f
BEFORE THE
’ POSTAL RATE COMMISSION
ASHINGTON,
D.C. 20268-0001
EE CHANGES,
POSTAL RATE AND
)
2000
Docket
No. R2000- 1
1
Rebuttal
Testimony
DR. JOHN
of
HALDI
Concerning
STAND
.d
A ENHANCED
CARRIER
ROUTE MAIL
+
on Behalf
of
DIRECT MARKETING
SYSTEMS, INC.,
DEALERS ASSOCIATION,
INC., AND
OL WRIGHT PROMOTIONS,
INC.
William J. Olson
John S. Miles
WILLIAM J. OLSON, P.C.
8 180 Greensboro
Dr., Suite 1070
McLean, Virginia 22 102-3860
(703) 35675070
Counsel for Val-Psk Direct
Marketing
Systems, Inc.,
Val-Pak Dealers Association,
Inc.
Carol Wright Promotions,
Inc.
August
14.2000
vP/cw-R-l-
1
BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON,
D.C. 20268-0001
POSTAL RATE AND FEE CHANGES,
Rebuttal
2000
Testimony
DR. JOHN
Docket
)
No. R2000-
of
HALDI
Concerning
STANDARD
A ENHANCED
CARRIER
on Behalf
ROUTE MAIL
of
SYSTEMS, INC.,
VAL-PAK DIRECT MARKETING
VAL-PAK DEALERS
ASSOCIATION,
INC., AND
CAROL WRIGHT PROMOTIONS,
INC.
William J. Olson
John S. Miles
WILLIAM J. OLSON, P.C.
8180 Greensboro
Dr., Suite 1070
McLean, Virginia 22 102-3860
(703) 356-5070
Counsel for VaI-Pak Direct
Marketing
Systems, Inc.,
VaI-Pak Dealers Association,
Inc.
Carol Wright Promotions,
Inc.
August
14, 2000
1
CONTENTS
AUTOBIOGRAPHICAL
PURPOSE
I.
II.
SKETCH
OF TESTIMONY
INTRODUCTION
..
. .. . .. .
. . .. . .
.. ..
.
. .. .
. .. . .. .
. . .. .
. . .. . .. 1
. .. . .. .
. . .. .. .
. . . 1
. .. . .. . .. 1
WITNESS CLIFTON PREFERS TO SOLVE HIS DILEMMA
BY
INCREASING
RATES FOR STANDARD A MAIL
. .. .. . .
III. WITNESS TYE HAS A MYOPIC FOCUS ON INCREASING
COVERAGE AND RATES FOR STANDARD A ECR MAIL
IV.
2
. 4
THE ARGUMENTS
OF WITNESSES
CLIFTON AND TYE
IGNORE KEY DIFFERENCES
BETWEEN
FIRST-CLASS
AND STANDARD A MAIL . . . .
.. . .. . .. 6
A. Standard
Standard
A Mail Has a Decidedly
Than First-Class
Mail
Lower Service
. .. .. .. . .. . .
B. Actual Performance
for Standard A Mail, Although
Unmeasured,
Is Far Less Reliable Than First-Class
C. Standard A Mail Needs Day-Certain
Delivery
Than Irregular Six-Days-a-Week
Delivery
.. . .. 6
Mail
Far More
.. . .. ..
. 7
. . 9
D. The Substantial
Contribution
to the Postal Service’s
Institutional
Cost by Standard A Commercial
Mall
Reduces the Costs for Other Subclasses
. . ..
. . . . . 10
E. A Separate Delivery System for Standard A Mail Could
Have a Lower Stand-alone
Cost . . . . . . . . . . . . . . . . . . 11
-y.
WITNESSES
CLIFTON AND ‘I-YE FAIL TO DISTINGUISH
PROPERLY BETWEEN STANDARD A ECR AND
REGULARWITH
RESPECTTO
COVERAGE
.. . .. ..
i
. . ~18
CONTENTS
V.
(con%)
(continued)
A. Comparisons
Between
the Two Standard
B. Comparisons
Between
First-Class
A Subclasses
and Standard
A Mail
. 19
20
VI.
WITNESS TYE’S CONCERN ABOUT A REVENUE
SHORTFALL ARISING FROM THE BEFORE AND
AFTER RATES VOLUME FORECASTING
METHOD
RAISES AN OLD ISSUE, PROVIDING NO BASIS
FOR IMPROVEMENT
. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
VII.
WITNESS TYE’S CONCERNS ABOUT ANOMALIES
AND
DISTORTIONS
IN RATE DESIGN FOR STANDARD A
MAIL APPEAR DISINGENUOUS
.. ..
. . . . . . . . . . . . . 24
ii
AUTOBIOGRAPHICAL.
1
For a copy of my autobiographical
2
3
sketch,
see VP/CW-T-
1 in this
docket.
PURPOSE
4
The purpose
5
6
(i) Newspaper
7
pertains
8
(ii) American
9
Mailers
10
SKETCH
OF TESTIMONY
of this testimony
Association
to the coverage
Bankers
rates for Standard
.-
of America
certain
witness
testimony
(“NAA”) witness
and rate level for Standard
Association
(“ABA/NAPM”)
is to rebut
and National
James
A. Clifton,
William
of
B. T’ye as it
A ECR Mail, and
Association
insofar
of Presort
as it relates
to
A Mail.
I. INTRODUCTION
11
Standard
12
A ECR Mail is the focus of the direct
testimony
13
Tye, NAA-T- 1. Tr. 30/ 14687- 14770.
