is implicit in the positions of ABM, McGraw-Hill, and the Postal Service that
"disproportionate" percentage increases are presumptively unfair, while intra-class
cross-subsidization as a result of some mail being carried below cost poses no
problems of fairness. That is entirely contradictory to the Commission's settled view
of the matter. In the most recent fully litigated rate case, the Commission repeatedly
made clear that its approach to the question of fairness in pricing is very nearly the
opposite of what the Postal Service now suggests. The Commission said:
-37-
Rate design for a subclass can be thought of as setting the
implicit percentage markups for each rate category . . . . The
Commission begins the rate design process assuming equal
implicit markups. This is a neutral starting position which
seems to be implied by § 3622(b)(1), a fair and equitable
schedule. It is consistent with the Commission's general
policies that the rates for each rate category be above cost;
that rates reflect the costs developed in the record; and that
rate design results in identifiable relationships between rate
categories.
PRC Op. R2000-1, ¶ 5533 (emphasis added).
After considering the coverage on Standard mail above and below the break point,
the Opinion in Docket No. R2000-1 concluded:
The Commission hopes that reliable information on implicit
markups may make it possible to calculate the total amount
of revenue that should be obtained from pieces above and
from pieces below the break point. This would be an
important contribution to ensuring that intra subclass rate
relationships for Standard Mail are fair and equitable. The
separate issue of the best way to design rates for the pieces
above and below the break point might also be addressed by
studying implicit markups.
PRC Op. R2000-1, p. 392, ¶ 5540 (emphasis added).
And in regard to the Residual Shape Surcharge in Standard, the Commission said:
Several objections raised on this record were also presented
and resolved in Docket No. R97-1. In essence, these
include arguments that there is no cost coverage
requirement below the subclass level; that costs should not
be “blended”; and that other mailers have not objected to
“averaged” costs. The Commission has once again
considered the validity of these arguments, but finds no
sound reasons to depart from its previous conclusions. In
general, the Commission continues to believe that overall
considerations of fairness and equity and an interest in costbased rates overcome opponents’ objections.
PRC Op. R2000-1, p.357, ¶ 5436 (emphasis added).
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The missing link in the arguments of ABM, McGraw-Hill, and the Postal
Service is any evidence that the rates proposed by Time Warner would be
detrimental to "a broad and diverse periodicals class," ABM Br. at 7. No evidence
for believing that this is so has been brought to the Commission's attention. As in
Docket No. C2004-1, ABM's witnesses show something like disdain for the
presentation of concrete facts or methodical analysis, relying wholly on broadgauged statements of opinion. McGraw-Hill focuses much more of its discussion on
facts and evidence, but it does not provide a fair representation of either. And the
Postal Service offers pleasant-sounding generalities that fail to convey the nature of
the link between the facts it adduces and the proposal it endorses.
In this proceeding, Time Warner has heeded the Commission’s
recommendations in Docket No. C2004-1, provided solid evidence from witnesses
whose caliber is well known to the Commission, and proposed a cost-based rate
structure that will serve the entire Periodicals class well. We strongly recommend
that the Commission approve Time Warner’s proposed rate structure, with such
modifications as the Commission deems necessary in order to effectuate the policies
of the Act..
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Respectfully submitted,
s/
John M. Burzio
Timothy L. Keegan
Burzio & McLaughlin
Canal Square, Suite 540
1054 31st Street, N. W.
Washington, D. C. 20007-4403
Telephone: (202) 965-4555
E-mail: [email protected]
COUNSEL FOR
TIME W ARNER INC.
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APPENDIX
METHODOLOGY FOR FURTHER TEMPERING OF
TIME WARNER'S PROPOSED RATES
Time Warner fully supports the tempered Periodicals rates proposed by
witness Mitchell in TW-T-1 and does not advocate further tempering the recognition
of costs. However, Time Warner recognizes that the Commission may reach a
different conclusion. We have therefore endeavored to place at the Commission's
disposal the means to further mitigate the impact of the proposed rates as it feels
necessary.
In his response to ABM/TW-T1-2 (Tr. 31/10464-65), Mitchell provided the
following instructions for adjusting the percentages for passthrough of bundle, sack,
and pallet costs, the costs represented in the "presort tree," and the costs of nonmachinability:
[T]he effects of changing the degree of moderation can be
developed using my workpaper, WP-Mitchell-3F-O6.xls. Go
to sheet 'Inputs'. Changing the figure in cell D123 changes
the passthrough on the bundle costs. Changing the figure in
cell D148 changes the passthrough on the sack costs.
Changing the figure in cell D177 changes the passthrough
on the pallet costs. In addition, the passthrough for any
selected cell or group of cells in the bundle, sack, and pallet
charges may be adjusted by changing the proportions in
cells C124 through C197, although it should be noted that
these compound with the passthroughs selected in the
corresponding cells in column D. Withdrawing the averaging
across origin entry points can be done by following the
instruction in cell J146 and cell J175 for the sack costs or the
pallet costs, respectively. The passthroughs relating to nonmachinability can also be adjusted, by changing the center
figures in the yellow boxes in the presort tree, in cells like
G54. Any and all of these can be changed, one at a lime or
in groups, and the new rates will show on the 'Rates' sheet.
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Once alternative rates are obtained, differences between
them and the rates I propose can be obtained by subtraction.
