BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON,
D.C. 20268-0001
POSTAL
RATE
D FEE CHANGES,
)
2000
Rebuttal
Testimony
JOHN
L. CLARK
Docket No. R2000-1
of
on Behalf of
AMAZON.COM,
INC.
William J. Olson
John S. Miles
WILLIAMJ. OLSON, P.C.
8180 Greensboro Drive, Suite 1070
McLean, Virginia
22102-3860
(703) 356-5070
Counsel for Amazonxom,
August
14,200O
Inc.
CERTIFICATE
OF SERVICE
I hereby certify that I have this day served this document upon all pUL..--r-...in this proceeding in accordance with Section 12 of the Rules of Practice.
August 14, 2000
AMZ-RT-2
BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON,
D.C. 20268-0001
POSTAL
RATE AND FEE CHANGES,
2000
1
Rebuttal
Testimony
JOHN
L. CLARK
Docket No. R2000-1
of
on Behalf of
AMAZON.COM,
INC.
William J. Olson
John S. Miles
WILLIAM J. OLSON,P.C.
8180 Greensboro Drive, Suite 1070
McLean, Virginia
22102-3860
(703) 356-5070
Counsel for Amazon.com,
August
14,200O
Inc.
CONTENTS
Page
SKETCH..
AUTOBIOGRAPHICAL
PURPOSE
........................................................
................................................................................................
.l
.2
INTRODUCTION
.................. .I ................................................................
.3
I. SAPPINGTON
TESTIMONY
.5
A. Intrinsic
.............................................................
Own Price Elasticity..
Value -
.....................................
B. Volume Trends.. ............................................................................
C. The Postal Service As Unfair
D. Competition..
Competitor..
..................................
...............................................................................
.6
.8
.9
.10
..................................................................
.12
A. Sack Shake Out.. .........................................................................
.14
II. LUCIANI
TESTIMONY
B. Non-machinable
Parcels.. ...........................................................
C. DDU Mail ....................................................................................
CONCLUSION..
.....................................................................................
.15
.15
.16
AUTOBIOGRAPHICAL
My name is John L. Clark.
I am founder,
4
2000, Chairman
and Chief Executive
5
L.L.C.
CTC began operations
6
Minnesota.
I
L.L.C. (CTC-RT-1)
I testified
as a rebuttal
managing
February
of
Services,
in 1982 in the city of Minneapolis,
witness
for CTC Distribution
Services,
in Docket No. R97-1.
distribution
programs
10
timely
11
parcels at its 13 operating
12
sortation,
13
to the shipment’s
14
delivery
15
and was until
Officer of CTC Distribution
CTC serves the direct marketing
8
9
(“CTC”).
SKETCH
and cost-effective
documentation
community
by developing
and
designed to deliver small parcels in a
manner.
Its core process is the consolidation
hubs.
This process involves the collection,
and transportation
final destination.
of
of parcels to entry points close
Final delivery
is made by a parcel
company.
The company’s
principal
16
infomercials,
home shopping
17
require
a cost-effective
18
freight
forwarder
19
number
20
companies
21
Service_(“UPS”),
customers
networks,
of shipping
alternatives,
such as the United
catalogs,
direct mail, and the internet,
means of shipping
and consolidator
sell goods through
these goods to consumers.
and
As a
of small parcels, CTC offers its clients a
and is a user of prominent
shipping
States Postal Service and United
as well as local and regional
3
carriers,
Parcel
for the final delivery
1
of its shipments.
2
competitive
3
exclusively
5
analysis
6
destination
7
offering
8
its clients.
9
Service.
10
offerings
During
4
CTC is, therefore,
available
very familiar
to small parcel shippers.
the period from 1982 through
on UPS for the final delivery
1991, CTC relied almost
of its shipments.
of the Postal Service’s shipping
entry discounts
with the various
rates -
After careful
particularly
which became effective in 1991-
Postal Service as well as UPS delivery
11
Since 1991, it has shipped 660 million
12
CTC currently
while utilizing
parcels through
employs over 1,300 hundred
CTC began
for a final delivery
By 1993, almost all of CTC’s business had migrated
CTC’s business has grown rapidly
the
DBMC
option to
to the Postal
entry rates.
the Postal Service.
people in nine states.