In addition
14
design
A ECR, he would
15
Commission
that he proposes
increase
A decrease
16
17
the direct
18
12476.
the coverage
of witness
Clifton
proposes
in rate
also have the
and rate level for ECR Mail.
in rates for First-Class
testimony
Witness
for Standard
to changes
of witness
Clifton,
workshared
ABA/NAPM-T-
mail is proposed
1. Tr. 26/ 12393-
that all or some of his proposed
in
reduction
in rates for workshared
increasing
the coverage
The positions
sections
reasons
detail below.
~~-
II.
11
Witness
instead
are elaborated
are seen to have ignored
on Standard
be decreased,
Clifton’s
principal
reduce
the rate for First-Class
13
reduce
revenue
14
revenue
loss, which
15
complaint
appears
16
accorded
17
those of First-Class
concern
workshared
From First-Class,
presents
a number
as is explained
than
in more
HIS
is to have the Commission
mail.
His various
proposals
and he needs some way to offset the
something
single-piece
workshared
on in the
A ECR Mail, rather
of a dilemma.
to be that the cost coverages
to First-Class
by
Mail.
WITNESS CLIFTON PREFERS TO SOLVE
DILEMMA
BY INCREASING
RATES
FOR STANDARD
A MAIL
12
18
19
20
21
22
23
24
25
‘Iye and Clifton
why the coverage
should
Mail be funded
A Commercial
Both witnesses
being increased,
8
9
10
on Standard
of witnesses
that follow.
of critical
First-Class
His main
and unit
contributions
mail are too low in comparison
mail.
He states,
for example:
[wlhile First Class workshared
mail is supposed to be part of
a single First Class letters subclass, it does appear
unmistakably
that in the growing disparate trends between
cost coverages for single piece versus cost shared mail in the
allocation
of institutional
costs, workshared
mail is being
7 singled out in an arbitrary
and almost punitive way. This is
unfair, inequitable,
and discriminatory
treatment
toward the
mailers whose substantial
investments
and ongoing
2
to
1
2
3
dedication
now move 45 billion
through automated
processing
[Tr. 26/ 12460.1
4
Having
said that,
however,
5
shift any part of the institutional
6
mail to First-Class
7
Standard
pieces of First Class Mail
technology
annually.
he stops short of a concrete
burden
single-piece
mail.
from First-Class
Instead,
he trains
proposal
workshared
his fire on
A Mail.
8
9
10
11
12
My proposals in total would reduce test year revenue by
$605 million, and can be financed
by a $232 million
increase
from Standard
A revenues,
which also entails a
$373 million reduction
in USPS costs. [Tr. 26/ 12457,
emphasis added.]
13
In considering
14
the primary
15
A Commercial
16
allowance
17
from within
18
derived.
19
distinguish
20
Regular
21
contribution.
22
23
to
possible
option
witness
Mail, with
Cltfton
option.
the differences
respect
The arguments
He expresses
between
to cost coverage
A ECR Mail, are flawed.
Clifton,
For reasons
3
with where,
is
to
A ECR and Standard
A
and unit institutional
insofar
explained
-
contingency
revenue
no effort, for example,
Standard
deficit,
rates for Standard
no concern
Mail, the additional
makes
of witness
revenue
in the Postal Service’s
A Commercial
His recommendation
Mail with
offers is to increase
a reduction
as a secondary
Standard
offsets to his $605 million
as they refer to Standard
below,
his arguments
do
1
not support
2
ECR Mail.
any increase
III.
3
4
5
Tye’s chief concerns
7
and rates for Standard
8
rates for Standard
9
respect,
his position
10
appears
indifferent
11
revenues
A ECR.
A Regular
differs
He expresses
slightly
A Mail, especially
increase
the Postal Service’s
14
proposal
for all Standard
15
witness
16
Commission
17
from the changes
18
subclass
19
other proposal)
20
the additional
21
key objective
‘Qe makes
net revenues,
no proposal
should
apply
benefit,
within
of course,
That is, he neither
that he proposes
Tye is merely
from which
Clifton,
be to
Clifton’s
however,
how the
that would
proposes
any specific
discount
that is designed
to generate.
which
result
other
(or any
to use any of
Obviously,
to drive up ECR rates.
4
who
additional
would
witness
regarding
In this
Clifton,
in net revenue
nor sponsors
with
those for ECR.
witness
whatsoever
the coverage
no concern
as would
any other subclass
net revenue
of witness
Unlike
any increase
he advocates.
should
almost
A subclass
‘lye’s proposal,
A Mail.
increasing
from that of witness
as to the Standard
13
is with
Mail, but only with
might be derived.
.,
The net effect of witness
12
from Standard
WITNESS TYE HAS A MYOPIC FOCUS ON
INCREASING
COVERAGE
AND RATES
FOR STANDARD
A ECR MAIL.
One of witness
6
in revenue
a
Among
1
the arguments
2
witness
3
of First-Class
4
30/14730-14732.
5
with
6
7
Tye compares
the coverage
the unit contribution
Mail, and he complains
In this respect,
that of witness
Witness
used in an effort to justify
Clifton,
on Standard
of Standard
that the former
his argument
and it is addressed
Tye offers a number
of additional
A ECR, which
his position,
A ECR with
is too low.
has general
in Section
arguments
can be summarized
8
9
10
Ignorance:
USPS witness Mayes did not know
that she was proposing a [slight] decline in the
coverage of ECR mall. Tr. 30/ 14215-7.
