DOCKET SECTION
$2 j
BEFORE THE
POSTAL RATE COMMISSfplj
WASHINGTON
D.C. 20268-0001
POSTAL
RATE AND FEE CHANGES,
Rebuttal
Docket No. R97-1
1997)
Testimony
DR. JOHN
of
HALDI
on Behalf of
VAL-PAK DIRECT MARKETING
SYSTEMS, INC.,
VAL-PAK DEALERS’ ASSOCIATION,
INC., AND
CAROL WRIGHT PROMOTIONS,
INC.
William J. Olson
John S. Miles
Alan Woll
John F. Callender, Jr.
WILLIAM
J. OLSON, P.C.
8180 Greensboro Dr., Suite 1070
McLean, Virginia
22102-3823
(703) 356-5070
Counsel for Val-Pak Direct
Marketing
Systems, Inc.,
Val-Pak Dealers’ Association, Inc.,
and Carol Wright Promotions, Inc.
March
9, 1998
VPICW-RT-I
BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON
D.C. 20268-0001
POSTAL
RATE AND FEE CHANGES,
Rebuttal
1997)
IDocket No. R97-1
Testimony
DR. JOHN
of
HALDI
on Behalf of
VAL-PAR DIRECT MARKETING
SYSTEMS, INC.,
VAL-PAK DEALERS’ ASSOCIATION,
INC., AND
CAROL WRIGHT PROMOTIONS,
INC.
William J. Olson
John S. Miles
Alan Wall
John F. &Render,
Jr.
WILLIAM
J. GLSON, P.C.
8180 Greensboro Dr., Suite 1070
McLean, Virginia
22102-3823
(703) 356-5070
Counsel for Val-Pak Direct
Marketing
Systems, Inc.,
Val-Pak Dealers’ Association,
and Carol Wright Promotions,
March
9, 1998
Inc.,
Inc.
TABLE
OF CONTENTS
Page
AUTOBIOGRAPHICAL
I.
II.
III.
PURPOSE
SKETCH
OF TESTIMONY.
WITNESS CHOWN’S
OF AWRIBUTABLE
.. ... .... . .
. .
.. . .. . . .
PROPOSED REARRANGEMENT
COSTS . . . . 1. . . . . . .
WITNESS CLIFTON’S PROPOSAL TO REDUCE
RATES FOR THE SECOND AND THIRD OUNCE
OF WORKSHARED
FIRST-CLASS
MAIL AND
INCREASE
RATES FOR STANDARD A htAIL BY A
CORRESPONDING
AMOUNT
. .
.
.
.
. 1. .
1
1
2
18
1
AUTOBIOGRAPHICAL
Please see VPICW-T-1,
3
SKETCH
pp. 1-2, Tr. 27/15040-41.
I. PURPOSE
OF TESTIMONY
4
This testimony
is divided into two distinct
5
Part I critiques
witness
6
rearranging
7
and explains
8
Commission.
attributable
10
(ABANAA-T-l),
11
subsidy
12
proposal
(NAA-T-1)
proposed method of
costs for purposes of assigning
institutional
costs
why that method should not be used or adopted~ by the
Part II critiques
9
Chown’s
parts.
certain
in particular
of Standard
aspects of the testimony
his unsupported
assertions
A Mail, as well as his unfounded
to change the coverages on First-Class
by witness
Clifton
concerning
and unjustified
and Standard
A Mail
cross-
2
1
2
3
II. WITNESS
Description
of Chown’s
4
Witness
5
“rearrangement”
6
purposes
7
substantially
8
described
9
rearrangement
10
of attributable
NAA-T- 1, proposes a
subclasses of mail, solely for
costs. Her rearrangement
from actual attributable
costs that it justifiably
Table 1 compares actual attributable
of those costs, which her testimony
differs so
can be
costs with her
calls “weighted
costs.”
It is worth noting
that witness
12
the overall level of attribution.
13
aspect of her proposal
14
columns
15
individual
16
indicated
17
percent
18
costs between
institutional
as dramatic.
REARRANG~EMENT
COSTS
Proposal
Chown, in her direct testimony,
of assigning
attributable
11
CHOWN’S PROPOSED
OF ATTRIBUTABLE
Chown’s methodology
Perhaps the easiest way to visualize
is to observe,that
this
the totals shown at the bottom of
1 and 2 of Table 1 are exactly equal.
amounts
does not change
At the same time, the
shown on each row of Table I differ substantially,
by the percentages
in column 3, which vary drastically
as
from 27
to 210 percent.
The methodology
in witness
used to develop the amounts
19
described
20
Suffice it to say that under witness
21
“weighted
attributable
Chown’s testimony,
shown in column 2 is
and need not be repeated
Chown’s methodology,
here.
the total of her
costs” will always equal total actual attributable
costs
3
1
Consequently,
in my opinion,
it is appropriate
2
a rearranging
of attributable
costs. Witness Chown recommen.ds that these
3
rearranged
4
coverages used to assign all institutional
5
mail.’
6
actual attributable
7
revenues for each subclass.
attributable
costs be used as the basis for developing
Under her scheme, institutional
TT. 25113381.
as
the
costs to each class and subclass of
costs thus assigned wauld be added to
costs, which sum would become the basis of target
1
to describe her methodology
4
TABLE
2
3
4
Actual
1
and Weighted
Attributable
Costs by Function
Test Year After Rates
(000)
5
6
7
8
9
10
Actual
Attributable
costs
(1)
11
12
13
16
17
18
Sources:
Column
Column
1, Exhibit
2, Exhibit
NAA-lB, p. 1.
NM- 1D.