13
PURPOSE
14
15
The purpose of the following
testimony
(UPS-T-6)
is to rebut the testimony
and Ralph L. Luciani
of UPS
16
witnesses
David E. M. Sappington
17
5) insofar
as they advocate higher rates for Parcel Post and to urge and
18
encourage
the Postal Rate Commission
19
requested
rates for the entry of parcels at Origin
20
Destination
Bulk Mail Centers,
21
Destination
Delivery
to recommend
Destination
Units.
2
(UPS-T-
the Postal Service’s
Bulk Mail Centers,
Sectional
Center Facilities,
and
INTRODUCTION
I
I have studied the testimony,
examination
of UPS witnesses
substantial
rate increases
5
would have a dramatic
6
equally
7
Service.
negative
long-range
seem to be overstated,
impact on shippers
of goods to America’s
11
and dramatic
12
driving
13
clip, the need for the efficient
14
increasing.
15
phenomenon
16
those enterprises
costs out of the delivery
While America’s
network.
delivery
As inventories
of smaller
transportation
to improve
19
improved
service and efficiency,
20
need can now be delivered
21
of a small parcel.
channels
to businesses
is
turn at a faster
shipments
network
swift
is ever
impacted
by this
and, most specifically,
small parcels.
businesses
18
is undergoing
of the science of logistics
The sector of the economy most dramatically
delivering
of the Postal
is no doubt aware that the
homes and businesses
Application
is the nation’s
Their advocacy of
of small parcels and an
effect upon the survival
the Commission
distribution
changes.
and Luciani.
of the effect of Parcel Post rate increases may
10
17
Sappington
and oral cross
for Parcel Post, if accepted and recommended,
While this prediction
8
9
devastating
interrogatories
of distribution.
are utilizing
America’s
these distribution
homes are also benefiting
Almost every conceivable
right to the doorstep,
3
advances
from
household
and most likely in the form
The number
1
2
is increasing,
3
expanding
4
enterprises
5
delivery
6
segments.of
of companies
and familiar
competing
their service offerings
are no longer considered
delivery.
the market.
8
left far behind.
9
primary
upward
These
such as ground
Each company is competing
for virtually
all
~changes, the Postal Service is being
It faces the significant
product,
market
and capabilities.
in a single dimension
In the midst of these dramatic
I
growing
names, such as UPS and Federal Express, are
and improving
or expedited
for this rapidly
First-Class
Mail.
cost pressures
threat
Its flagship
of electronic
product,
diversion
Priority
at the same time it attempts
to its
Mail, faces
10
significant
11
market
12
but it also faces ever increasing
13
survive in these times of rapid change, it must be allowed to compete for the
14
growing
15
significant
and ironic that its chief antagonist,
16
aggressive
role in influencing
share in the face of competition.
markets
to maintain
Parcel Post has shown potential,
competition.
If the Postal Service is to
while it adapts to changes in declining
markets.
It is both
UPS, plays such an
Postal Service pricing.
Since 1991, the Postal Service has proven that it can compete for the
17
18
delivery
of small parcels, but only for home delivery
19
merchandise.
20
pazels
21
for the mandated
The Postal Service is not competitive
to businesses.
The extensive
delivery
delivery
of First-Class
of lower priced
for the delivery
network,
originally
Mail to American
4
of
designed
homes, is the
1
foundation
2
business.
3
upon which the Postal Service has built its parcel delivery
With the emergence
of e-commerce
4
marketing
over the internet,
5
have a B-to-C delivery
6
stock, and they will not get it without
7
These factors pose a significant
and business-to-consumer
the largest competitors
solution.
realize that they must
They want that “internet”
residential
threat
(“B-to-C”)
multiple
for their
delivery.
to Parcel Post’s future.