All the flats mail flow models presented in the rate case analyze the costs of
machinable and non-machinable flats separately. But whereas the other models
average the costs of machinable and non-machinable flats within each rate category
before presenting their results, which then are used as inputs to rate design, the
Time Warner model presents separate results for machinable and non-machinable
flats in each category. In the resulting rates, this deaveraging leads to considerable
variation in impact: many publications whose flats are not machinable today would
experience a large increase in postage.
If the Commission wishes to recognize the cost of non-machinability but
believes that a full passthrough of the cost differential would create too great a “rate
shock” on some publications, it might wish to mitigate the impact by passing through,
for example, only 50%. One method of doing so is described by witness Mitchell in
the passage quoted above. However, employing that method without also affecting
the passthrough of other cost differentials, e.g., those based on presort level or the
presence of a barcode, may pose difficulties.. The following is a simple way to
mitigate the passthrough of the cost of non-machinability, without affecting other
things such as the allocation of costs between presort levels.
This tool will do only one thing, partially deaverage the costs of machinable
and non-machinable flats within a rate category. It is a form of passthrough–within a
rate category a portion of the cost of non-machinability is passed through to the non-
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machinable flats, while the remaining costs continue to be shared by all the flats
within the category.
Consider two groups of flats that are similar except that one group is
machinable and the other is not (i.e., they are in the same subclass, have the same
level of presort, and either all or none of them have a pre-applied barcode). Let VM
and VNM be the number of flats in each group and CM and CNM their unit costs. The
average unit cost is then:
CA = (VM*CM+VNM*CNM)/(VM+VNM)
This is the unit cost one would use if one simply ignored the cost differential
between the two groups, as the Postal Service’s and the MPA/ANM models do with
regard to flats machinability.
It is possible to reflect only some of the cost differential, e.g., a fraction F,
where F is between zero and one, but to do so without changing the average unit
cost (CA) of the two groups, by assigning the following unit costs to the two groups:
CM,F = CA +VNM*F*(CM-CNM)/(VM+VNM); and
CNM,F = CA +VM*F*(CNM-CM)/(VM+VNM)
It can easily be verified that the volume weighted average of the two modified
costs remains CA, and that the differential between CM,F and CNM,F is F times the
differential between CM and CNM. It can also be verified that if F is zero (i.e., no
passthrough of the cost differential), then both costs become equal to the average
(CA), and that if F is equal to one, then CM,F=CM and CNM,F=CNM.
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There are several ways the above can be applied to reduce the passthrough
of the cost difference between machinable and non-machinable flats in the rate
design model presented by witness Mitchell. Perhaps the easiest way is through
spreadsheet R2006Volumes-Rev.xls in Library reference TW-5 Revised. This
spreadsheet contains the per-piece unit costs that are used in Mitchell’s rate design
spreadsheet, to which it is linked. The unit costs used in Mitchell’s rate design are in
cells G37-G54 on worksheet ‘Pc costs’. The corresponding test year Outside
County volumes are in cells P7-P24 on worksheet ‘Pieces’. The unit costs and piece
volumes are arranged in pairs of non-machinable and machinable categories with
otherwise similar characteristics.
Table 1 below shows the results of applying the method described above to
the unit costs used by Mitchell. For example, the first two categories represent flats
in mixed ADC bundles without pre-barcoding. According to Stralberg’s cost model,
the per-piece processing costs for such pieces are 50.75¢ if non-machinable but
only 33.81¢ if they are machinable, as shown in the third table column.17 The
differential in this case is 16.94¢. In the last column, the difference has been
reduced to half. The resulting costs still have the same volume-weighted average.
Applying Mitchell’s rate design to these cost estimates would produce the same
overall revenues but a smaller rate increases for publications that currently use a
17
Note that the costs shown in the table are not the rates Mitchell designed, only the per-piece mail
processing unit costs that went into his rate design. Note also that these costs do not include the
costs of sorting the bundles or the containers in which these pieces were originally presented to the
Postal Service.
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non-machinable format. It would, of course, raise the postage for machinable
categories.
Table 1: Example Of Mitigating Impact Of Cost Differentials Due To NonMachinability (Differential Reduced 50%)
Bundle
Piece
Modeled
Mitigated
Costs
Test Year
Costs
Level
Type
($/piece)
Volumes
($/piece)
MADC
NBC/NM
$0.5075
1,981,562
$0.4316
NBC/M
$0.3381
17,009,405
$0.3469
BC/NM
$0.4574
2,915,249
$0.4014
BC/M
$0.3095
9,132,816
$0.3274
ADC
NBC/NM
$0.4117
10,927,535
$0.3583
NBC/M
$0.2798
46,395,549
$0.2923
BC/NM
$0.3719
23,827,617
$0.3250
BC/M
$0.2587
115,946,182
$0.2684
3d
NBC/NM
$0.3484
68,750,964
$0.3163
NBC/M
$0.2548
149,754,482
$0.2695
BC/NM
$0.3171
195,831,056
$0.2845
BC/M
$0.2369
845,304,673
$0.2445
5d
NBC/NM
$0.2070
92,831,283
$0.1991
NBC/M
$0.1818
157,796,440
$0.1865
BC/NM
$0.2059
420,474,080
$0.1924
BC/M
$0.1733
2,098,946,912
$0.1761
CR
NM
$0.0751
485,008,677
$0.0749
M
$0.0746
3,468,792,818
$0.0746
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