11
12
13
Rate design anomalies
and distortions:
A
general increase in rates is a good way to cure
rate design anomalies.
Tr. 30/ 147 17-2 1.
14
15
16
17
Compartmentalization
[and circularity]:
USPS witness Mayes blames USPS witness
Moeller, who in turn blames USPS witness
Mayes. Tr. 30/14721-3.
18
19
20
Subjectivity:
USPS witness Mayes had no
objective reason to do what she did.
Tr. 30/ 14723-5.
21
22
23
24
25
Forecasting
flaws: The method used by the
Postal Service and the Commission
to project
after-rates
volumes from before-rates
volumes
can produce anomalous
results and
overestimate
net revenues.
Tr. 30/ 14725-30.
26
27
These flawed
proposed
by witness
arguments,
which
do not justify
Tye, will be addressed
5
Tr.
similarity
V, infra
for increasing
as follows:
the solution
in subsequent
that
sections.
1
2
3
IV.
THE ARGUMENTS
OF WITNESSES
CLIFTON
IGNORE KEY DIFFERENCES
BETWEEN
FIRST-CLASS
AND STANDARD
A MAIL
4
Witness
Clifton’s
direct
testimony
AND TYE
states that:
5
6
7
8
9
10
11
12
13
14
15
16
[a]s a percentage of the total costs for a postal service,
delivery costs have the lowest degree of attribution
of the
four major services . . . . in FY 1999 . . . . nearly 49% were
institutional.
Because cost coverages are...determined
by a
single mark-up
over the attributable
costs of all services,
First Class Mail . . . . has been shouldering
an extremely
unfair share of institutional
delivery costs for several years,
while Standard A mail has unfairly
benefited
from this cost
coverage convention..
. . This gaping issue has been around
for a long time. It was raised by NAA witness Sharon Chown
in R97-1, and also in R90-1. [Tr. 26/12460-12462,
emphasis added.]
17
This argument
contained
obviously
18
criterion
19
comparison
20
and Standard
21
quotation,
22
overly simplistic
23
need to be considered,
24
25
A.
in 5 3622(b)(l)
between
A Mail, as suggested
may appear
Standard
A Mail
Service Standard
27
contained
28
54(n).
First-Class
by witness
in the above
Clifton
In my opinion,
a number
as the following
sections
Has a Decidedly
Than First-Class
for First-Class
Mail is generally
Act.
by First-Class
ignores
in the Postal Service’s
and equity
unit contributions
straightforward.
and it clearly
fairness
of the Postal Reorganization
the respective
The service standards
26
goes to the non-cost
response
of critical
Mail
it is
issues that
explain.
Lower
Mail
and Standard
A Mail are
to the Commission’s
considered
6
however,
A
to be “urgent”
Rule
matter,
and
1
the delivery
standard
2
days, depending
3
whenever
4
access to the collection
5
service.
upon
distance.
the distance
6
Standard
7
It is considered
8
exclusively.
9
2- 10 days, depending
First-Class
system,
Standard
witness
11
though
it reflects
12
13
ii.
warrants.
Mail consists
Clifton
the distance
16
any destinating
17
extensive
period,
18
workloads
during
19
performance
20
the fact that on several
21
intentions
facility
that-the
to initiate
are available
an end-to-end
between
even
Mail
at each stage of
upstream
perhaps
of
for an
if it is used to level Postal Service
Unfortunately,
occasions
almost
in 5 3622(b).
A Mail that is entered
and most especially
data of any kind
this difference,
A Mail, Although
Than First-Class
to deferral
matter.
mail needs to travel.
a risk of being deferred,
busy periods.
or return
that ranges
one of the criteria
Standard
runs
standard
Tye mentions
A Mail is subject
and delivery.
free forwarding
transportation
Actual Performance
for Standard
Unmeasured,
Is Far Less Reliable
processing
Mall has
and uses surface
nor witness
15
First-Class
by air
of advertising
value of service,
All Standard
to 3
largely
A Mail has a delivery
upon
from overnight
Mail is transported
and it receives
to be non-urgent,
Neither
Mall ranges
to be traveled
A Commercial
10
14
for First-Class
no systematic
for Standard
A Mail, despite
the Postal Service has expressed
measurement
7
system
its
for Standard
1
A.’
Consequently,
2
Standard
3
to Rule 54(n).
no data are available
A Mail is delivered
Also, for Standard
4
set forth
6
for the number
7
Standard
8
54(n) statement
9
ahead of the day specified.
apparently
11
variation
12
estimated
of days by which
A Mail not delivered
is usually
occurs
years,
rarely,
15
Standard
16
Moreover,
appear
the standard
within
specified
such “outstanding”
its principal
for those endeavoring
standard
Although
in the Rule
is delivered
performance
effect is only to increase
the
to plan based on the
arrival.
received
from Standard
that the amount
A Mail can be and is subject
the further
is missed.
the period
Although
time of the mails
it would
in the response
no data are available
late, it can be and sometimes
and uncertainty
14
shown
in the Postal Service Rule 54(n) statement,
On the basis of reports
13
the standard
of time that
A Mail that fails to make the delivery
5
10
within
for the percentage
upstream
A mailers
of time required
over the
to deliver
to a wide range of uncertainty.2
in the postal
network
that mail is
1
The availability of independently
measured and regularly reported
end-to-end performance data for First-Class Mail [‘EXFC”). coupled with the
fact that no performance data of any kind is available for Standard A Mail,
enhances the value of service of First-Class Mail relative to Standard A Mail.