8
I. SAPPINGTON
9
10
With this background,
11
alternate
12
testimony
TESTIMONY
I would ask the Commission
to consider an
view of some of the points made in the UPS witness
Sappington
(UPS-T-6).
13
The essence of this testimony
14
like it has been doing okay; (2) the intrinsic
15
increasing;
16
increases;
17
competitors
18
assignments.
19
response to increasing
20
coverage so that it makes a much higher contribution
(3) shippers
seems to be that:
(1) Parcel Post looks
value of Parcel Post is
of small parcels have alternatives
and (4) the Postal Service has enjoyed an unfair
and has damaged competitors
According
price
advantage
over
due to low cost coverage
to UPS, the Commission
attributable
against
needs to increase rates in
costs and increase Parcel Post’s cost
5
to overhead.
I
2
A.
Intrinsic
Value-Own
It is a serious error to believe that the intrinsic
3
increasing.
4
has declined in relative
5
sensitive
6
Price Elasticity
This is a product,
when compared
value.
This is a product
because if offers so few enhancements
In selecting
a parcel delivery
7
the price and features
8
value provided
9
provided
carriers
delivery
is evident
to alternate
offerings,
which is extremely
to a basic delivery
a typical
of Postal Service delivery
by each alternative
by alternative
carrier,
value of Parcel Post is
price
service.
shipper would compare
with the additional
carrier.
which
cost and
The greater value
from such features
as basic
II
insurance (included at no additional charge), tracking, proof of delivery
..
(signature), consistency or predictability
of delivery times, freight charge
12
refund if not delivered
13
telephone)
14
the delivery
10
15
when promised,
with an irate consumer,
service is deficient
the cost of dealing
(over the
and the risk of alienating
a consumer
if
in any way.
A shipper assigns a value to all of these features.
If that value plus
16
the price offered for the basic service offered through
the Postal Service is
17
sufficiently
will choose the Postal
18
Service.
19
won by the Postal Service over the last nine years will show that mostly low
20
value merchandise
below the alternative
A careful examination
carriers,
the mailer
of the small parcel business which has been
(less than $65.00 at retail)
6
is currently
being handled
by
I
Parcel Post. This is the merchandise
which is most sensitive
to shipping
2
3
Rate increases
at the level recommended
4
will have one of the following
5
will increase
6
dramatic
7
which will cause shippers
to reduce, or eliminate
8
lower priced merchandise
which cannot bear the increased
9
The third
10
sufficiently
shift to-that
possibility
effects.
by UPS witness
relative
carrier.
The rate for an individual
to the next alternative
Alternatively,
is that the alternative
Sappington
shipment
carrier
to cause a
the rate will rise to a level
completely,
delivery
raise its prices, using the postal rate as an umbrella
the sale of
cost of shipping.
company will simply
under which it
11
12
On that latter
point, it is important
13
proportion
14
and receive the items needed for everyday
15
dresses, and other garments,
16
substantial.
17
those living in rural areas without
18
Can a $10.95 purchase
19
of the nation’s
Confirmation
21
Commission
living.
The quantity
games and hobbies delivered
of shoes,
by Parcel Post is
by older Americans
ready access to large shopping
stand a delivery
Sappington
that a large
still depends on “mail order” to buy
Many of these items are purchased
Witness
20
population
to be reminded
and
malls.
charge of $7.00?
suggests that the availability
of Delivery
adds value, even as an unused option, to Parcel Post. The
needs to appreciate
the fact that this service adds very little
7
1
value to this product.
2
delivered.
3
information
4
delivery
5
shipment
When it works, it only reports when the parcel was
It is not a proof of delivery.
about the shipment
time.
Consumers
is at all times.
There is no signature.
is available
and shippers
while in transit,
only the
now want to know where their
They want pipeline
If the Postal Service does not confirm
6
No
7
Postal Service will not pay for the lost parcel.
8
the consumer
9
shippers
back the fee paid for Delivery
visibility.
delivery
and a claim is filed, the
It might,
Confirmation.
after a tussle, give
As a result,
use the data derived from this service only to monitor
10
times.
11
on parcels destined
12
times.