Witness
Chown’s
Weighted
Attributable
costs
(2)
Weighted
as a
Percent
of Actual
(3)
5
1
Witness
2
Chown’s
Witness
Weighted
Attributable
Chown’s weighted
Costs
attributable
3
institutional
4
window
5
costs which are not “identifiable”
6
“system-wide”
7
witness
8
piggybacked)
9
attributed
10
functions
11
had no “identSable”
12
Chown’s methodology
13
identical.
None of the four functions
14
the higher
the level of attribution,
15
is weighted.
16
weight
costs are derived. from the
costs that she considers to be ‘iden&able”
service, mail processing,
institutional
transportation,
and delivery.
costs. The actual attributable
include
were 100 percent
institutional
are termed
costs in each of
both direct and indirect
costs, and her “identifiable”
direct and indirect
Institutional
with any of these four functions
Chown’s four functions
(i.e.,
costs indude
non-
costs. If all direct costs in any one of these
attributable,
institutional
and the function
costs whatsoever,’
actual and weighted
Conversely,
with four functions:
also
then under witness
attributable
has 100 percent
in question
costs would be
attributable
costs, but,
the lower the factor by which the function
the lower the level of attribution,
the greater the
that is assigned.
2
Under witness Chown’s methodology, attributable costs within each
function include indirect piggybacked attributable costs, and her “identifiable”
institutional costs include institutional costs associated with piggybacked costs.
Thus, even if mail processing is treated as 100 percc.nt. attributable, the indirecl.
costs that are piggybackad onto mail processing could give rise t,o “idrntifial~~lr”
institutional costs.
6
1
2
The Assignment
Witness
of Institutional
Costs
Chown proposes “that the Commission
3
institutional
costs” -
4
institutional
costs -
5
using actual attributable
6
continue
7
3622(b) of the Act when determining
8
same time, she is “not proposing
9
to each subclass of mail” nor is she “proposing
that is, the sum of “identifiable”
costs.“3 She further
to apply its judgmental
assessment
of the factors under Section
Witness Chown Builds Her Judgment
Rate-Making
Criteria
into the Basis
of Institutional
Cost Assignments
At the
of institutional
costs
any specihc ‘shift’ of
costs from one subclass to another.“’
The critical
question
that naturally
15
Chown hope to obtain from her proposal,
16
institutional
17
question,
on
arises is: what result
costs should in fact be assigned?
it is useful to explore two “extreme”
attributable
does witness
since she declines to indicate
hypotheticals.
adopted witness
costs, but after due consideration
3
Tr. 25113381 (emphasis in original).
4
Tr. 25/13382.
5
Tr. 25113381.
how
In order to analyze this
First, let us suppose that the Commission
weighted
cost assignments.“‘l
any specific assignment
11
12
13
19
proposes “that the Commission
institutional
institutional
18
and “system-tide”
“to subclasses of mail based upon the fact,ors in the Act
10
14
assign total
Chown’s
it decided to retain
7
1
the Postal Service’s proposed contributions
2
class and subclass of mail.
3
mark-ups
4
the Commission
5
interprets
6
arrive at and justify
7
acknowledges
that use of her weighted
8
the possibility
of this outcome, it clearly is not her desired result
on weighted
Clearly,
attributable
as witness
and applies the various
the new mark-ups.
dramatically,
and
the way it
Although
attributable
witness
Chown
costs doe:s not preclude
let us suppose that the Commission
to interpret
11
Service has in its filing,
12
Postal Service has proposed to witness
13
Under
14
some subclasses
15
would rightly
16
altered
outcomes.
17
witness
Chow&
18
criterion7
were
the non-cost factors of the Act in the same way as the Postal
this hypothetical,
7
Chown herself points out, the
non-cost factors of the Act in order to
10
G
costs from each
cost would need to be quite different,
would have to alter, perhaps
As our second hypothetical,
9
to institutional
and therefore
apply the same mark-ups
Chown’s weighted
it is clear that the institutional
of mail would be dramatically
ask what in witness
different.”
Chown’s methodology
attributable
or it has implicitly
has implicitly
given extremely
costs.
costs assigned to
Concerned
parties
has caused such
The answer can be viewed in one of two ways.
methodology
that the
Either
added a new rate-making
heavy and unprecedented
Tr. 25/13421, 11.7-8.
Witness Chown does not explicitly formulate any such criterion, but. it;
would embody her repeated desire to “reflect the benefit each class receives from
[identifiable] institutional costs.” Tr. 25/13421, 11.23-24. In fact,, witness CbJwn
explicitly denies that her methodology adds a new criterion t,o the Act. Tr. 25113424,
11.18-19.
8
1
weight
to her particular
interpretation
of one of the existing
statutory
2
3
To the extent that witness
Chown’s methodology
4
implicitly
5
inappropriate
6
examine,
in light of the existing
criteria,
7
following
explanatory
which she appeared
8
motivation
adding
a new non-cost criterion
of the Act. Let us therefore
her methodology
along with the
to offer ,as the essential
for her change:’
9
10
11
I think it is unfair to ask people with high mail processing
transportation
costs to contribute large amounts to the
institutional
costs of the delivery function.
12
In focusing
on “fairness,”
13
centered
on her interpretation
14
opinion,
her methodology
15
her interpretation
16
analysis
17
witness
Chown’s methodology
of criterion
1, fairness
would place unprecedented
of criterion
and application
Assertions
of the non-cost criteria
to the contrary
methodology
19
application
of the non-cost criteria
20
discretion,.
Rather,
21
Commission
of attributable
and un’due emphasis
witness
Clnown’s
costs do not leave
spin on criterion
even begins to examine how institutional
Tr. 25/13430, II. 17-19.
begins its
of the Act to the Commission’s
she applies her narrow
In my
of the Act.
notwithstanding,
and her rearrangement
and
is clearly
and equity.