2
For Standard A Mail that must travel long distances,
and 20 days to delivery is not unheard of.
8
between
15
1
entered,
the less certain
2
Under
3
predict
4
any assurance
5
comparison
6
discusses
7
Mail, and the low value of service in comparison
8
9
C.
the existing
with
is the time when
final delivery
six days per week delivery
any accuracy
when
that it will
of coverages,
neither
witness
the poor and uncertain
The knowledge
11
with
12
delivery
13
unpredictability,
14
would
15
non-daily,
16
provides
17
advertising
18
campaign
19
advertising
20
specified
is routinely
benefit
subject
should
highly
is timed
delivery
wider
on television
day, or within
?fTe
by Standard
to First-Class
A
Mail.
Delivery
Far
Delivery
A Mail in accordance
variation
delivery
or radio.
a narrow
system
6 days a week.
window,
3
becomes
system
Direct
Often,
other sales promotions,
When this occurs,
A Mail
that offered
it does from a postal
well in advance.
with
and
why Standard
delivery
than
are planned
to coincide
In their
can range from 2 to 10 days, and (ii) actual
far more from an alternate
campaigns
day.
not witness
of Standard
to much
unpredictable
can neither
nor do they have
received
help one to understand
but day-certain
arrive,
Clifton
performance
that (i) delivery
the Rule 54(n) statement
mailers
on some specified
Standard
A Mail Needs Day-Certain
More Than Irregular
Six-Days-a-Week
10
system,
their mail will
not arrive
will occur.3
mail
a direct
such as
delivery
on a
increasingly
By itself, consideration of this extensive uncertainty markedly
reduces the value of service, thereby offsetting the fairness and equity
argument.
9
that
mail
1
important.
Because
2
advertising
campaigns,
3
alternate
4
days per week - or perhaps
5
The arguments
postal
6
the implicit
7
week.
8
requirements
9
frequency
of the long lead time involved
mailers
system
that provided
assumption
To the extent
Clifton
as sex-n-weekly
11
explained
12
when
13
that paid by First-Class
14
15
16
D.
to an
on only 3 or 2
and Tye both appear
A Mail requires
publications),
the contribution
important
of Standard
6 days a
Such delivery
Mail with high
most especially,
not Standard
this is an extremely
to make
delivery
Mail and Periodical
(e.g., daily newspapers
or weekly
comparing
delivery
that this is their view, I disagree.
apply to First-Class
below,
accommodate
day-certain
that Standard
of publication
mail
even only 1 day per week.
of witnesses
10
A Mail.
factor
as well
As
to keep in mind
A Commercial
Mail with
Mail.
The Substantial
Contribution
to the Postal Service’s
Institutional
Cost by Standard
A Commercial
Mail
Reduces the Costs for Other Subclasses
Witness
17
could readily
in direct
Clifton
18
Service’s
institutional
19
volume
20
1999, respectively
21
and Tye, each for their
22
Standard
variable
acknowledges
that the contribution
cost by Standard
costs by $5,035
A Commercial
and $4,576
(Table 13). Tr. 26/12461.
A Commercial
own reason,
Mail should
million
to the Postal
Mail exceeded
in FY 1998 and FY
However,
witnesses
assert that the contribution
be still higher.
10
Clifton
from
Given the magnitude
seem clear.
of the contribution
2
things
First,
3
exceed incremental
4
is clearly
not the recipient
5
Standard
A Commercial
Mail, other subclasses
6
costs and pay a higher
rate than they do now.
7
excluding
8
pieces),
9
pieces (all other subclasses
from Standard
cost by a substantial
the volume
the remainin
g volume
required
11
contributed
12
3.9 cents per piece would
13
the story.
14
15
E.
billion
to institutional
Second,
Mail (69.4 billion
mail amounted
competition
at the present
18
competition
is from newspaper
19
Based on casual
observation,
to 127.6 billton
Had those other pieces been
that Standard
A Commercial
inserts.
however,
4
of
A Mail
Mail, the portion
time is saturation
revenue
But that is not the end of
System for Standard
Stand-alone
Cost
17
without
In FY 1998, for example,
have been required.
A Commercial
A Mail
have to bear more
costs in FY 1998, an additional
A Separate
Delivery
Could Have a Lower
Mail
hence Standard
would
A Commercial
combined).
to pay the $5.035
Of all Standard
margin,
of domestic
cost, a few
A Commercial
of any cross-subsidy.4
of Standard
10
16
revenues
to institutional
ECR.
most subject
The major
to
source
of
These can be of any weight.
they usually
are not too heavy;
Witness Clifton minimizes the role of the incremental cost test,
stating that “[ijn my own view, the Postal Service’sdevelopment
of an elaborate
incremental cost test for cross-subsidization
has been in part a chimera
designed to take the focus off this specific issue [the contribution
to
institutional
cost].” Tr. 26/12462.
11
1
e.g., some inserts
2
the newspaper
3
ounces.
4
to 82.0 billion
5
ECR mail, and somewhat
6
Standard
7
special
9
The volume
alternate
11
exist.