13
of Parcel Post is not credible.
14
improved
15
offered by other carriers.
16
value is de minimis.
17
18
19
B.
20
showing
21
effects of the UPS strike, which occurred at the end of 1997. While I am not
_~ ..~
aware of any definitive studies of the volume impact of the event, UPS
22
Typically,
a sophisticated
delivery
parcel shipper will only select this service
for selected destinations
to draw a profile of transit
To suggest that the mere existence of this option enhances the value
This service needs to be dramatically
before it is comparable
Volume
Trends
Witness
Sappington’s
to the more advanced type of feature
To those parcels where the option is declined,
conclusions
Parcel Post can sustain
concerning
strong volume trends as
a high rate increase completely
8
the
ignores the
1
volume averaged slightly
2
that by the 15-day duration
3
Service delivered
4
unable to deliver.
5
which UPS restarted
6
substantial
7
C.
9
10
of those 165 million
There was also at least another
operations
of diverted
I1
to deliver
Competitor
argues that maintenance
inhibits
of low rates protects
potential
entries into the
and unfairly disadvantages
existing suppliers.
._
There is no evidence that the Postal Service has been protected
12
effective competition.
13
Postal Service to implement
14
competitors
15
in the delivery
All evidence, in fact, indicates
to inhibit
competitive
significantly
pricing
from
that the inability
of the
and services has allowed
the competitiveness
of the Postal Service
of parcels.
No evidence supports
16
15-day period during
parcels.
The Postal Service As Unfair
Sappington
parcels that UPS was
and the Postal Service continued
the Postal Service from competition,
market
parcels per day. Multiplying
of the strike, it is easy to see that the Postal
a fair portion
numbers
Witness
8
more than 11 million
the proposition
that entry and innovation
have been discouraged.
Just the opposite is true.
in the
17
“delivery
industry”
18
shippers
now have more choices than ever as to the type of service and
19
pricing
20
(“RPS”) is now actively
21
while using the Postal Service for the final mile, is also offering
levels they can utilize.
rolling
Consider
only that Roadway
out a home delivery
9
service.
Parcel
Parcel Service
Airborne
freight,
shippers
an
I
alternative.
Many new entries competing
2
pricing
3
Commission.
4
many new entries
5
incentives.
6
Service to enjoy the benefits
7
technology
8
institutional
initiatives
only the so-called “consolidator
since the introduction
Partnerships
without
of additional
with private
industry
shippers
industry”
by the
which has
work sharing
have allowed the Postal
of more, not less, efficient
burdening
production
with “unnecessarily
large
costs.”
Sappington
10
a competitor.
11
client, UPS, on a number
12
demonstrate
13
D.
14
are tied to
sponsored by the Postal Service and recommended
Consider
Witness
9
for parcel delivery
fails in every way to demonstrate
His reluctance
to advance any information
of different
any damage to
concerning
his
occasions and subjects, appears to
that no case can be made for the proposition
he is advancing.
Competition
The Postal Service provides
In one, it is a monopoly.
its services through
15
scenarios.
16
many directions.
17
other classes has been beaten to death.
18
analysis,
In the other, it faces competition
19
class of mail pays its own way.
20
called competitive
The issue of a cross-subsidy
we should be pretty
two operating
between First-Class
I find these arguments
10
Mail and
It seems that after all the effort and
close to the objective of assuring
classes of mail actually
from
that each
ironic since the so-
benefit First-Class
Mail.
If the
1
contribution
these classes make did not exist, is it not logical that First-
2
Class rates would have to be significantly
The UPS witnesses
3
a certain
higher?
in this docket seem to advance the idea that
4
applying
percentage
markup
5
class of mail is the only objective of the rate making
6
a business, in a competitive
7
predetermined
8
excessive price, defies common business sense. To discuss, in conjunction
9
with such a calculation,
the real possibility
10
a result of such pricing
as if it were worth
11
order to achieve compliance
12
the mind.
13
markup
14
possible from that level of pricing.
