OCA-T-6
Docket No. R2000-1
DIRECT TESTIMONY
OF
JAMES F. CALLOW
ON BEHALF OF
THE OFFICE OF THE CONSUMER
MAY 22,200O
ADVOCATE
TABLE OF CONTENTS
I.
STATEMENT
II.
PURPOSE
PART I
1.
.,
2.
3.
4.
. .._....................,,..,.,,.,..,.,,,,..,,,,,,
.I... ._,... ., ..__.,,.__...._..._., .._..,.. .._...._...
..,._._....,,... .._.,
3
.,.
COST BURDEN ON FIRST-CLASS
LETTER
..,_...,.,,..__.,,_.....,.,,.,....,,,.....,,.,...,,,,........,..,.,.,.......,.....,.,.,
2.
A comparison
of First-Class Letter and Standard (A)
Regular mark-up and cost coverage indices reveals a
widening gap ..,,_....,,,...._...,,.....,,.......,..,.....,.,......,,,.......,........,..,.
A comparison of actual First-Class Letter and Standard
(A) Regular cost coverage and mark-up indices to the
Commission’s recommendations
also reveals a widening
gap . . . . . .. . .. . . . . . . . . . . . . . .. . . .. . . . .
6
6
The First-Class Letter Mail cost coverage is high and
rising ..,._.........._.........................,.......,.,......,.,......,........,,.....,,,......,
The mark-up index reveals a rising institutional cost
burden on First-Class Letter Mail .._._........__................................
The cost coverage index also shows an increase in the
institutional cost burden on First-Class Letters .._..,....._.,_,..._.,,....
Cost coverage and mark-up indices reveal a high FirstClass
Letter Mail institutional
cost burden
when
compared to Commission recommendations
.._.._...._.........
The Institutional
Cost Burden on First-Class Letter Mail Is
Increasing Relative to the Institutional Cost Burden on Standard
(A) Regular Mail .
.
. . . . ..
.
1.
III.
1
Common Measures of Institutional Cost Show a High and
Rising Burden Being Borne by First-Class Letter Mail ..,,,....._,......,.........
1.
B.
._,_......_,,_.._.........................................,.....
AND SCOPE OF TESTIMONY
THE INSTITUTIONAL
MAIL IS INCREASING
A.
II.
OF QUALIFICATIONS
Page
6
7
8
10
11
14
15
. 17
THE INCREASING
FIRST-CLASS
LETTER INSTITUTIONAL
COST
BURDEN
HAS RESULTED
IN FIRST-CLASS
LETTER
MAIL
CONTRIBUTING
REVENUES
IN EXCESS
OF THE AMOUNT
INTENDED BY THE COMMISSION . . .. . . .. . .. . .. .._...............................................
21
TO MITIGATE THE INCREASING INSTITUTIONAL
COST BURDEN
ON FIRST-CLASS
LETTER MAIL, THE COMMISSION
SHOULD
MAINTAIN THE SINGLE-PIECE
FIRST-CLASS RATE AT 33 CENTS...........
24
Docket No. R2000.1
A.
B.
C.
IV.
OCA-T-6
The Proposed
Increase
in Rates for First-Class
Letters
Preserves the Already High Institutional Cost Burden on FirstClass Letter Mail _,__,_._.,.,,................,.................,........,..........................
24
The Proposed Increase in Rates for First-Class Letters Cannot
be Justified by Higher Postal Service Costs
.._...._.............................
25
Reducing the High Institutional Cost Burden on First-Class
Letters Would Enhance Fairness and Equity
. .._.._.......................... 27
CONCLUSION
.. .._...........,_.....,......,.,,.........,,.........,,......,,.,.....,.,..,......,,,,.......,,,
PART II ._..,............_.......,.......................,.,......,,..,......,,.,,....................,.,,..........,,........,
I.
HOUSEHOLDS
AND BUSINESS
MAILERS
HAVE DIFFERENT
INTERESTS WITH RESPECT TO CHANGES IN THE FIRST-CLASS
RATE . ..._...._..._...............,............,.,,.....,.,,,........,..,......,,.....,,,.........,........,........
A.
Households Prefer Longer Periods of a Stable Single-Piece
First-Class Rate .._.............,..........,.,...............................,......................
1.
2.
B.
To the Extent Increased First-Class Rates Are Necessary,
Smaller, More Frequent and Predictable Rate Adjustments Are
Preferred by Business Mailers
.._..............................................
1.
2.
C.
II.
Longer periods of rate stability reduce inconvenience for
household mailers
.._...........,...........................,............,.........
Longer periods of rate stability minimize confusion to
household mailers
.._...............................................................
More frequent rate increases minimize the likelihood of
sharp increases in mailers’ costs .._........._.................................
More predictable
rate increases
facilitate
business
planning
.
.._..................................................................
The Postal Service Recognizes That Business Mailers Desire
Smaller, More Frequent and Predictable Rate Adjustments
29
30
30
31
31
32
32
33
33
34
THE DIFFERING INTERESTS
OF HOUSEHOLD
AND BUSINESS
MAILERS
CAN BE ACCOMMODATED
BY ADJUSTING
THE
SINGLE-PIECE
FIRST-CLASS
RATE
EVERY
OTHER
RATE
PROCEEDING . . .. . . .. . . .. . . .. . . .. . .. . .. . . .. . .. . .. . .. . .. .. . .. .. .. . . .. . .. . .. . .. . .. . . .. . .. . .. . .. . .. . .. . .. .. . .. .. . 36
A.
Adjusting the Single-Piece Rate Every Other Rate Proceeding
Would Involve Maintaining the “Whole Cent” Integer Rate for
Households and Establishing Workshare Discounts Based upon
a Non-Integer Rate . . .. . .. . .. . . .. . .. . .. . .. .. . .. .. . .. . .. . .. . .. . .. . . .. . .. . .. . .. . .. . .. . .. . .. . .. .. . .. .. 36
Docket No. R2000-1
1.
2.
3.
B.
2.
3.
Ill.
The single-piece
First-Class rate should be changed
every other rate proceeding . . . .. . .. . .. . .. .. . .. .. .. . .. .. . .. . .. . .. . .. . .. . .. . .. . .. . . 37
The difference between the “whole cent” integer rate and
the non-integer
“calculated”
rate would be used to
maintain the single-piece rate during the period following
the second rate case . . . .. .. . . .. . .. . . .. . .. . .. . .. .. .. . .. .. .. . . .. . .. . .. . .. . .. . . .. . .. . .. 37
De-linking workshare discounts from the “whole cent”
integer rate would more accurately reflect costs .._.................... 38
The Operation and Effect of Separating the Timing of Rate
Adjustments
for Household
and Business Mailers can be
Illustrated . . .. . .. .. . .. .. . ..._...........................................................................
1.
C.
OCA-T-6
39
First-Class revenues will vary, and volume will shift
between single-piece and workshare .._............._....................... 39
The shifting of volumes
between
single-piece
and
workshare
results from changes
in the “calculated”
single-piece
non-integer
rate and the size of the
workshare discount . . . .. .._..........._................................................
42
The shifting volumes between SPFC and workshare will
affect certain mailers and the Postal Service .._.....,,,._.._............ 44
Adjusting the Single-Piece Rate Every Other Rate Proceeding
Should be Circumscribed Under Certain Circumstances . .._................ 45
CONCLUSION
. . .. . . . .. ...___...............................................,................,............,,,,.
47
PART Ill . .. . . .. . .. . . . .. . . .. . . .. . . .. . . .. .. . .. .. . .. .. . . .. . .. . . .. . .. . . .. . .. . .. . . .. . .. . .. . .. .. . .. .. .. . .. . .. . .. . . .. . .. . .. . . .. . .. . .. 49
I.
THE NONSTANDARD
SURCHARGE IS NO LONGER WARRANTED
FOR LOW ASPECT RATIO NONSTANDARD
LETTER MAIL _......._...._,...,,.... 49
A.
Significant Changes in Mail Processing Have Occurred Since
the First Nonstandard Surcharge Was Implemented ._.._._.,.,.,.,.,.,,........ 50
1.
2.
B.
The nonstandard
surcharge was intended to facilitate
machine processing by encouraging
use of standard
envelopes and thus reduce costs . . .. . .. . .. .. . .. .._............................. 51
Mail processing now relies on automated equipment,
permitting processing of low aspect ratio nonstandard
letter mail .. . .. .. . .. . .. . . .. . .. . . .. . .. . .. . .. . .. . . .. . .. . .. .. . .. .. . .. .. . .. . .. . .. . .. . .. . . .. . .. . .. . 52
The Commission’s
Opinion
in Docket No.~ R97-1 Found
Important Reasons To Doubt the Basis for the Nonstandard
Surcharge ._._..._..........................................................,.........................,
- 111-
53
Docket No R2000-1
II.
THERE IS NO COST BASIS TO APPLY THE NONSTANDARD
SURCHARGE TO LOW ASPECT RATIO LETTER MAIL
.._....................... 55
A.
The Postal Service, Through the Testimony of Witness Miller,
Presents Unrealistic Assumptions to Justify the Nonstandard
Surcharge for Low Aspect Ratio Mail
The Assumption
that All Nonstandard
Letter-Shaped
Mail Is
Processed Manually Is Not Justified for Low Aspect Ratio Mail............ 56
C.
The Assumption of All Manual Processing Should Be Replaced
for Purposes of Estimating Mail Processing
Costs for Low
Aspect Ratio Mail . . . .._...._..._.._.........,................................................,....,
2.
A high degree of automated
processing
is a more
realistic assumption for estimating mail processing costs
for low aspect ratio letter mail ..o._....................,......,...........,......,
The mail processing cost model for manual mail, with
adjustments,
is appropriate for estimating the costs of
low aspect ratio mail .._...._......._.................................................
THE COMMISSION SHOULD RECOMMEND ELIMINATION
NONSTANDARD
SURCHARGE
FOR
LOW
ASPECT
.
.. .. .
.
NONSTANDARD
LETTER MAIL
A.
B.
IV.
55
B.
1.
Ill.
OCA-T-6
58
58
61
OF THE
RATIO
.
66
The Reduction in Revenues Associated With Eliminating the
Nonstandard
Surcharge for Low Aspect Ratio Letter Mail Is
Minimal
..
66
Elimination of the Nonstandard Surcharge for Low Aspect Ratio
Letter Mail is Consistent With the Classification Criteria of the
Postal Reorganization Act . . . . .. .. . .. . .. . . .. . . . . .. . . . . . . . . . . . . . . .. . . . ..
67
CONCLUSION
.
.. .
.
- I” -
. . .
. .
69
UNITED STATES OF AMERICA
Before The
POSTAL RATE COMMISSION
WASHINGTON,
D.C. 20268-0001
Postal Rate and Fee Changes, 2000
Docket No. R2000-1
)
DIRECT TESTIMONY
OF
JAMES F. CALLOW
1
I.
STATEMENT
2
OF QUALIFICATIONS
My name is James F. Callow.
3
have been employed
4
February
5
I am a Postal Rate and Classification
by the Postal
Rate Commission
1995 in the Office of the Consumer
I have testified before the Commission
Advocate
and MC95-1.
7
pricing formula for Mailing Online as an alternative
8
Automation
9
mailings using Mailing Online.
In Docket
No. MC98-1,
I proposed
Basic (within class and shape),
I
since June 1993, and since
(OCA).
in Docket Nos. MC98-1,
6
Specialist.
R97-1, MC96-3,
a computer-implemented
postage
to the single average discount
proposed
by the Postal Service
In Docket No. R97-1, I proposed
a restructuring
rate,
for all
of post
10
office box fee groups to better reflect costs of providing box service in high and low cost
11
offices.
12
surcharge
13
equalize
14
size.
My testimony
in Docket No. MC96-3 opposed the Postal Service’s non-resident
on post office boxholders,
inter-group
In Docket
cost coverages
No. MC95-1,
and proposed
alternative
box fees designed
and reduce the disparity in cost coverages
my testimony
summarized
the comments
to
by box
of persons
Docket Non R2000-1
OCA-T-6
1
expressing
2
postal rates and services.
3
views to the Commission
As a Special Assistant
to former Commissioner
4
in Docket Nos. R94-1, MC93-2
5
responsibility
6
and Recommended
7
Postal
8
evaluated
9
special postal services.
for substantive
Service
and MC93-1.
with respect
Specifically,
of the Postal
Prior to joining the Commission,
10
of Congress
Senator
12
Governor of the State of Michigan in Washington.
I am an accountant
University.
by training.
by the Commission
quantitative
of workers’
Service
I held positions
11
13
and a Member
on
H. Edward Quick, I participated
I analyzed
to the estimation
proposals
Advocate
In Docket No. R94-1. I was assigned
subject areas considered
Decision,
rate design
and the Office of the Consumer
from Michigan,
in its Opinion
testimony
compensation
of the
costs and
and other parties
related to
on the legislative staff of a US
and served
as an aide to the
In 1985, I earned an MS degree in accounting
14
from Georgetown
My course work included cost accounting
15
1977, I obtained
16
major in political science and history and a minor in economics.
my BA degree from the University of Michigan-Dearborn
-2-
and auditing.
In
with a double
Docket No, R2000-1
1
II.
OCA-T-6
PURPOSE
2
AND SCOPE OF TESTIMONY
This testimony examines three issues related to First-Class
Mail: the institutional
3
cost burden on First-Class Letter Mail, a new approach for setting the single-piece
4
Class rate for letters and cards, and the nonstandard
5
mail. The testimony is divided into three parts.
6
In Pat-t I, I propose that the current rate for First-Class
7
33 cents in order to mitigate the growing
8
Mail.
9
burden
institutional
During the past 12 years, First-Class
of the institutional
10
more prominent
11
Service
12
growth
13
declined.
14
increased
15
surcharge
data using several
in institutional
Similarly,
Letters be maintained
cost burden on First-Class
common
measures
costs has occurred
the institutional
of institutional
cost
burden
has become
Moreover,
the
Letter Mail has
Letter
Mail has
cost burden on Standard (A) Regular Mail.
intended
Letter Mail has also grown relative to
the institutional
17
recent recommended
18
$6.2 billion more than intended
19
Postal Service since FY1988,
and this additional
20
billion through
Mitigation
of the institutional
21
Letter Mail should
involve consideration
of the additional
22
costs above that intended by the Commission.
the test year.
cost.
on First-Class
16
decisions.
