UNITED STATES OF AMERICA
Before The
POSTAL RATE COMMISSION
WASHINGTON, DC. 20268-0001
Postal Rate and Fee Changes,
2000
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Docket No. R2000-1
)
TRIAL BRIEF
OF
THE OFFICE OF THE CONSUMER ADVOCATE
TED P. GERARDEN
DIRECTOR
EMMETT RAND COSTICH
SHELLEY S. DREIFUSS
KENNETH E. RICHARDSON
ATORNEYS
UNITED STATES OF AMERICA
Before The
POSTAL RATE COMMISSION
WASHINGTON, D.C. 20268-0001
Postal Rate and Fee Changes,
2000
Docket No. R2000-1
TRIAL BRIEF OF THE
OFFICE OF THE CONSUMER ADVOCATE
The Office of the Consumer
Ruling R2000-l/4,
Advocate
issued February
25, 2000; Presiding
issued May 26, 2000; and Rule 30(e)(l)
Postal Rate Commission
(“OCA”), pursuant
to Presiding
Officer’s
Ruling R2000-lf71,
of the Rules of Practice and Procedure
(‘Commission”),
Officer’s
39 C.F.R. §3001.30(e)(l),
of the
hereby submits its
Trial Brief in this proceeding.
EXECUTIVE
SUMMARY
To lessen the burden of new postal rates on members of the general public, the
OCA urges the Commission
proposed
by the Postal Service in this case.
one percent
confronting
Service
to recommend
contingency
provision
the Postal Service.
is unnecessary,
several
changes
The Commission
as reasonable
under
The 2.5 percent contingency
unsupported,
in the rates and fees
should recommend
a
all of the circumstances
requested
and harmful to all mailers.
by the Postal
The Commission
Docket No. RZOOO-1
-2.
should resist efforts by the Postal Service and other parties to reduce attributable
To the contrary,
and particularly
time, the Commission
accurately
should
with respect to mail processing
attribute
first-ounce
is needed
Investment
letter-mail
the situation
processing
and the public should
in this area.
Envelope
Mail (“CEM”)
The Commission
has kept the cost of First-
should
again
recommend
should recommend
large mailers’
rate increases.
The nonstandard
mail.
convenience
First-Class
should recommend
preference
rates change
for consumers
a reduction
for smaller,
surcharge
The Commission
providing courtesy “make-up”
a discount
that the Board of Governors
for
when
for consumers
more frequent
should be eliminated
should
recommend
the
First-Class
adopt a rate
only every other rate
This would permit greater rate stability and convenience
letter
even more unfair.
mailpieces.
accommodating
improve
equipment
costs, and
to permit the public to share in the lower cost of
stability plan under which single-piece
square
from becoming
Mail has
receive the benefit of the Postal Service’s
The Commission
handling automation-compatible
case.
that most
First-Class
portion of the Postal Service’s institutional
now to prevent
in automated
Class Mail down,
Courtesy
in the manner
rate should remain at 33 cents.
been carrying an ever-increasing
success
and city carrier load
reflects the costs of providing the services.
The First-Class
restraint
costs to services
costs.
while
and predictable
for square and near-
that the Postal
rate does
stamps at the time of the rate change.
Service
change
by
The Commission
in the fees for domestic and military money orders and
should carefully review the support for the per increment fee for insurance.
-3-
Docket No. R2000-1
ARGUMENT
I.
THE POSTAL SERVICE CONTINGENCY
As part of its requested
include a “reasonable
articulate a reasoned
revenue requirement,
explanation
national
conditions
variance
of the Postal
Postal Service management
for the amount of the contingency
that shape managements
reasonableness
IS UNREASONABLE
the Postal Service is permitted
provision for contingencies,”
the considerations
economic
REQUEST
judgment
and the Postal Service’s
Service’s
analysis, which measures
request
requested.
to
must
Among
should be an assessment
microeconomic
can be tested
of
position.
The
by reference
to a
the Postal Service’s historic ability to forecast costs
and revenues accurately.
OCA witnesses
Robert Burns and Edwin Rosenberg
presented
by the Postal Service
inadequate
and that the Commission
for a 150 percent
increases,
at 9.
one percent
in the contingency
contingency
is
point out that the Postal Service
with rates that reflect a lower contingency,
fiscal health for the period FY 1995-1999.
the current
increase
should retain the current one percent contingency.
