USPS-T-33
BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON, D.C. 20268-0001
Postal Rate and Fee Changes, 2000
: DOCKET NO. R2000-1
DIRECT TESTIMONY
OF
DAVID R. FRONK
ON BEHALF OF
UNITED STATES POSTAL SERVICE
,-.
TABLE OF CONTENTS
SKETCH . .. .. . .. . . .. . .. . .. . .. .. . .. .. . .. .. .. . .. . .. . .. . . .. . .. . . .. . .. . . .. . .. .. . . .. . .. . . .. . .. . .. ii
AUTOBIOGRAPHICAL
I.
PURPOSE
II.
GUIDE TO TESTIMONY
Ill.
PROPOSAL
IV.
CHARACTERISTICS
V.
VOLUME
VI.
RATE HISTORY..
.-,
VII.
VIII.
-.
OF TESTIMONY..
..............................................................................
AND SUPPORTING
DOCUMENTATION..
................... 1
.......................................................................................................
OF FIRST-CLASS
AND REVENUE
MAIL ...................................................
HISTORY.. ................................................................
.2
.5
.8
...............................................................................................
12
SUBCLASS.. ...........................................................................
12
................................................................................
15
A.
LETTERS
B.
CARDS SUBCLASS
RATE DESIGN ...................................................................................................
16
A.
RATE DESIGN ISSUES ..........................................................................
B.
RATE PROPOSAL
FOR LETTERS SUBCLASS..
C.
RATE PROPOSAL
FOR CARDS SUBCLASS
SUMMARY
1
OF THE FINANCIAL
18
..................................
.21
.......................................
.38
IMPACT OF THE RATE DESIGN.. ............... .43
RATES.. ................... .45
ATTACHMENT
USPS-33A:
FIRST-CLASS
MAIL PROPOSED
ATTACHMENT
USPS-33B:
FIRST-CLASS
MAIL TEST YEAR SUMMARY..
............. .46
AUTOBIOGRAPHICAL
SKETCH
My name is David Fronk. I am an Economist in Pricing. My primary duties are to
develop Postal Service domestic rate and fee proposals. Specific areas of responsibility
include First-Class Mail.
I joined the Postal Service in 1996. Prior to joining the Postal Service, I worked
for 15 years as an economic and management consultant.
For 10 of those years, I was
employed as an Associate, Senior Consultant, and Principal by the consultjng firm of
Putnam, Hayes & Bartlett, Inc. (and a San Francisco firm which merged into it). For
approximately five years, I maintained my own independent consulting practice. My
consulting work included ratemaking and forecasting analysis in the electric utility and
telecommunications
industries. I also worked on a large number of wmmercial disputes
(antitrust, licensing, etc.), primarily in high technology industries. This work frequently
involved preparing pricing and demand analyses under alternative assumptions about
costs, business conditions, future growth, and competitive response.
Earlier in my career, I also worked as an Economist at the Federal Trade
Commission and the Internal Revenue Service, and as a Financial Management Analyst
at NASA.
I received a BA in ewnomics
and history from the University of Minnesota. I
also hold an MA in ewnomics from the George Washington University and an MBA
from Stanford University.
This is the third piece of testimony I have filed with the Postal Rate Commission.
I also filed direct testimony with the Commission on First-Class Mail rate design in
Docket No. R97-I, and on the nonletter-size Business Reply Mail experiment in Docket
No. MC97-1.
ii
-.
1
I.
PURPOSE
OF TESTIMONY
The purpose of this testimony
2
is to describe the Postal Service’s proposed
3
rate design for First-Class
Mail and to present the specific First-Class Mail rates
4
that the Postal Service is requesting
5
approval.
6
cost coverages,
7
First-Class Mail volume trends, mail characteristics,
8
The testimony concludes
9
rates in Test Year 2001.
that the Commission
recommend
The rate design will be described~in terms of percentage
and contribution.
The testimony
for
changes,
also includes a description
of
and a recent rate history.
with a summary of the financial
results of the proposed
10
11
.c,
12
GUIDE TO TESTIMONY
This testimony
AND SUPPORTING
is structured
as follows.
In Section Ill, the First-Class Mail
rate design is introduced
14
background
15
data on rates, volumes, and revenues.
16
are associated with these sections of my testimony:
17
Diary Study, USPS LR-I-116,
18
117, and (3) Rate History, USPS-LR-I-118.
19
establish a context within which the rate design can be discussed.
information
and summarized.
DOCUMENTATION
13
20
-
II.
on the characteristics
Sections
IV-VI then provide
of First-Class
The following
USPS Library References
(1) the 1998 Household
(2) Volume and Revenue
Histories, USPS LR-I-
Taken together,
Section VII then presents the rate design.
Mail and historical
Sections IV-VI
After discussing
overall rate
21
design issues in Section VII.A, Section VI1.B focuses on the Letters and Sealed
22
Parcels subclass and Section VI1.C deals with the Cards subclass.
23
design depends on several inputs from my colleagues.
1
The rate
First, witness Mayes
1
(USPS-T-32)
2
coverage targets for First-Class
Mail. Second,
3
Miller (USPS-T-24)
information
4
Daniel (USPS-T-28)
5
rate, and witness Campbell
6
Business
7
updated cost data developed
for updated
and subclass cost
I rely on the cost work of witness
on worksharing
cost savings, witness
for a new weight study relevant for the additional ounce
(USPS-T-29)
for updated information
Reply Mail (QBRM) costs. For the nonstandard
My testimony
8
9
provides the overall revenue requirement
surcharge,
I cite
by witness Miller (USPS-T-24).
concludes
financial impact of the proposed
(USPS-T-33
on Qualified
in Section VIII with an overall discussion
First-Class
Fronk Workpaper,
of the
Mail rates. Section VIII relies on my
10
Workpaper
11
169) which details the revenue and volume results of the rate proposal at the
12
billing determinant
13
and data relied upon.
level. The Workpaper
filed electronically
as USPS LR-I-
itself contains references
to sources
14
15
16
17
Ill.
PROPOSAL
The proposed
average changes in revenue per piece for First-Class
including fee revenue, are as follows:
18
Letters Subclass
3.5%
19
Cards Subclass
5.0%
20
Total Class
3.6%
21
Mail,
These changes
result in revenues that are 196.3 percent of volume
22
variable cost for letters and 148.5 percent of volume variable cost for cards.
23
the class as a whole, the resulting cost coverage is 194.5 percent.
2
For
First-Class
1
2
of revenue and costs for the Postal Service.
3
first-ounce
4
or 3.0 percent, increase in this rate (from 33 to 34 cents). This matches the one-
5
penny increase from the last rate case, Docket No. R97-1.
6
increase
7
went down one-cent as a result of Docket No. R97-1. Our proposal would return
8
it to the 23-cent level that prevailed from 1991 until 1999.
rate for single-piece
letters.
piece card rate (from 20 to 21 cents).
11
increase as a result of the last rate case.
12
increase
a one-cent increase in the single-
The single-piece
card rate did not
Our proposal would result in the first
-~
since January 1995.
In terms of worksharing
discounts,
presort letter discounts
the Postal Service proposes that
14
automation
15
propose that the discount for nonautomation
16
reduced
17
discounts
18
We propose an
in the rate for additional ounces from 22 cents to 23 cents. This rate
10
13
The most visible postal rate is the
The Postal Service proposes a one-cent,
The Postal Service is also proposing
9
.-
Mail letters are the vanguard service and the principal source
by 0.5 cents.
remain at their present levels. We also
presort letters, flats, and parcels be
In addition, we propose that the automation
from the single-piece
presort card
rate increase by 0.2 cents.
With one exception, the Postal Service’s proposals keep all elements of
19
the existing First-Class
Mail rate structure
in place. The proposed
20
change is a split of the combined 3/5-digit rate for automation
21
3-digit and 5-digit rates. This change‘is
22
no change in the 13-ounce breakpoint
23
testimonv
rate structure
flats into separate
discussed in Section VII. We propose
with Priority Mail, as discussed
of witness Robinson (USPS-T-34
3
at Section 1II.E).
in the
The Postal Service’s proposed
1
2
presented
rates for First-Class
Mail letters are
below in Table 1.
Table 1 - Rates for First-Class
3
Letters Subclass
Current Rate
(cents)
Proposed Rate
(cents)
33
11
30
34
11
31
30.5
5
-4.6
32.0
5
-4.6
22
23
27.0
26.1
24.3
23.8
28.0
27.1
25.3
24.8
30.0
27.0*
N/A
5
31.0
29.5
27.5
5
-4.6
22
4.6
23
Single-Piece 8
Nonautomation Presort:
Single Piece (all shapes):
First-Ounce
Nonstandard Surcharge
Qualified Business Reply
Mail
Presorted (all shapes):
First-Ounce
Nonstandard Surcharge
Heavy Piece Deduction
Additional
Ounce
Automation:
Letters (First Ounce):
Basic Automation
3-Digit
5-Digit
Carrier Route
Flats (First Ounce)
Basic Automation
3-Digit Flats
5-Digit Flats
Nonstandard Surcharge
Heavy Piece Deduction
Additional Ounce
4
l
This is currently a combined
rate for 3/5 Digit flats.