Letter
is based upon an analysis of Postal
as the cost of First-Class
cost burden on First-Class
cost burden
at
Letter Mail has been carrying an increasing
This conclusion
relative to the institutional
The institutional
for certain nonstandard
costs of the Postal Service, and that burden
in recent years.
First-
by the Commission,
As a result, First-Class
by the Commission
-3-
as expressed
in several
Letter Mail has contributed
to the institutional
revenue is expected
costs of the
to reach $11.2
cost burden on First-Class
contribution
to institutional
Docket Non R2000-1
1
In Part II, I propose that the Postal Service adopt a new approach
2
single-piece
3
business
4
every two years,
5
predictable
6
to
7
accommodate
8
Under
9
OCA-T-6
First-Class
mailers.
rate for letters and cards that would benefit both household
The Postal Service appears
in response
rate changes.
household
determined
and
for setting the
to the concerns
However,
smaller-volume
more frequent
the single-piece
mailers for smaller,
more
rate changes can be inconvenient
The
the differing interests of household
my proposal,
to have adopted plans to adjust rates
of business
mailers.
and
approach
I propose
would
and business mailers.
First-Class
without regard to the “integer constraint.”
(“SPFC”)
rate
would
be
The rate paid by households,
by
10
contrast, would be set at a whole cent, as in the past. The SPFC integer rate would be
11
set so that sufficient
12
single-piece
13
approximately
14
proceeding,
15
deficiency
16
greater
17
predictable
revenues
in a “reserve account”
to permit the
rate to remain the same for a period of two rate proceedings,
a duration of
four years.
generated
in the second
rate period.
while
allowing
every other rate
during the first rate period covering
In this manner,
business
household
mailers
smaller,
any revenue
mailers would enjoy
more frequent
and
rate adjustments.
Accommodating
18
In effect, the SPFC rate would be changed
with revenue
rate stability,
would accumulate
the differing interests of household
19
manner
can be achieved
while preserving
20
respect to rate changes,
21
date of new rates,
22
issue in every case.
23
case period would permit the single-piece
Postal
and business
management’s
mailers in this
prerogatives
with
including the timing of the filing of rate cases and the effective
It would also preserve the right of every participant
The only difference
is that revenues
First-Class
-4-
generated
to litigate any
in the first rate
to remain in effect over two rate
Docket No. R2000-1
OCA-T-6
1
cases.
2
the reserve account balance could prove inadequate,
3
every other proceeding
4
shift
5
circumstances,
6
Nevertheless,
large
volumes
this proposal
recognizes
that in changing
while rates for workshare
between
the single-piece
Part Ill of my testimony
surcharge
single-piece
economic
or that changing
mail change
and
elimination
for First-Class
workshare
mail.
of the current
7
cent nonstandard
8
mailpieces
9
longer warranted
for such mail, having been outdated by advances
IO
mail processing.
As a result, consumers
11
mail, such as seasons
greeting
12
processing.
Moreover,
the Postal Service’s manual processing
13
the costing
on which
the surcharge
14
assumptions
about the costs of processing
15
are less than the surcharge.
16
nonstandard
17
individual mailers.
such
cases.
(and proposed)
The nonstandard
are charged
cards or invitations,
is based
11
surcharge
is no
in the technology
of
extra for low aspect ratio letter
that requires
little (if any) special
assumption
is unrealistic.
underlying
Using more realistic
low aspect ratio letter mail reveals that costs
For these
for low aspect
Under
“low aspect ratio” letter mail-letter-shaped
that are square or nearly square in shape.
surcharge
the SPFC rate
each rate case could
rate could be adjusted in two consecutive
proposes
conditions,
reasons,
I propose
elimination
ratio letter mail as a matter
-5-
of the
of fairness
for
Docket No. R2000-1
OCA-T-6
1
2
3
PART I
I.
4
THE INSTITUTIONAL
INCREASING
First-Class
COST
BURDEN
ON FIRST-CLASS
costs of the Postal Service.
6
cost and revenue data over the past twelve years.
7
an analysis
8
prominent
in recent years, and is expected
9
continued
growth in the burden on First-Class
This conclusion
of several common measures
10
other subclasses
11
12
A.
13
Several measures
is based upon a review of Postal Service
Moreover, this trend, evident from
of institutional
to continue
of mail, most notably Standard
cost, has become even more
into the test year.
Also, the
Letter Mail is evident by comparison
with
(A) Regular.
Common Measures of Institutional Cost Show a High and Rising Burden
Beino Borne bv First-Class Letter Mail
of institutional
14
Commission
15
various classes of mail over time.’
16
Beginning
17
Commission
cost burden are commonly
relied upon by the
and the Postal Service to analyze the relative institutional
with
its opinion
introduced
The cost coverage
and recommended
a “mark-up”
index.3
is one commonly
decision
in Docket
cost burden on
used measure.’
No. R87-1,
the
In recent years, the Postal Service
has
Institutional costs represent the amount of total costs remaining after subtracting costs that are
directly “attributable”
2
MAIL IS
Letter Mail has been carrying an increasing burden of the institutional
5
1
LETTER
to each class or type of mail service.
See PRC Op. R97-1, Appendix G, Schedule 1 at 1. The cost coverage. for example. is calculated
by dividing revenues by attributable costs.
3
See generally PRC Op. R87-1. Appendix G. Schedule 3. at 33. A mark up index is obtained by
dividing the “mark-up” (the percentage by which the revenues exceed costs) of a class or subclass by the
total “mark-up” for all mail and special Services.
-6-
Docket NCI R2000-1
OCA-T-6
expressed
a preference
for a “cost coverage”
institutional
cost, the institutional
index.”
Using virtually any measure
cost burden on First-Class
of
Letter Mail is high, and has
been rising in recent years.
4
1.
The First-Class
5
The First-Class
6
total, or “systemwide,”
7
Class
8
systemwide
Letter
Mail
Letter Mail cost coverage
is hioh and rising
Letter Mail cost coverage
has traditionally
average
However,
has
cost coverage.
increased
significantly
been higher than the
the cost coverage
in recent
years
for First-
compared
to the
average.
9
Table 1 shows the high and rising cost coverage
10
total average cost coverage for all mail classes and services.5
11
the data.
12
cost coverage has risen from 162 percent to 197 percent.
13
period, FY 1997 and 1998, the First-Class
14
reaching
15
cost coverage
16
years prior to the two highest years of FY 1997 and 1998. To put this rapid advance in
During the 12 year period FY 1988 through
205 and 209 percent,
retreated
for First Class Letters, and the
Figure 1 visually depicts
FY 1999, the First-Class
In two fiscal years during this
Letter cost coverage exceeded
respectively.
Letter
200 percent,
For the most recent year, FY 1999, the
to 197 percent, but remains well above the cost coverage
for
1
In Docket No. R97-1. witness O’Hara maintained that “for setting rate levels based on the new
cost information, the cost coverage index provides a better starting point than the mark-up index.” Docket
No. R97-1, USPS-T-30 (O’Hara), at 20. The cost coverage index is calculated by dividing the cost
coverage of a given class of mail by the cost coverage of all of the mail. The only difference between a
mark-up index and a cost coverage index is cardinality
The calculation of a cost coverage index simply
involves adding one to the numerator and denominator of the corresponding mark-up index. The value of
a cost coverage index is closer to 1.O than the corresponding mark-up index, but all subclasses retain
their order. The cost coverage index simply reduces the magnitude of the difference between any two
subclasses.
5
The data in Tables
OCA-LR-3
1-12 in Part I of this testimony
-7-
are developed
in Part I of Library Reference
Docket Non R2000-1
OCA-T-6
1
the cost coverage
2
gradually
3
to remain in the upper 190’s through the test year.
into perspective,
from FY 1988 to FY 1996 the cost coverage
from 162 percent to 175 percent,
The First-Class
cost coverage
rose
is expected
Figure 1: Comparison of First-Class Letters and
Total Average Cost Coverage
220%
210%
200%
190%
s 160%
i?
$ 170%
6 Firs!
+ Total
160%
150%
140%
1968 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
YSWS
4
5
2.
The mark-up
6
7
The mark-up index reveals
First-Class Letter Mail
index places
Letter Mail on a more comparable
a rising institutional
the rising institutronal
basis from year-to-year.6
5
cost burden
on
on First-Class
Table 2 and accompanying
The mark-up index can control for changes in the average level of attributable
control for changes in the relative share of costs attributed to different subclasses.
-a-
cost burden
costs but does not
Dock&No.
R2000-1
OCA-T-6
Figure 2 show the First-Class
up index for First-Class
1988 through
FY 1999.
rise in the institutional
period beginning
1.439.
Letter mark-up index.
Letters rose from 1.256 to 1.439 during the 12 year period FY
In more recent years, the mark-up
cost burden on First-Class
in FY 1995, the mark-up
The First-Class
As revealed in Table 2, the mark-
Letter mark-up
index shows a more rapid
Letter Mail.
index increased
index is expected
During the five year
from 1.169 to a high of
increase
still higher in FY
2000.
Figure 2: First-Class
Letter Mark-Up
Index
1.600
1.500
1.400
+ First
+-rota
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1996 1999 2000 2001
YEWS
-9-
Docket No. R2000-1
3.
OCA-T-6
The cost coverage index also shows an increase in the institutional
cost burden on First-Class Letters
The cost coverage
index shows the rising First-Class
4
burden on a different yet comparable
5
Class Letter cost coverage
6
index, a similar increase
7
Based upon reported data, the cost coverage
8
1.084 in FY 1988 to 1.177 in FY 1999, and is expected
9
As with the mark-up index, the First-Class
10
index.
index shows,
cost burden
index for First-Class
Letter Mail.
Letters grew from
to rise still higher in FY 2000.
with FY 1995 through FY 1999.
- 10 -
like the mark-up
on First-Class
Letter cost coverage
See note 4, supra
cost
Table 3 and Figure 3 present the First-
The cost coverage
in the institutional
rise from 1.065 to 1.177 beginning
I
basis.’
Letter institutional
index shows a steady
Docket No. R2000-1
OCA-T-6
Figure 3: First-Class
Letter Cost Coverage
Index
1.250
+ First
--Total
0
z
6
1.000
0,950
0.900
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Yeal.
1
2
3
4.
4
Cost coverage and mark-up indices reveal a high First-Class Letter
Mail institutional
cost burden when compared to Commission
recommendations
The high and rising institutional
5
from another
6
presents
7
Class Letter mark-up
8
the period
8
perspective:
the First-Class
covered
cost burden on First-Class Letter Mail is revealed
by comparison
to Commission
Letter mark-up
index obtained
by this analysis.’
index compared
recommendations.
to the recommended
from the four Commission
The First-Class
PRC Ops. R67-1, R90-1, R94-1 and R97-1.
-ll-
Table 4
First-
opinions
issued during
Letter mark-up
index is also
Docket No R2000-1
1
compared
2
the four Commission
3
OCA-T-6
to the average recommended
opinions.
First-Cla,ss Letter mark-up index calculated
Figure 4 visually depicts the data compared
During the 12 year period,
FY 1988 through
Letter mark-up index is higher than the recommended
5
the recommended
6
through FY 2001, the actual First-Class
7
above the recommended
8
mark-up index, the actual First-Class
9
index for all but five of the 12 years from FY 1988 through
IO
Class Letter mark-up
11
through FY 2001.
in Table 4.
FY 1999, the actual First-Class
4
First-Class
for
index for all but three years.
If
Letter mark-up index from Docket No. R97-1 is extended
index.
Letter mark-up index is also expected to remain
When compared
to the average
First-Class
Letter
Letter mark-up index remains above the average
index is also expected
-12-
FY 1999.
The actual First-
to be higher than the average
index
Docket No. R2000-1
OCA-T-6
Figure 4: Comparison of First-Class Letter Mark-Up Index to
Recommended
and Average
ti
2 1.300
$
1.250
$
I
1.200
+ First
+Recom'd
*Average
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
YeaIS
1
Table 5 shows the actual First-Class
Letter cost coverage
index compared
2
recommended
3
Commission
4
recommended
5
actual
6
presented
7
Letter cost coverage indices and the actual First-Class cost coverage
8
9
IO
First-Class
opinions
cost
coverage
cost coverage
Letter cost coverage
During the 12 year period,
recommended
derived
index is also calculated,
index.
in Table 5 on the recommended
Letter cost coverage
index,
from
issued during the period covered by this analysis.
First-Class
First-Class
Letter
and average
FY 1988 through
index is above the recommended
First-Class
Letter
cost coverage
-13.
the
four
The average
and compared
Figure 5 visually
to the
compares
recommended
to the
the data
First-Class
index.
FY 1999, the actual First-Class
index for all but two years.
index from
Docket
If the
No. R97-1
is
OCA-T-6
Docket No. R2000-1
extended
through
FY 2001, the actual First-Class
expected
to remain
higher
cost coverage
the actual
By comparison
First-Class
to the
First-Class
coverage
index remains above the average index for six of the 12 years from FY 1988
The actual First-Class
index,
index.
index is also
average
through FY 1999.
Letter
than the recommended
Letter cost coverage
Letter
cost
Letter cost coverage index is also expected to
be higher than the average index through FY 2001.
Figure 5: Comparison of First-Class Letter Cost Coverage
Recommended
and Average
1.200
Index to
~..
1.180
% 1.160
=
1.140
&l
2: 1.120
g
-First
+Recom'd
*Average
1.100
0" 1080
1.060
1.040 L
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Years
The Institutional Cost Burden on First-Class Letter Mail Is Increasing
Relative to the Institutional Cost Burden on Standard (A) Regular Mail
7
8
B.
9
First-Class
IO
institutional
Letter
Mail has long contributed
more in absolute
terms
to the
costs of the Postal Service than the next largest class of mail, Standard
-14.
(A)
Docket No. RZOOO-1
OCA-T-6
1
Regular
2
Class Letter Mail has grown relative to the share contributed
3
mail.
mail.
4
5
Over time, the relative share of institutional
1.