OCA-T-2 at 12; OCA-T-3 at 3, 7. Both OCA witnesses
has fared well financially
find that the justification
enjoying
robust
Even in FY 2000, the second year in which
will have been in effect, and prior to any rate
the Postal Service projects positive net income.
OCA-T-3
at 5; OCA-T-2
Docket No. R2000-1
A.
-4-
The Postal Service Has Failed To Support
Provision
1.
Service’s
explanation
for its 2.5-percent
the contingency
not based his proposal
and disavows
conformance
the results
support
from one to 2.5 percent.
on the specific evaluation
of a variance
with past Commission
management’s
for
proposal
perception
proposal,
the
Commission
of risks in the test year must be “articulated
evidence test is satisfied.
conclude
has
at 8,
furnishes
in
Id.
witnesses
Burns and Rosenberg
articulated
the Postal Service’s reasons for increasing
See generally
Witness Tayman
that he reluctantly
is
short list of
of individual factors, OCA-T-2
analysis
directives.
a contingency
degree” so that the substantial
requires
that
to a reasonable
PRC Op. R87-1, 72073.
that witness Tayman
OCA
has not satisfactorily
the contingency
so dramatically.
OCA-T-2 at 8-12; OCA-T-3 at 18, 18.
Witness
Rosenberg
contrasts
Tayman with the careful, thorough
contingency
planning.
unexpected
conditions
needed
contingency
Postal Service witness Tayman presents a frankly subjective,
reasons for increasing
As
Contingency
The Postal Service has failed to “articulate[ ] to a reasonable
degree” its reasons for the dramatic increase in the contingencyfrom 1 .O to 2.5 percent
The Postal
insubstantial.
a 2.5 Percent
generating
Utilities
the meager
furnished
analyses that are often performed
perform
hundreds
and random unplanned
capacity
explanation
reserves.
or thousands
in the course of
of simulations
events in order to estimate
OCA-T-3
at 21.
by witness
the size of
This type of analysis
(and could) have been made by the Postal Service in presenting
of
should
its case before the
Docket No. R2000-1
Commission.
prerogative
-5-
But the Postal Service eschews
such analysis in favor of relying on its
to select a number to its liking.
2.
Largely,
The few reasons advanced by the Postal Service for increasing
contingency are not convincing
the conditions
that witness
Tayman
does cite as uncertainties
actually matters that the Postal Service can influence or control.
growth,
which
subclasses
the Postal
Service
or by advertising
vague reference
management
targeted
to “significant
has important
can influence
by improving
input into wage and salary levels.
are already in place for FY 2001.
are fully accounted
government
for in the roll-forward
index-the
Employment
service
Burns stresses that some
Those that are yet to be negotiated
to the test year by means of a respected
Cost Index.’
health benefit costs-another
are, to a large extent,
Indices and forecasts
insurance
employees
premiums
both foreseeable
Furthermore,
“uncertainty”
and controllable
employee
management
has
OCA -T-2 at 10.
cited by witness Taymanby postal
exist for such costs; id. at 11, and management
down by increasing
Witness Tayman’s
OCA -T-2 at 10. With
material input into the new contracts that will result in test year wages.
Likewise,
to particular
on salary,” loses sight of the fact that
respect to wages that will be paid in the test year, witness
labor contracts
are
These include volume
services more aggressively.
new pressures
the
overtime,
management.
can keep health
rather than adding new
to the payroll.
Id. The Bureau of Labor Statistics maintains the Employment Cost Index
Docket No. R2000-1
B.
The Commission Should Recommend
Percent Continoencv Provision
Continuation
1.
point
Stable
economic
contingency
Relatively
Service’s
-6-
favorable
and stable
ability to forecast
reliably.
allow for smaller contingency
contingency
conditions
economic
conditions
that a disciplined
The United
Macroeconomic
environment
States
provisions;
one
strengthen
the
indeed, the Postal Service reduced
of highly respected
moderate
conditions,
Rosenberg.
of postal
especially
in the Consumer
organizations,
reorganization
and stable
tend to
its own
It is clear,
provision
conditions.
both private and public,
Id.. at 8-10.
of a low contingency
Postal
Id. at 6.
low inflation
inflation through 2001.
calls for continuation
The early years
enjoying
One
percent
analysis of the optimum size of the contingency
is currently
forecasts
predict continued
This stable economic
provision.
were
characterized
in the rate of inflation.