5
6
4
The rates proposed for cards are presented
in Table 2.
Table 2 -- Rates for First-Class Cards Subclass
Current Rate
(cents)
Proposed Rate
(cents)
Single-Piece
Qualified Business Reply Mail
20
18
21
18
Nonautomation
18
19
16.6
15.9
14.8
14.1
17.4
16.7
15.4
14.9
Single-Piece 8
Nonautomation Presort:
Presort
Automation:
Basic Automation
3-Digit
5-Digit
Carrier Route
5
6
IV.
CHARACTERISTICS OF FIRST-CLASS MAIL
First-Class Mail consists of mailable matter weighing
7
includes business and personal correspondence,
8
invoices, remittances,
9
weighing
financial statements,
cards, sealed parcels, bills,
and advertising.
13 ounces or less may be sent as First-Class
10
share of many types of mail eligible for First-Class
11
advertising,
12
is mailed at lower Periodical
into four sectors:
and Standard
(1) household-to-household,
14
(3) nonhousehold-to-household,
Mail.
All mailable matter
In practice, a large
Mail, such as publications
For purposes of market analysis, the First-Class
13
13 ounces or less. It
(A) rates.
Mail flow can be divided
(2) household-to-nonhousehold,
and (4) nonhousehold-to-nonhousehold.
5
and
1
According
to the “Household
2
of First-Class
3
households
4
About 41 percent of First-Class
5
and the remainder,
6
LR-I-116 at Table 4-l).
Mail originates
transmitted
about 15 percent
either to other
Mail) or to nonhouseholds
Mail goes from nonhouseholds
(9 percent).
to households,
44 percent, is nonhousehold-to-nonhousehold
household-generated
8
primarily of bill payments,
9
85 percent of the mail sent by households
10
contained
11
payment, or insurance
mail (USPS-
First-Class
Mail consists
greeting cards, and personal correspondence.
to nonhouseholds
credit card
premium (Id. at page IV-l 12).
to household
sector is a major component
The largest volume of First-Class
of the First-
13
Class Mail stream.
14
continues
15
page IV-43).
16
including utility and medical bills. The insurance and credit card industries
17
account for about 40 percent of bills as well (Id. at Table 4-19).
18
largest volume of First-Class
19
consists of advertisements,
20
leisure services, specialty stores, banks, and mail order companies
21
IWO).
to be bills.
About
in FY 1998
some type of payment, for example, utility remittance,
The nonhousehold
12
Fiscal Year 1998,“’
from households,
(6 percent of total First-Class
As might be expected,
7
Diary Study:
On average, households
Approximately
Mail, in terms of content,
receive 2.9 bills per week (Id. at
40 percent of bills come from the service sector,
Mail received by households
After bills, the
from nonhouseholds
primarily from credit card companies,
publishers,
(Id. at page
’ USPS LR-I-116. The other page numbers and table citations in this section
were also taken from this source.
6
-.
1
The major industry users of First-Class
2
financial sector.
3
banks, insurance
4
percent of total First-Class
5
industry corresponds
6
with bills and remittances
7
organizations
8
telephone
9
Mail are concentrated
The three largest senders of First-Class
companies,
and credit card companies,
in the
industry mail are
which combine for 15
Mail volume (Id. at page l-9). This high volume by
with the large percentage
described
earlier.
of the mail stream associated
Social/charitable/political/nonprofit
account for three percent of total First-Class Mail volume and non-
utilities account for approximately
two percent (Id. at Table 4-18).
Since 1987, there has been an increase in the percentage
10
nonhousehold
11
percent to 68 percent (Id. at page IV-57). The credit card industry presorts most
12
all of its volume (92 percent).
13
include non-telephone
14
page IV-64).
16
to household
mail sent presorted or prebarcoded,
of
Other industries
up from 54
making heavy use of presort
utilities (81 percent) and publishers (80 percent) (Id. at
The volume of First-Class
characteristics.
Mail received by a household
As income and education
varies according
16
to demographic
17
volume of mail received.
18
households
19
mail received by households
20
Table 4-4). Households
21
by an individual aged 45-54 years. Volume then falls off as the age of the head
22
of the household
23
on the occupation
According to the 1998 Household
increase, so does the
Diary Study,
with incomes less than $7,000 per year receive 39 percent of the
with incomes greater than $100,000 per year (Id. at
receiving the largest volume of mail are those headed
increases.
Volume of First-Class
of the head of household
7
Mail received also depends
and whether the household
is urban
1
or rural. As an occupational
2
mail, and suburbanites
3
households
group, white collar professionals
receive the most
receive more mail than both city-dwellers
and rural
(Id. at Table 4-3).
4
5
6
V.
VOLUME
AND REVENUE
HISTORY
Tables 3-5 below provide historical information
7
volumes, revenues,
and percentage
8
Mail accounts for about 60 percent of domestic
9
billion in First-Class
mail revenue.
Mail revenue in FY 1998, approximately
from nonpresorted
letters, flats and parcels, emphasizing
11
importance
12
$1.0 billion, or 3.0 percent, of First-Class
of single-piece
Mail
shares. As indicated in Table 3, First-Class
10
13
on First-Class
mail in the First-Class
Of the $33.9
$21.8 billion came
the continuing
Mail stream.
Cards generated
Mail revenue.
Table 3 also shows that First-Class
Mail volume has generally
decreased
14
as a percentage
of total mail volume over time, dropping from 59 percent of total
15
volume in 1970 to 51 percent in 1998. Most of this decline occurred
16
to 1985. First-Class
17
remained fairly steady between 1985 and 1998 (ranging from as high as 54% to
18
as low as 51%).
Mail volume as a percentage
19
8
from 1975
of total mail volume has
.C
1
2
3
4
Table 3
First-Class Mail
Summary Volume and Revenue Data
5
(in millions)
6
Mail Revenue
P
7
a
9
10
Domestic Mail
Single-piece letters, flats, and parcels accounted for $21.8 billion:
accounted for $1 .O billion.
Source: Volume and Revenue Histories, USPS LR-I-117.
l
cards
11
This decline in volume share occurred despite the fact that First-Class
12
13
Mail volume has increased every year since 1976.
14
First-Class
15
billion pieces annually to 100.4 billion pieces.
16
First-Class
17
1980s
ia
During the 199Os, the average annual growth rate has been only 1.8 percent.
19
fi
20
As shown below in Table 4,
Mail volume nearly doubled from 1976 to 1998, increasing
from 52.5
The average annual growth rate in
Mail volume has been declining in recent years, however.
During the
First-Class Mail volume increased about 4.0 percent per year on average.
While both total letter and card volume have grown similarly over the long
run, their patterns of growth do show recent differences.
9
Volume in the letters
Table 4
First-Class Mail Volume Trends
1970-l 998
1
subclass
2
also grown virtually every year, but declined in 1992 and 1993 following the large
3
rate increase implemented
4
in February 1991.
The growth in First-Class
Mail since 1976 has been concentrated
5
entirely in presorted
6
letter, flat, and parcel volume has grown slowly and has fluctuated
7
billion to 57 billion piece range during the last 12 years.
a
9
rC
has grown every year since 1976. Volume in the card subclass has
(both automation
and nonautomation)
almost
mail. Nonpresort
in the 54
On the other hand, presort letter, flat and parcel volume has grown since
its inception in 1976 to 40.6 billion pieces in 1998. As Table 5 indicates below,
10
however, there have been significant
11
last five years.
12
the nonautomation
13
Simultaneously,
14
automation
15
accounted
16
growth has similarly been dominated
17
represent
In response
shifts within the presort category over the
to rate incentives and mail preparation
requirements,
portion of the presort total has shrunk considerably.
the prebarcoded
rate category,
portion of the total, particularly the 3-digit
has exploded in volume.
In 1998, 3-digit letters
for about half of the presort volume in the letters subclass.
Card
by the presort category, though cards
only about 5 percent of First-Class Mail volume.
ia
19
20
21
22
11
Table 5
First-Class Mail
Volume Trends for Letters Subclass
1994-1998
Presort/Automation
(in millions)
7
6
9
Includes ZIP + 4 prior to its elimination on July 1, 1996.
Note: Basic Automation rate for letters and flats introduced on July 1, 1996.
Source: First-Class Mail Billing Determinants for 1994-1998.
l
10
11
12
VI.
RATE HISTORY
The most recent changes
13
in First-Class Mail rates occurred on January
14
10, 1999 as result of Docket No. R97-1. A brief history of First-Class
15
follows, with more detail available in USPS Library Reference
16
A.
Letters and Sealed Parcels Subclass
17
1.
Single-Piece and Additional-Ounce
ta
The basic, first-ounce
First-Class
Mail rates
l-l 18.
Rate
Mail letter rate has been changed
increasing from 8 cents to 33 cents.