15
very significant
16
paying higher
17
volume once it is lost. To me, it seems to be irrelevant
18
formula
19
have a particular
20
to generate
21
more volume driven by lower prices.
market,
level, without
to the attributable
cost of a given
process.
can set its margin
The idea that
at some
regard for the real world consequences
with a markup
of giving up 45 million
accepting
of an
parcels as
that consequence
percentage
objective also boggles
I am not aware of any business which would not take a little
to preserve market
The loss of this volume of business has
for the people losing their jobs, the shippers
rates and the ability
and lawyers
markup
less
share and then work to make as much profit as
consequences
or witnesses
in
of the Postal Service to regain the
can establish
in the abstract.
total dollar contribution
that some precedent,
that Parcel Post should
Markup
to institutional
should be set at a level
costs. This can mean
Lower prices encourage
11
more parcels
to be shipped because the businesses
because of lower shipping
There is another
society is already
one serves can make more profit
costs.
reason to keep Parcel Post price competitive.
faced with a situation
where 75 percent (or more) of the
5
parcels shipped and delivered
in the United
6
transportation
7
well served when one company can control
8
market,
9
to the everyday
States via surface
are under the control of one company,
let alone the delivery
well-being
of products
that-may
of society’s members.
entrants,
but they are not capable of replacing
11
network.
These considerations
12
to alternative
must prevail
of delivery
UPS.
Society is not
such a significant
IO
suppliers
Our
portion
be considered
The market
of any
essential
has new
the Postal Service delivery
over vague allegations
of injury
service.
13
II. LUCL4NI
14
15
16
17
UPS witness
to be reviewed
Luciani
(UPS-T-5)
TESTIMONY
raises a number
of points which need
and examined.
The first problematical
claim he makes is that the Postal Service has
18
spent $18.5 million
dollars on advertising
19
Service officials whom I have questioned,
20
was spent on Parcel Post. The Postal Service recently
12
Parcel Post. According
an amount
to Postal
less than $1 million
(August
7,200O)
1
responded
to a UPS interrogatory
2
rates Parcel Post advertising
(UPS/USPS-55)
showing
test year after
costs would be a mere $0.555 million.
3
Second, in his testimony
(Tr. 25/11780),
witness
4
that the cost of parcel delivery
5
that “[ilf weight
6
narrow
7
then it surely should be used in the case of the more significant
8
differences
9
mail.”
is driven by the weight.
is a proper basis for reflecting
ranges from one ounce up to thirteen
between the lighter-weight
contends
He makes the point
cost differences
within
and the heavier-weight
between
weight
classes of
items that tit in a
11
mail box and those that do not, this decision is not driven by weight
12
size. Witness
13
a parcel than to place an item in the mail box.” However,
14
not a function
15
cost in 20 pound parcel as opposed to a 10 pound parcel.
Luciani
of weight.
witness
evidence that additional
Luciani
convincing
18
Table 3, should be added to Parcel Post.
At Tr. 25/11783,
this distinction
witness
was not able to present
costs, such as those he proposes in his
Luciani
attempts
to make the point that
20
there is a cost which should be assigned to parcels which is incurred
21
sorting
and sequencing
is
If the parcel is the same size, there is no added
17
19
but by
makes the point that it costs more “to hand someone
Upon close questioning,
16
the
ounces for First Class Mail . .
While there is an obvious cost differential
10
Luciani
by route drivers.
13
in the
He concludes, based upon one
1
DDU visit, that the sorting
2
of all, 30 parcels per route seems to be quite an unlikely
3
number.
4
and number
5
volume of about five parcels per route.
6
attempt
7
consumer.
8
able to make a strong case for isolating
9
support
10
lasting
11
assembled,
12
Commission
13
A.
14
of 30 or so parcels on a route must occur.
A simple effort in arithmetic
of routes in the United
First
and exaggerated
using parcel volume, days of the year,
States results
in an average daily
Secondly, witness
Luciani
makes no
to account for those parcels which are picked up at a DDU by the
Under questioning
number
to parcels.