1, even before the Commission
18
8
as
to Section 3622(b), :it clearly is
and must be rejected as violative
statement
can be understood
unfettered
1 before the
costs ought to be
on
9
1
assigned.
Witness
Chown does not say whether
2
also get a second round of application
3
appears to view “fairness”
4
other than the one she attributes
5
costs with certain
6
attributable
7
unfair,
8
reasonable
9
heavily
10
highly
in determining
to it-the
subclasses of mail.
coverage factors.
identification
For example, ifit
to criterion
favors not loading
prepared
of what is fair and
6, degree of mailer
institutional
or application
of institutional
would have to lean over backwards
consideration
She
were to rearrange
costs in a way that reflects her perception
the Commission
1 would or should
as though it could have no meaning
to give
preparation,
costs on those mailers
which
who enter
ECR mail, often at DDUs.
In sum, while ostensibly
11
criterion
discretion
leaving
undiminished
to exercise its judgment
the Commission’s
12
ultimate
13
witness
14
its own into the basis she would have the Commission
15
weighted.
16
undoubtedly
17
judgments,
18
Should the Commission
19
be forced either to yield, at least partially,
20
fairness,
21
interprets
Chown’s proposed
attributable
approach builds
on institutional
a large judgment.al
is meant to exercise a prior influence
component
use -- namely,
costs. Witness Chown’s proposed
in line with her personal
cost assignments,
of
heI
approach
on the Cammission’s
view of what is fair and equitable.
opt to use her rearranged
attributable
to her personal
or else it would have to revamp totally
the manner
and applies the non-cost factors of the Act.
costs, it would
standards
of
in which it
10
1
2
3
Witness Chown’s Methodology
Would
Introduce
a Middle Tier of Costs
Into the RateSetting
Process
4
By witness
Chown’s own admission,
she lacks any causzal basis by
5
which her “identifiable”
6
of mail.
7
and the Supreme
8
distributing
9
mail all costs “through
variability
10
inferences
to be the consequence
11
(ii) the Commission
12
services that signticant
13
that may reasonably
14
cost-of-service
15
subject to discretionary
16
in the Act,.“’ Despite rejection
17
decision, it would appear that witness
18
the Commission
19
somehow bears responsibility
20
institutional
institutional
costs can be attributed
to any subclass
She is of course aware that at one time a lower court first mandated,
9
Court later rejected, the following
costs: (i) first, the Commission
of causation
of providing
to each class of
okher reasonable
the service”;
costs of the IPostal Service
to each on the basis of bl3st available
and (iii) finally,
allocation
method for
among the mail cla.sses and
of all remaining
be assigned
estimates”;
must attribute
theory as well as through
“must then distribute
portion
“three-tier”
“the residuum
of costs is
in accord with the noncost factors set forth
of the middle tier by the Supreme
Chown nevertheless
should use a methodology
Court
feels strongly
that
which ensures that each subclass
for its “fair share” of her “identifiable”
costs, which in her view can be reasonably
assigned
by
see &&&s’n
of ChetinJ: Card Puhli&
v. postal
Service, 569
F.2d 570, 589 (D.C. Cir., 1976) (emphasis added), mandat.ing the Ybree-tier”
method. This methodology was disapproved by the Supreme Court, in iVA(X:P v.
ce.I 462 US 810 (1983).
11
weighting
service
the attributable
estimates,
Her “weighted
a clever, thinly-disguised
the Supreme
middle
7
8
9
10
attributable
effort to reinstitute
the type of approach
costs by mechanistically
rejected by
take into account a
linking
her “identitiable”
costs with each subclass of mail.
Witness Chown’s Classification
of
Institutional
Costs Ignores Incremental
and Improperly
Treats “System Related”
Institutional
Costs
11
costs” can thlus be viewed as
Court’s decision, and have the Commission
tier of institutional
institutional
costs of each subclass on the basis of her cost-of-
At page 8 of her testimony,
NAA-T-1,
12
institutional
costs speciiicaXy
13
institutional
costs, but in addition
14
institutional
costs that cannot be specifically
15
function,”
16
NAA-1C
17
while tot‘al institutional
18
$26,997,063,000.
19
follows
identified
Costs
witness
with each function
(thousands):
institutional
costs shown in Exhibit
Her dichotomy
as “identifiable”
to these “there is still a large pool of
which she refers to as “system-wide”
shows her “identifiable”
Chown defines
associated with any particular
institutional
costs. Exhibit
costs as $18,2161,239,000,
NAA-lA,
p. 5, amount to
thus breaks down institutional
costs as
12
1
Identifiable
2
System-wide
3
Total
4
Witness
Chown’s
$26,997,063
dichotomy
5
the Postal Service presents
6
incremental
7
variable
8
develops in her testimony
9
must therefore
10
Witness
11
subset of non-volume
12
either “identifiable”
13
By definition,
14
mail, along with witness
15
incremental
16
explain
costs.“’
$18,261,239
e&mates
For purposes
costs with attributable
include
of her testimony,
Chown’s failure
of incremental
to recognize incremental
or “system-wide”
incremental
“identifiable”
costs and explain
institutional
costs”
costs.”
costs as a special
omission in, and of itself
with specific subclasses of
Chown’s four stated functions.
costs among her “identifiable”
.which she
the extent to which they are
is a glaring
costs are identified
and
she equates volume-
costs. Under this approach,
some $2.8 billion
variable
the fact that in this docket
of both volume-variable
and exhibits,
why an incremental
19
ignores totally
institutional
When she includes
costs, she needs to
cost that is specific to one subclass should
USPS-T-30.
11
Attributable costs have heretofore been based on causality (i.e.,
establishing a causal nexus between costs and a subclass of mail), and have includrtl
both volume variable and specific fixed costs. Now that the Postal Service has made
a complete presentation of incremental costs, the Commission will: have to decide
whether attributable costs will be based on incremental or volume-variable cost,s.