10
19
times since postal reorganization,
20
two increases, occurring in 1995 and 1999, saw the rate go from 29 cents to 32
21
cents and then to 33 cents.
12
The past
-
1
An additional-ounce
2
Until 1975, this additional-ounce
3
that time, a structure was established
4
additional-ounce
rate is less than the first-ounce
5
additional-ounce
rate grew from 9 cents to 23 cents, and then was reduced to 22
6
cents as a result of Docket No. R97-1.
7
for the nine months when the Commission’s
a
rates were implemented
9
the same or a lesser amount than the first-ounce
rate was the same as the first-ounce
and subsequently
rate. Over the last 25 years, the
under protest, the additional-ounce
11
1991, the differential
12
has increased
13
2.
between the first-ounce
except
rate has changed
by
rate, thus gradually increasing
degression”).
Since February
rate and the additional-ounce
rate
from 6 cents to 11 cents.
Presorted and Automation
Rates for Letters and Flats
Rates for 3/5-digit presorted,
nonautomation
15
introduced
16
Subsequently,
17
cents in 1985.4.2
16
No. MC951,
19
the evolving impact of automated mail processing
20
automation
21
No. R97-1.
23
where the
Docket No. R80-1 recommended
the gap between these two rates (“progressive
22
maintained
rate. At
In each set of rate adjustments,
10
14
P
rate is charged for ounces above the first ounce.
First-Class
Mail letters were
in 1976, with an initial discount of 1 cent off the basic letter rate.
that discount was increased to 2 cents in 1978,3
cents in 1981,4
cents in 1991, and 4.6 cents in 1995. As a result of Docket
the size of this discount was reduced to 2.5 cents, consistent
discounts.
with
and the evolution of
The discount remained at 2.5 cents as a result of Docket
Carrier route presort incentives began with a l-cent discount off the 315
digit presort rate in 1981. This incremental
13
discount was increased
to 1.5 cents
1
in 1988, 1.8 cents in 1991, and 2 cents in 1995. As a result of Docket No.
2
MC95-I,
3
barcoded
4
the carrier route rate is 0.5 cents less than the 5-digit letter automation
5
the carrier route rate was only made available for delivery-point
letters destinating
in zones specified
Discounts for ZIP + 4 coded letters were introduced
6
for nonpresorted
7
discounts
6
these discounts were increased
9
As a result of Docket No. MC95-1 classification
IO
II
by the Postal Service.
letters and 0.5 cents for presorted
were increased
strategy emphasizing
A prebarcoded
letters.
In 1995,
reform and an organizational
ZIP + 4 discounts
were eliminated.
letter discount was first offered in 1988. The basic
automation
rate, currently 27.0 cents, was introduced
13
automation
pieces that do not meet the 150-piece
14
for the 3-digit or 5-digit rates. The current incremental
15
are 0.9 cents for 3-digit presorted
16
rate) and 1.8 cents for 5-digit presorted
Prebarcoded
In 1991, these
again to 1.5 cents and 0.7 cents, respectively.
12
17
rate.
in 1983 at 0.9 cents
to 1.4 cents and 0.6 cents, respectively.
barcodes,
At present,
in 1996 for bulk
minimum volume requirement
pieces (compared
prebarcoded
to the basic automation
pieces (compared
flat rates were implemented
discounts
to the 3digit
in 1992, at 2.3 cents less than
ia
the basic nonpresorted
rate and 1.5 cents less than the basic presorted
19
1996, the separate discount for nonpresort,
20
Instead, prebarcoded
21
area receive a 3.5 cent discount from the nonautomation
22
residual automation
prebarcoded
23
14
rate. In
flats was eliminated.
flats meeting minimum volume requirements
pieces pay a basic automation
rate).
by 3/5-digit
presort rate, and
rate for flats.
P
1
3.
A First-Class Mail piece weighing one ounce or less and exceeding
2
3
standard
4
(length to width) ratios, is assessed
5
surcharge
6
three times since, to 11 cents today.
7
mail was also set at 7 cents in 1979, but has since been reduced to 5 cents.
9
letter-size dimensions,
for nonpresorted
than 2 ounces.
a nonstandard
currently 4.6 cents.
11
B.
to a specified
surcharge.
range of aspect
The nonstandard
mail was set at 7 cents in 1979, and has increased
The nonstandard
The discount, introduced
10
12
or not conforming
There is also a heavy piece deduction
6
-
Other Letter Rates
surcharge
for presorted
for presorted
mail weighing
more
at 4.0 cents per piece in 1988, is
Cards Subclass
The basic card rate has gone from 6 cents to 20 cents since postal
13
reorganization.
14
was increased to 2 cents in 1985, increased
15
returned to the 2-cent level in 1996, where it remains today. As with letters, an
16
incremental
17
introduced
16
cents in 1995. As a result of Docket No. MC95-1, the carder route rate was only
19
made available for delivery-point
20
by the Postal Service.
21
automation
22
23
A l-cent presort discount was introduced
in 1976. The discount
again to 2.1 cents in 1995, and then
l-cent carrier route discount from the 3/5 digit presort rate was
in 1981. It increased to 1.5 cents in 1988, 1.8 cents in 1991, and 1.9
barcoded
The difference
cards destinating
in zones specified
between this rate and the 5digit
rate for
cards is now 0.5 cents
Asp with letters, ZIP + 4 discounts
per piece for nonpresorted
were first offered in 1983 at 0.9 cents
cards, and 0.5 cents for presorted
15
cards.
By 1995,
1
these discounts
had increased
2
No. MC95-1 classification
A prebarcode
3
to 1 .I cents and 0.6 cents, respectively.
reform eliminated
the ZIP + 4 discount.
discount for cards was offered beginning
4
the nonpresort
prebarcoded
5
minimum 150-piece volume requirement
6
automation
rate was eliminated.
7
are 0.7 cents for 3-digit presorted
a
rate) and 1.3 cents for 5-digit presorted
rate of 16.6 cents.
Docket
in 1988. In 1996,
Instead, cards not meeting the
by.3/5-digit
area now pay the basic
The current incremental
pieces (compared
prebarcoded
discounts
to the basic automation
pieces (compared
to the 3-digit rate).
9
10
VII.
RATE DESIGN
11
A.
Rate Design Issues
The testimony
12
of witness Mayes (USPS-T-32)
13
Class Mail rate proposal
14
designing
15
design issues.
16
1.
17
First-Class
Benchmarks
is consistent
discusses
how the First-
with statutory postal ratemaking
Mail rates, I also considered
criteria.
In
the following broad rate
and Avoided Costs
One of the key issues affecting First-Class
point of comparison
Mail rate design is establishing
16
an appropriate
19
savings.
20
because it is the mail type used as the standard for computing
21
Simply stated, cost avoidances
22
subtracting
That point of comparison
for determining
is frequently
automation-related
termed the “benchmark”
and the resulting discounts
the cost of the rate category under consideration
16
cost
cost savings.
are measured
by
from the benchmark
/--
1
cost. Consequently,
2
rate category
3
rC
the benchmark
in determining
is as critical as the measured
the discount.
A key aspect of choosing the benchmark
discounts
for determining
4
presort/automation
5
Nonpresorted
6
featuring
7
mail (pieces featuring
a
addresses)
- and all the mail in between.
9
benchmark
results in a larger discount than using a benchmark
or pre-printed
and often mailed in bulk) to “dirty”
and more frequently
IO
have all the attributes of presort/automation
11
presortation
12
mail.
from “clean” mail (uniform pieces
addresses
handwritten
or application
the bulk
is the broad spectrum of nonpresorted
mail includes everything
typewritten
cost of the
incorrect or incomplete
Using all nonpresort
letters as a
which tends to
mail, except for the actual
of the barcode.
In its Docket No. MC95-1 Opinion and Recommended
13
Commission
14
analysis, the Commission
15
on the costs that the worksharing
16
rather than full cost differences.
17
in part on “dirty” mail (rather than the “clean” mail most likely to be candidates
18
automation)
19
incentive for mailers.
20
avoided by the Postal Service provides the bulk mailer an incentive to presort or
21
apply a barcode only if it can do so at lower cost than the Postal Service.
22
23
included an extensive discussion
Decision, the
generally
concluded
of the benchmark
that discounts
activity (presortation,
In developing
Setting discounts
avoids,
categories
for
mailers only for the costs
discounts for letters and cards
in Docket No. R97-1, the Postal Service focused on the costs avoided by
17
based
and can create the wro~ng
to compensate
the bulk presort/automation
should be based
prebarcoded)
Discounts for bulk automation
overstate the benefits of worksharing
issue. In its
1
successive
degrees of presorting or automation
2
Commission’s
3
Service used in setting the discounts for bulk automation
4
R97-1 was the sum of mail processing and delivery costs for bulk metered mail.’
5
As the Commission
6
IV-l 36), ” . . .the single-piece
7
categories
a
focused on the mail processing
9
Docket No. R97-1 proposal because these are the costs that will be affected
Docket No. MC95-1 Decision.
is limited to the bulk metered mail component.”
be avoided as a result of these worksharing
12
reached the same conclusion
13
No. MC95-1 (paragraph
Commission
16
Postal Service’s conceptual
21
22
23
letters in Docket No.