6
costs contributed
by Standard
by First-
(A) Regular
A comparison of First-Class Letter and Standard (A) Regular markUD and cost coveraoe indices reveals a widenina aao
The relative change
in institutional
cost contributions
7
Standard
a
indices for each subclass.
Table 6 and accompanying
9
Class Letter and Standard
(A) Regular
(A) Regular
mail can be shown by comparing
by First-Class
mark-up
Letters and
and cost coverage
Figure 6 compares
the First-
mark-up indices to the total average mark-up
IO
index for all mail classes and services.
11
institutional
12
years.
13
index rises steadily from 1.169 to 1.439, while the Standard
(A) Regular mark-up index
14
reveals an overall decline from 1.080 to 0.828.
during FY 2000 and 2001,
15
the Standard (A) Regular mark-up index is expected to decline further, ending at 0.777.
16
By contrast, the First-Class
17
in FY 2000, and then decline in the test year to 1.422.
cost contribution
Table 6 reveals the widening
of First-Class
For the five year period beginning
Letters and Standard
gap in the relative
(A) Regular in recent
in FY 1995, the First-Class
Moreover,
Letter mark-up
Letter mark-up index is expected to rise still higher to 1.469
-15-
Docket No. R2000-1
OCA-T-6
Figure 6: Comparison of First-Class Letters and
Standard (A) Regular Mark-Up Indices
1.600
1.500
1.400
1.300
2
0
i
1.200
1.100
g
1.000
g
0,900
+ First
+Std (A)
+-Total
0.800
0.700
0.600
0.500
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1996 1999 2000 2001
YE2H.S
1
Table 7 and Figure 7 compare
the First-Class
cost coverage
3
indices for First-Class
4
of the mark-up
5
First-Class
6
index,
7
beginning
8
from FY 1995 through FY 1999, and is expected to rise still higher in FY 2000, falling in
9
the test year.
Letters and Standard
indices-a
widening
First-Class
in FY 1995.
Letter
(A) Regular
cost
The First-Class
By contrast, the Standard
cost coverage
(A) Regular shows a pattern similar to that
gap in the relative institutional
Letters vis-a-vis Standard
rising
index for all mail. Comparing
(A) Regular
2
the
indices to the cost coverage
Letter and Standard
in recent years.
coverage
index
cost contribution
of
Like the mark-up
is especially
noticeable
Letter index rises steadily during the five years
(A) Regular cost coverage
-16-
index exhibits an
Docket No, R2000-1
OCA-T-6
1
overall decline during the same five year period, from 1.031 to 0.931. and is expected
2
to be lower still in the test year.
Figure 7: Comparison of First-Class Letters and
Standard (A) Regular Cost Coverage Indices
1.250
1.200
1.150
z
E
1.100~
g
e
6:
1.050
;;
0
”
0.950
-First
+ Std (A)
+ Total
1.000
0.900
0.850
0,800 1
J
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
YNWS
3
4
5
6
2.
The relative
A comparison of actual First-Class Letter and Standard (A) Regular
cost coverage
and mark-up
indices
to the Commission’s
recommendations
also reveals a widenino QaD
change
7
compared
to Standard
8
recommendations.
9
mark-up and cost coverage
in the institutional
(A) Regular
Comparing
cost contribution
can also be shown
the actual First-Class
by reference
Letters
to Commission
Letter and Standard
indices to the recommended
-17-
of First-Class
(A) Regular
mark-up and cost coverage
OCA-T-6
Docket No. R2000-1
1
indices reveals a widening
2
Standard
3
gap in the relative contributions
by First-Class
Letters and
(A) Regular mail.
Table 8 and accompanying
4
Standard
5
index for each subclass,
6
Commission
7
for Table 8 for First-Class
a
The actual First-Class
9
recommended
(A) Regular
mark-up
Figure 8 compare the actual First-Class
indices to the Commission’s
and the average
recommended
recommended
index calculated
with respect to Table 4.
index until FY 1994, falling below the recommended
years.
11
increases,
12
actual First-Class
13
mark-up
14
below the recommended
15
then returns below the recommended
16
Regular mark-up index follows the same pattern by comparison
17
index.
From FY 1995 through
FY 1999, the actual First-Class
rising above the recommended
index.
The analysis
Letter mark-up index roughly tracks, albeit somewhat
10
Letter mark-up
By contrast,
mark-up
for the four
opinions issued during the period covered by this analysis.
Letters is the same as presented
Letter and
higher, the
index for three
Letter mark-up index
index during the last three fiscal years.
The
index follows a similar pattern vis-a-vis the average
the actual Standard
(A) Regular
mark-up
index remains
index for all but four years, FY 1994 through
FY 1997, and
index through FY 1999.
-10-
The actual Standard (A)
to the average mark-up
Docket No. R2000-1
OCA-T-6
1.600
1.500
1.400
-First
+ First, Rec.
+ First, Ave.
* Std (A)
- Std (A), Rec.
--Std (A). Ave.
E 1.300
2 1.200
Lj 1.100
i
s
1.000
0.900
0.600
0~700
0.600
1966 1969 1990 1991 1992 1993 1994 1995 1996 1997 1996 1999 2000 2001
Yeal.
1
Table 9 and Figure 9 compare
2
Regular cost coverage
3
index.
indices against the Commission’s
and the average
opinions.
The analysis
the actual First-Class
recommended
index
Table 5. Table 9 shows the actual First-Class
the recommended
recommended
9
coverage
10
(A)
cost coverage
for the four
Commission
Letters is the same with respect to
Letter cost coverage
index falls below
index in only two years, FY 1995 and FY 1996, during the 12 years
from FY 1988 through
8
recommended
calculated
of Table 9 for First-Class
Letter and Standard
FY 1999.
From
FY 1995,
index during the last three years.
it increases,
rising above
The actual First-Class
the
Letter cost
index is above the average index during six of the 12 year period, FY 1988
through FY 1999, and rises high above the average in the last three years.
-19-
By contrast,
Docket No. R2000-1
Table
9 shows
recommended
Standard
OCA-T-6
the actual
Standard
index for all but four years
(A) Regular cost coverage
the average cost coverage
latter years,
recommended
(A) Regular
index.
as the Standard
cost coverage
from FY 1988 through
index
below
FY 1999. The
index follows the same pattern when compared
Again, the widening
(A) Regular
trend is most apparent
cost coverage
the
index declines
to
in the
from the
and average indices.
Figure 9: Comparison
Cost Coverage
of First-Class Letter and Standard (A) Regular
Indices to Recommended
and Average
1.250
1.200
1.150
2
E 1.100
-First
+ First, Rx
-First,
Ave.
* Std (A)
+ Std (A), Rec.
-.- Std (A), Ave.
El 1.050
g
g 1.000
0
s72 0.950
0.900
0.850
0.800
1966 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Year!3
-2o-
Docket No. R2000-1
1
2
3
II.
OCA-T-6
THE INCREASING FIRST-CLASS
LETTER INSTITUTIONAL
COST BURDEN
HAS
RESULTED
IN FIRST-CLASS
LETTER
MAIL
CONTRIBUTING
REVENUES IN EXCESS OF THE AMOUNT INTENDED BY THE COMMISSION
4
That the institutional
5
1988 through
6
substantial
7
revenue contributed
8
has exceeded
9
FY 1999, and at an accelerating
by First-Class
Opinion
10
Commission
11
mark-up
12
“setting
13
systemwide
14
factors.“’
15
mark-up relationships
16
ratemaking
17
factors.‘O
and
suggested
target coverages
average
Recommended
rates.
There,
represents
the
19
and
than the prior
services,
20
recommended
21
average
10
Id., 94043.
Docket
the
it placed on the role of cost coverages
and
the Commission
No.
expressed
of the
the belief that
section
that, in the determination
for purposes
near the
3622(b)
of rates, the
of the section
average cost coverage
and mark-up
index
in several recent opinions.
recommended
PRC Op. R94-1, n4041.
R94-1,
rate relationships,
by the Commission
costs
in Docket No. R90-1 were a better guide to sound
the systemwide
9
in
best accommodation
and the cost coverage
cost coverage
Decision
concluded
recommended
10 presents
institutional
[for First Class and third class mail] reasonably
Moreover, the Commission
Table
the additional
intended by the Commission
the importance
indices in setting
has produced
More significantly,
Letter Mail to the Postal Service’s
the revenue contribution
its
Letter Mail has risen from FY
rate in recent years,
additional revenues for the Postal Service.
In
18
cost burden on First-Class
by the Commission
-21-
3622(b)
for all mail classes
for First-Class
Letters,
Using the systemwide
as a “benchmark,”
it would
Docket No. R2000-1
1
be possible
2
Class Letters.
OCA-T-6
to measure
the excess revenue contributed
to institutional
costs by First-
Table 10
SYSTEMWIDE AVERAGE AND FIRST-CLASS LETTERS COST
COVERAGE
AND MARK-UP
INDEX FROM SELECTED COMMISSION
RECOMMENDED DECISIONS
&32
m!Q
B&z
ks!?
Systemwide Average
148.3%
150.0%
156.9%
155.3%
First-Class Letters Cost
Coverage
158.0%
161.7%
174.5%
172.4%
First-Class Letters Mark
Up Index
1.200
1.235
1~310
1.308
Cost Coverage
3
Rather than measuring
the excess revenues
4
coverage,
a more conservative
5
coverage
recommended
6
average.
For purposes
7
mark-up
8
conversion
9
last line of Table 10.”
10
using
the
approach
might consider
by the Commission
of measuring
First-Class
of the First-Class
Letters
the change
in revenue,
mark-up
index
the First-Class
average cost
the First-Class
as “reasonably
Letters cost coverage
Averaging
using the systemwide
figures
Letters cost
near” the systemwide
I calculate
an average
in Table
10.
The
to a mark-up index is shown in the
Letters mark-up index for all four rate
cases (PRC Ops. R87-1 through R97-1) results in an average mark-up index of 1.263.
Using this 12-year average First-Class
11
12
First-Class
13
billion to the institutional
II
Letter Mail has contributed
Letters mark-up index as a “benchmark,”
net additional
revenues
in the amount of $6.8
costs of the Postal Service during the period FY 1988 through
A systemwide average cost coverage would, of course, have a mark-up index of one.
-22-
Docket No. R2000-1
FY 1999.
OCA-T-6
This excess contribution
amount of net additional
has accelerated
revenues to be contributed
in recent years.
Moreover,
the
from FY 1988 through the test year
is expected to reach $11.2 billion.
Table 11 summarizes
institutional
intended
the annual contribution
of First-Class
Letter Mail to the
costs of the Postal Service, both greater than and less than the amount
by the Commission,
index benchmark.
based
The amounts
higher level of costs attributed
upon the average
First-Class
Letters mark-up
reported in Table 11 take into account the generally
by the Commission
to mail classes than that of the
Postal Service.12
1988
1999
1990
Table 15
ANNUAL CONTRIBUTION TO INSTITUTIONAL COSTS BY FIRST-CLASS LEnERS
IN EXCESS OF THE AVERAGE FIRST-CLASS MARK.UP INDEX
(amounts in millions)
1 Estimated
1
TOtal
1991 1992 1993 1994 1995 1996 4997 1998 1999 1 2000 2001 1 1988-99
19892001
$116
$555
$906
$522
$696
$665
$117
($747)
($354)
12
$599
$1.769 $1.964 $2.662
$1,729
$6,633
$11.245
The specific adjustment factors and use of the Commission’s version of the CRA that produce the
higher level of attributable costs can be found in Table B. located in Part I of OCA-LR-3.
-23-
I
1
Docket No RZOOD-1
1
2
3
Ill.
OCA-T-6
TO MITIGATE THE INCREASING INSTITUTIONAL COST BURDEN ON FIRSTCLASS LETTER MAIL, THE COMMISSION SHOULD MAINTAIN THE SINGLEPIECE FIRST-CLASS RATE AT 33 CENTS
4
The Commission
should mitigate the increasing
institutional
cost burden on First-
5
Class
6
Maintaining
7
burden
8
contributed
9
with a 33 cent First-Class rate, the mark-up index will be approximately
10
Letter
Mail
by maintaining
the current
on First-Class
single-piece
Letter
by single-piece
A Commission
rate
12
proposed
increase.
13
costs
benefit
consumers,
Letter Mail, and standards
A.
16
The Postal Service’s proposed
The Proposed Increase
Already Hiqh Institutional
cost
as revenues
$607 million.‘4
Even
1.4!?~2.‘~
First-Class
rate will
cost burden that results from the Postal Service’s
Moreover, such a decision is supported
14
15
at 33 cents.
rate will reduce the institutional
decision to maintain the current single-piece
the very high institutional
preserves
First-Class
First-Class
letters will decline by approximately
moderate
17
single-piece
Mail,13 and directly
11
for First-Class
the
by declining
Postal Service
of fairness and equity.
in Rates for First-Class Letters Preserves
Cost Burden on First-Class Letter Mail
increase in rates for First-Class
the status quo with respect to the institutional
cost burden
the
Letter Mail largely
being borne
by
13
There are, of course, other options for reducing the institutional cost burden on First-Class Letter
Mail. These include reducing the extra ounce rate, reducing the current presort discounts. or increasing
the “passthroughs” for presort mail. However, these options would be less beneficial for consumers.
14
For single-piece letters, (($22,746.522 - $22,169,105) + (5167,072 - $137,713)). or single-piece
((TYAR revenues - TYBR revenues) + (TYAR Fees - TYBR Fees)). USPS-LR-I-169 (revised 4/17/00), at
2. The reduction in revenues for the entire First-Class Letter Mail subclass is approximately 51.076 billion
(($35,976,352 - $34,933.727) + ($169.592 - $156.568)), or subclass ((TYAR revenues - TYBR revenues)
+ (TYAR Fees - TYBR Fees)). Id.
Attachment USPS-32A (revised 4-12-00), adjusted for OCA costs. I will recalculate this mark-up
index figure at the time OCA witness Thompson (OCA-T-9) files supplemental testimony concerning
PESSA costs.
- 24 -
Docket No, R2000-1
First-Class
OCA-T-6
Letter Mail.
for First-Class
In the test year, the Postal Service proposes
Letters of 197 percent,
a cost coverage
This is the same as the actual cost coverage for
First-Class Letters in FY 1999 (see Table 1).