12
Witness Takis, USPS-T-4 1, estimates that in TYAR incremental cost,.+
exceed attributable costs by approximately 8.2 percent.
13
1
increase her weighted
2
than being restricted
3
on an incremental
4
attributable
costs uniformly
for all subclasses,
to the one subclass to which it explicitly
Let me provide
one example to illustrate
portion
6
variable.
I
costs are clearly identified
8
methodology,
9
transportation
of the costs of the Eagle Network
According
to the testimony
though,
the point.
are incremental,
based
with Express Mail.
all institutional
A substantial
but not volume-
of witness Takis, USPS-T-41,
Under witness
Any subclass of mail that has low density
11
transportation
12
weighted
13
the Eagle Network.
14
costs that are included
in her “identifiable”
15
instead
costs being singled out and expressly
16
individual
17
would obscure the direct one-to-one
18
weights,
19
there is no causal link.
costs attributed
attributable
with
given to transportation
10
of incremental
to it, such as Parcel Post, wou:ld also have its
costs of
result would obtain with all other incremental
institutional
class of mail to which they pertain,
would cause incremental
problem
costs.
and has a large share of
cost saddled with a share of the incremental
A similar
these
Chown’s
costs that are “identsable”
would increase the weighting
Yet another
pertains,
cost analysis.
5
20
rather
relationship
witness
costs. That is,
assigned to each
Chown’s methodology
and, when determining
costs to be spread to subclasses
with witness
assign total
Chown’s methodology
21
-~;ould have “the Commission
institutional
22
mail based upon the factors in the Act using weighted
her
to which
is that she
costs to subclasses of
attributable
costs,
14
1
rather
than actual attributable
2
“identifiable”
3
costs are “a better measure
4
institutional
5
explain
6
subclass benefits from system-wide
7
an explanation
8
wide institutional
9
class of mail.
institutional
effort.“”
is lacking,
11
benefits
12
statement,
13
14
Witness Chown’s
Lacks Economic
attributable
of how each subclass of mail benefits
attributable
from
does she make any effort to
costs are a better mea,sure of how each
institutional
costs.
of course, is that no explanation
inappropriate
Tlhe reason such
exists.
to any specific function,
to imply that witness
Systemnor to any
Chown’s
costs are a better measure than actual costs of how each subclass
from system-wide
effort, because no basis exists for any such
or for the way she treats “system-wide”
16
inversely
proportional
17
delivery
18
a very large weight.
19
delivery
function,
institutional
costs.
Methodology
Foundation
As noted previously,
15
derived from her
costs, she claims that her weighted
costs cannot be linked
It is entirely
weighted
By using weights
At no point, however,
why her weighted
10
costs.“”
witness
Chown’s weights
to the percentage
for each function
of costs which are at.tributed.
for example, has a low level of attribution,
Her weighted
delivery
11
Tr. 25/13381 (emphasis in original).
12
Tr. 25113384.
The
hence it receives
costs are 210 percent
cost, as shown in Table 1, column 3. Conversely,
are
of actual
mail processing
15
1
has a rather
high level of attribution,
2
attributable
costs are only 56.1 percent of actual attributable~
3
Since witness
hence witness
the non-cost factors of the Act to her weighted
5
that her methodology
6
unless the Commission
7
the profound
8
coverages and markups,
9
large amounts
would not preordain
effect of witness
costs, she claims
any speci5c outcolme. However,
Chown’s weighting
significant
11
Similarly,
12
transportation
13
contribution
to institutional
14
explanation
concerning
15
is her desired result.
and transportation
in their required
contribution
subclasses which consume little
would see a substantial
services would see a
to institutional
than faintly
18
sometimes
19
That is, it calls for large mark-ups
20
mark-ups
21
Component
Pricing
22
competiti,ve
environment
Chown’s
regards
Component
methodology
Pricing
paradigm
with respect to rate design for individual
on the delivery
and transportation
par digm is increasingly
strong
as fair, that doubtless
Chown’s weighting
of the Efficient
on mail processing
and
increase in their requ.ired
what she subjectively
17
costs.
or even no mail processing
costs. In light of witness
At the subclass level, witness
reminiscent
factors when setting
it seems evident that subclasses wh:ich consume
of mail processing
invoked
attributable
should apply
were somehow able to find a way to counter-balance
10
16
costs.
Chown does not say how the Commissio:n
4
reduction
Chown’s weighted
function,
is more
that, is
rate categories.
with reduced
costs. The Efficient
inappropriate
for the changing
in which the Postal Service operates.
The
16
1
Commission
2
unfolding
developments,
ranging
3
electronic
funds transfer,
the increasing
4
and the Internet.
5
and the Postal Service both need to be able to take into account
from alternate
An analogy from the printing
delivery
use of toll-free
industry
Service with a large volume of mail) may help iuustrate
I
witness
8
establishment
9
Customer
10
contrast,
needs a small booklet that requires
11
printing,
folding,
12
Chown’s
methodology,
13
overhead
14
function
15
or operating
16
(e.g., design, layout,
17
premise,
18
those customers
19
firm.
A needs only stationery
around the printing
and binding.
design, layout,
function.
Customer
typesetting,
recovery of the firm’s general administrative
by placing
derived from those functions
typesetting,
B, by
If one were to apply witness
that is common to all jobs (presumably
presumably,
the economic effect of
with a simple letterhead.
costs should be concentrated
profit
numbers,
Suppose a firm has a full-service
which, of course, is centered
collating,
telephone
(which supplies, the Postal
6
Chown’s methodology.
of hard copy to
folding,
a high mark-up
printing),
and
on one
with little
mark-up
used only by some customers
collating,
and binding).