4302 at page
The Postal Service
in its
by
and “other costs” are not likely to
activities.
about transportation
The Commission
had
and “other” costs in Docket
4273 at page IV-123).
15
19
20
Transportation
In its Opinion and Recommended
reinforced
the Postal
and delivery cost aspects of this benchmark
11
ia
The specific benchmark
with the
mail most likely to convert to the automation
presorting and prebarcoding.
17
consistent
had stated in Docket No. MC95-1 (paragraph
10
14
compatibility,
Decision in Docket No. R97-1, the
its Docket No. MC95-1 views in its acceptance
of the
approach to discounts.
In general, the Commission agrees with the Service’s basic approach to
developing worksharing cost savings. In particular, the Commission
commends the Service’s proposed adoption of bulk metered mail (BMM)
as the basis for calculating unit mail processing cost differences.
It also
agrees with the Service that the measured costs should be limited to
activities exhibiting identifiable savings, namely unit processing and
delivery costs.” [paragraph 5027 at page 2681
’ Bulk metered mail refers to meter~b_elt bypass mail. This is metered letter mail
which is trayed by the mailer, so it does not require the preparation that bundled
metered letters would. Similarly, bulk metered mail does not require facing and
canceling.
ia
.e
with precedent, the discounts the Postal Service is proposing
2
here use the same approach as in Docket No. R97-I,
3
benchmark
4
measure costs avoided.
5
consideration
6
the rate increase on mailers, and simplicity in the rate structure.
7
designing
a
avoidance estimates.
9
2.
IO
-
Consistent
1
is used in conjunction
with mail processing
that is, the bulk metered
and delivery costs to
The statutory pricing criteria call for a balanced
of a number of factors, including fairness and equity, the effect of
rates, I have not limited myself exclusively to consideration
Postal Service Automation
in
of cost
Goals and Discount Trends
For a number of years, the Postal Service has been relying on automation
11
to control the costs of mail processing
12
to continue working toward a mailstream that is as barwded
13
have taken account of the importance
14
discounts that recognize the need for continued
15
automation
16
Accordingly,
and delivery functions.
of the automation
The goal has been
as practicable.
I
program by proposing
bulk mailer participation
in that
program.
The following table highlights the recent trend in discounts for both 3digit
17
and 5-digit letters.
These two rate categories
ia
majority of workshared
together
comprise the great
First-Class Mail - 69 percent in 1998.
Table 8
First-Class Mail 3-Digit and 5-Digit Letters
Discount Summary
19
20
21
22
23
(in cents)
Discount from Single-Piece
Rate
Category
3-Digit Letter
5-Digit Letter
Letter Rate
Docket No.
R94-1
Docket No.
MC95-1
Docket No.
R97-1
5.6
6.2
6.6
8.2
6.9
8.7
19
1
As indicated in Table 6, discounts for the largest two rate categories
First-Class
Mail increased
2
workshared
3
Comparing
4
piece letter rate went from 29 cents to 33 cents, an increase of 13.8 percent.
5
Over the same four-year
6
26.1 cents, a decrease
7
cents to 24.3 cents, a decrease
a
were also changes between
9
minimum number of pieces needed to,qualify
rates between
between
of
Docket Nos. R94-1 and R97-1.
Docket No. R94-1 and Docket No. R97-1, the single-
period, the 3-digit letter rate went from 26.4 cents to
of 1 .I percent.
The 5-digit letter rate went from 25.8
of 5.8 percent.
It should be noted that there
Docket No. R94-1 and Docket No. MC95-1 in the
for these rates. The minimum
10
number of pieces for the 3-digit rate went from 50 to 150 and the minimum
11
number of pieces for the 5-digit rate went from 10 to 150.
12
The cost analysis performed
demonstrates
for the current docket by witness Miller
13
(USPS-T-24)
that the cost differences
14
are now smaller than they were estimated
15
result, if the proposed
16
many discounts would need to be reduced.
17
proposal in this docket will generally
ia
present levels, as discussed
19
in this docket are the beginning
20
worksharing
21
anticipate smaller discount
workshare
between automation
to be in Docket No. R97-1.
tiers
As a
discounts were tied strictly to avoided costs,
Instead, the Postal Service’s
maintain workshare
in detail below.
discounts at their
However, if the cost data presented
of a new cost trend indicating that the value of
to the Postal Service has peaked, then the mailing community
proposals
in the future.
22
23
20
might
_-
1
B.
Rate Proposal for the Letters and Sealed Parcels Subclass
2
1.
Single-Piece and Nonautomation
The rate structure for single-piece
3
4
rate, (4) the nonautomation
the heavy piece discount.
-~
a
this rate structure.
9
a.
Single-Piece
(1) the single-piece,
presort rate, (5) the nonstandard
The Postal Service proposes
first-ounce
surcharge,
and (6)
retaining all elements of
Letters, Flats, and Parcels
The basic one-ounce
rate is the most visible and important rate in the
eyes of the general public.
12
for about 30 percent of domestic
13
category in any other class of mail.
In 1998, the basic rate (first-ounce
the basic rate. This one-cent
16
was the smallest proposed
only) accounted
mail revenue, far more than any other rate
The Postal Service is proposing
15
17
presort letters, flats
Reply Mail (QBRM) rate, (3) the additional-ounce
11
14
and nonautomation
and parcels currently consists of six components:
rate, (2) the Qualified Business
10
Presort Letters, Flats, and Parcels
an increase of one cent, or 3.0 percent, in
increase matches that in Docket No. R97-1, which
increase since postal reorganization.
This increase is consistent
with the Postal Service’s revenue requirement
ia
and the statutory ratemaking
criteria of the Act.
In view of that revenue
19
requirement,
20
large rate increases
21
the basic rate would unfairly relieve other mail classes of their fair share of the
22
institutional
a proposal not to change this rate would impose unreasonably
in other classes of mail. Conversely,
cost burden.
21
a two-cent increase in
For administrative
1
ease and to avoid unnecessary
complexity
for the
2
general mailing public, the Postal Service is continuing the practice of proposing
3
this rate in whole cents.
4
b.
Qualified Business Reply Mail
As a result of Docket No. R97-1, the Postal Service implemented
5
a new
6
discounted
7
qualify for the discounted
a
prebarcoded,
9
replaced the previous Business
Reply Mail Accounting
IO
which involved full single-piece
postage and per-piece fees, with a new structure
11
that features discounted
12
Service proposes a one-cent
13
cents3
14
letter rate of 30 cents for Qualified Business Reply Mail (QBRM).
rate, mailers need to be pre-approved
automation-compatible
Business Reply Mail.
To
and prepare
In effect, QBRM
System pricing structure,
postage and per-piece fees. For this docket, the Postal
increase in the QBRM postage rate, from 30 to 31
The proposed increase in the QBRM postage rate will maintain the
15
discount at three cents below the single-piece
16
prepared
17
avoidance
16
through 90 percent of this measured
19
discount,
20
T-39). can result in substantial
21
approximately
by witness Campbell
(USPS-T-29
of 3.4 cents, applicable
rate. The new cost study
at Section 1V.D) shows a cost
to both letters and cards.
cost avoidance.
My proposal passes
The three-cent
coupled with the new fee structure proposed by witness
savings for those customers
postage
Mayo (USPS-
receiving
more than
113,000 pieces of BRM annually.
3 See the testimony of witness Mayo, USPS-T-39
discussion of BRM fees.
22
at Section IV.D, for a
QBRM is clean, prebarwded
1
2
mail. Automation-compatible
3
millions of individuals and small businesses.
4
associated
5
customers to more directly share in the benefits of automation.
6
C.
7
First-Class Business Reply Mail is used daily by
By recognizing
cost savings
with this mail, the Postal Service is able to permit a broader base of
Additional-Ounce
Rate
The Postal Service proposes an additional
and presorted
mail. This represents
ounce rate of 23 cents for both
a
single-piece
9
present rate, and returns the rate to the level that prevailed from 1991 until 1999.
IO
.F~
mail and incurs less cost than non-barcoded
a one-cent
This proposal maintains the current difference
of 11 cents between the
II
first-ounce
12
additional-ounce
13
cents minus 23 cents), to 9 cents as a result of Docket No. R94-1 (32 cents
14
minus 23 cents), and to 11 cents as a result of Docket No. R97-1 (33 cents
15
minus 22 cents).
16
17
rate and the additional-ounce
increase over the
rate. The “degression”
in the
rate increased from 6 cents as a result of Docket No. R90-1 (29
The additional-ounce
for the Postal Service.
rate continues to be an important source of revenue
In FY 1998, additional
ounces generated
billion in revenue, or 14 percent of First-Class
Mail revenue for the year. The
19
Docket No. R97-1 change in the breakpoint
20
ounces will work to increase the number of First-Class
21
and the revenue importance
with Priority Mail from 11 to 13
22
is an important factor in helping First-Class
23
and in helping the Postal Service meet its revenue requirement.
of this rate. Accordingly,
23
about $4.7
Mail additional
the additional
ounces
ounce rate
Mail meet its cost coverage target
1
Several considerations
went into developing
2
including achievement
3
coverage provided by witness Mayes.