Id. at 12.
Price Index (“CPI”) are presented
by volatility
Annual
in the testimony
in
rates of
of witness
Id. at 13. They show an overall decline in the rate of change in the CPI in
recent years.
When these changes
postal rate changes,
approved
a
OCA-T-3 at 7. In turn, reliable forecasts
would place great weight on the state of the economy.
change
toward
request in Docket No. R94-1 and again in Docket No. R97-1.
therefore,
economic
of the Existing
for time periods corresponding
it is evident that epochs for which high contingency
(e.g., 1970-1990),
recent periods
are averaged
of relatively
were characterized
lower contingencies
levels of change in the CPI. Id. at 14.
to
levels were
by great voltitility in the CPI, while the
(i.e., 1991-1999),
correspond
to low
Docket No. R2000-1
-?-
2.
There
Developments
contingency
is a sharp
forecast accurately
in Postal
contrast
between
Service
forecasting
point
to
the Postal
Service’s
incipient
ability
its costs and revenues at the outset of postal reorganization
current ability to do so. The Postal Service now has thirty years of experience
exercise of honest, efficient, and economical
Id. at 12.
organization
Moreover,
management
a low
to
and its
in the
under postal reorganization,
the Postal Service recently created a sixteen-person
whose mission is to improve forecasts of changed conditions.
forecasting
Id.
Postal Service witness Tayman presents a variance analysis in his exhibits, but
expressly
disavows
understandable
any reliance
on it.
His attempt
when one considers that the 2.5 percent contingency
lies outside the range of the variance analysis results.
range of the four results is nearly zero, with ominous
contingency
to avoid variance
proposal.
analysis
is
that he proposes
Id. at 18. The mid-point of the
implications
for a 2.5 percent
Id.
The Postal Service has indicated that it may be moving in the direction of shorter
rate cycles.
Docket No. R97-1 rates were put in place in January 1999. Rates from the
instant case are likely to be implemented
rate cycle.
There are indications
increase in 2003.
contingency
provision.
a two-year
that the Postal Service is already planning for a rate
Witness Rosenberg
amount of error and uncertainty
in January 2001, thus concluding
observes that shortened
in forecasting.
rate cycles reduce the
Id. at 24-25.. This allows for a smaller
Docket No. R2000-1
-a-
A high contingency
3.
Unnecessarily
Managers
industries
high contingencies
may be cushioned
leads to laxity.
OCA-T-2
contingency,
“perverse
from the consequences
at 6.
Witness
managerial
they also will act aggressively
contingency
to 2.5 percent.
contingency
provision
of failing to control costs.
Rosenberg
cites measures
taken
cushion
lead to lower revenues
competition
OCA’s witness
as a justification
against
cost
Rosenberg,
warns that a large
A vicious cycle may be created that
for Postal Service competitors.
and accelerate
however,
the
Id. at 28-29.
calls for further
This, in turn, can
rate increases.
Increased
calls for restraint in rates, not for rate increases.
Witness
Flawed
OCA witness
Bozzo’s Analyses
J. Edward
witness Bozzo (USPS-T-15).
and that his proposed
Commission.
in other
for increasing
THE COMMISSION SHOULD REJECT THE POSTAL SERVICE’S
CHANGE IN THE VOLUME VARIABILITY OF MAIL PROCESSING
A.
This
to keep costs down.
can be counterproductive.
creates more headroom
competition
incentive[s].”
OCA-T-3 at 22. If postal managers feel the pressure of a properly moderate
Witness Tayman cites increasing
flawed
create
to avoid the “moral hazard” of an overly comfortable
increases.
II.
is counterproductive
of Mail Processing
Smith responds
Dr. Smith concludes
PROPOSED
COSTS
Volume Variability
to the testimony
Are
of Postal Service
that Dr. Bo.zzo’s study is significantly
model is incomplete
and should
be rejected
by the
Docket No. R2000-1
-9-
Dr. Bozzo’s work is a continuation
mail processing
measure
comprised
variabilities
cost variability presented
the volume
variability
of activities
important issue.
of Dr. Michael D. Bradley’s work on segment 3
of each
associated
Segment
in Docket No. R97-1.
of several
pools
with mail processing.