12
area which
13
per week.
delivery
delivery
Mail.’
greater
than
the combined
Newspaper
companies
inserts,
also compete
advertising
inserts
in 1990
the volume
volume
of course,
delivery
with
materials
or Standard
companies
that would
A Commercial
to weigh less than 3
of
of all
are the
Qe.
they cover with
Any critique
than
and most of
grew from 56.0 billion
is considerably
of hard-copy
delivery
appear
inserts
#eater
of newspaper
Alternate
Standard
of newspaper
of witness
such as coupons,
I see would
in 1997, which
concern
the volume
15
which
A Commercial
10
14
inserts
Alternate
8
are one or two sheets,
generally
ECR.’
is small compared
A Commercial
provide
the appropriate
Mail with that of First-Class
to
Mail, it does
each address
service only a limited
compare
Although
in the
number
of days
contribution
of
Mail should
5
NAA Institutional
response to VP-CW/NAA-Tl - 11, and the web
site referenced therein. Tr. /
. During the years 1990- 1997 the
newspaper insert business has handily survived competition from Standard A
ECR (formerly third-class carrier route presort), as evidenced by the 46 percent
growth in volume between 1990-1997. According to that response, data for
1998 and 1999 are expected to be posted on the web site some time during
September, 2000.
6
See testimony of John White, AAPS-T- 1, Harry J. Buckel, SMC-T1, and Roger Merriman, SMC-T-2; Tr. 22/9935-62,
22/9903- 17, and
32/15656-69.
respectively.
12
1
consider
the stand-alone
2
designed
to handle
3
Neither
4
alternate
delivery
5
providing
service only 1, 2, or possibly
6
such alternate
delivery
7
would
tomconvertthe
8
into a strength
witness
attempt
primarily
Clifton
would
system
by offering
at this time represent
11
it nevertheless
reduce
12
fairness
13
versus
delivery
14
been explored
15
article
16
cost of such an alternate
in a pioneering
he demonstrates
The economics
that under
delivery
any
mail, it likely
delivery
days
delivery
network
may
for the United
States,
when
of Standard
article
Because
of limited
alternate
consideration
Mail.’
by
delivery.
situation
of the coverage
Any such
costs sharply
“weakness”
day-certain
system
A Mail.
focus on advertising
seeming
a hypothetical
that of First-Class
Standard
3 days per week.
would
is an important
delivery
Tye does so, however.
of such an extensive
10
and equity
alternate
(or even exclusively)
nor witness
system
Contemplation
9
cost of a separate
by Bernard
certain
system
comparing
the
A Commercial
Mail
of this situation
but
have
Roy of La Paste.’
In that
conditions
the stand-alone
for advertising
mail would
7
Sweden has completely repealed its monopoly statutes, and the
firm of City Mail has for several years competed with Sweden Post to deliver
advertising mail. At present, City Mail reportedly provides delivery two days
per week in Sweden’s three largest cities. Relaxation of the monopoly statutes
in other European countries could result in further competition of this sort.
8
“Technico-Economic
Analysis of the Costs of Outside Work in
a
Post& Delivery,” in Emerging Competition in Postal and Delivery Services, ed. by
Michael A. Crew and Paul R. Kleindorfer.
Boston: Kluwer Academic
Publishers, 1999.
13
1
enable
the operator
2
incumbent
3
these conditions
4
5
6
l
Feasibility:
the volume of advertising
mail
must be sufficient to support an alternate
delivery network.
7
8
9
0
Coverage:
the coverage of delivery stops by
non-advertising
mail on carrier routes is
substantially
below 100 percent.
10
11
l
Rates:
the rates for advertising
mail are based
on sharing the cost of daily delivery.
12
Under
postal
to charge
rates less than those charged
administration
for delivery
by the
six days a week.
Broadly,
are as follows:
the conditions
delivery
described
above, diversion
13
to an alternate
system would
14
delivery
15
driving
16
extent
17
delivery
18
alternative
delivery
19
incumbent
postal
20
advertising
mail
can be seen as being
21
subsidizing
some
of the cost of daily
22
Class) mail,
which
is totally
23
Clifton
stops on routes
receiving
up cost (while reducing
to which
advertising
of urgent
mail.
daily delivery
revenues),
reduce
of urgent
and thereby
mail has helped
Roy points
operator
substantially
reduce
coverage
revealing
contrary
14
the
cost of the
by the
such circumstances
of cross-
for urgent
to the assertions
and Tye.
charged
in the position
delivery
of
mail, thereby
out that if the stand-alone
then under
mail
the cost for daily
is less than the amount
administration,
of advertising
(i.e., First-
of witnesses
The higher
1
the share of advertising
2
without
3
daily delivery.’
4
percent
5
significant
6
Postal Service would
be highly
7
entrants,
charge
8
Is this a possibility?
9
Service’s
such mail stop coverage will be reduced
Since Standard
of total domestic
impact
current
11
total delivery
^_
12
$16.5
13
volume
14
addition,
15
Postal Service’s
variable
technical
U. S. mail volume
vulnerable
in column
in 1999, it likely
about
1, below,
35
has a
to be allowed,
the
by new
stand-alone
cost.
help put the Postal
in perspective.
1 of Table
costs charged
1, in FY 1999 the Postal Service’s
carriers
slightly
combined)
amounted
over $2.8 billion
to Standard
A Commercial
institutional
Mall constituted
a lower rate equal to their
Of this amount,
Standard
it is that
that receive
to “cherry-picking”
The data in Table
situation
on routes
Were free competition
costs (city and rural
billion.
9
A Commercial
on coverage.
who would
As shown
10
mail, the more likely
A Commercial
Mail contributed
to some
represented
Mail.
$4.6 billion
In
to the
cost.
See the article by Roy, footnote 7, supra, for a more complete and
discussion of the conditions.