4
important to develop an additional
5
the rate is designed
6
presents the results of the First-Class
7
of the revenue requirement
to recover.
the proposed 23-cent rate,
and the First-Class Mail cost
The Postal Service also considers
ounce rate that reflects the underlying
The testimony
of witness Daniel (USPS-T-28)
there is difficulty in measuring
8
additional ounce costs with the highest degree of precision
9
weight-step
basis.
IO
evaluating,
in the aggregate,
11
and the overall costs it is designed
12
basis for addressing
13
between the additional ounce rate and its underlying
14
As discussed
between the additional ounce rate
to recover.
potential concerns
and presort.
on a weight-step-by-
the weight study does provide a basis for
the alignment
in USPS-T-28,
costs
Mail weight study prepared for this docket.
As noted by witness Daniel (USPS-T-28),
Nevertheless,
it
Also, the weight study provides a
that there may be a large disparity
costs.
the weight study develops costs for both
15
single-piece
On average, across all weight steps, each additional
16
ounce for single-piece
17
each additional ounce for a presort mail piece adds 14.8 cents to cost (Id. at
18
Table 2). Taking single-piece
19
on average adds 12.7 cents to First-Class
mail adds 12.5 cents to cost (USPS-T-28,
and presort mail together,
Table I), while
each additional ounce
Mail costs.4
4 Calculated by using the data in USPS-T-28 as follows: 12.5 cents for singlepiece calculated in Table 1 by taking $2,236,175,478
in costs /17,967,736,454
additional ounces, and 14.8 cents presort calculated in Table 2 by taking
$389,874,405 in costs I 2,639,970,578
additional ounces. The weighted
average of the two is 12.743, or $2,626,049,883
in costs ($2,236,175,478
+
$389,874,405) divided by 20,607,707,032
additional ounces (17,967,736,454
+
2,639,970,578).
24
1
While the concept of mark-up applies most directly at the subclass level,
2
examining the mark-up for an individual rate can give an indication of how the
3
rate compares with the rate/cost relationship
4
shown in the First-Class
5
33B), the mark-up for the letters subclass at proposed
6
percent.
7
(23 cents in revenue per ounce/l2.7
8
below, but generally consistent
9
additional ounce mark-up
10
11
for the subclass as a whole.
Mail Test Year Summary
(below in Attachment
As
USPS-
rates is approximately
The mark-up for the additional ounce rate is approximately
96
81 percent
cents in cost per ounce), which is somewhat
with the subclass as a whole.
Because the
is below the subclass average, the additional ounce
rate is serving to reduce the overall mark-up for the letters subclass.
The cost data compiled
by witness Daniel also show that the first
12
additional ounce of single-piece
13
at Table I), while the first additional ounce of presort mail adds 17.7 cents to
14
cost (Id. at Table 2). In general, subsequent
15
than the first additional
16
mail adds 22.4 cents to unit costs (USPS-T-28
additional
ounce for both single-piece
In addition, while the first additional-ounce
ounces add less to costs
and presort mail.
costs less for presort mail than
17
for single-piece
18
argues against a lower additional-ounce
19
would steadily increase the presort discount as the weight of the piece
20
increased, even though the weight study data indicate that the cost difference
21
does not continue to increase for heavier pieces.
22
23
mail, these costs catch up for heavier pieces.
rate for presort, since the lower rate
It might be argued that the rates for additional
should be strictly cost based.
This cost behavior
ounces of First-Class
Under such a scheme, the rates for additional
25
Mail
I
ounces would vary from ounce increment to ounce increment to reflect a more-
2
or-less constant
3
at least three reasons.
4
costs with great precision, especially for heavier presort pieces with relatively low
5
volume.
6
across all weight increments;
7
rates from ounce increment-to-ounce
8
data.
cost coverage.
The Postal Service views this as undesirable
The first is the difficulty in measuring
It is one thing to examine additional
additional ounce
ounce costs in the aggregate
it is quite another thing to attempt to fine-tune
increment based on disaggregated
cost
The second reason why the Postal Service views varying rates as
9
10
undesirable
11
design with a single stamp that can be used for each additional
12
is simple and easy for the general public to use.
is simplicity in rate design for single-piece
mailers.
A uniform rate
ounce of postage
The third reason is that, given a uniform rate for single-piece
13
14
non-uniform
15
presort.
16
weight step to weight step, creating an unpredictable
17
d.
18
for
mailers, a
rate for bulk mailers could create a skewed set of incentives to
The presort discount from single-piece
could vary significantly
workshare
from
response.
Presorted, Nonautomation
Rate for Letten, Fiats, and Parcels
The Postal Service proposes
a nonautomation
single-piece
presort rate of 32.0 cents,
19
or 2.0 cents below the proposed
rate. This proposal
reduces the
20
current discount of 2.5 cents by 0.5 cents and reflects the newly measured
21
avoidance
of only 0.1 cents, compared
22
USPS-T-24
at Table 1). As discussed
to the bulk metered benchmark
cost
cost (see
in the testimony of witness Miller, the
26
1
measured
2
isolate nonautomation
presort costs.
rate of 32.0 cents represents
because the
4
proposed
5
and an increase in the price of close to 5.0 percent.
6
the discount at this time (and a correspondingly
7
could have resulted in a significant rate impact for our customers
a
nonautomation
presort rate. A more moderate reduction in the discount reflects
9
the appropriate
balance between recognizing
a 20 percent reduction in the discount
An even greater reduction
the implications
data and acknowledging
11
customers.
12
beginning
13
Postal Service has peaked, then the mailing community
14
discounts
15
e.
of a new cost trend indicating that the value of worksharing
to the
might anticipate
smaller
in the future.
Nonstandard Surcharge
The Postal Service proposes maintaining
11 cents for nonpresort
18
surcharge
19
by one penny.
20
nonstandard
21
level that has prevailed since 1988.
23
of the new cost
the impact that a sharp rate increase would have on our
17
22
mailing at the
As indicated earlier, if the costs presented in this docket are the
for nonpresort
the nonstandard
surcharge
at
mail weighing one ounce or less. The nonstandard
mail was last changed in 1995 when it was increased
In addition, the Postal Service proposes maintaining
the 5-cent
surcharge for presort mail weighing one ounce or less, the rate
In Docket No. R97-I, the Postal Service proposed increases
nonstandard
in
greater increase in the price)
10
16
..-
now reflects the Postal Service’s ability to better
I passed through more than the measured cost avoidance
3
fly
cost avoidance
surcharge for both nonpresort
27
in the
and presort mail. Those proposals
1
and the supporting
cost study drew criticism and considerable
2
intervening
3
T-24 at Attachment
4
issues which surfaced in the earlier docket, demonstrating
5
Service has made substantial
6
The nonstandard
parties.
The Docket No. R2000-1 testimony
USPS-24B)
addresses
7
mailers that the cost of processing
a
find that a nonstandard
9
to pay the corresponding
nonstandard
surcharge.
However,
11
signal the impact of nonstandard
12
Generally,
13
method of processing
14
pieces.
15
objective, and the nonstandard
16
Without an appropriate
17
could be adversely affected by large numbers
pieces is not sufficiently
that criticism.
pieces is higher.
Mailers may
if the price mailers pay for
high, the Postal Service may not properly
pieces on its mail processing
operations.
it is the Postal Service’s policy to provide mailers with a low-cost
differently
Some standardization
shaped and sized one-ounce
cents for nonpresort
20
pieces.
21
both nonpresort
First-Class
of basic mail pieces is necessary
surcharge
surcharge,
encourages
nonstandard
Mail
to achieve this
such standardization.
Postal Service mail processing
of nonstandard
In his study, witness Miller obtains nonstandard
19
23
that the Postal
piece will best meet their needs and that they are willing
nonstandard
22
and cost
performs an important role in signaling
10
18
of witness Miller (USPS-
several mail processing
progress in addressing
surcharge
attention from
operations
pieces.
surcharge
costs of 23.4
pieces and 9.3 cents for presort nonstandard
These costs are clearly above the present levels of the surcharge
and presort mail.
While witness Millers study makes significant
progress
issues identified in Docket No. R97-1, even his improved
28
in addressing
nonstandard
cost
for
-.
1
estimates do not achieve the ideal of completely
2
which weigh over one ounce.
3
surcharge proposals
4
proposals also reflect consideration
5
.F~
are influenced
the Postal Service’s nonstandard
by, but not tied strictly to costs. The
of underlying
policy objectives.
retention of the current nonstandard
surcharges,
the Postal
6
Service’s primary objective is clearly not to achieve absolute precision in de-
7
averaging the rates for disparate
8
maximize revenue generated
9
paramount, the Postal Service would propose surcharges
one-ounce
First-Class
by nonstandard
pieces.