3 mail processing
mail processing
of costs
Volume
(MODS
pools)
variability
is an
costs are in excess of $17 billion, and the
applied to the various cost pools associated
are used to measure
The work attempts to
with a mail processing
costs attributable
to the various
activity
classes
and
subclasses.
Volume variability
percentage
change
cost, measured
measures
in volume.
by total pieces
processing
activities.
volume variability
OCA-T-4
in hours worked,
measured
the percentage
(TPH),
Id. Traditionally,
Dr. Smith analyzes
out by the Commission
or total pieces
the Commission
Id. at 6.
ranging from 52 percent to 95 percent.
in cost with respect to the
at 5. Dr. Bozzo measures
with respect to changes
handled
is 100 percent.
change
the variability
of
in the volume of mail, as
fed (TPF), for ten mail
has found that mail processing
Dr. Bozzo found estimated
variabilities
Id. at 8, Table 1.
Dr. Bozzo’s study on the basis of the evaluation
in Docket No. R97-I.
criteria set
Id. at 8-9, 22.
1.
A study should include the development
and
database, appropriately verified and complete.
use of an adequate
2.
Models should be derived from the appropriate economic
should fit correctly within any system that applies them.
3.
The study should include a discussion of the modeling approach
it is consistent with the underlying data.
theory
and
and how
Docket No. R2000-1
-lO-
4.
A correct
estimation
estimation (regression) procedure
needs at hand should be used.
5.
Results of econometric equations and alternative econometric analyses
should include a discussion of the values, signs and other relevant
information for the variables.
Dr. Smith first reviews the work of Dr. Bradley
Commission’s
study in that case.
to the
No. R97-1 and the
Dr. Smith
testifies that, in general, these criticisms apply as well to Dr. Bozzo’s work.
Dr. Smith
evaluation
of Dr. Bradley’s
in Docket
is suitable
Id. at 10-17.
also concludes
criticisms
which
that Dr. Bozzo’s study suffers from significant flaws in each of the above
criteria.
ld. at 18-19. The major problems of the study as determined
by Dr.
Smith are:
1.
the questionable accuracy of the data base, id. at 23-25, 30-36, as well as
a discontinuity in the investment data series that may not reflect current
operations, id. at 26-29;
2.
the short-run nature of the study, which failed to focus on longer-run
expansion paths as they affect costs, id. at 12-13, 40-43;
3.
the continued
4.
conceptual problems associated with variables such as the manual ratio,
id. at 29-30, the network variable, id. at 44-45, and the capital (QICAP)
variable which ostensibly models capital, id. at 52-54;
5.
the omission of important
utilization, id. at 36;
6.
the need to consider additional factors such as the interdependence
of
mail processing
activities, id. at 4546;
Dr. Bozzo’s inappropriate
assumption
that the ratio of capital to labor does not change
(homotheticity), id. at 47; and new issues concerning
Postal Service cost
minimization of its factor inputs and the impact on the volume variability
analysis, id. at 47-51;
use of the fixed effects model, id. at 69;
variables,
id. at 43-44,
such
as capacity
Docket No. R2000-1
-ll-
7.
a lack of a clear presentation and derivation of the model being estimated
from microeconomic theory, id. at 3740; and
8.
the failure to consider
investment, id. at 54, 60.
the
possibly
endogenous
Dr. Smith reviews Postal Service witness Degen’s testimony
operational
presents
nature of mail processing.
a theoretical
expansion
fundamental
analysis
of capital
on the physical and
Utilizing witness Degen’s information,
of the underlying
path by which volume variability
shortcoming
nature
economic
basis for the longer-term
should be measured
of the Bozzo methodology,
Dr. Smith
that demonstrates
id. at 55-65;
a
see particularly
Figures 4 and 5 at 61-62.
Dr. Smith also provides
provide a visually compelling
pools, id. at 65-6, Appendix
B.
graphs
simply plotting all data for six cost pools that
indication of 100 percent volume variability for those cost
at 1-6.
The Commission Should Retain 100 Percent Volume Variability
Cost Pools Analvzed bv Witness Bozzo.