25 minutes,
during
(Tr. 12011-12017X
witness
and transferring
Luciani
was not
costs from a street
It would seem to me that more than one visit
which he observed five or ten routes being
should be required
to make a credible
recommendation
to the
for changes in cost assignments.
Sack Shake Out
Witness
Luciani
misunderstands
to DDUs typically
what happens at DDUs.
are palletized
or bed loaded.
Parcels
15
delivered
16
when they arrive at a DDU, they are typically
transferred
17
hampers,
are on wheels and they are
18
then rolled into the Postal Unit for final sort to the routes.
19
occasional
one for each zip code. The hampers
sack, which in CTC’s operation
14
In either case,
by the driver to
If there is an
would only occur if there were
1
multiple
smalls,* the contents
2
hampers
by the driver.
3
B.
Non-machinable
machinable
and non-machinable
5
derive the cost avoided is the correct way to calculate
6
discount.
7
parcels to DDUs confront
8
Postal Service when handling
9
incentive
10
incentive.
11
C.
Witness
into the same
Parcels
The method of averaging
4
of the sack would be emptied
Luciani
conveniently
the appropriate
forgets that companies
the same cost and handling
work sharing
bringing
issues faced by the
non-machinable-parcels.
in the form of an additional
parcels to
If there is an extra
discount,
it is a proper
DDU Mail
Witness Luciani
12
states that DDU parcel post is attracting
13
“substantial”
volumes because of the promise of next day delivery.
14
provides
15
conclude that because of this “fact,” DDU should receive the same markup
16
as Priority
17
him that parcels received the same treatment
no evidence supporting
Mail.
his assertion,
but nevertheless
19
entered parcels are only a small percentage.
20
been faced with the daunting
1
proceeds to
On his single visit to a DDU, he noted that it seemed to
as Priority
The simple fact is that in the total universe
18
He
task of building
Mail.
of Parcel Post, DDU-
Users of this entry option have
the volume and network
One definition of “smalls” is anything that will fit through a coat hanger 15
1
required
to support
a program
that shippers
2
pricing
3
well as consistent
4
meaningful
5
challenge
6
DDU entry times that would result in faster delivery
I
to remember
8
one element
9
parcels entered
(after the cost of preparing
delivery
utilization
times.
could rely upon for compelling
and delivering
parcels to the DDU) as
Very few have been able to achieve a
of DDU rates and service.
Compounding
the
for DDU users has been the Postal Service’s inability
that the transit
only one element
11
certainly
12
percent markup
It is important
time from the DDU to the consumer
of the total time in transit
10
times.
to provide
experienced
by a shipper.
If certain
at a DDU do receive next day service, that transit
of the total time in transit,
have not been comparable
and those delivery
to Priority
Mail.
is only
time is
times
The idea of a 63
is absurd.
13
CONCLUSION
14
15
UPS witnesses
Sappington
16
data, testimony
and analysis
17
Parcel Post rates.
18
Commission
19
Service’s ability
20
benefit to their client, United
and Luciani
have presented
volumes of
of the Postal Service recommendations
Their single objective is obviously
for
to cause the
to raise parcel rates to a level which would cripple the Postal
to compete in this market.
Parcel Service.
typically a bag or small box.
16
This would provide maximum
We have seen many of these arguments
1
2
they simply
4
change, the proposals
5
DDU.
6
an appropriate
7
mailers
8
American
9
deal with the enormous
contribution
public at reasonable
11
several years.
12
of them competitively.
14
providers
prices.
costs. This action will allow
to continue
to offer their product
to the
It will give the Postal Service time to
to thrive
Parcel
as they have done over the last
The Postal Service is a long way from being able to harm any
The Postal Service must be allowed
market
OBMC, DSCF, and
changes we all know are on the horizon.
will continue
without
by any other class of mail and make
toinstitutional
of lower priced merchandise
delivery
to accept and recommend,
of the Postal Service for DBMC,
These rates are not subsidized
10
13
before, and
do not reflect reality.
I urge the Postal Rate Commission
3
and assumptions
place for small parcel delivery.
17
to compete effectively
in the