Mail pieces or to
If those objectives were
at or near the level of
IO
the costs provided by witness Miller.
11
be set at a level which ensures that nonstandard
12
pay a reasonable
13
nature. The Postal Service considers that the primary purpose of the
14
nonstandard
15
high degree of standardization
16
efficiency of mail processing
17
set at a level which provides a significant financial
18
so that they contribute
19
,-
By proposing
Accordingly,
excluding the costs of pieces
proportion
surcharges
Instead, the proposed
one-ounce
of the costs associated
surcharges
should
mail pieces directly
with their nonstandard
should be to modify mailer behavior by encouraging
of basic one-ounce
operations.
to operational
a
pieces, which increases the
As a result, the surcharges
should be
incentive to design mail pieces
efficiency.
At the same time, the Postal Service recognizes that there are one-ounce
20
First-Class Mail pieces which, because of the physical features of their contents,
21
cannot be “standardized.”
22
which reflects the full cost of “nonstandard-ness”
23
desirable degree of mailer standardization.
It does not seem necessary
29
to impose a surcharge
in order to influence a
Nor does it seem necessary to set
1
the surcharge
at a level that would appear to punish those mailers who cannot
2
alter their mail pieces.
Witness Miller’s nonstandard
3
4
Attachment
USPS-24B)
5
that the surcharges
6
character
7
should lead to a general concurrence
6
Commission
9
approach
surcharge
do not fully reflect the costs attributable
of one-ounce
First-Class
Mail pieces.
to the establishment
impose a reasonable
11
on those pieces and spread the remainder
12
larger pool of First-Class
more policy-oriented
Such an approach
of the extra costs of nonstandard
should
pieces directly
of the costs on the overwhelmingly
Mail pieces (to negligible effect).
should also reflect reasonable
rate relationships
14
standard
one-ounce
pieces, nonstandard
one-ounce
15
pieces of First-Class
Mail. Improvements
in cost measurement
16
avoid a degradation
17
basis for future adjustments.
16
interpreted
19
f.
of mail processing
among
pieces, and two-ounce
or the need to
efficiency should also be considered
Preservation
of the current surcharges
as a
should be
as a first step toward adopting such an approach for the long term.
Heavy Piece Discount
In Docket No. R87-1, the Commission
20
of her results
that the Postal Service and the
of the surcharges.
proportion
to the nonstandard
His affirmation
should take a less strictly cost-driven,
The surcharges
at
confirms witness Daniel’s Docket No. R97-1 conclusion
10
13
cost study (USPS-T-24
21
approved
22
mail pieces weighing
23
cents;
recommended
the adoption of an additional 4-cent heavy-piece
more than two ounces.
the Postal Service proposes
discount for presorted
At present, this discount is 4.6
maintaining
30
and the Governors
this discount at its present level.
As noted in the discussion
1
C
2
data compiled by witness Daniel (USPS-T-28
3
the initial additional-ounce
4
piece mail, these costs catch up for heavier pieces.
5
against a lower additional-ounce
6
increase the presort discount as the weight of the piece increased,
7
available data indicate that the cost difference
a
heavier pieces.
This cost behavior,
9
pieces weighing
more than two ounces.
at Tables 1 and 2) show that, while
costs for presort mail are less than those of singleThis cost behavior argued
rate for presort, since the lower rate would
however, does support the discount for
A one-time discount recognizes
initial additional ounces cost less for presort, but that this difference
11
continue to grow as the pieces get heavier.
12
2.
Automation
even though
does not continue to increase for
10
13
.-
on the additional ounce rate above, the cost
that
does not
Letters and Flats
The rate structure for automation
letters and flats consists of several
14
components.5
The rate structure for bulk automation
letters consists of four tiers:
15
basic, 3-digit, 5-digit, and carrier route.
16
must consist of 500 or more prebarcoded
17
3-digit (or 5-digit) rate, the mailing must have at least 150 pieces to the same 3-
18
digit (or 5-digit) ZIP Code/scheme
19
piece minimum pay the basic automation rate. Thus, the basic automation rate
20
can be viewed as a rate for bulk residual barcoded
To be eligible for these rates, a mailing
pieces.
destination.
Further, to be eligible for the
Pieces that do not meet the 150-
pieces. The carrier route
5 The preceding discussions of the additional ounce rate (Section VII.B.l .c) and
the heavy piece discount (Section Vll.B.1.f) also apply here. In addition, the
preceding nonstandard surcharge discussion (Section VII.B.l .e) also applies to
automation flats.
31
1
letter rate is only available for delivery-point
2
specified
3
pieces per carrier route.
4
not qualify for this rate category.
5
by the Postal Service.
barcoded letters destinating
in zones
Further, the mailing must have at least 10
Pieces destined for routes with less than 10 pieces do
The rate structure for bulk automation
flats currently consists of two
6
components:
basic and 3/5-digit. To be eligible for these rates, the mailing must
7
consist of 500 or more pieces.
8
mailing must have at least 10 pieces to the same 5-digit ZIP Code or at least 10
9
pieces to the same 3-digit ZIP code; remaining
Further, to be eligible for the 3/5-digit rate, the
pieces pay the basic automation
10
rate for flats. The mailer is required to sort to the 5-digit level if the mailer has 10
11
or more pieces to the same 5-digit ZIP code.
12
automation
13
As in the case of letters, the basic
rate can be viewed as a rate for bulk residual barcoded
The Postal Service is not proposing
any changes in the piece minimums
14
associated
15
be retained, with the exception that we propose that the current combined
16
digit flat rate be disaggregated
17
with this rate structure.
pieces.
In addition, all existing automation
3/5-
into a 3-digit rate and a 5digit rate.
Unit cost savings for the bulk automation
18
Table 7. The savings shown for basic automation
19
metered benchmark,
20
in terms of the previous automation
21
automation
22
single-piece
23
metered mail, making it the appropriate
or 5digit
tiers will
letter tiers are shown below in
are in relation to the bulk
while the 3-digit, 5-digit and carrier route savings shown are
tier (for example, 3digit in terms of basic
in terms of 3-digit automation).
As noted previously,
mail most likely to convert to the automation
benchmark.
32
categories
the
is bulk
Table 7
Unit Cost Savings and Discounts for Automation
1
2
3
Current
Discount
Unit Cost
Savinss*
4
5
6
(Cents)
Basic Automation
4.9
3-Digit
1.0
.c rl:,:,
1.2
Carrier Route
0.3
l
Unit costs include mail orocessinq
Table 1.
(Cents)
(Cents)
6.0
6.0
0.9
0.9
1.8
1.8
0.5
0.5
and deliven/ costs. Source USPS-T-24
a
letters, where discounts,
9
previous tier. As shown in the table, the newly measured
like unit cost savings, are expressed
in key instances.
at
for automation
in terms of the
cost avoidances
are
For example, the rate for
10
now below the current discounts
11
basic automation
Ii
latest cost data show that the mail processing
13
basic automation
14
discount should be reduced by 1 .I cents, to 4.9 cents below the single-piece
15
rate.
16
-
Proposed
Discount
Table 7 also presents the current and proposed discounts
7
Letters
letters is currently 6.0 cents below the single-piece
rate. The
and delivery costs avoided by a
letter are now 4.9 cents, which, by itself, would suggest that the
Instead, the passthroughs
and the discounts that underlie the proposed
17
rates were selected to balance several goals, including:
(1) achieving the cost
18
coverage target provided by witness Mayes, (2) recognizing
19
worksharing,
20
rate impacts, and (4) acknowledging
21
overall postal operations.
22
equipment
the value of mailer
(3) avoiding changes in discount levels which result in disruptive
the importance
of mailer barcoding
Mailers have invested significantly
and changed their mail processes
33
in
in automation
as a result of the recent expansion
1
in worksharing
2
incentives.
3
difficulties if a large portion of the nearly 45 billion workshared
4
pieces reverted to the Postal Service for sorting and barcoding.
5
a.
6
incentives,
and it would be unfair to sharply reverse these
At the same time, the Postal Service could experience
Basic Automation
First-Class Mail
Letters
The Table 7 difference
in unit costs between a basic automation
7
the bulk metered benchmark
a
6.0 cents below the single-piece
9
would suggest that this discount should be reduced
is 4.9 cents.
The current basic automation
letter and
rate is
rate. Thus, the latest cost data, taken by itself,
10
below the single-piece
11
tiers are keyed to the basic automation
12
basic automation
13
single-piece
14
operational
by 1 .I cents, to 4.9 cents
rate. Since the discounts for the subsequent
automation
starting point, any decision to reduce the
discount would also work to reduce the discounts from the
rate for 3-digit, 5-digit, and carrier route mail.
Instead, the Postal Service is proposing
15
measured cost avoidance
16
cents. This results in a one-cent
17
to a proposed 28.0 cents.
18
above, including the avoidance
19
of incentives to automate.