15
1
Table
2
Volume
3
4
1
Variable Delivery
FY 1999, millions
Costs
(1)
5
6
7
AllMail
8
City Carriers,
9
Rural
cost segments
Carriers,
cost segment
6 & 7
11
12
One-sixth
13
14
Source:
15
How much
$ 16,531
$
Exhibit
delivery
network
17
days per week?
18
$16.5 billion
19
day per week universal
20
variable
it cost to operate
to every business
As shown
amounts
cost charged
746
$2,835
2,755
USPS-ST-44M.
would
16
$2,089
3,892
10
Total
10
$ 12,639
(2)
Standard A
Commercial
and residence
in the bottom
to some $2.755
delivery
to Standard
an alternate
is just
slightly
A Commercial
10
in the country
row of Table
billion.r”
nationwide
Thus,
1 or 2
1, one-sixth
the amount
of
for 1
less than the volume
Mail for delivery.
For
Note that this is one-sixth of the Postal Service’s total cost for city
and rural carriers: i.e., it assumes that an alternate delivery company would
pay&e same wage rate (including benefits) as the Postal Service and provide
servide wasuniversal as that provided by the Postal Service. Further, carrier
costs shown in Table 1 include some amount for unfunded pension liability
that is also included in the $2.755 billion.
16
1
universal
delivery
2 days per week, one-third
2
about
3
volume
4
is almost
5
delivery
6
Although
by no means
7
revenues
from Standard
8
sufficient
to support
$5.5 billion.
variable
Although
delivery
$2 billion
less than
A Commercial
possibility
11
by Standard
12
Neither
13
consideration
14
Standard
15
of, say, 2 days per week.
16
such an alternate
17
subsidizing
18
necessary
Clifton
that daily delivery
of First-Class
A Commercial
Mail, especially
the testimony
of witness
to the various
A Commercial
delivery
daily delivery
Clifton
factors,
Mail would
by virtue
variable
suggest
that the
more than
delivery
system.”
and ‘Iye fail to address
the
mail may be cross-subsidized
Standard
A ECR Mail.
nor that of witness
discussed
be better
Nor do they consider
system.
would
alternate
Mail, it
($4.6 billion).
Mail are already
standalone
of witnesses
A Commercial
to overhead
these numbers
to
more than the
the sum of volume
plus contribution
definitive,
10
to somewhat
to Standard
$7.4 billion,
a universal
The testimonies
9
this amounts
cost charged
cost ($2.8 billion)
of the total cost amounts
If Standard
of paying
‘@e gives any
above, which
indicate
off with day-certain
the stand-atone
that
delivery
cost of
A Mail is crossrates higher
than those
to support a stand-alone system, the consequence is that the
11
If an alternate delivery system were to provide less than universal
service - ig,~cherrypick
the areas to be served - the cost of 2-day per week
delivery would likely be substantially
less.
17
1
rates for Standard
2
contrary
A ECR Mail should
to the assertions
Increasing
3
of witnesses
the coverage
4
increases
the potential
5
copy delivery
6
could
7
potentially,
8
rates for First-Class
9
Clifton,
have the effect of diverting
mall, thereby
11
contrary
12
goes, people should
13
might
A ECR Mail
entrants
establishment
large volumes
to the hard-
of alternate
of advertising
delivery
mail (and
as well) from the Postal Service and (i) driving
Mail, contrary
and (ii) reducing
10
and Tye.
for would-be
Successful
Periodicals
Clifton
not increased,
and rates for Standard
profitability
business.
be reduced,
intensifying
to the result
.,.
to the result
desired
the rates for independent
the competition
desired
by witness
be careful
about what
‘lye.
by witness
delivery
for newspaper
up
of advertising
inserts,
As the familiar
saying
they ask for, because
they just
get it.
V. WITNESSES
CLIFTON AND TYE FAIL TO
DISTINGUISH
PROPERLY
BETWEEN
STANDABD
A ECR AND BEGIJLAB
WITHHESPECTTOCOVEBAGE
14
15
16
17
Witnesses
18
19
workshared
20
its unit
21
postal
Clifton
subclass
contribution
network
and Tye both raise the same issue:
has a coverage
near the systemwide
could be less than that of subclasses
more extensively.
Witness
18
Clifton
if a highly
average,
which
then
use the
(Tr. 26/ 12461) focuses
1
on the non-attributed
2
comparisons
(institutional)
portion
of delivery
cost and offers
between:
3
0
All First-Class
4
5
0
First-Class
and
workshared
mail and Commercial
Standard
6
7
0
First-Class
mail.
workshared
mail and First-Class
single-piece
8
And in a similar
vein, witness
Standard
A;
A;
‘fye states:
It is important
to consider unit contributions.
First, they
highlight
the actual contribution
being made by the average
piece. This can facilitate
comparison
among similar
subclasses.
Second, unlike cost coverage percentages,
unit
contributions
are not distorted by the differing degrees of
worksharing
among the various subclasses.
[Tr. 30/ 14732,
emphasis added.]
9
10
11
12
13
14
15
16
Mail and Commercial
A.
Comparisons
Between
The unit contributions
17
18
are compared
in my direct
19
pointed
20
of Standard
21
for a piece of Standard
22
but it earns a lower unit
23
the two subclasses
out there,
12
the Two Standard
of Standard
testimony
A Regular.