4
Similarly, when measured
5
institutional
6
institutional
7
and then decline to 1.422 in the test year.
8
the mark-up
9
Table 2).
10
change
cost
burden
by the mark-up index, the proposed
high
in the test year.
The
First-Class
Letter
Letter
cost burden is expected to rise from 1.439 in FY 1999 to 1.469 in FY 2000,
This mark-up
index for all but the two preceding
A review
of the First-Class
index number is higher than
years covered
Letter cost coverage
by this analysis
index reveals
(see
a similar
(see Table 3).
The institutional
11
remains
First-Class
cost burden proposed
12
high by comparison
to Standard
13
First-Class
14
FY 1999. By contrast, the Standard
15
than in FY 1999.
16
17
B.
18
The Postal Service’s
Letter mark-up
(A) Regular
for First-Class
mail.
Letter Mail also remains
Comparing
mark-up
index in the test year remains near its actual historic high in
(A) Regular mark-up index in the test year is lower
The Proposed
Increase in Rates for First-Class
Justified by Hioher Postal Service Costs
by reference
indices, the
proposed
Letters
increase in the rates for First-Class
19
justified
to Postal Service costs for First-Class
Letters.
20
Class Letter Mail as a share of total postal costs have declined
21
covered by this analysis.‘6
Moreover, the decline has accelerated
16
Cannot
be
Letters is not
Costs for Firstduring the period
in recent years.
The decline in First-Class letter mail costs is confirmed by a separate analysis prepared by the
Postal Service at the request of the Commission.
That analysis shows unit mail processing (and city
(continued on next page)
-25-
Docket No. RZOOO-1
1
OCA-T-6
Table 12 and accompanying
2
costs for First-Class
3
First-Class
4
52.98 percent
5
1999.
6
percent in the test year.
7
most apparent
8
declined
9
postal costs in the test year.
10
Figure 10 compare the attributable
Letters as a percent of total postal costs.
Letter Mail attributable
to 45.71 percent
First-Class
Letter attributable
continuously
Moreover,
First-Class
constant
12
shows,
First-Class
the decline in First-Class
13
percent
to 65.76 percent
14
institutional
Letter
and are expected
Mail institutional
Mail institutional
during
costs are expected
Letter attributable
Since FY 1995, First-Class
as a percent of the total institutional
Letter
of the total have declined from
FY
costs are expected to decline still further, to 44.99
from 53 percent
11
Table 12 reveals that the
during the 12 year period from FY 1988 through
in recent years.
By contrast,
costs as a percentage
and institutional
the same
costs is
Letter Mail costs have
to be 44.99 percent of total
costs
have remained
costs of the Postal Service.
costs have declined
12 year period.
nearly
As Table 12
slightly
from 66.52
First-Class
Letter Mail
to decline to 63.96 percent in the test year.
carrier in-office activity) costs for First-Class letter-shaped mail declining over the entire 11 year period
between 1969 and 1999.
See Response of Postal Service Witness Smith to Presiding Officer’s
Information Request No. 4. March 17, 2000, Question 1. Attachment at 1.
-26-
Docket No. R2000-1
OCA-T-6
Figure 10: Comparison
of Institutional
Attributable
Cost Shares for First-Class
and
Letters
80.00%
60.00%
E
z
kp 50.00%
+ Inst’l Shr
+ Attrb Shr
40.00%
30.00%
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Years
1
2
C.
3
The first pricing criterion
Reducing the High Institutional
Enhance Fairness and Equitv
in section
4
requires that consideration
5
equitable
6
of nine criteria suggests its importance
7
rate schedule.
Simple fairness
Cost Burden on First-Class
3622(b)
in establishing
suggests that the institutional
Mail be mitigated.
9
recent years and will remain high by historic standards
the attributable
The cost coverage
costs of First-Class
and maintenance
Act
of a fair and
of the “fairness and equity” criterion as the first
8
10
of the Postal Reorganization
be given to the establishment
The placement
Letters Would
for First-Class
rates.
cost burden for First-Class
Letter
Letter Mail has risen rapidly in
through the test year. Moreover,
Letters as a percent of total postal costs continues
-27-
Docket No, R2000-1
OCA-T-6
1
to decline through
2
percent of the total will remain high through FY 2000, before declining.
3
single-piece
4
Class
5
consumers.
6
the test year, while institutional
First-Class
Letter
costs of First-Class
Maintaining
rate at 33 cents would achieve the goal of moderating
institutional
cost burden
The Commission
should
7
Letter
Mail by considering
8
institutional
cost
9
institutional
cost burden
burden
mitigate
in a manner
the institutional
the relationship
on First-Class
on First-Class
between
Letter
Letters
cost burden
As shown
has exceeded
4, the
that intended
by the
three of the 12 years from FY 1988 through FY 1999.
12
Letter
13
index in all but five of the past 12 years. The result has been substantial
14
revenues
15
First-Class
16
revenues contributed
17
the Commission.
has exceed
of $6.8 billion contributed
the average
by First-Class
excess of that intended
20
be appropriate
21
cost burden on First-Class
22
with criterion
23
deems appropriate.
9, which
Letters,
permits
mark-up
net additional
costs of the Postal Service by
It bears emphasizing
that this $6.8 billion in
cost burden borne by First-Class
by the Commission,
for the Commission
Commission-recommended
Letter Mail is in excess of the amounts intended by
The trend of a higher institutional
19
mark-up index, for all but
Moreover, the actual First-Class
to the institutional
Letter Mail since FY1988.
and actual
in Table
11
index
by the Commission-recomm’ended
to
on First-Class
the recommended
Mail.
the
the First-
the most benefit
Commission,
18
as measured
providing
10
mark-up
Letters as a
on balance,
requires mitigation.
to consider this fact in determining
Moreover,
the Commission
-28-
Letter Mail in
such consideration
to consider
It would
the institutional
would be consistent
such other factors
as it
Docket No. R2000-1
1
2
IV.
OCA-T-6
CONCLUSION
First-Class
Letter Mail has been carrying an increasing
burden of the institutional
Using virtually any measure of institutional
cost, the
3
costs of the Postal Service.
4
institutional
5
years, and has become more prominent
6
occurred
7
cost burden on First-Class Letter Mail has increased relative to the institutional
8
burden on Standard
cost burden borne by First-Class
as the cost of First-Class
Letter Mail has risen during the past 12
recently.
Letter Mail has declined,
costs has
Similarly, the institutional
cost
(A) Regular Mail.
9
Moreover,
10
relative to the institutional
11
several recent recommended
12
contributed
13
of the Postal Service during this 12 year period.
14
additional
15
The growth in institutional
the institutional
cost burden on First-Class
Letter Mail has grown
cost burden intended by the Commission,
decisions.
As a result, First-Class
as expressed
in
Letter Mail has
net additional revenues in the amount of $6.8 billion to the institutional
costs
Through the test year, the total net
revenue is expected to reach $11.2 billion.
The increasing
institutional
cost burden on First-Class
Letter Mail should be
16
mitigated.
For that reason, I propose that the single-piece
First-Class
17
maintained
at 33 cents. Doing so would reduce the institutional
18
Class Letter Mail, and provide the most benefit to individual and smaller mailers.
19
mitigating the increasing institutional
20
greater share of institutional
21
Commission
cost burden, consideration
rate be
cost burden on FirstIn
should be given to the
costs borne by First-Class Letter Mail than intended by the
in the pricing of First-Class
Letter Mail.
-29-
Docket No. R2000-1
2
3
4
I.
OCA-T-6
HOUSEHOLDS
AND BUSINESS MAILERS HAVE DIFFERENT
WITH RESPECT TO CHANGES IN THE FIRST-CLASS RATE
Changes
in the First-Class
business
6
interests
7
business largely reflects their differing reliance on First-Class Mail
9
Consequently,
differing concerns for households
5
8
mailers.
rate generate
with respect
Households
rely on First-Class
household
mails
11
percentage
terms, however,
12
pieces of First-Class
By contrast,
approximately
business
substantial
portion
15
minimum
quantities.
16
Class Mail represent
17
management
19
of which
interests
are mailed at single-piece
twelve
households
have different
of households
and
First-Class
Mail
pieces
rates.
per
The average
month.”
In
mailed only 16.1 percent of the 101.4 billion
mailers sent 82.7 percent of all First-Class Mail pieces,”
were mailed
Consequently,
a major
at discounted
for many business
rates that require
mailers,
a
entry in
rates paid for First-
item of cost and, as a result, occupy
considerable
attention.
Not surprisingly,
interests
The differing
mailers
Mail in 1999.”
14
18
and business
and
Mail more so than any other class of mail.
Virtually all pieces mailed by households
10
13
households
to such changes.
INTERESTS
therefore,
household
and
business
related to the amount and timing of rate changes
1996 Household
Diary Study, USPS-LR-116.
p. l-6.
USPS-T-6 (Tolley) at X-26.
Id., at 25.
- 30 -
mailers
have
different
related to First-Class
Mail.
Docket No. R2000-1
1
The response
2
adjustments
OCA-T-6
of the Postal
A.
5
As less frequent
preserving
7
a stable
8
confusion,
Households
Rate
users
First-Class
for household
Changes
interests
is to propose
Mail, households
First-Class
have an interest
in
(“SPFC”) rate as long as possible.20 Maintaining
of convenience
and economy,
and can minimize
mailers
Longer periods of rate stability reduce inconvenience
mailers
in the SPFC rate can be inconvenient
12
in the single-piece
13
New stamps are issued for both the new single-piece
14
the old and new single-piece
15
requires
16
unnecessary
17
often been crowded
rate is accompanied
the purchase
rate
basis
Periods of a Stable Single-Piece
of First-Class
SPFC rate is a matter
1.
11
Prefer Longer
the single-piece
9
10
to these differing
on a more frequent and predictable
3
4
6
Service
by new postage
of the rate change.
by household
mailers.
A change
stamps related to First-Class.
rate and the difference
rates, e.g., the “make-up”
of the new denomination
in the absence
to household
for household
stamp.”
of stamps
between
The rate change
that would
otherwise
be
In the past, retail post offices have
(and smaller-volume)
mailers seeking to obtain the
20
Some non-household smaller mailers whose volumes do not qualify for worksharing discounts, or
whose volumes while sufficient, mail infrequently, may also view a more stable single-piece first-class rate
favorably.
21
Traditionally, the postal sewice has printed new first-class stamps bearing alphabetic rather than
numeric denominations in advance of the commission’s opinion, assigning a value once the decisions of
commission and board of governors is known. This practice is being discontinued.
After Docket No.
R2000-I. the Postal Service will issue stamps bearing the new single-piece First-Class rate. Tr. 21/910405 (USPS Response to OCAIUSPS-62).
-3l-
OCA-T-6
Docket No. R2000-1
1
new denomination
2
household
3
implementation,
4
unused
stamps at the time of implementation.22
mailers
have “left over” stamps
a hidden
5
6
2.
cost is imposed
Longer periods
mailers
8
mailers-at
9
over” stamps
on households
11
“inventories.”
If the wrong denomination
12
the possibility
of inadvertent
13
stability
14
confusion
15
change
B.
19
Rate increases
20
to households.
21
management,
Where household
mailers have “left
(some of which may be non-denominated),
of the new or “make-up”
16
17
18
go
for household
purchase
stamps
introduces
separate
or non-denominated
over or underpayment
the need to purchase
over the then-effective
such stamps
rate changes can create confusion
of older denominations
minimize
when
to household
least for a time after implementation.
would
at the time of
confusion
10
22
of older denominations
of rate stability minimize
The prospect of more frequent
7
Moreover, to the extent that
of postage.
new stamps
First-Class
the
stamp
stamp is chosen, there is
Longer periods of rate
and therefore
rate, at least in the period immediately
minimize
following a rate
To the Extent Increased First-Class Rates Are Necessary, Smaller, More
Frequent and Predictable Rate Adjustments Are Preferred by Business
Mailers
pose a different
In particular,
large
customer relationships
Wilson, Scott
set of problems for business
rate increases
mailers compared
can be disruptive
to business’
and planning.
“In For A Penny (Stamp), In For A Long Wait,” Washington Post, January 12, 1999,
at Bl.
- 32 -
Docket No. R2000-1
1
2
OCA-T-6
1.
3
More frequent rate increases
increases in mailers’ costs
Postal rates represent
costs to business
minimize
mailers.
the likelihood
For some business
4
large rate increases
5
cannot be absorbed
without affecting other aspects of business,
6
and prices charged
to customers,
7
minimize
the likelihood
8
likelihood
of price increases
9
postage costs.
can mean sharply
the alternative,
exists as the duration between
12
adjustments.
13
increases which might otherwise
14
basis
increases
Smaller,
2.
Uncertainty
in smaller
more frequent
smaller rate increases
costs and, consequently,
of any rate change.
18
affected.
19
between
20
on new investments,
21
services (rather than immediately
22
More predictable
rate increases
rate proceedings,
would
require
could
is extended.
more frequent
avoid steeper
of
In
rate
general
rate increases facilitate business olanninq
planning
are larger as a consequence
planning for offsetting
rate increases
in
if rates were adjusted on a less frequent
As a result, business
and planning
the
to increase, the possibility
with respect to the timing of rate changes compounds
the amount
such increases
including investments
rate proceedings
rate increases
be necessary
More predictable
17
Where
increments
mailers,
related directly to large increases
To the extent postal prices are expected
11
Generally,
By contrast,
in mailers’
or other adjustments
larger rate increases
16
costs.
among others.
of sharp increases
10
15
increased
of sharp
cost reductions,
concern about
can be adversely
of an extended
estimating
period
the return
the “best time” to raise prices on products
or
in response to a rate change) is made more difficult.
can aid orderly business planning
- 33 -
Docket Non R2000-1
C.