Dr. Smith
has considered
percent volume variability.
mail processing
than its traditional
the alternatives
He recognizes
to the continued
that the Commission
“between”
Commission
use of the 100
may wish to attribute
costs for the ten cost pools on the basis of a variability analysis other
approach.
Dr. Smith reviewed the mail processing
data supplied by the Postal Service and applied the appropriate
Smith concludes
for the
that based upon the information
outlined
and
economic theories.
Dr.
now available,
model is the “least bad” of the models presented.
has previously
information
the deficiencies
the cross sectional
He points out that the
of the alternative
fixed effects
-12-
Docket No. R2000-1
model, and that the other alternative,
variables
the pooled model, lacks sufficient
and so is subject to specification
error.
adoption
of the “between”
model.
results in costs that are 95 percent attributable,
of
On the other hand, the “between”
model permits analysis on the basis of the size of the facilities.
does not advocate
measures
Nevertheless,
Although
the application
Dr. Smith
the “between”
model
of the model, which is
known to be subject to error, is hardly worth the effort. Id. at 69-70, 74.
Dr. Smith
recommends
that the Commission
volume variability for the ten mail processing
provided this information
analysis incorporating
continue
with the 100 percent
cost pools that witness Bozzo studied.
to OCA witness Thompson
this recommendation.
(OCA-T-9)
who presents
He
a cost
Id. at 74. Dr. Smith also sponsors
OCA-
LR-I-2, a Category 2 Library Reference.
C.
The Commission Should Recommend the Establishment of a Technical
Workina Grouo to Consider Mail Processina Volume Variabilitv
Dr. Smith further advises that inasmuch as Dr. Bozzo’s study needs substantial
work for completion,
establish
a working
19-21, 75-76.
the Commission
should
recommend
group to discuss mail processing
The four-month
period available
that the Postal
volume variability
issues.
consequence
of the time constraints
a scientific analysis point of view.
and comment on theoretical,
issues to a conclusion.
Id. at
to the parties for examination
Bozzo’s work is not sufficient to explore all aspects of this complex problem.
necessary
Service
of Dr.
It is the
of a rate case, but is not adequate
A working group is necessary
data, and modeling approaches
from
to discuss, evaluate,
in an effort to bring these
Obviously, such a group would require the honest and effective
Docket No. R2000-1
-13-
participation
Accordingly,
of all of the parties involved.
to recommend
the establishment
variability of mail processing.
Ill.
Dr. Smith urges the Commission
of a working group to consider
in detail the volume
Id. at 75-76..
THE COMMISSION
SHOULD AGAIN REJECT THE POSTAL SERVICE’S
PROPOSED TREATMENT OF CITY CARRIER LOAD TIME COSTS
Postal Service witness
Baron (USPS-T-12)
time be treated as “fixed time at a stop.”
million) would
then be reallocated
has proposed
that a portion of load
This portion of load time (amounting
to the access
component
of carrier
to $260
street time.
Witness Baron would split the remaining load time into two parts. Only “elemental”
load
time costs would be attributed
this
proposal
to categories
of mail.
The Commission
in Docket No. R97-1, and OCA witness Mark Ewen (OCA-T-5)
rejected
urges it to do
so again.
Afler estimating
the direct volume variability of the remaining
load-time accrued
cost pool, witness Baron treats the residual component,
or coverage-related
as an unattributable
institutional
differs from the Commission’s
established
of attributing
approach
cost.
This treatment
coverage-related
load-time,
load-time based on the proportion
of mail delivered to single subclass stops.
In its Opinion and Recommended
specifically
rejected
theoretically
flawed.
this
approach,
concluding
that
the
stops
Based upon review of the relevant testimony
Mr. Ewen concurs
that the proposed
fictional
founded
construct
Decision, Docket No. R97-1, the Commission
upon
stops effect approach
an incorrect
interpretation
effect
concept
and supporting
is not justified.
of prior
is
data,
It is a
Commission
Docket No. R2000-1
opinions.
-14-
Additional
unnecessary
justification
extension
offered for the approach
of the activity-based
functional
is based on a strained
approach
for allocating
and
total
street-time
among the major carrier activities into the assessment
variability.
No data exist that directly measure the effect, nor do the results of the load-
time regression
equations
time at each stop.
imputed
provide a hint that carriers might spend some fixed amount of
Furthermore,
using available
data.
effect is neither theoretically
recommends
IV.
even if such an effect exists, it cannot be accurately
As a result, the Postal Service’s
nor empirically
that the Commission
witness
modified
Smith’s
and witness
version
Descriptions
Thompson
supported.