20
toward expanding
21
smaller cost avoidances
to pass through
and maintain this discount
at its present level of 6.0
increase in this rate from its present 27.0 cents
This is consistent
of disruptive
with the ratemaking
rate increases
The fact that this represents
discounts
122% of the
goals described
and the maintenance
a shift from the trend
serves to signal the mailing community
that are currently being measured.
22
23
34
about the
1
b.
This rate applies to the largest volume of barcoded
2
3
year, more than one-half of the automation
4
Postal Service proposes a one-cent
5
cents.
This proposed rate maintains
6
0~
3-Digit Letters
7
the basic automation
8
proposal passes through somewhat
9
between
passthrough
11
metered benchmark
12
discussion
13
C.
14
In the test
letters are in this rate category.
The
increase in the current 26.1 cent rate to 27.1
the discount at its present 0.9 cents below
rate and 6.9 cents below the single-piece
basic automation
10
letters.
rate. While this
less than the amount of avoided costs
and 3-digit letters (90 percent),
of 117 percent of the measured
it also results in a
cost avoidance
and 3-digit letters (6.9 cents I5.9 cents).
regarding the basic automation
between the bulk
As such, the
rate design is also applicable
here.
5-Digit Letters
Consistent
with its rate proposals
maintaining
for basic automation
and 3-digit letters,
15
the Postal Service proposes
16
3-digit rate (compared with the 1.2-cent measured
17
3-digit and 5-digit automation
18
percent increase over the current rate. Use of this rate category, which contains
19
the second largest volume among automated
20
Mailers can be expected to use this rate only when their cost of making the 5-
21
digit separation
22
rates, and when their mailings have sufficient geographic
tiers).
the current 1.8 cent discount from the
The proposed
is less than the rate difference
-
35
cost avoidance
between the
rate is 25.3 cents, a 4.1
rate categories,
is optional.
between the 3-digit and 5-digit
density.
Again, the
I
rate design reflects the blending of several factors, including costs, customer
2
impact, and operational
3
d.
goals.
Carrier Route Letters
The Postal Service proposes maintaining
4
the carrier route rate at 0.5
5
cents below the proposed
6
percent increase over the current rate. This proposed discount compares
7
the measured
8
and again reflects the consideration
9
impact, and operational
IO
11
e.
5-digit rate. The resulting rate is 24.8 cents, a 4.2
cost differential
Automation
with
of 0.3 cents between 5digit and carrier route mail,
of several factors, including costs, customer
goals.
Flats
The rate structure for bulk barcoded
12
barcoded
13
three tiers by disaggregating
14
5-digit rate. Preparation
15
letters today.
16
This split is designed
17
sorting to the 5-digit level when mailers choose to do so, and to avoid burdening
18
mailers with mandatory
19
rate and 36digit
flats currently has two tiers: a basic
presort rate. The Postal Service proposes
the 3/5-digit combined
creating
rate into a 3-digit rate and a
to the 5-digit level would be optional, as is the case with
All other mail preparation
requirements
to recognize the additional
would remain the same.
mailer preparation
involved in
5-digit separations.
The Postal Service proposes a one-cent
increase in the basic automation
20
rate, from 30 to 31 cents.
The Postal Service further proposes a new 3digit flat
21
rate of 29.5 cents and a new 5-digit flat rate of 27.5 cents. At present, the
22
combined
3/5-digit flat rate is 27 cents.
The most recent mail characteristics
36
1
data available6 indicate that currently about 90 percent of the combined
2
volume is prepared to the 5digit level, with about 10 percent prepared to the 3-
3
digit level. If these percentages
4
average rate that current 3/5-digit flat mailers would pay would be approximately
5
27.7 cents (0.9
6
the current 27-cent combined
7
Class Mail rates.
/--
27.5 cents + 0.1
The proposed
8
9
l
were to hold under a disaggregated
l
29.5 cents).
regime, the
This increase of 0.7 cents over
rate is in line with the increases for other First-
bulk automation
preserve the appropriate
3/5-digit
flat rates are designed primanly to
rate relationships
arena, and between automation
between letters and flats in the
10
automated
11
rate that applies to both letters and flats. These considerations
12
seen in the proposed
13
nonstandard
rates for two-ounce
flats and the nonautomation
presort
are most easily
pieces (to eliminate the effect of the
surcharge):
14
15
16
17
18
19
20
21
Basic
51.0
54.0
3-Digit Letters/Flats
50.1
52.5
22
5-Digit Letters/Flats
48.3
50.5
---Automation--Letters
Flats
Nonauto Presort
Letters/Flats
55.0
23
With the proposed rate relationships,
24
25
than nonautomation
‘See
USPS-T-33
barcoded flats pay less postage
presort flats, and more postage than barcoded letters at all
Fronk Workpaper
at page 4.
37
1
automation
tiers. This design is consistent
2
which calls for simple, identifiable
with the postal ratemaking
relationships
among rates.
The proposal to create separate 3-digit and 5-digit automation
3
4
also consistent
5
schedules.
6
additional mailer preparation
7
choose to do so. Mailers are no longer burdened
a
separations.
9
parallels that for automation
with the statutory criteria governing
the
involved in sorting to the 5-digit level when mailers
with mandatory
5-digit
The proposal also creates a rate structure that more closely
the desirability
11
customers
12
C.
letters. The proposed
new classification
of the mail by better meeting the mail preparation
and by better reflecting customer worksharing
enhances
needs of our
efforts.
Rate Proposal for the Cards Subclass
As discussed
below, the proposed
percentage
higher than those proposed for letters.
increases for cards are
14
somewhat
15
of applying increases similar in magnitude
16
card prices.
17
the general mailing public, the Postal Service is continuing
18
proposing the most broadly used rates in whole cents.
19
1.
NonAutomation
20
a.
Single-Piece Cards
21
flat rates is
changes to classification
The proposal promotes fairness and equity by recognizing
10
13
criterion
For administrative
Single-piece
In large part, this is the result
to those for letters to lower current
ease and to avoid unnecessary
complexity
for
the practice of
Cards
cards account for about 60 percent of card revenues,
As was the case with single-piece
more
22
than any other card rate category.
23
Postal Service is also proposing an increase of one cent in the basic card rate.
38
letters, the
1
Since the single-piece
2
the proposed increase would be the first since January
3
of 21 cents represents
4
the single-piece
and to avoid unnecessary
7
penny increase is the amount consistent
a
b.
complexity
in whole cents for administrative
ease
for the general mailing public. Also, a onewith the subclass cost coverage target.
Qualified Business Reply Cards
As a result of Docket No. R97-1, the Postal Service implemented
10
discounted
11
qualify for the discounted
12
prebarcoded,
13
QBRM replaced the previous Business
14
structure, which involved full single-piece
15
structure that features discounted
16
the Postal Service proposes
17
gap with
letter rate.
6
9
1995. The proposed rate
an increase of 5 percent, and retains the l&cent
As in the past, this rate is proposed
5
.-~
card rate did not increase as a result of the last rate case,
card rate of 18 cents for Qualified Business
Reply Mail (QBRM).
rate, mailers need to be pre-approved
automation-compatible
Reply Mail Accounting
To
and prepare
Business Reply Mail cards.
In effect,
System pricing
postage and per piece fees, with a new
postage and per piece fees.
maintaining
a new
For this docket,
the QBRM postage rate at 18 cents.’
Maintaining the QBRM card rate at 18 cents will expand the QBRM card
ia
discount to three cents below the single-piece
19
discount for QBRM letters.
20
(USPS-T-29
21
both letters and cards.
card rate, matching the three-cent
The new cost study prepared
at Section 1V.D) shows a cost avoidance
by witness Campbell
of 3.4 cents, applicable to
My proposal passes through 90 percent of this measured
’ See the testimony of witness Mayo, USPS-T-39
discussion of BRM fees.
39
at Section IV.D, for a
1
cost avoidance.
The three-cent
2
proposed
3
those customers
4
annually.
discount, coupled with the new fee structure
by witness Mayo (USPS-T-39),
receiving more than approximately
QBRM is clean, prebarcoded
5
can result in substantial
savings for
113,000 pieces of BRM
mail and incurs less cost than non-barwded
6
mail. Automation-compatible
7
individuals
a
with this mail, the Postal Service is able to permit a broader base of’customers
9
more directly share in the benefits of automation.
10
C.
First-Class
and small businesses.
Nonautomation
By recognizing
12
presort card rate. This proposal
13
piece card rate. It is also consistent
14
between
15
letters.
16
2.
17
the single-piece
Automation
some cost savings associated
to
Presort Cards
The Postal Service proposes
11
reply cards are used daily by millions of
a one-cent increase in the nonautomation
maintains the two-cent discount from the singlewith the proposed 2-cent difference
letter rate and the rate for nonautomation
presort
Presort Cards
The rate structure for automation
presort and carrier route cards consists
ia
of four tiers:
basic, 3-digit, 5-digit, and carrier route. As is the case with letters, a
19
mailing must consist of 500 or more prebarcoded
20
digit and 5-digit rates. Further, to be eligible for the 3-digit (or 5-digit) rate, the
21
mailing must have at least 150 pieces to the same 3-digit (or 5-digit) ZIP
22
Code/scheme
destination.
pieces to be eligible for the 3-
Pieces that do not meet the 150-piece volume
40
1
minimum pay the basic automation
2
viewed as a rate for bulk residual prebarwded
3
rate can be
pieces.