OCA-T-6
The Postal Service Recognizes That Business
More Freauent and Predictable Rate Adiustments
In response
to the desires
future rate adjustments
two years.
speech
of business
on a more frequent and predictable
beginning
Direct
Marketing
basis-approximately
Association,
stated
in response
9
assumed
to a request of the General Accounting
that
postal
two years thereafter,
11
by the Commission,
12
in January
e.g., January 2003, 2005 and 200i’.24 Moreover,
13
resulting from Docket No. R97-1 took effect in January 1999
2001 would
Business
15
and predictable
16
considers
smaller,
17
Service’s
proposals
in estimating
of the proposed
be consistent
with a two-year
more
in
frequent
Docket
in the future.
rate
No.
increases
R97-1
are
volumes
if recommended
rate changes from this proceeding
rate cycle, as the increases
mailers expect the Postal Service to propose
rate increases
is
in January 2001, and every
10
14
management
Office (GAO), the Postal Service
rate increases would become effective beginning
implementation
every
General John Nolan, in a
to plan for the 2003 and 2005 rate cases.23 Previously,
8
Desire Smaller,
mailers, the Postal Service is planning
Recently, it was reported that Deputy Postmaster
to the
Mailers
smaller,
One association
to be postal
considered
of business
“policy.“*5
by
more frequent
some
The
mailers
mailers
Postal
to
be
23
Odell. Patricia. “USPS to Cut Jobs and Reevaluate Property,” DirecfNewsLine. May 3. 2000. See
also Association for Postal Commerce, PostCorn Bulletin, 21-00. May 5, 2000; and, Alliance of Nonprofit
Mailers, Alliance Report, 00114, May 10, 2000.
24
See LR-I-179, p. 5.
25
Letter of American Mail Marketing Association
-34-
to the USPS Board of Governors,
October 4, 1999.
Docket No. R2000-1
1
responsive
2
rate increases.‘6
3
4
OCA-T-6
to the “longstanding
Moreover,
desire of business mailers” for smaller, more predicable
the expectation
to be widely held. According
that rate increases will occur every two years appears
to the publication
Publishers
Auxiliary?
Another [rate] case will come two years after [the current case], since
some in the postal community sought smaller, more frequent rate,
increases, and the Postal Service has responded with just such more
frequent rate increases.
26
Letter of Time, Inc. to the USPS Board of Governors,
21
Boone, Xenia.
May 21, 1998.
“Major Shifts Seen In Public Policy Concerns,”
at 1.
-35-
Publishers Aux;/iary, April 3, 2000,
Docket No. R2000-1
II.
OCA-T-6
THE DIFFERING INTERESTS OF HOUSEHOLD
AND BUSINESS MAILERS
CAN BE ACCOMMODATED
BY ADJUSTING
THE SINGLE-PIECE
FIRSTCLASS RATE EVERY OTHER RATE PROCEEDING
Household
mailers seek the convenience
5
by maintaining
a stable single-piece
6
customers
7
that rate adjustments
8
responded
First Class rate for longer periods.
prefer smaller, more predictable
occur
and simplicity that would be promoted
rate increases
on a more frequent
to the desires of business
need
10
to rate adjustments
not be viewed
11
accommodate
12
business mailers’ desire for smaller, more predictable
13
that the single-piece
the interests
of households
First-Class
basis.
The Postal
suggests
Service
has
and business
as irreconcilable.
for a longer
period
adjustments.
mailers with respect
There
is a way
to
of stable rates with
To do so, I propose
rate be adjusted every other rate proceeding.
Adjusting the Single-Piece
Rate Every Other Rate Proceeding Would
Involve Maintaining the “Whole Cent” Integer Rate for Households and
Establishino Workshare Discounts Based upon a Non-lnteaer Rate
14
15
16
A.
17
Setting the single-piece
18
policy in postal ratemaking
19
smaller-volume
20
in tenths
21
achieve
22
smaller, more frequent
28
(when necessary)
mailers in this regard.
However, the differing interests of households
9
That business
mailers.”
First-Class
to promote
rate in whole
convenience
and simplicity for household
Rates for presort and automation
of a cent, represent
discounts
the twin goals of longer periods
adjustments
from the whole
of rate stability
for business
See PRC Op, R94-1 at 15005.
- 36 -
cents is a long established
compatible
and
mail, expressed
cent single-piece
for household
mailers, the relationship
rate.
To
mailers and
between
the
Docket No. R2000-1
I
single-piece
2
must be changed.
OCA-T-6
integer rate and the discounted
3
4
I.
The single-piece
rate DrOCeedinq
rates for presorted
First-Class
and automation
rate should be changed
5
As envisioned
6
cards would be established
7
and remain in effect during the period following
8
Class rate would be determined
9
compliance
IO
proceeding,
II
subclass,
I2
by households,
13
remain the same for the time period covered by the two rate proceedings,
14
approximately
four
15
determination
of First-Class
16
“calculated”
First-Class
in an initial rate proceeding
rates for First-Class
(“SPFC”)
the next rate proceeding.
requirement,
non-integer
The First-
with one exception.
Letters, based upon an appropriate
would be set at a whole cent.
years,
rate for letters and
(such as Docket No. R2000-I),
would be set without regard to the “integer constraint.”
by contrast,
every other
in the same manner as in past proceedings,
with the test year break-even
2.
I7
18
I9
here, the single-piece
assuming
rate cases
mail
In each rate
mark-up for each
The rate actually paid
This “integer
are filed every
rates other than single-piece
including
would
rate” would
a duration of
The
two years.
be based
on the
rate in each rate proceeding.29
The difference between the “whole cent” integer rate and the noninteger “calculated” rate would be used to maintain the single-piece
rate durinq the period followina the second rate case
20
The SPFC integer
rate established
21
selected so as to generate
22
used for SPFC mail, The additional
during the first rate proceeding
revenues greater than if the calculated
revenues
29
generated
non-integer
would
be
rate were
would permit maintenance
of
For purposes of this testimony, I refer to estimation of costs and application of the pricing criteria
as the “calculated” single-piece non-integer rate, as distinguished from the integer rate.
- 37 -
Docket No. R2000-1
OCA-T-6
1
the SPFC integer rate through
2
during the first rate case period and recorded
3
books
4
calculated
5
single-piece
of the Postal
non-integer
two rate cases.
Service.
This amount
in a “SPFC Reserve Account”
would
rate and the SPFC integer
be the difference
rate, multiplied
on the
between
by the volume
the
of
letters.
6
If, during the second
7
rate causes a revenue “deficiency,”
8
would
9
between the new calculated
rate proceeding,
non-integer
and the SPFC rate previously
II
letters.
maintenance
of the same SPFC integer
the positive balance in the SPFC Reserve Account
be used to make up the difference.
10
I2
A positive balance would be created
The deficiency
rate established
established,
multiplied
At the time of the third rate proceeding,
would be the difference
in the second rate proceeding
by the volume of single-piece
when it would again be time to change
I3
the SPFC integer rate, the balance in the SPFC Reserve Account,
I4
would be taken into account in setting the new SPFC rate.
I5
I6
3.
I7
Currently,
positive or negative,
De-linking workshare discounts from the “whole cent” integer rate
would more accuratelv reflect costs
the
discounts.
single-piece
rate is the
Rates for workshare
reference
point
for establishing
I8
workshare
19
and the percentage
20
piece rate.
mail are based upon estimated cost savings
21
reference
22
decimal places, rather than the whole cent integer rate used for SPFC mail.
23
workshare
of those savings “passed-through”
Under this proposal,
to the calculated
rates for workshare
non-integer
mail would, therefore,
all
in discounts
from the single-
mail would be established
by
rate in each rate case, set at one or more
more accurately
-36-
reflect costs,
Rates for
During the period rates
Docket No. R2000-1
OCA-T-6
1
from the first rate case are in effect, the result would be lower discount
2
workshare
3
postal costs rise in the interim, the calculated
4
to a new level.
5
non-integer
6
SPFC
7
discounts
8
9
mail compared
If the size of the discount,
integer
rate paid by households
non-integer
determined
remains
presuming
rate would also likely increase
by reference
to the calculated
mail will increase while the
unchanged.
In effect,
workshare
The Operation and Effect of Separating the Timing of Rate Adjustments
for Household and Business Mailers can be Illustrated
the SPFC rate every other rate proceeding
II
mail change each rate case will affect First-Class
12
the changes
13
business
in workshare
mailers.
1.
16
rate period,
would shrink vis-a-vis the SPFC rate during the second rate period.
Changing
14
I5
In the second
rate, remains the same, the rates for workshare
B.
10
to the SPFC rate.
rates for
discounts
revenues and volumes.
will vary workshare
volumes,
In particular,
affecting
certain
First-Class revenues will vary, and volume will shift between
piece and workshare
single-
These changes can be illustrated.
Table I3 illustrates the operation
of this proposal and its effect on revenues.
17
the first rate change,
I8
upon
19
purposes
20
rate of 34 cents might be recommended
21
rate case.
22
piece rate of 33 cents would be multiplied
23
period to determine
the litigated
while rates for workshare
Year 2001, the calculated
revenue
of illustration
requirement,
to be 33 cents.
The difference
between
costing
single-piece
non-integer
and pricing,
After determining
and then held constant
rate (based
etc.) is assumed
the calculated
In
for
rate, a SPFC
through the following
the 34 cent SPFC rate and the calculated
single-
by the SPFC mail volume each accounting
the amount of revenues
credited to the SPFC Reserve Account for
- 39 -
Docket
No. R2000-1
OCA-T-6
1
that accounting
2
cumulative total revenue credited to the SPFC Reserve Account.
3
period.
Table
Based upon a two-year
4
this example.
5
piece rate of 34.8 cents.
6
cents.
7
each accounting
8
Account for that accounting
9
Account generated
13 shows, for Years 2001 and 2002, the annual and
rate cycle, the next rate case would be in Year 2003 in
In that rate proceeding,
The difference,
However,
the litigation might result in a calculated
the SPFC rate charged
consumers
now a negative 0.8 cents, is multiplied
period
to determine
period.
the amount
debited
single-
remains at 34
by the SPFC volume in
from the SPFC
Reserve
In effect, the positive balance in the SPFC Reserve
during the first rate case is used to “make-up” the expected
during the next rate case period.
revenue
10
deficiency
This effedt is also shown in Table 13, for
11
Years 2003 and 2004, where the total balance in the SPFC Reserve Account declines.
Table 13
ILLUSTRATIVE
ANNUAL AND TOTAL CHANGE IN ESTIMATED REVENUES
IN SPFC RESERVE ACCOUNT DURING TWO RATE CASES
(volumes and amounts in millions. except rates)
Year 2000
Calculated
Single-Piece
Rate (1)
SPFC Rate [2]
Difference [3]
SPFC Volume
[4]
$0.33
Year 2001
$0.330
$0.34
$0.010
Year 2002
$0.330
$0.34
$0~010
Year 2003
SO.346
$0.34
-$0.006
Year 2004
$0.346
$0.34
-$0,006
51,727
51.023
52,646
50,137
$517
$517
$510
$1,027
-8423
$605
-8401
$204
53,376
SPFC Reserve Acct _ Annual 151
SPFC Reserve Acct. Total 161
12
In the third rate case, when the SPFC rate is expected to change, the balance in
13
the SPFC Reserve Account,
14
new SPFC rate.
15
16
positive or negative, would be considered
Over a two rate case cycle, volume
workshare
categories.
will shift to and from single-piece
By holding the SPFC integer
-40.
in deciding
rate constant
through
the
and
two rate
Docket No. RZOOO-1
OCA-T-6
1
cases as proposed,
2
SPFC rate with each rate case (although
3
calculated
4
SPFC rate is greater than the calculated
5
discount.
6
results when the SPFC rate is less than the calculated
7
second rate case, creating a smaller discount relative to the SPFC rate.
8
9
the workshare
single-piece
discount
rate is assumed
not to change),
single-piece
Table 14 illustrates the changing
For purposes
the difference
11
rate and the workshare
12
constant at 6 cents during the entire four year period.
rate, is assumed.
14 shows
between
mail.
The opposite effect
single-piece
rate after the
volume over a period of
mail of 6 cents
the calculated
It is also assumed
the SPFC integer
relative to the
rate, there is a larger workshare
of Table 14, a discount for Workshare
Basic), representing
to the
In the first rate case, when the
SPFC and workshare
(Automation
Part A of Table
of the discount
more workshare
10
13
up and down compared
the amount
In theory, this should generate
two rate cases.
“cycles”
single-piece
that the discount remains
rate of 34 cents and resulting
14
volumes,
and assumes the 34 cent rate remains constant
15
cases-a
period of four years in this example.
16
also shown.
17
and the workshare
18
change from 33 cents in Years 2001 and 2002 to 34.8 cents in Years 2003 and 2004
19
for purposes
20
than the calculated
21
estimated
3.2 percent
22
workshare
volume.
23
then increase
Part B shows the calculated
rate and volumes.
of this illustration.
single-piece
reduction
for the duration
The workshare
single-piece
The calculated
of two rate
rates and volumes are
non-integer
single-piece
rate and volumes
rate is assumed to
In Year 2001, when the SPFC rate is 1 cent greater
rate and the workshare
in SPFC
Total First-Class
volume
discount is 7 cents, there is an
and a 3.5 percent
increase
in
volume would decline by 21 million pieces, and
by 75 million in Year 2002.
In 2003, when the SPFC rate is 0.8 cents
-41-
Docket No. R2000-1
less than
the
OCA-T-6
calculated
single-piece
rate
and the effective
workshare
discount
becomes
5.2 cents, there is an 1.8 percent increase in SPFC volume, and a 2.2 percent
decrease
in workshare
volume.
Total First-Class
in 2003 and by 93 million in 2004.
volume would decrease
volume would decrease
by 54 million
Over the entire four year period, total First-Class
by 89 million.
The resulting changes in SPFC and workshare
volume can be seen in Part C of Table 14.
Workshare
1.629
t4.d mange
(21)
7
8
9
10
2.
Mail
11
increase
12
calculated
13
discount
1.704
3.5%
75
(1.002,
(54)
-2.2%
(989)
-2~2%
(89)
1.412
0.72%
(89)
The shifting of volumes between single-piece
and workshare
results from changes in the “calculated” single-piece non-integer
rate and the size of the workshare discount
volumes
shifting
and decrease
single-piece
compared
3.5%
between
with changes
single-piece
and workshare
in the workshare
rate and SPFC rate.