INCREASE
calculates
Ewen’s costing
of the Commission’s
analysis
of the stops
For these reasons,
maintain its established
OCA COSTING PROPOSALS
COSTS BY $2.3 BILLION
OCA witness
of load-time volume
treatment of load-time costs.
TEST YEAR VOLUME
the effect
on volume
proposals.
cost model
Mr. Ewen
Witness
to perform
VARIABLE
variable
Thompson
these
costs
of
uses a
calculations,
of the cost model functions as well as electronic copies of her files may be
found in OCA-LR-I-l.
Witness Thompson
cost model by replicating
has verified the accuracy and reliability of the
the Postal Service’s
base year, interim. years, and test year
after rates cost estimates to a high degree of precision.
OCA-T-9, Exh. 1 D, col. C.
Docket No. R2000-1
-15-
After using the cost model to replicate Postal Service results, witness Thompson
incorporates
proposals.
Postal Service corrections,*
As shown in OCA witness Thompson’s
OCA witnesses
approximately
Ewen’s
and Smith’s
$2.3 billion ($42.77 -
total costs
increase
$74.6
corrections
and the OCA’s proposals.
THE FIRST-CLASS.
proposals
supplemental
increase
$40.44 billion).
Class single piece letter cost attribution
V.
as well as OCA witnesses
Ewen’s and Smith’s
testimony,
test year cost attribution
Of the $2.3 billion increase,
increases $1 .O billion or 7.9 percent.
million (0.1 percent)
as a result of the Postal
in order to mitigate the growing
Class Letter Mail subclass.
Part I) shows that First-Class
institutional
2
First-
Test year
Service
FIRST OUNCE RATE SHOULD REMAIN AT 33 CENTS
The OCA proposes that the current 33 cent rate for single-piece
be maintained
Exhibit 3C,
institutional
First-Class
cost burden
Mail
on the First-
The testimony of OCA witness James F. Callow (OCA-T-6,
Letter Mail has been carrying an increasing
burden of the
costs of the Postal Service.
Due to time constraints, witness Thompson was unable to incorporate the following three
corrections: (1) Rehabilitation program costs (Tr. 21660662): (2) Labor cost changes (P.O. Information
Request No. 7 (April 6.2000). POIR-7-1; and (3) Mail volume changes due to reclassifying from Priority to
First-Class those pieces weighing more than 11 ounces but not more than 13 ounces (Tr. g/3578). Nor
has witness Thompson incorporated the Commission’s single-subclass-stop methodology, although OCA
witness Ewen recommends that the Commission continue using that methodology. OCA-T-5 at 19.
Docket No. R2000-1
A.
-16.
First-Class Letter Mail Is Bearing An Increasing
of the Postal Service
Witness
Callow
shows
that the First-Class
traditionally
higher than the “systemwide”
significantly
in recent years compared
period FY 1988 through
FY 1999, the First-Class
During the 12 year
has risen from
to an advance in the systemwide
perspective,
from FY 1988 to FY 1996 the First-Class
162 percent
average.
Letter cost coverage
to 168 percent.
from
while
average cost coverage for all mail, has risen
149 percent
gradually
Cost Burden
Letter Mail cost coverage,
to the systemwide
162 percent to 197 percent, compared
Institutional
To put this rapid advance
to 175 percent,
average from
in the cost coverage
into
Letter Mail cost coverage
rose
In the test year, the Postal
Service
proposes to preserve the high First-Class Letter Mail cost coverage at 197 percent-the
same cost coverage
actually provided by First-Class
Letter Mail in FY 1999.
OCA-T-6
at 7-8.
Measuring
the institutional
cost burden via a markup index or a cost coverage
index also reveals a rising burden on First-Class
Letter Mail.
The markup
index for
First-Class
Letters rose from 1.256 to 1.439 during the 12 year period FY 1988 through
FY 1999.
In the test year, the markup index of 1.422 is higher than the markup index
for all but two of the preceding
coverage
index reveals a similar change.
First-Class
institutional
12 years.
Letter
A review of the First-Class
Letter cost
Id. at 8-l 0.