The
would be that it is not fair to earn much profit from
who require
and use the full range of services offered by the
17
1
2
3
Conclusion
In summary,
I suggest that the Commission
Chown’s proposed rearrangement
of attributable
reject use o:f witness
costs because:
.
the approach to institutional
cost assignment proposed by
witness Chown unjustifiably
and yet on a permanent basis
builds her personal judgments on fairness and equity into the
mechanics of rate design;
8
9
.
the narrow conception of fairness and equity underlying
above personal judgments is itself flawed;
the
10
11
12
.
the proposed classification
of “identifiable”
deals with incremental
costs in an entirely
manner; and
costs
13
14
.
the proposal
institutional
15
I cannot think
to change the basis for assigning
costs has no foundation.
of any economic justification
16
application
of weighting
17
Moreover,
in my opinion,
18
economics,
institutional
inappropriate
to support
system-wide
the mechanistic
factors such as those advocated by witness
the use of such weights
and set an undesirable
precedent.
would reflect bad
Chown
18
III.
6
WITNESS
CLIFTON’S
PROPOSAL
TO REDUCE
RATES
FOR THE SECOND AND THIRD OUNCE OF
WORKSHARED
FIRST-CLASS
MAIL AND
INCREASE
RATES FOR STANDARD
A MAIL
BY A CORRESPONDING
AMOUNT
Description
7
of Clifton’s
Witness
8
2111082934,
9
First-Class
Clifton,
Proposal
in his direct testimony,
ARA/NAA-T-1,
pp. 11-16, Tr.
proposes to reduce the rate for the second and third
workshared
ounce of
letters from 23 to 12 cents per ounce, and compensate
10
for any loss of revenues through
11
a corresponding
12
immediate
13
increase
14
Class Mail and increase the coverage on Standard
15
does not indicate
16
Regular
17
under the Revenue Forgone Reform Act, an increase in the mark-up
18
commercial
19
Standard
amount.
Witness Clifton
effect of this proposal
them in Standard
an increase in rates for Standard
does not call attention
A Mail by
to one
to reduce revenues in First-Class
A. Namely,
it would reduce the coverage on First,A Mail.
Witness
how he would split his proposed increase between
and ECR subclasses of Standard
rate Standard
Clifton
A Mail.
attempts
to justify
Clifton
the
He does acknowledge
A Mail would cause the mark-up
A Mail to increase in tandem
and
that
on
on nonprofit
(by one-half).
20
Witness
his proposal
21
(i) the marginal
22
Class workshared
23
coverage on the second and third ounce of workshared
cost associated with handling
by asserting
additional
that
ounces of First-
letter mail is low, (ii) at 23 cents per oux:e the implicit
letters is 920 percent,
19
1
and (iii) such a high implicit
2
other class is being cross-subsidized.
3
Mail, especially
4
rates, as the target of his cross-subsidization
5
Position
6
cost coverage must mean that mail in some
Witness Clifton
the lack of a rate increase in the second and third
A
ounce
charges.
of This Testimony
I do not take issue with witness
Clifton’s
position
7
ounce (or $3.68 per pound) the rate for additional
8
seems generally
9
weight.
high in relation
coverage is, per se, an indication
11
well as his assertion
12
Mail is currently
13
proposed rates.
14
First-Class
15
16
The Weight-Cost
Relationship
of First-Class
Mail
that at 23 cents per
ounces of First-Class
to the Postal Service’s cost of handling
I do, h,owever, take issue with his assertion
10
17
selects Standard
of cross-subsidy
Furthermore,
Mail is neither
to any other class of mail
analyzed
first person to testify,
that within
19
is charged for each additional
20
in relationship
First-Class
Standard
A
in cost coverage for
nor adequately
This docket is not the first case to recognize,
18
within,
as
under the Postal Service’s
his proposed reduction
properly
extra
that a high implicit
that any subclass of, or rate category
being or will be subsidized
Mail
justified.
nor is witness
Clifton
Mail the decremental
the
rate that
ounce beyond the first ounce appears excessive
to the Postal Service’s cost of handling
extra weight.
20
1
Although
2
the weight-cost
3
suggests that the current
4
marginal
5
Postal Service’s proposed pound rates for the Standard
6
subclasses
7
pound rate is a small fraction,
8
($0.23 per ounce) both currently
the Postal Service has not submitted
relationship
cost incurred
study concerning
Mail, considerable
evidence
rate of 23 cents per ounce is substantially
in handling
are, respectively,
As another
9
for First-Class
a reliable
example,
additional
weight.
above the
For example, the
A Regular
and ECR
$0.65 and $0.53. Each proposed Standard
less than 20 percent,
of the $3.6,8 pound rate
charged and proposed for First-Class
the minimum
A
Mail.
rate for up to two pounds of
10
Priority
Mail is currently
11
$3.20).
If this minimum
12
pound components,
13
pound,
14
on Priority
15
appears to be well under $1.50 per pound.
16
unzoned
17
@reposed by the Postal Service to increase to about $1. lo), which is well
18
below the $3.68 per-pound
19
$3.00 (proposed by the Postal Service to increase to
rate were to be broken down into per-piece
the weight
component
and per-
would be less than $1.50 per
and at this rate the Postal Service appears to earn a substantial
Mail; i.e., for this component
of First-Class
As a third
Mail thle average cost.
Also, the current
rate for a 3-, 4- and 5-pound Priority
ftncremental
Mail package it: $1.00
rate charged for extra ounces of First-Class
example, the coverage for all First-Class
20
an average weight
of 3.3 ounces, amounts
21
the average coverage for First-Class
Mail.
profit
to 256 percent,
Mail.
flats, which have
significantly
This is yet another indication
above
that
21
1
the decremental
2
from additional
rate for extra ounces exceeds the incremental
weight.”