A change
rate relative
will
alternately
to changes
in the size of the workshare
to the SPFC rate shifts volumes to and from SPFC and workshare
-42-
in
Docket No. RZOOO-1
OCA-T-6
1
mail.
In the first rate case, where the discount is “large,” workshare
2
while SPFC volume decreases.
3
the calculated
4
offsets the increase
5
SPFC rate is held constant,
6
causing
7
calculated
8
SPFC rate.
9
effect of workshare
single-piece
This occurs because
rate.
volume.
rate, such that the workshare
Consequently,
11
as the difference
between
12
size of the discount changes.
13
plus/minus
14
rate is shown.
15
determined
16
cents.
17
SPFC rate.
Again,
More specifically,
from the calculated
However,
of the change
the workshare
discount
In Table 15, when it is assumed
18
single-piece
19
the calculated
20
cents.
21
volume increases
22
is 2 cents less than the calculated
23
rate decreases
The maximum
by 3.258 billion.
is smaller vis-a-vis the
offsets the volume-reducing
in SPFC and workshare
single-piece
volumes
rate change, and the
from the calculated
discount
rate, is assumed
increases
single-piece
(for Automation
Basic),
to remain constant
and decreases
compared
at 6
to the
the SPFC integer rate is 2 cents greater than
rate of 33 cents, the effective
reduction
to 4 cents.
workshare
single-piece
the SPFC rate is below the
the effect of varying the SPFC rate by
cent increments,
the illustrated
on a real basis,
because of the lesser discount.
SPFC rate and calculated
2 cents, in one quarter
and
rate period, when the
discount
the SPFC volume increase
mail shifting to single-piece
SPFC volume
mail is declining
This occurs because
Table 15 shows the magnitude
10
During the second
the rate for single-piece
SPFC volume to increase.
single-piece
the SPFC integer rate is above
The higher SPFC rate reduces
in workshare
volume increases
in SPFC volume
discount
rate expands
to 8
is 3.281 billion, while workshare
Similarly, when it is assumed the SPFC integer rate
single-piece
The result:
rate of 33 cents, the effective discount
SPFC and workshare
-43-
volumes shift in opposite
Docket No. R2000-1
directions,
volume
OCA-T-6
with SPFC volumes
decreasing
increasing
by 3.258 billion.
by a total of 3.360 billion and workshare
Overall,
however,
total First-Class
Mail volume
does not vary by more than 102 million pieces per year.
Table
ILLUSTRATIVE
15
EFFECT OF CHANGE IN SPFC RATE ON SHIFT IN ESTIMATED
SINGLE-PIECE AND WORKSHARE VOLUME
(volumes in millions)
Rate
Difference
-80,020O
-80~0175
-$0.0150
-$00125
-$0~0100
-$0,0075
-50.0050
-b0.0025
00~0000
$00025
50~0050
$00075
$0,0400
50,0425
50,045o
50,0475
$0~0500
50.0525
$0,0550
50.0575
50,060O
50~0625
$0~0650
50,0675
50.0700
50,0725
$0,0750
50~0775
50.0600
$0~0100
$0~0125
50,0150
$0.0175
500200
4
5
3.
6
Changing
7
increase
8
Consequently,
9
impacted,
10
SPFC
Volume
Change
Workshare
Discount
Workshare
Volume
Change
3.360
2,936
2,513
2,091
1,670
1,251
633
416
0
(414)
(828)
(1.240)
(1,651)
(2.060)
(2.468)
Net
Volume
Change
(3,258)
(2.851)
(2.44-T
(2.036)
(1.629)
(1.222)
(815)
(407)
0
407
815
1.222
1,629
2,038
2,444
2,851
3.258
(2.876)
(3.261)
SPFC
Volume
% Change
102
6,3%
5.5%
4.7%
3.9%
3.1%
2,3%
1.6%
0~8%
0.0%
-0.8%
-1.6%
-2,3%
-3.1%
-3.9%
46%
-5.4%
-6.1%
85
69
54
41
29
18
8
i,
(13)
(18)
(21)
(24)
(25)
(25)
(23)
Workshare
Volume
% Change
-7.2%
-6,3%
-5,4%
-4.5%
-3.6%
-2,7%
-1~8%
-0~9%
0 0%
0,9%
1.8%
2~7%
3,6%
4.5%
5.4%
6,3%
7.2%
The shifting volumes between SPFC and workshare
certain mailers and the Postal Service
rates for workshare
and decrease
presort
the volume
mailers,
Net
Volume
% Change
0,103%
0.086%
0.070%
0,055%
0~042%
0~029%
0.018%
0,009%
0~000%
-0,007%
-0~013%
-0,018%
-0,022%
-0~024%
-0~025%
-0~025%
-0,024%
will affect
mail while holding the SPFC rate constant
of SPFC and workshare
mail at different
and to a lesser extent, pre-barcode
mailers,
will
times.
will be
as well as the Postal Service.
With respect to the Postal Service, the shift in volume to and from SPFC mail
11
and workshare
12
First-Class
mail from one rate case to another
is likely to have little effect on total
volume or overall Postal Service operations.
-44-
As shown in Table 15, when
Docket No. R2000-1
OCA-T-6
1
the price difference
is -2 cents, the largest net percentage
2
volume is negligible
at well under one percent, i.e., 0.103 percent.
3
Nevertheless,
change in total First-Class
the shift in volumes to and from SPFC and workshare
4
some impact on Postal Service operations.
5
could shift between
6
and are likely to be smaller and more gradual than seasonal fluctuations
7
the two.
As much as 3.4 billion pieces per year
However, such shifts can be anticipated
With respect to presort mailers, changes
8
will create cycles causing volumes and revenues
9
between the SPFC rate and the calculated
higher volumes
11
between the SPFC rate and calculated
12
operate with lower volumes and revenues and potentially
As proposed
higher
single-piece
here, the first cycle would
in mail volume.
discount
to rise and fall. When the difference
single-piece
and potentially
and planned for,
in the size of the workshare
10
13
and revenues,
would have
rate is positive, mailers will see
profits.
When the difference
rate is negative, however, they will
lower profits.
occur when the difference
between
volumes
14
SPFC and calculated
rate is positive, resulting in a period of higher workshare
15
and mailer revenues.
This, in turn, should permit presort mailers to establish a financial
16
base with which to offset lower volumes following the second rate case. Over the entire
17
four year period, these cycles could induce greater efficiency,
18
new capital equipment
19
the period of lower volumes.
as some firms invest in
during the period of higher volume in order to compete
Adjusting the Single-Piece Rate Every Other Rate Proceeding
Circumscribed Under Certain Circumstances
during
Should be
20
21
C.
22
Holding the SPFC rate constant for a period of two rate cases creates a risk that
23
the SPFC Reserve Account may prove insufficient to cover the likely revenue deficiency
-45-
Docket No. R2000-1
OCA-T-6
during the second rate case period.
high or rising inflation, increasing
piece non-integer
4
cause
5
reducing workshare
6
This prospect becomes
the possibility of a larger rise in the calculated
rate than what otherwise
the workshare
discount
more likely in a period of
to shrink
single-
might be necessary.
This, in turn, could
even more compared
to the SPFC rate,
volume even more.
As shown in Table 15, the largest shifts in volume could reach +6.3 percent for
7
SPFC mail and -7.2 percent for workshare
8
2 cents greater than the SPFC rate. As noted above, a difference
9
becomes
more likely in an inflationary
mail when the calculated
environment.
larger deficit in the SPFC Reserve
11
compared
12
not change
13
create greater difficulties for presort and pre-barcode
14
rate is
of this size or larger
Such a difference
10
Account
single-piece
could produce a
at the end of the two rate case cycle
to a low inflationary
period.
Moreover,
while total First-Class
to any significant
degree,
a larger decrease
in workshare
volume would
volume could
mailers.
The possibility that the balance in the SPFC Reserve Account may be insufficient
15
during the second
rate case period suggests
16
SPFC rate under certain circumstances,
17
rate case period.
18
rate in the second rate case is expected
19
existing
20
the calculated
21
of a large deficit in the SPFC Reserve Account,
22
piece and workshare
23
Table 15.
I propose
SPFC integer
the need to permit an increase
rather than maintaining
that in circumstances
it during the second
where the calculated
single-piece
to increase by more than 1.5 cents above the
rate, a change in SPFC rate would be warranted.
single-piece
in the
If changes in
rate were limited to 1.5 cents, there would be less likelihood
and the volume shift between
mail would be limited to approximately
-46-
5 percent,
single-
as shown in
Docket No. R2000-1
1
2
Ill.
OCA-T-6
CONCLUSION
Changes
in the First-Class rate generate differing concerns for households
3
business mailers.
4
with respect to the amount and timing of rate changes related to First-Class
5
less frequent
6
single-piece
7
rates are necessary,
8
rate adjustments.
9
As a result, household
and business mailers have different interests
users of First-Class Mail, households
First-Class
and
rate as long as possible.
Mail. As
have an interest in preserving the
To the extent increased
First-Class
business mailers prefer smaller, more frequent and predictable
In order to accommodate
the interests of households
10
rates with business
11
that the single-piece
12
proceeding.
13
regard to the “integer constraint.”
74
cent so that revenues would accumulate
15
rate period to permit the single-piece
16
second rate proceeding-a
17
household
18
mailers smaller, more frequent and predictable
19
accommodating
20
can be achieved while preserving Postal management’s
21
rate changes.
for a longer period of stable
mailers’ desire for smaller, more predictable
adjustments,
I propose
First-Class rate for letters and cards be adjusted every other rate
In each rate proceeding,
the First-Class
rate would be determined
The rate paid by households
without
would be set at a whole
in the SPFC Reserve Account during the first
rate to remain the same during the period after the
duration of approximately
four years.
Under this approach,
mailers would enjoy a longer period of rate stability while allowing business
rate adjustments.
the differing interests of household
-47-
Moreover,
and business mailers in this manner
prerogatives
with respect to
OCA-T-6
Docket No. R2000-1
Changing the SPFC rate every other rate proceeding
while rates for workshare
mail change each rate case will cause volumes to shift between single-piece
and
workshare.
could
The shifting of volumes to and from single-piece
and workshare
become larger in a period of high or rising inflation than might otherwise
Such an outcome could create difficulties for presort and pre-barcode
be expected.
mailers.
In order
to minimize such difficulties and ensure that sufficient revenues are available to sustain
the SPFC rate during the second rate case period, I propose that the SPFC rate be
increased
at the time of a second rate case under certain circumstances.
-48-
Docket No. R2000-1
OCA-T-6
1
2
3
PART Ill
I.
4
THE NONSTANDARD
SURCHARGE IS NO LONGER WARRANTED
ASPECT RATIO NONSTANDARD
LETTER MAIL
The
nonstandard
surcharge
In Docket
5
classification
system.
6
establishment
of a classification
7
third-class
8
rate proceeding.3’
9
cents
after
MC73-1,
for nonstandard
11
for single-piece
the
increases
the
Postal
Service’s
of longstanding
Commission
single-piece
proposed
in the mail
recommended
First-Class,
to be determined
In Docket No. R78-1, the Commission
rejecting
Subsequent
Airmail and
in a subsequent
initially set the surcharge
surcharge
have resulted in the current nonstandard
of
surcharge
13
at 7
cents.32
of 11 cents
First-Class Mail.”
The nonstandard
13
Advances
14
have made the surcharge
15
the assumptions
30
No.
maiL3’ with the amount of the surcharge
10
12
is a classification
FOR LOW
surcharge
in the technology
is no longer warranted
of mail processing
for low aspect ratio mail.34
since implementation
of the surcharge
obsolete with respect to low aspect ratio mail, and rendered
underlying the costing on which the surcharge
is based unrealistic.
PRC Op. MC73-1 at 26
31
Id., at 27
32
PRC Op. R78-1 at 1
33
See USPS LR-I-118. The first nonstandard surcharge (seven cents) was established in 1979. In
Docket No. R87-1, a reduced surcharge of 5 cents per piece was established for presorted First-Class
Mail.
34
I use the phrase “low aspect ratio mail” to refer to letter-size mailpieces that are nonstandard
virtue of an aspect ratio from 1:l up to 1:1.3. Such mailpieces are square or nearly square in shape.
-49-
by
Docket No RZOOO-1
A.
Significant Changes in Mail Processing Have Occurred
Nonstandard Surcharoe Was tmotemented
Nonstandard
measurements.3s
5
OCA-T-6
mailpieces
Currently,
subject to the applicable
are
defined
by
any piece of First-Class
nonstandard
surcharge
D
a thickness
7
D
a height exceeding
6.125 inches, or
8
D
a length exceeding
11.50 inches.
9
A separate defining characteristic
to
physical
Mail weighing one ounce or less is
0.25 inches, or
of nonstandard
mail is the “aspect” ratio. The aspect
10
ratio is simply the ratio of the height to the length of a mailpiece.
11
mailpiece
12
nevertheless
not exceeding
several
if it ha?
6
exceeding
reference
Since the First
the thickness,
be subject to the nonstandard
height,
and length
surcharge
Consequently,
standards
(above)
a
may
if it has
13
D
14
Examples
15
nonstandard
16
invitations that are square (aspect ratio of 1:l) or nearly square in shape.
an “aspect” ratio of less than 1:1.3 or more than 1:2.5.
of First-Class
letter-size
mailpieces
available
to consumers
that would be
by virtue of the aspect ratio “test” might include seasons greeting cards or
35
It should be noted that all First-Class Mail must meet certain minimum and maximum standards,
or it is unmailable. See DMM §CO10.1.2 and 5CO10.1.3.
36
See DMM 5 C100.4.0.
37
Dividing the length of a letter-size mailpiece by its height produces the aspect ratio. A letter that is
square in shape has an aspect ratio of l-to-l. A letter that is 6.5 inches long and five inches in height has
an aspect ratio of 1:1.3.
-5O-
Docket No. R2000-1
1
These
2
establishment
OCA-T-6
four
defining
limits
of the classification
3
4
5
1.