A ECR and Standard
on Standard
the unit contribution
almost
A Regular
As
exceeds that
twice as much
Mail as it does for a piece of ECR mail,
contribution.
of Standard
A ECR Mail.”
of ECR persistently
The Postal Service spends
A Regular
A Subclasses
Thus,
any comparison
A, such as that advocated
See VP/CW-T- 1, pp. 38-53. Tr. 32/ 15792-15807.
19
between
in witness
Tye’s testimony,
would
ECR and directly
support
undercuts
Since a key purpose
4
for Standard
45, 14859-60,
14889-9
10
correctly
11
else is equal,
12
That is, the unit contribution
13
increased.
14
B. Comparisons
15
16
calculated
Witness
of First-Class
and Standard
avoided
Between
Clifton
and Standard
witness
Tye does
are
are set to 100 percent,
would
F@st-Class
be equal.”
A ECR should
and Standard
the unit
contribution
be reduced,
to institutional
Witness
no reference
_~
.,.
cost
A Mail as follows:
22
virtually
not
A Mail
[t]he cost coverage for First Class workshared
mail has
become highly discriminatory
since 1994 relative to
Standard A commercial
mail and First Class single piece
mail, and should be reduced.
[Tr. 26/ 12458, underlining
and capitalization
omitted.]
23
and all
Tr. 30/ 14863.
17
18
19
20
21
Clifton
he
Tr. 30/ 14844-
costs from worksharing
on Standard
compares
When
or whether
answer.
However,
contributions
rates
A ECR to be similar
a responsive
and if passthroughs
then the unit
is to increase
subclasses,”
1, and 14970-90.
of
position.
Tye’s testimony
“stmilar
to provide
agree that “[i]f the applicable
in the unit contribution
to avoid any such comparison.
A Regular
he declined
‘&e’s
of witness
how he defined
Standard
subclasses,
9
witness
A ECR, he strives
asked repeatedly
considered
a reduction
(i) compares
coverages
to the non-cost
criteria
20
of different
in 5 3622(b),
subclasses
which
with
underlie
1
all cost coverages,
and (ii) ignores
2
already
3
Class Mail, as discussed
4
In addition,
be in the position
5
First-Class
6
Mail because
7
of any subclass.
8
Standard
9
increase
of cross-subsidizing
of witness
A Commercial
Mail, witness
highly
situation
Clifton
to that which
11
workshared
12
perceived
13
roundly
denounces,
by exacerbating
14
inequity
(pertaining
to Standard
In effect, witness
(affecting
that the latter
proposes
workshared
another,
the highest
rate increase
impose
is in a
for First-Class
to remedy
mail), which
one
he
closely comparable,
A ECR mail).
16
17
18
19
the by now generally accepted principle that heavily workshared subclasses will have high cost coverages precisely
because of the cost avoidance from worksharing.
[NAA-T- 1,
p. 3; see also pp. 24, 40-42, 511.
20
Like witness
of different
subclasses
for
a rate
Witness
Clifton,
of
A ECR
15
21
‘Iye, for his part,
would
he describes
Clifton
First-Class
on behalf
A ECR is among
A ECR, notwithstanding
maiLl
of First-
to Standard
an across-the-board
10
inequity
core argument
applicable
of Standard
Yet, in proposing
analogous
daily delivery
Clifton’s
mail is equally
the cost coverage
on Standard
A mail may
above.
much
workshared
the fact that Standard
draws
witness
with virtually
on the following
Tye would
old chestnut:
also (i) compare
no reference
coverages
to the non-cost
criteria
;
13
testimony,
The excessively high coverage of ECR is discussed in detail in my
VPfCW-T-1, 38-47. Tr. 32/15792-15801.
21
1
in 5 3622(b),
2
and most especially
3
cross-subsidizing
4
5
6
7
8
VI.
and (ii) ignore
the fact that Standard
the ECR subclass,
daily delivery
A commercial
may already
of First-Class
mail,
be in the position
Mail, as discussed
of
above.
WITNESS TYE’S CONCERN ABOUT A REVENUE SHORTFALL
ARISING FROM THE BEFORE AND AFTER RATES
VOLUME FORECASTING
METHOD RAISES AN
OLD ISSUE, PROVIDING
NO BASIS
FOR IMPROVEMENT
9
Witness
10
Year ECR revenues.
11
Service ignored
likely
12
due to changes
in rate design.
13
the fact that rates for some categories
14
while
15
are derived
16
the Commission
others
‘Qe asserts
decline.
that the Postal Service has overstated
He explains
shifts
in the billing
According
from a two-step
that this occurs
determinants
Tr. 30/ 14726.
the Postal
in the Test Year
In particular,
of Standard
to witness
process
because
Test
he discusses
A ECR Mail increase
Qe, the after-rates
volumes
used by both the Postal Service and
that:
17
18
19
20
21
22
results in perverse upward-sloping
demand curves for some
rate groups.
Basic economic principles
state that as prices
(rates) increase, quantity
(volume) should decrease. This is
not always the case tn Postal Service predictions..
. . Such
results indicate that the volume forecasting
model is not
fully compatible
with the rate proposal.
[Tr. 30/ 14728-29.1
23
Witness
24
i.e., developing
25
rate category
‘Iye proposes
no solution
a more accurate
(or rate cell).
forecast
for the issue that he identifies
of after rates volumes
His observations
22
and comments
-
for each
are not new.