Admittedly,
3
witness
Clifton’s
4
ounces of First-Class
5
consideration.
6
issue other than his narrowly-crafted
7
second and third
8
support
9
as that advanced by witness
testimony
concerning
Mail raises an interesting
Nevertheless,
issue for the Commission’s
proposal
proposal,
letters.
to limit rate relief to the
Although
a sharply-focused,
Clifton
which it can be evaluated.
can benefit by having
against
11
initiative,
12
the Postal Service for an under one-ounce First-Class
13
coupled with an across-the-board
14
additional
15
underlying
16
somewhat
he could have proposed
For example,
to all First-Class
A slight variation
proposal
some benchmarks
a l-cent increase in the rate proposed bl
letter
(to 34 cents),
decrease of 4 or 5 cents in the rate for all
Such an approach
Clifton is clearly broader,
mailers,
to the
and perhaps
than his proposal.
might have been to increase the basic rate for a
18
First-Class
19
to two ounces could be mailed for that rate, coupled with an incremental
20
that would be applicable
IS
such
as a more comprehensive
ounces (e.g., to 18 or 19 cents per ounce).
issue raised by witness
the record does not
piecemeal
10
17
the rate for extra
there are several other ways to deal with the
ounce of workshared
any definitive
fairer
cost arming
letter by 2 cents (i.e., to 35 cents), with the understanding
for each additional
two ounces.
See NDMS-T-1, p. 34, Tr. 24112907
The rate for
that up
rate
22
1
additional
2
However,
3
the result would be a decrease for heavier-weight
4
Postal Service’s proposed rates of 33 cents for the first ounce and 23 cents for
5
each additional
6
$1.25, respectively.
7
each additional
8
$0.65 and $0.95, which is somewhat
9
rates.”
weight
might need to be increased
since that rate would cover each additional
Clifton
two-ounce
increment,
pieces, For example,
at the
ounce, 3-ounce and s-ounce pieces would pay $0.79 and
At 35 cents for the first two ounces, plus 30 cents for
two ounces, the rate for 3-ounce and 5-ounce pieces would be
Alternatively.
10
from 23 cents to, s;ay, 30 cents.
within
less than the Postal Service’s proposed
the rate category of workshared
11
witness
12
refer to as “hundredweight”
13
workshared
14
acceptance
15
applied
to the total weight
of the mailing.‘”
16
involve
any rate averaging
for additional
17
Instead,
under hundredweight
18
mailer’s
weight
Fi~rst-Class Mail,
might have proposed a rate design that shippers
pricing.
Under this approach,
sometimes
the: postage for
mail, which is always entered in bulk at a Postal Service
unit, would consist of a fixed amount
pricing,
per piece, plus a pound rate
Hundredweight
weight,
does not,
even I-ounce increments.
each additional
and postage, and mailers
pricing
insert increases
always have an incentive
a
to
14
Witness Clifton registers strong objection to the fact, that rates within
Standard A are averaged over the first 3.3 ounces. By averaging rates over t,woounce increments, the structure for First-Class rates would become more like that.
for Standard A. This, arguably, would also simplify First.-Class rates.
15
This is the way postage is computed for St,andard A bulk mail l.bat,
exceeds the breakpoint of 3.3 ounces per piece.
23
1
restrain
the weight
2
without
any reduction
3
the actual postage paid by worksharing
4
illustrated
5
first ounce plus 23 cents for each additional
6
pricing,
7
a minimum
8
9
of their mail at the margin.
in nominal
At the same time, even
rates, hundredweight
mailers.
pricing
would reduce
This can be readily
using the proposed rates for single piece mail (i.e., 33 cents for the
ounce).
Under hundredweight
the rate would be 10 cents per piece plus $3.68 per pound, subject to
rate that averages 33 cents per piece.‘”
Using the preceding
1,600 pieces, each weighing
assumptions,
1.5 ounces.
consider the rate for a mailing
of
Under proposed rates, each piece
10
would pay 56 cents (33 + 23 cents), for a total of $896. Under hundredweight,
11
pricing,
12
times $3.68, or $553, for a total of $712. In this particular
13
postage would be 20 percent less than the single piece rate, even though
14
rate for additional
15
ounce).
16
the mailer
would pay 10 cents per piece, or $160, plus 150 pounds
weight is $3.68 (which is equivalent
It is not the purpose
17
preceding
alternatives,
18
substitute
for the proposal
19
the Commission
20
workshared
of my testimony
the
to 23 cents per
to propose at this time any of the
or any other alternative
advanced by witness
needs to recognize that mailers
letters
example, the total
for that matter,
Clifton.
as a
At the same time,
of 2- and 3-ounce
are not the only ones that are disadvantaged
by the 23
16
For simplicity, this example ignores the various presort and
prebarcode discounts which would continue to he applicable to all workshared
mail.
24
1
cent rate for each additional
2
excessively
3
mailers
4
would likely
complicate
5
Commission
might find equally
high.
Witness
ounce of First-Class
Clifton’s
and should be evaluated
proposal
A piecemeal,
7
could wind up balkanizing
8
the Commission
9
additional
were found to be
ignores the needs ,of these
in a broader context, since its adoption
or act as a barrier
6
Mail, ifit
to alternative
changes that the
or more desirable.
ad hoc approach
to the issue raised by witness
the First-Class
Mail rate categories.