6
In recommending
of nonstandard
mail
have
not
changed
since
in Docket No MC73-1 .38
The nonstandard
surcharge was intended to facilitate machine
processing by encouraging use of standard envelopes and thus
reduce costs
a classification
7
on the growing
importance
8
classification
was established,
9
processed.39
Accordingly,
for nonstandard
of mechanization
to process
56 percent
the Commission
mail, the Commission
of standard
determined
the mail.
size letters
focused
At the time the
were
manually
that
mechanization requires that some definition of maximum size be specified
for purposes of machine design and procurement. This is especially true
since the Postal Service anticipates
eventually
moving to a fully
mechanized system.40
10
11
12
13
resulting
length
15
established
“in order to encourage
16
the
Service
17
Commission
separately
18
nonstandard
mail because of its effect on the machinability
19
Service
20
configuration,
evidence,
thickness,
and
The
Postal
maximum
height,
14
the Commission
were
therefore
the use of standard mail pieces, and to compensate
for the added
identified
standards
costs
of handling
nonstandard
The
items.“4’
the aspect ratio as another defining characteristic
found “as envelopes
or an aspect ratio of l:l,
significant
Compare PRC Op, MC73-1 at 26 and DMM 5ClOO.4.0.
39
PRC Op. R78-1 at 36.
40
Id., citations omitted.
41
PRC Op. MC73-1 at 26.
-51-
of mail. Based upon Postal
move away from a square
improvement
UI
of
in machinability
occurs
Docket No. R2000-1
OCA-T-6
1
after a ratio of 1:1.4 to 1:1.5.“42 The Commission,
2
ratio of 1:1.3 as the lower bound on the range for standard maiL4’
3
4
2.
5
has changed significantly
6
of the nonstandard
7
manually,
with manual
8
Machines
(“LSMs”).
9
become increasingly
service.45
11
automated
12
recommended
Mail processing now relies on automated equipment,
processinq of low aspect ratio nonstandard letter mail
Technology
IO
however,
Letter
classification.
the processing
Most standard
processing
subsequently
mail is now
Virtually
permitting
of mail since establishment
letter mail was initially processed
supplanted
Over time, the Postal Service’s
sophisticated.44
an aspect
largely by Letter Sorting
mail processing
equipment
has
all LSMs have now been removed from
processed
almost
entirely
on highly
sophisticated
equipment.46
The importance
13
prevalence
14
for processing
15
“faces,” cancels
16
processing.
17
barcodes
of automation
and use of automated
for letter mail processing
equipment
letters includes the Advance
in mail processing.
Facer Canceller
and sorts letters (and cards) into separate
Optical
Character
Readers
(“OCRs”)
on such letters and sort the letters.
read
is revealed
by the
The latest equipment
System (“AFCS”),
mailstreams
printed
which
for additional
addresses,
print
There are several types of Bar Code
Id., at 28.
43
Id
44
PRC Op. R97-1, para. 5227.
45
USPS-T-10
(Kingsley) at 34.
46
An exception is letter mail that, at the request of a mailer, may be processed
Postal Service. See DMM 5 M130.1.5.
-52 -
manually
by the
Docket No. R2000-1
1
OCA-T-6
Sorters (“BCSs”) that read letter mail with barcodes
mailers,
including
Sorters (“DBCSs”)
barcoded
Mail Processing
applied by Postal Service OCRs or
Bar Code Sorters (“MPBCSs”)
and Carrier Sequence
Delivery Bar Code
Bar Code Sorters (“CSBCSs”)
mail into the delivery sequence followed by the carrier.
The
nonstandard
processed
increasing
letter
sophistication
mail,
previously
on the automated
of
automated
unsuited
equipment.
for
equipment
mechanized
permits
9
cull out such mail.47 The result is that some “mail pieces with nonstandard
will be processed
correctly
11
automation
12
are square in shape (aspect
13
automated
14
15
6.
16
In its Opinion
equipment)
on the AFCS and will therefore
that is designed to
aspect ratios
be routed to downstream
In fact, it has been shown that some seasonal greetings that
operations.“48
ratio of 1:l) are processed
either partially, or entirely, on
equipment.49
The Commission’s
Opinion in Docket No. R97-1 Found
Reasons To Doubt the Basis for the Nonstandard Surcharqe
17
Commission
rejected
18
nonstandard
surcharge
48
to be
In the case of low aspect ratio letter mail,
there is no feature of the AFCS (or other mail processing
IO
certain
processing,
8
47
that can sort
and
the
Recommended
Postal
Service’s
for single-piece
Important
Decision
in Docket
No.
R97-1,
proposed
45 percent
increase
the
in the
mail, from 11 cents to 16 cents, and the 120
Tr. 5/2078
Id
19
See Docket No. R97-1, Testimony of NDMS witness
Reference LR-NDMS-1.
-53-
Haldi (NDMS-T-l),
at 11-12, and Library
Docket No. R2000-1
OCA-T-6
1
percent
2
was based largely on the testimony of NDMS witness Haldi.
3
increase
for presorted
The Commission
mail, from 5 to 11 cents,
found “compelling
reasons”
The Commission’s
for maintaining
the surcharge
for
respectively.
Specifically,
the
4
single-piece
and presort
5
Commission
questioned
6
operational
necessity
7
technology,
“automation
6
pieces.“”
The Commission
also found the cost support “defective”
9
including,
among
the assumption
mail at 11 and 5 cents,
the “validity
nonstandard
11
the Postal Service
12
should
13
environment.“53
of the assumption
capabilities
have expanded,
letter mailL5’ The Commission
provide
that the surcharge
is an
for all types of pieces now subject to it.“50 With the advance
others,
10
decision
“intends
to continue
a justification
that
at least for low aspect ratio mail
of 100 percent
concluded
in several respects,
manual
its analysis
to assess these surcharges
accurately
PRC Op. R97-1,1[5226
Id., 15227.
Id., 15228.
Id., n5230.
-54-
of
depicts
the current
processing
for
by admonishing,
in the future,
mail processing
if
it
Docket No R2000-1
1
2
II.
3
OCA-T-6
THERE IS NO COST BASIS TO APPLY THE NONSTANDARD
TO LOW ASPECT RATIO LETTER MAIL
The
Postal
Service’s
4
surcharge
5
is manually processed,
6
is unrealistic.
7
developed
8
the processing
cost
is highly problematic.
estimate
Specifically,
which assumption
An alternative
justifying
the
the assumption
underlies
proposed
nonstandard
that all nonstandard
mail
its cost estimate for the surcharge,
to the Postal Service’s
that relies on more realistic assumptions
SURCHARGE
problematic
cost estimate can be
involving estimated probabilities
for
of low aspect ratio mail
9
10
11
A.
The Postal Service, Through the Testimony of Witness Miller, Presents
Unrealistic Assumptions to Justify the Nonstandard
Surcharge for Low
Aspect Ratio Mail
12
The testimony
13
analysis for the nonstandard
14
were the subject of criticism in Docket No. R97-1 with respect to the Postal Service’s
15
nonstandard
16
assumption
17
mailpieces weighing
of witness
surcharge
Witness
remnant
provides the Postal Service’s
Miller addresses
the validity of the nonstandard
of 100 percent manual processing
for nonstandard
cost
three issues that
letter definition,
the
letters, and cost data for
less than one ounce
19
outdated
20
processing
21
and that specific features
22
and length standards
54
surcharge.
proposal:
Witness Miller maintains
18
Miller (USPS-T-24)
that the definition
from the past.“”
equipment
is designed
of nonstandard
He states that the current
around the existing definition
of the AFCS cull letter mail exceeding
from the mailstream.
letter mail “is not an
generation
of nonstandard
the thickness,
Witness Miller acknowledges,
USPS-T-24 (Miller) at 19.
- 55 -
of letter
mail,
height,
however, that
Docket No. RZOOO-1
OCA-T-6
1
unlike letters exceeding
2
with a low aspect ratio cannot be culled by the AFCS.
3
be rejected during subsequent
4
Witness
the maximum thickness,
Miller assumes,
as was the case
nonstandard
letters are processed
6
not always true in fact, but observes
7
“little impact on the total results as nonstandard
8
shaped..“57
manually.“56
With respect to costs, witness
the existence
Such letters may nevertheless
of testimony
in Docket
Witness
11
unit costs for letters, flats, and parcels
12
witness
13
estimate
14
volume
15
witness Daniel’s cost data by shape do not look reasonable
categories
(USPS-T-28,
Daniels)
weighing
because
First-Class
increment
18
There is no basis for the Postal Service’s assumption
are manually
55
Id., at 20-21.
56
Id., at 22, emphasis added.
57
Id., citation omitted.
58
Id.
processed.
- 56 -
mail processing
However,
In other words,
for one-ounce
The Assumption that All Nonstandard Letter-Shaped
Manuallv Is Not Justified for Low Aspect Ratio Mail
mailpieces
unit costs,
and shape for low
Mail pieces.“58
B.
shaped
estimating
flat
“it may be difficult to precisely
16
17
19
mail processing
less than one ounce.
costs by both ounce
such as nonstandard
would make
mail pieces are overwhelmingly
Miller uses average
use of this testimony
that “a//
that this is
that, even if it were, this assumption
despite
CRA mail processing
No. R97-1,
Miller recognizes
10
Miller rejected
letters
processing.55
5
9
height, and length standards,
pieces.
Mail Is Processed
that all nonstandard
To the contrary,
letter-
it is known that low
Docket No. RZOOO-1
OCA-T-6
1
aspect ratio letter-shaped
2
Postal Service’s
3
pieces can be processed
network of automated
The assumption
partially, if not entirely, through the
equipment.
that 100 percent of nonstandard
letter-shaped
mail is manually
4
processed
5
that the assumption
6
not always be true” in fact. 59 With respect to low aspect ratio letters, it is clear there is
7
some automated
8
primary”
operation.60
9
delivered
nonstandard
is not supported
of witness Miller.
of 100 percent manual processing
mail processing
According
at least through
to witness
Witness Miller confirms
for nonstandard
what is known
Miller, “the presence
letter mail “may
as the “outgoing
of a barcode
letter shows that this letter has been successfully
10
either the Optical Character
11
consistent
12
on automated
on a
processed
Reader (OCR) or the Output Sub System (OSS).“6’
with the Postal Service’s
on
This is
efforts to process as much letter mail as possible
equipment.
While the assumption
13
by the testimony
of all manual processing
14
low aspect ratio mail can be successfully
15
mail processing
16
how the aspect ratio affects mail processing
17
intend to undertake
59
Id.
MI
Tr. 713225.
61
USPS-T-24
62
Id.. at21.
network
is unknown.
processed
is not realistic, the extent to which
through the Postal Service’s entire
The Postal Service does not “fully understand”
a study of processing
operations6’
operations
at 21.
-57-
Nor does the Postal Service
involving low aspect ratio mail, as
Docket No. R2000-1
OCA-T-6
1
“benefits obtained
2
revenue and cost associated
3
Service is essentially
4
such mail.
C.
from such a study would outweigh
the costs.“63 In other words, the
with low aspect ratio letters are so small that the Postal
unconcerned
with what (if any) surcharge
should be imposed on
The Assumption
of All Manual Processing
Should Be Replaced for
Purposes of Estimatinq Mail Processina Costs for Low Aspect Ratio Mail
The assumption
a
representative
9
a delivered
that all low aspect ratio letter mail is manually processed
of mail processing
by the Postal Service.
The existence of a barcode on
low aspect ratio mailpiece confirms there is a probability
10
that such mailpieces
were processed
on automated
11
For these reasons,
the assumption
of manual
12
estimating
mail processing
1.
13
14
15
processing
17
statistical probability
18
Theoretically,
of one operation-the
19
for further automated
20
a letter moves from 1:l and approaches
21
mail-it
of canceling
Advanced
M
Tr. 5/2062.
is not a realistic basis for
Facer
Canceller
System-the
and initially sorting a square mailpiece is 50 percent.@
at least, there is 50 percent probability
Id., at 21-22.
at least to some extent.
A high degree of automated
processing
is a more realistic
assumption for estimating mail processing costs for low aspect ratio
letter mail
In the case
63
equipment,
greater than zero
costs for low aspect ratio letter mail.
16
is reasonable
is not
mail processing
of square letters being presented
after the AFCS operation.
1:1.3-the
to assume that this probability
- 56 -
As the aspect ratio of
minimum aspect ratio for standard
would increase, meaning an even
Docket No. RZOOO-1
1
higher
2
equipment.
3
OCA-T-6
percentage
of letters will be forwarded
For purposes
of estimating
for further
processing
the volume of low aspect
on automated
ratio letters suitable for
4
automated
5
of letters having an aspect ratio of 1:1.3, will be forwarded
to downstream
6
processing
operations.
does
7
percentage
of low aspect ratio letters forwarded
8
I have
9
operation
increases
10
selected
percentages
11
letter volumes between
12
model in order to calculate
13
mail.
mail processing,
assumed
However,
the
that the probability
between
Service
to automated
of additional
not know
processing.65
processing
beyond
the
true
Therefore,
the AFCS
I use
50 percent and 100 percent to allocate low aspect ratio
automated
and manual processing
a range of mail processing
the linear probabilities
15
letter mail by aspect ratio that I assume
16
automated
65
Postal
automated
in a linear fashion as the aspect ratio of a letter increasesE6
Table 16 presents
14
I assume that 50 percent of square letters, and 100 percent
in the mail processing
cost
unit costs for low aspect ratio
(and, therefore,
will be advanced
the percentages)
of
for further processing
on
equipment.
Tr. 7/3132 (OCWJSPS-T-24-5(f)).
See also USPS-T-24 at 21.
66
Other probability distributions could, of course, be assumed. The probabilities of acceptance for
further automated processing could be distributed exponentially; that is, probabilities would rise more
dramatically as the aspect ratio approaches 1:1.3. Conversely, the probabilities could be distributed in a
logarithmic fashion, resulting in a more rapid rise nearer the aspect ratio 1:l.