The carrier route letter rate is only available for delivery-point
in zones specified by the USPS.
barcoded
4
letters destinating
5
have at least 10 pieces per route. Pieces destined for routes with less than 10
6
pieces do not qualify for this category.
7
Further, the mailing must
The Postal Service does not propose any changes in the piece minimums
a
associated
9
retains all existing automation
10
F,
rate. Thus, the basic automation
with this rate structure.
In addition, the Postal Service proposal
tiers.
The cost analysis performed for this docket indicates the cost savings for
11
the 3-digit and 5-digit automation
12
for these tiers (USPS-T-24
13
discounts
14
costs, these two discounts
15
with letters, the passthroughs
16
were selected to balance several goals, including:
17
coverage target provided by witness Mayes, (2) recognizing the value of mailer
18
worksharing,
19
rate impacts, and (4) acknowledging
20
overall postal operations.
21
tiers are now smaller than the current discounts
at Table 1). Consequently,
for 3-digit and 5-digit automation
if the proposed workshare
cards were tied strictly to avoided
would need to be reduced.
and the discounts
Instead, as was the case
that underlie the proposed
rates
(1) achieving the cost
(3) avoiding changes in discount levels which result in disruptive
the importance
of mailer barcoding
in
As a result, the Postal Service’s rate proposal in this docket will maintain
22
the 3-digit and 5-digit discounts,
23
present levels for cards.
as Well as the carrier route discount, at their
The updated cost savings for the basic automation
41
tier,
1
however, indicate that an expansion
2
discounts for the subsequent
3
starting point, the proposal to increase the basic automation
4
by 0.2 cents also works to increase the discounts
5
3-digit, 5-digit. and carrier route cards.
As discussed
6
7
size of the percentage
a
percentage
9
cards.
10
a.
increases
of this discount is warranted.
automation
tiers are keyed to this basic automation
increases in the rates for automation
cards; the
the 5.0 percent increase for single-piece
Each proposed card automation
Basic Automation
rate for
to rate design mitigates the
rate is 0.8 cents above its present level.
Cards
This rate is currently 1.4 cents below the nonautomation
11
12
Based on updated cost data, the Postal Service proposes
13
discount by 0.2 cents to 1.6 cents. This expanded
14
percent passthrough
15
nonautomation
16
cents, a 4.8 percent increase over the current rate.
17
b.
48
discount for cards
from the single-piece
in detail below, this approach
approximate
Since the
of the 1.7-cent measured
presort and basic automation
expanding
discount
cost difference
cards.
presort rate.
this
represents
a 94
between
The resulting rate is 17.4
3-Digit Cards
The Postal Service proposes maintaining
the 0.7 cent discount between
19
the basic automation
rate and the 3-digit rate, notwithstanding
20
measured
21
its current level. As was the case with letters, the Postal Service is mitigating the
22
impact on card rates that rigid adherence
cost difference.
the 0.5-cent
The resulting rate of 16.7 cents is 5.0 percent above
to a 100 percent passthrough
42
would
I
imply. Moreover, coupled with the larger basic automation
2
the proposal reflects a larger discount from the single-piece
3
C.
of the existing
discount of 1.3 cents between 3-digit and 5-digit cards, nonwithstanding
6
cent measured
7
rate category is optional.
a
their cost of making the 5-digit separation
9
d.
cost difference
between the two automation
Mailers can be expected
tiers.
the 0.7
Use of this
to use this rate only when
is less than the rate difference.
Carrier Route Cards
The Postal Service is proposing to maintain the carrier route rate at 0.5
11
cents below the proposed
12
carrier route discount could be proposed, the cost estimates
13
small amount of data due to the small volume in this rate category.
14
incremental
15
letters, where considerably
16
difference
17
route trays and packages.
19
VIII.
20
r‘
the maintenance
5
10
P
rate.
5-Digit Cards
The proposed 5-digit rate represents
4
discount for cards,
5-digit rate. While the cost data suggest that a larger
are based on a
discount of 0.5 cents would match the incremental
more data are available.
does recognize the extra mailer preparation
An
discount for
The proposed
rate
required to make carrier
SUMMARY OF THE FINANCIAL IMPACT OF THE RATE DESIGN
The overall rate proposal, including percentage
21
each rate category, is presented
22
financial impact of the rate design is detailed in Attachment
23
calculations
supporting
in Attachment
changes
USPS-33A
these financial results are contained
43
in the rates for
to this testimony.
USPS-33B.
The
in my Workpaper
The
I
(USPS-T-33
Fronk Workpaper).
2
in Table 8. Revenues
The key financial results are summarized
below
include fees.
3
4
Table 8
Estimated Total Revenue, Cost, and Contribution
Test Year 2001 After Rates
($ thousands)
5
6
7
a
g’
Letters
Cards
Total Class
Revenue
cost
$36,231,201
$1,052,689
$37,283,890
$18,456,821
$708,877
$19,165,698
44
I
Contribution
$17.774.380
_. ,. .,--_
$343,812
$1 8,118,192
I Percentage
I
1 Rate Increase
I
1
1
3~5%
-.- .5.0%
3.6%
Attachment
FIRST-CLASS
MAIL PROPOSED
RATES
Current Rate
(Cents)
Proposed Rate
(Cents)
Change
33
30
11
34
31
11
3.03%
3.33%
0.00%
30.5
-4.6
5
32.0
-4.6
5
4.92%
0.00%
0.00%
22
23
4.55%
20
18
18
21
16
19
5.00%
0.00%
5.56%
27.0
26.1
24.3
23.8
26.0
27.1
25.3
24.6
3.70%
3.83%
4.12%
4.20%
30.0
27.0
N/A
5
31.0
29.5
27.5
5
3.33%
N/A
N/A
0.00%
22
-4.6
23
-4.6
4.55%
0.0%
16.6
15.9
14.6
14.1
17.4
16.7
15.4
14.9
4.82%
5.03%
5.48%
5.67%
REGULAR:
Letters, Flats 8 IPPs:
Non-presorted:
First Ounce (except QBRM)
Qualified Business Reply Mail
Nonstandard Surcharge
Nonautomation Presort:
First Ounce
Heavy Piece Deduction
Nonstandard Surcharge
Additional Ounce
,-
USPS-33A
Cards
Ge
Piece (except QBRM)
Qualified Business Reply Mail
Nonautomation Presort
AUTOMATION:
Letters 8 Flats:
Letters (First Ounce):
Basic Automation
3-Digit Letters
5-Digit Letters
Carrier Route Letters
Flats (First Ounce):
Basic Automation
3-Digit Flats’
5-Digit Flats
Nonstandard Surcharge
Additional Ounce
Heavy Piece Deduction
LCards
Basic Automation
3-Digit Cards
5-Digit Cards
Carrier Route Cards
* Currently a combined 3/5-Digit rate.
45
%
Attachment
FIRST-CLASS
BEFORE RATES
AFTER RATES
% CHANGE
100,261,726
99,657,394
-0.40%
$34,966,392
$156.566
$35,142,960
$0.350512
$36,041,609
$169.592
$36,231.201
50.362629
3.02%
21.08%
3.10%
3.51%
516565,943
189.29%
516.577.037
516,456,821
196.30%
517,774,360
-0.59%
5,584.931
5,440,951
-2.58%
51,021,746
$7.500
51.029.246
50.184290
51,043,775
$8.914
51,052,689
$0.193475
2.16%
18.85%
2.28%
4.98%
$727,672
141.44%
5301,574
5708,877
148.50%
5343,812
-2.56%
14.01%
105,846,657
105,298,345
-0.52%
536.008.136
$164,088
536.172,226
50.341742
$37,085,384
$198,506~
537,283,890
50.354079
2.99%
20.98%
3.07%
3.61%
519,293,615
187.48%
516,678,611
$19,165,698
194.53%
518,118,192
CARDS SUBCLASS:
Volumes
Revenues:
Postage Revenue
Fee Revenue
Total Revenue
Revenue Per Piece
costs:
Total Costs (incl. contg.)
Cost Coverage
Contribution
TOTAL FIRST-CLASS MAIL:
Volumes
Revenues:
Postage Revenue
Fee Revenue
Total Revenue
Revenue Per Piece
costs:
Total Costs (incl. contg.)
Cost Coverage
Contribution
USPS-T-33
?
MAIL TEST YEAR SUMMARY
LElTERS SUBCLASS:
Volumes
Revenues:
Postage Revenue
Fee Revenue
Total Revenue
Revenue Per Piece
costs:
Total Costs (incl. contg.)
Cost Coverage
Contribution
Source:
USPS-33B
Fronk Workpaper
at page 1.
46
7.22%
-.