Clifton
Inevitably,
would be called upon to grant some kind of relief to the
ounce rate for other portions
of the First-Class
such request is analyzed
11
could be separate
12
mail; (ii) the fourth
13
(iii) the second and third ounce of single piece letter mail; (iv) the fourth
14
through
15
rate for flats that weigh less than, say, 4 or 5 ounces; (vi) the extra ounce rate
16
for flats that weigh more than, say, 4 or 5 ounces; and (vii) the extra ounce
17
rate for residual,
18
19
Contrary
to Witness Clifton’s
of Standard
A Mail Receives
21
rates for (i) the second and third
the eleventh
through
the eleventh
the foreseeable
result
ounce of workshared
ounce of workshared
letter
letter mail;
ounce of single piece letter mail; (v) the extra ounce
non-letter,
In his direct testimony,
extra-ounce
separately,
If
10
20
and presented
Mail stream.
non-flat
pieces (i.e., parcels).
Assertion,
No Part
a Cross-Subsidy
witness
Clifton
asserts that “since the zero
charge for the second and third ounces of Stand.ard
A mail is not,
25
1
cost-justified,
2
apparent
3
reasons explained
the incremental
cross-subsidy
extra-ounce
to Standard
5
subsidy implies,
G
customers)
7
other ratepayers,
8
subsidy
9
commonly
is a compound
word.
The existence
(which could be a group of
not by taxpayers
(via the government).
as it applies to customers,
or users, of a product
11
service.
13
his testimony,
14
Perloff.‘*
or service, it is
15
edition
16
contains
witness
Clifton
(0 1994) the Carlton
the same example,
SOURCE:
Faulhaber
subsidy.
the lproduct or
the term “cross-subsidy”
cites the fist
edition
but in the second
and Perloff source cited by witness
accompanied
by the following
Tr. 21/10915.
p, 2. Tr. 21/10820.
Clifton
footnote:
Stigler and Friedland (1962). See
(1975) for a precise definition of cross-
ABA/NAA-T-I,
as used in
of a text by Carlton
I was unable to locate a copy of this edition,
18
With respect to
costs of providing
When asked to define and justify
17
by
accepted in economics that a subsidy exists when the rates paid by
the users do not cover the incremental
17
18
19
20
of a cross.
and, second, that the subsidy is provided
10
12
For
is not correct.
i%rst of all, that some entity
is being subsidized
an
A mail from other mail classes.“”
below, this statement
The term “cross-subsidy”
cost of this mail is creating
and
26
1
The article by Stigler
and Friedland
discusses the extent to which
2
regulators
3
level of prices, as well as the rates paid by various
4
This article,
5
subsidy.
6
another
of the electric utility
industry
while interesting,
is irrelevant
It never once uses or mentions
issue contained
The article by Faulhaber
8
economies of joint production,20
9
implicit
cite Faulhaber
11
Faulhaber
12
of Faulhaber
13
discussion
14
subsidization
15
Faulhaber’s
in-depth
16
According
to Faulhaber,
to the issue of subsidy or cross-
the term “subsidy”;
deals with multiproduct
and amazingly,
of cross-subsidization
10
groups of customers.”
in the example discussed by Carlton
I
definition
have been able to affect the overall
as a source.*’
Between
and Carlton/Perloff,
is incomparably
the contradictory
and detailed
more authoritative
theoretical
contradicts
expertise
the
and Perloff, who
positions
of
theoretical
argument.
than the loose, cursory
who deal in their textbook
as one topic among many.
and Perloff.
firms that have
offered by Carlton
the careful
by Carlton/Perloff,
it flatly
it refers to
with cross-
They clearly do not have
on the topic of cross-subsidization.
19
Stigler, George J., and Claire Friedland, “What. Can Regulat,ors
Regulate? The Case of Electricity.” Jo~mml of Low mrd E~:o~ronric~.October 1912
(vol. V), pp. l-16.
20
Enterprises.”
21
Gerald R. Faulhaber, “Cross-Subsidization: Pricing in Public
American Econonkc Reoku~, Vol. F5 (1975), pp. 966.‘77.
Carlton, Dennis and Perloff, Jeffrey, &dem
Harper Collins, 1994, p. 855, lines 1-7.
Industrial
O~katiuo.
27
If the provision of any commodity (or group of commodities) by a
multicommodity
enterprise subject to a profit constraint 1.ead.sto
prices for the other commodities no higher than they would pay
by themselves, then the price structure is subsidy-free.
(Emphasis in original.)
6
When the price structure
is not subsidy-free,
7
cross-subsidy
8
governmental
subsidy).
9
mathematical
game-theoretic
terms) conditions
Succinctly,
in order to determine
(assuming,
10
is subsidy-free.
11
subsidy-free,
12
their incremental
13
combinations
14
costs when considered
15
of course, that the !irm does not receive any
The FauIhaber
it is necessary
to ascertain
costs on an individual
or groupings
of products
article discusses (in rigorous
under which a price structure
that a price structure
(i) whether
products
basis, and (ii) whether
are also covering
is
are covering
various
their mcremental
jointly,
The fact that one product
16
case of postal products)
17
concerned,
18
high coverage, or profit margin,
19
existence
20
customers
21
not sufficient
22
it can be said to result in
is a good indication
the price structure
of a cross-subsidy
pay different
to establish
has a high profit margin
is subsidy-free.
emphatically
that, insofar
as that product
is
What this means is that a
does not in any way prove the
to some other product.”
prices for a product
(or c,overage, in the
The fact that various
with the same or similar
the existence of cross-subsidy.
Incidentally,
cost is
the
In the course of my private consulting work, I have encountered nonpostal products where th 2 profit margin exceeded the 920 percent. t,bat. witness
Clifton claims for the second and third ounce of worksbaretl FirsKIass worksbarr~l
letters.
28
1
example in Carlton
2
nor a detition
3
4
No Portion
of Standard
Receives a Cross-Subsidy
5
6
and Perloff cited by witness
Clifton
an example
of cross-subsidy.