1
In Docket
No. R97- 1, virtually
2
conjunction
with Priority
The Commission
3
the identical
Mail, along with a proposed
rejected
part because
5
volume
6
econometric
7
went
8
“the Postal Service and other parties
9
suggest
10
does not exactly
that the Commission
model and forecasting
reproduce
derives
solution.
for Priority
to the two-step
empirical
process”
Musgrave’s
The Commission
on the issue is needed,
to conduct
Mail, in
the aggregate
from witness
methodology.“14
on to add that more research
improvements
proposed
in
and it invited
studies
and to
relied upon by the
Commission.
Witness
11
12
the “method
the solution
4
forecasts
issue was raised
?fTe apparently
has not conducted
on the issue that he identifies.
any empirical
research
He does state that:
13
14
15
16
17
18
19
20
[wlitness Moeller’s method of using “before rates” billing
determinants
to calculate the percentage rate increase is to
overestimate
the actual percentage rate increase in rates that
will be realized by the rate proposals,
as it does not account
for the shift in volumes in response to relative price changes.
This is an example of a well-known
problem in index
numbers.
[Tr. 30/ 14730, emphasis in original, footnote
omitted.]
21
Since witness
22
known
problem,
23
regrettable
14
Tye identifies
it presumably
that witness
the situation
has a well-known
‘Qe does not indicate
as an example
solution.
of a well-
It is therefore
how that solution
might
See Docket No. R97-1, Op. & Rec. Dec., App. H, pp. 7-10.
23
be
1
employed
to improve
2
Commission.
It may well be possible
3
methodology.
In the absence
4
witness
‘lye’s criticisms
5
revenue
projections
6
7
8
VII.
9
Witness
the forecasting
methodology
relied upon by the
to improve
the existing
of such constructive
are to little
avail.
input,
forecasting
however,
For now, the Postal Service’s
must be relied upon.
WITNESS TYE’S CONCERNS ABOUT ANOMALIES
AND DISTORTIONS
IN RATE DESIGN FOR
STANDARD
A MAIL APPJMR DISINGENUOUS
‘fye expresses
and distortions
concern
10
anomalies
11
Tr. 30/ 147 17- 1472 I. For Standard
12
on 10 passthrough
about what
he describes
in the design of rates for Standard
categories,
A Regular
as
A Mail.
Mail he provides
details
and states that:
13
14
15
16
17
18
[i]t is clear that the Regular Mail passthroughs
are driven understandably
- by the desire to have qualified letter mail
submitted
at Regular automation
rates rather than ECR
Basic rates. This leads to passthroughs
that vary
considerably
from the optimal,
[Tr. 30/14719,
emphasis
added.]
19
His concerns
appear
misplaced
20
testimony
21
developing
optimal
passthroughs.
22
of the passthroughs
in Standard
23
proposal
24
compare
7-
does not carry through
on how they should
for a number
with his expressed
He presents
A Regular
be improved.
the Test Year contributions
of reasons.
a rather
his
for
detailed
critique
(Tr. 30/ 147 18), but makes
When asked why he did not
of Standard
24
concern
First,
A Regular
as proposed
no
1
by the Postal Service along with those of ECR and First-Class
Mail
2
presented
at page 41 of his testimony
‘lye
3
responded
“lojptimal
4
scope of my testimony.”
5
rates for Standard
6
seriously
7
submitted
rates for Standard
A Regular
Tr. 30/14860.
about
a proposal
anomalies
designed
desired
for Standard
desired
relationship
with
10
letters,
are achieved
both in the rate designs
11
witness
Moeller
Third,
12
13
volume
14
substantially,
15
year-to-year
and in my direct
since new rates were implemented
from 7.2 billion
reduction
Fourth,
16
the rate for Standard
of ECR Basic non-automated
17
Regular
18
overriding
15
letters
objective
a set of
Were he
he should
have
A ECR, including
the
A Basic Automation
proposed
testimony
by Postal Service
fVP/CW-T-1r5).
on January
has already
in FY 1998 to 5.6 billion
1, 1999, the
declined
in FY 1999, a
of some 22 percent.16
the desire to have qualified
automation
optimal.
the
matters.
9
(USPS-T-341
matl are outside
and distortions,
to improve
incentives
witness
Nor does he present
A ECR mail that he considers
concerned
Second,
8
(Tr. 30/ 14731).
rates rather
as to warrant
letter mail submitted
at
than ECR Basic rates is not such an
changes
in rate level as proposed
by
Tr. 32/ 15808-10.
16
USPS-LR-I- 125 and USPS-LR-I-259Jespectively.
Since the
higher rates were only in effect for nine months of FY 1999, a comparison of
the last nine months of each respective year may reflect a reduction of more
than 22 percent.
25
1
witness
2
of volume
3
despite
4
and the total volume
5
150 percent.
6
Standard
7
rates,
8
makes
no sense to offer such a classification
9
widely
popular),
10
‘Iye.
In FY 1999 the contribution
variable
cost) exceeded
the fact that the volume
variable
Standard
A Regular.
in some misguided
that of Regular
of Regular
was some 19 percent
costs for Regular
both at current
mail is highly
and then inflate
A ECR (in excess
by some $408 million,
exceeded
A ECR is a far more profitable
Further,
ECR Basic letter
by Standard
profitable
those of ECR by
subclass
to the Postal Service.
(which
it as a category.
26
than
rates and at proposed
also happens
the rate out of all proportion
effort to eliminate
greater,
It
to be
to the cost,
CERTIFICATE OF SERVICE
I hereby certify that I have this day served this document upon all participants of record
in this proceeding in accordancewith Section 12 of the Rules of Practice.
August 14, 2000