- 59 -
Docket No. RZOOO-1
OCA-T-6
Table 16
PROBABILITIES ASSOCIATED WITH
ASPECT RATIOS 1:l.O TO 1:1.3,
INCLUSIVE: LINEAR MODEL
Aspect Ratio
(X)
Probabilities
(Y)
1
1.0125
1.025
1.0375
1.05
1.0625
1.075
1.0875
1.1
1.1125
1.125
1.1375
1.15
1.1625
1.175
1.1875
1.2
1.2125
1.225
1.2375
1.25
1.2625
1.275
1.2075
1.3
1
The probabilities
associated
2
adjust the mail processing
3
used in the mail processing
4
probabilities
67
assumed
0.500
0.521
0.542
0.563
0.583
0.604
0.625
0.646
0.667
0.687
0.708
0.729
0.750
0.771
0.792
0.812
0.833
0.854
0.875
0.896
0.917
0,937
0.958
0.979
1.000
with aspect
“acceptance
ratios in Table 16 are also used to
rates” developed
by the Postal Service
cost model I have selected.67
here suggests
The “acceptance” and "upgrade"
"Accept Rates."
that
as letters
rates used by witness
-6O-
The linear progression
move
away
from
and
of
a square
Miller are found in USPS-LR-I-162,
Docket No, R2000-1
1
configuration
2
will be accepted
3
4
2.
5
OCA-T-6
toward an aspect ratio of 1:1.3, there is a greater probability such letters
during mail processing
utilizing automated
equipment.
The mail processing cost model for manual mail, with adjustments,
is appropriate for estimatinq the costs of low aspect ratio mail
The Postal Service develops
6
the unit cost of processing
7
flow model, developed
8
processing
9
operations
numerous
mail processing
various types of maiL6’
by witness
cost models to estimate
I have selected the “manual”
Miller (USPS-T-24),69
mail
and adjust that model for the
of low aspect ratio letter mail.
Several assumptions
Single-piece
are made about the processing
of low aspect ratio letter
10
mail.
11
holiday greetings
12
piece mail that is letter-shaped
13
will not be identified as nonstandard
14
operation.
15
mail to reflect the percent of such mail forwarded
16
a more realistic model of the processing
of low aspect ratio letter mail than assuming all
17
nonstandard
in the “manual” model.
Table
18
low aspect ratio letter mail is likely to be handwritten,
or invitations
Consequently,
sent by consumers.
20
of mail processing
the
mail
processing
unit costs are presented
See USPS-T-24, Appendix
69
USPS-T-24, Appendix
single-
by the Postal Service prior to (or during) the AFCS
low aspect ratio
from the AFCS operation,
unit
costs
for
low
represents
aspect
letter mail based upon the manual mail flow model, as adjusted.
68
of
mail and, therefore,
the manual mail flow model, after allocating
17 presents
nonstandard
nonstandard
is likely to be entered as collection
mail is manually processed
19
‘Moreover,
consisting
1.
I at l-35.
-61 -
along with the probabilities
ratio
A range
and aspect
Docket No. R2000-1
OCA-T-6
1
ratios shown
2
requires several adjustments
3
all 10,000
4
consistent
with his assumption
5
percentage
of low aspect
6
unknown,
7
the
8
respectively,
9
Moreover,
the rates for “acceptance”
and “upgrade”
10
associated
with each aspect ratio.
These changes
11
presented
12
the unit costs for low aspect ratio letter mail are presented
70
in Table 16.
mailpieces
The derivation
of this range of mail processing
in the manual cost model. As presented
are entered
at the “Outgoing
Primary
of 100 percent manual processing.
ratio
letter
volume
receiving
unit cost
by witness Miller,
Manual”
operation,
Because
automated
the true
processing
is
I enter 100 percent, 75 percent, and 50 percent of the 10,000 mail pieces at
“Outgoing
RCR.”
of mailpieces
The
remaining
are entered
0 percent,
at the “Outgoing
in Table 17. The specific adjustments
Electronic copies of the spreadsheets
available in OCA-LR-3, Part Ill.
25 percent,
containing
-62-
Primary
are multiplied
produce
and
50 percent,
Manual”
operation.
by the probabilities
the range of unit costs
to the manual model used to develop
in my workpapers.‘O
the ‘“adjusted” manual processing
model are
Docket No. R2000-1
OCA-T-6
Table17
UNIT COSTS FOR LOW ASPECT RATIO NONSTANDARD
LElTER MAIL FOR SELECTED VOLUMES ALLOCATED
TO AUTOMATED MAIL PROCESSING
Probability
(Percent)
III
0.500
0.521
0.542
0.563
0.583
0.604
0.625
0.646
0.667
0.687
0.708
0.729
0.750
0,771
0.792
0.812
0.833
0.854
0.875
0.896
0.917
0.937
0.958
0.979
1.000
Aspect
Ratio
I21
1
1.0125
1.025
1.0375
1.05
1.0625
1.075
1.0875
1.1
1.1125
1.125
1.1375
1.15
1.1625
1.175
1.1875
1.2
1.2125
1.225
1.2375
1.25
1.2625
1.275
1.2875
1.3
Percent of Volume Allocated to
Automated and Manual Processing
100/o
1 75125
50 / 50
Unit Cost 1 Unit Cost 1 Unit Cost
131
I41
[51
163-48
19.177
19.000
18.815
18.633
18.435
18.228
18.014
17.791
17.571
17.330
17.080
16.820
16.549
16.268
15.989
15.685
15.368
15.039
14.696
14.340
13.987
13.601
13.200
12.783
26.496
20.368
20.235
20.097
19.960
19.811
19.656
19.496
19.329
19.163
18.983
18.795
18.600
18.397
18.186
17.977
17.749
17.511
17.264
17.007
16.740
16.475
16.186
15.885
15.572
n-.644
21.559
21.470
21.378
21.287
21.188
21.085
20.977
20.866
20.756
20.635
20.510
20.380
20.245
20.104
19.965
19.813
19.655
19.490
19.319
19.140
18.964
18.771
18.570
18.362
In the case of letters having an aspect ratio of 1:1.3 (e.g., standard-size
letter
mail) that are processed entirely on automated equipment in the same manner as
standard-size
letter mail, the model mail processing
cost is not significantly
unit cost is 12.783 cents. This unit
different from the average test year mail processing
-63-
unit cost of
Docket No R2000-1
OCA-T-6
1
12.296 cents, based upon the CPA, presented
2
unexpected,
3
automated
4
similar to the average CPA unit cost.
5
since
letter mail of standard
equipment
should
exhibit
size (i.e.,
presented
to automated
7
cents.
8
acceptance
9
for the automated
equipment,
The assumption
in shape,
presented
Nor is this result
processed
where
entirely
on
unit cost somewhat
only 50 percent
are
unit cost is 21.644
for automated
by 50 percent is reasonable,
processing
1:1.3)
the model mail processing
of 50 percent
rates adjusted
Miller.”
a model mail processing
In the case of letters that are square
6
by witness
processing
and represents
and
a “worst case”
of square letter mail. This unit cost figure is less than the
10
Postal Service’s model mail processing
11
is assumed,
12
2.056
13
weighing
14
9.348 cents (21.644 - 12.296) greater than the average test year CPA mail processing
15
unit cost.
16
of 23.941
cents.”
unit cost, where.100
Moreover,
cents more than the average
the 21.664
percent manual processing
cents model unit cost is only
test year mail processing
unit cost for letters
less than or equal to 1 ounce.73 As a “worst case,” the unit cost figure is only
Selecting a midpoint of 75 percent for initial automated
processing
and adjusting
17
accept rates to 75 percent of those of the Postal Service results in an “adjusted” manual
18
mail processing
19
Miller’s average test year CPA mail processing
unit cost of 18.6 cents.
This unit cost figure compares
Attachment USPS-TZ4B
(revised 3/3/2000).
Attachment USPS-T-24B
(revised 3/3/2000).
Tr. 7/3234-35, Attachment
USPS-T94B
unit cost of 12.296, the manual letter
(revised 4/25/2000).
-64-
with witness
Docket No. R2000-1
OCA-T-6
1
mail processing
2
processing
3
The largest cost difference
4
surcharge
unit cost of 23.941, and the 19.588 cent average test year CRA mail
unit cost for letter-shaped
pieces weighing
less than or equal to 1 ounce.
is 6.304 cents (18.6 - 12.296), a far cry from the 11-cent
sought by the Postal Service.
- 65 -
Docket No. R2000-1
1
2
3
III.
4
OCA-T-6
THE
COMMISSION
SHOULD
RECOMMEND
ELIMINATION
OF THE
NONSTANDARD
SURCHARGE
FOR LOW ASPECT RATIO NONSTANDARD
LETTER MAIL
The nonstandard
5
The surcharge
6
processing.
7
can
8
Moreover,
9
resulting estimated
10
revenue resulting
11
mail is minuscule
12
13
A.
14
Eliminating
surcharge
for low aspect ratio letter mail should be eliminated.
is no longer warranted
As the testimony
be processed
of witness Miller makes clear, low aspect ratio letter mail
at least
the assumption
for such mail based upon the costs of mail
partially
on
automated
of all manual processing
mail processing
from elimination
of the nonstandard
the 11 cent nonstandard
surcharge
16
after rates (TYAR), the total volume of nonstandard
17
is 360,307,000.74
18
the total
19
$39,634,000.75
estimated
Assuming
Mail revenues
all nonstandard
for low aspect
ratio
reduction
in revenue
only letter-shaped
74
USPS-LR-I-169.
15
Id.
pieces.
for low aspect ratio letter mail
to the Postal Service.
single-piece
mailpieces
- 66 -
First-Class
mailpieces
after
rates
would
be
in revenue to the Postal Service would
Nonstandard
at 4. revised 4117100.
In the test year
were low aspect ratio letters,
in the test year
A more realistic estimate of the reduction
consider
surcharge
Finally, the lost
The Reduction in Revenues Associated With Eliminating the Nonstandard
Surcharae for Low Aspect Ratio Letter Mail Is Minimal
would slightly reduce First-Class
21
equipment.
of low aspect ratio mail, and the
costs for such mail, are unrealistic,
15
20
mail processing
letter-shaped
mailpieces
represent
Docket No. R2000-1
17.41 percent
year
after
OCA-T-6
of the total nonstandard
rates,
nonstandard
(360,307.OOO * 0.174068).
aspect
single-piece
letter-shaped
However,
ratio letters is unknown,
volume
l
B.
7
8
9
IO
would
Assuming
pieces that are low
all 62,718,OOO nonstandard
revenue
62,718,OOO
letter-shaped
loss would be $6,899,000
Elimination of the Nonstandard Surcharge for Low Aspect Ratio Letter
Mail is Consistent
With the Classification
Criteria of the Postal
Reorqanization Act
the nonstandard
11
from a review of the classification
12
Reorganization
13
classification
14
letter mail reflects my judgment
Act.
criteria.
surcharge
criteria,
In developing
Elimination
for low aspect ratio letter mail is justified
found in Section
my proposal,
I have
of the nonstandard
Removing
3623(c),
of the Postal
considered
the relevant
surcharge
this defining characteristic
of nonstandard
16
warranted.
17
the surcharge
18
consumers
19
variance
20
Service to conduct a future study that could reduce that variance,
21
impose an 1 l-cent surcharge
mailing low aspect ratio nonstandard
Attachment
of nonstandard
on such mail) from the DMCS would
in cost estimates
USPS-T-24B
for low aspect ratio
as to the application of those criteria.
The low aspect ratio as a defining characteristic
76
equal
In the test
$0.11).
Eliminating
15
voIume.‘6
the volume of letter-shaped
pieces were low aspect ratio letters, the estimated
(62,718,OOO
First-Class
for low aspect
promote
mail
mail is no longer
mail (and eliminating
fairness
(Criterion
1).
and equity for
Given the huge
ratio letters and the refusal of the Postal
on low aspect ratio letters.
(revised 3/3/2000)
- 67 -
it is patently unfair to
Docket No. R2000-1
1
OCA-T-6
In the test year after rates, the combined
rate for low aspect ratio nonstandard
2
letter mail would amount to 45 cents (34 cents + 11 cents).
3
the test
4
52,877.657)
5
assumptions
presented
6
approximately
one-half
7
ratio letter mail of 34.548
8
eliminating
9
materially
year
afler
rates
average
for all single-piece
cost
per piece
First-Class
above,
a test
year
the surcharge
cents
(25.20
on First-Class
11
special
12
processing
13
much the same manner as standard-size
14
longer desirable
15
charged
16
processing.
17
would simplify the First-Class
18
Moreover,
19
aspect
20
technology,
77
is no longer
cents
rate
of
34
cost to process
+ 9.348).
revenues
($13,326.042
Moreover,
would be negligible,
cents
is
low aspect
the effect of
and would not
First-Class Mail.
that defines certain nonstandard
justified
I
In fact, under the “worst case”
single-piece
cents
affect the cost coverage of single-piece
classification
of 25.2
cent less than the total estimated
The low aspect ratio characteristic
10
Letters.”
This amount far exceeds
(Criterion
2).
mail as a
The technology
of mail
has improved to the point that low aspect ratio letter mail is processed
extra
letter mail. Consequently,
from the point of view of consumers
for low aspect
And, elimination
ratio letter
(Criterion
mail that requires
of the nonstandard
rate structure,
surcharge
this provision
5).
letter
mail
is unnecessary
and the minimal reduction in First-Class
USPS-LR-I-169,
at 2 (revised 4/17/2000)
- 66 -
Consumers
are
on low aspect ratio letters
and be more convenient
because
is no
little (if any) special
from the point of view of the Postal Service, imposing
ratio
in
of improved
for consumers.
a surcharge
mail
on low
processing
revenues to the Postal Service.
Docket No. R2000-1
1
2
IV.
OCA-T-6
CONCLUSION
The 11 cent nonstandard
surcharge
is no longer warranted
3
letter mail. Advances
4
implementation
5
low aspect ratio mail, and rendered the assumptions
6
the surcharge
7
aspect ratio letter mail that requires little (if any) special processing.
8
realistic assumptions
9
reveals costs that are less than the surcharge.
in technology
of the surcharge
is based unrealistic.
with respect to mail processing
for low aspect ratio
since
in the 1970’s have made the surcharge obsolete
Consequently,
underlying the costing on which
consumers
related to the costs of processing
are charged extra for low
Using more
low aspect ratio letter mail
For these reasons, the nonstandard
10
surcharge for low aspect ratio letter mail should be eliminated
11
individual mailers.
-69-
for
as a matter of fairness for