A Letters
When asked to define the term “cross-subsidy”
testimony,
is neither
witness
Clifton’s
as used in his
response was as folIows:23
7
8
9
10
Cross subsidization
in this context means that Standard
A workshared letters are charged zero cents for the second and
third ounce, which is below the marginal cost of these extra
ounces.
11
This statement
ignores totally
12
classes. In, Standard
13
while in First-Class
14
Clifton’s
15
any one-ounce
16
subsidize
17
hundredweight
pricing
18
cross-subisidies,
as defined by witness
approach,
23
the different
rate designs of the two
A, rates are simply averaged over the first 3.3 ounces,
rates are averaged over each ounce. Using witness
one could also say, with equal justification,
category
of First-Class
that within
letter mail, N + 0.1 ounce letters
N + 0.9 ounce letters. ” Carried
cross-
to its logical extreme,
for bulk mail would be the only way to eliminate
Clifton.25
Tr. 21l1089G.
24
The term “IV is an integer equal to 0,1,2,3,... up to the penultimate
maximum weight of First-Class Mail.
25
As USPS witness Moe&r has already noted, “there is a certain degree
Tr. 612740.
of averaging within most, if not all, r.Ae categories.” DMtVUSF’S-TX-3.
Within unzoned Priority Mail up to 5 pounds, rates are averaged across all zoney.
Although a 4.pound package to Zone 8 has a lower profit, margin t,han one of t,llp
29
1
2
Witness Clifton has not Justified
the Proposed
Shift in Coverage
3
The high coverage which witness
Clifton
asserts for the second and
4
third
5
coverage for all First-Class
6
on the second and third
7
in both revenues
8
indignation
9
ounces, witness
10
non-cost criteria
11
Class Mail, nor does he bother to explain why he has not proposed
12
increases
ounce of workshared
First-Class
Mail.
Mail constitutes
Witness
Clifton’s
ounce of workshared
a small part of the
proposal
to reduce rates
letters would cause a reduction
and coverage for First-Class
Mail.
While expressing
at the asserted 920 percent coverage on the second and third
Clifton’s
testimony
makes no effort to justify,
of the Act, his proposed reduction
for other components
13
Similarly,
in proposing
14
Mail, witn.ess Clifton
15
apply to Standard
16
the non-cost criteria
11
O’Hara.
ideally
of the First-Class
in terms of the
in the coverage of Firstoffsetting
rate structure.”
to increase the cost coverage on Standard
should review all the criteria
A. At a minimum,
witness
have been misapplied
Clifton
Clifton
of the Act as they
should <explain which of
or misinterpreted
In the absence of such review, witness
A
by witness
has not justified
any
same weight to the local, 1, 2, 3 zone, it does not, follow that the package to Zone X is
cross-subsidized by the package delivered locally.
!a?
If some rate categories of First-Class Mail have implicit coverages
much higher than the average for all First-Class Mail, as witness Clifton assert,s,
then it stands to reason that the cost coverage of some rate catsgories within First,Class Mail must be below the average. Witness Clifton nevnrtheLess avers t,hst, t,he
coverage is too high on all components of First-Class Mail: see Tr. 21/10973.
30
1
change in coverage.
2
advertising
3
Conclusion
4
It is not sufficient
mail, or to quote surveys to that effect.”
In sum, I wish to reiterate
5
Clifton’s
6
First Class Mail seems generally
7
of handling
8
points that he presents
9
10
position
that I do not take issue with witness
that the 23 cents-per-ounce
extra weight.
rate for additional
high in relation
I do, however,
ounces of
to the Postal Service’s cost
take issue with sever;al of the key
in the sequel of his testimony.
.
High implicit cost coverage of a rate category, contrary to what
witness Clifton asserts, is per se no indication of cross-subsidy to
any other subclass or rate category. Before the issue of crosssubsidization
can be raised at all, it is necessary to show that
some rates fail to cover incremental costs and that subsidization
exists.
.
Witness Clifton does not demonstrate that any part of Standard
A Mail receives a subsidy. His argument that rate averaging
within the first 3.3 ounces of Standard A Mail represents a
subsidization
of the second and third ounce by the first ounce is
academic to the point of being downright frivolous. By the same
argument, any nonzero weight range in the Postal tariff
structure would represent a subsidization
of items near the high
end of the range by items near the low end. In this regard, the
usual one-ounce range is no different from any other weight
range that may be chosen as convenient for rate design.
Therefore, when witness Clifton singles out rate averaging
within the first 3.3 ounces of Standard A Mail to compensate foi
his proposed reduction of First-Class additional-ounce
rates, he
does so in a narrowly arbitrary fashion that lacks justification.
2,
See Answers of fIBA/NAA witness Clifton to questions
11
12
13
14
15
to say that he does not like
16
17
18
19
20
21
22
23
24
25
26
21
28
hearings, p. 5.
posed
during
31
.
Witness Clifton’s testimony is equally narrow and arbitrary
when it singles out the rate for the second and third additionalounces of First-Class workshared mail, but not the rate applying
to further additional ounces, as his target for particular rate
reductions.
Linking this reduction to his proposed.
compensatory coverage for Standard A Mail make,s neither of
the two proposed changes less arbitrary.
8
Witness
9
the First-Class
Clifton’s
position
additional-ounce
concerning
the exceedingly
rate has merit, and the Commlission
10
be well advised to consider it in the broad context of a variety
11
distributing
12
ways to offset the corresponding
13
rates.
14
of witness
considerable
The narrowly
Clifton
reductions,
crafted
high coverage of
together
of options for
with a broad range of possible
revenue loss by readjustment
and arbitrarily
would
linked
should be rejected as unacceptable.
of First-Class
rate adjust.ment
proposals
I hereby certify that I have this day served the foregoing document upon all participants
of record in this proceeding in accordance with Section 12 of the Rules of F’ractice.
March 9, 1998