Mail has long contributed
more in absolute
terms
to the
costs of the Postal Service than the next largest class of mail, Standard
Regular mail.
Over time, the relative share of institutional
Class Letter Mail has grown as compared
costs contributed
to the share contributed
(A)
by First-
by Standard
(A)
Docket No. R2000-1
Regular
-17-
mail, and the “gap” has widened
beginning
in FY 1995, the First-Class
1.439, while the Standard
Moreover,
during
(A) Regular
year to 1.422.
For the five year period
Letter markup index rose steadily from 1.169 to
markup
index declined
FY 2000 and 2001, the Standard
expected to decline further, ending at 0.777.
index is expected
in recent years.
from 1.080 to 0.828.
(A) Regular
markup
By contrast, the First-Class
index is
Letter markup
to rise still higher to 1.469 in FY 2000, and then decline in the test
A similar relative change is evidenced
using the cost coverage
index.
Id. at 14-16.
B.
The First-Class Letter Mail Institutional
Intended bv the Commission
The institutional
the institutional
cost burden on First-Class
cost burden
recent recommended
decisions.
coverage and First-Class
the Commission
intended
Cost Burden Has Exceeded
Letter Mail has also grown relative to
by the Commission,
Witness Callow reviews the systemwide
Class Letter Mail.
the excess revenue contributed
Based upon that benchmark,
revenues
average cost
Averaging
to produce
to institutional
First-Class
of $6.8 billion to the institutional
during the 12 year period FY 1988 to FY 1999.
total net additional
in several
Letter Mail cost coverage and markup index recommended
Class Letter Mail markup index from all four proceedings
net additional
as expressed
in Docket Nos. R87-1, R90-1, R94-1 and R97-1.
witness Callow estimates
That
by
the First-
a “benchmark,”
costs by First-
Letter Mail has contributed
costs of the Postal Service
Id. at 22. Through the test year, the
revenue is expected to reach $11.2 billion.
Id. at 23.
Docket No. R2000-1
C.
-18-
Eauitv Reauires Retaininq the 33 Cent Basic Rate
The increasing
reversed
institutional
by maintaining
cost burden
the single-piece
provide
the most benefit to individual
measure
of equity to all First-Class
grown
in absolute
terms-and
further from the Commission’s
subclasses
VI.
A.
First-Class
average.
The Postal Service has proposed
Reply Mail (“QBRM”)
same discount
in this proceeding.
as that extended
a three-cent
to QBRM.
testified that these types of mail are processed
Willette has testified,
the cost avoidance
has
has departed
cost coverages
for those two
OTHER BENEFICIAL
Courtesy
Courtesy
cost burden
a
Id. at 17-28.
RECOMMEND
Mailers of Automation Compatible
to a Three-Cent Discount
Doing so would
(A) Regular-and
stated goal of maintaining
be
It would also restore
Mailers, since the institutional
relative to Standard
SHOULD
MAIL
Letter Mail should
rate at 33 cents.
and smaller mailers.
roughly near the systemwide
THE COMMISSION
FOR FIRST-CLASS
on First-Class
CHANGES
Reply Envelopes Are Entitled
discount
for Qualified
Business
reply mail is entitled to at least the
Postal Service witness
identically.3
Campbell
has
Thus, as OCA witness Gail
of CEM and QBRM is the same.
OCA-T-7
at 9.
Consumers
have waited for many years to reap direct benefits from the Postal
Service’s automation
3
program.
Not only have they watched
Responses to OCAIUSPS-T29-1 and 5
as the discounts
accorded
Docket No. R2000-1
-19-
large mailers have increased,
the Postal Service
but their own discount
Governors.
has been repeatedly
The OCA again proposes
(“CEM”) as a category of First-Class
Courtesy
rejected by
Envelope
Mail
Mail along with a three cent discount for mailers of
courtesy reply envelopes.
CEM has been a good idea for consumers
overdue.
Its establishment
is
CEM makes sense as the Postal Service moves from the paper mail world
into the electronic
transactions
payment
for a long time.
one with eMPay.
CEM can help the Postal Service retain some
mail which would otherwise
or account
debiting.
attractive to consumers,
migrate to alternatives
As the methods
for electronic
such as electronic
payment
become
it is inevitable that some, if not all, of the transactions
mailed today will disappear
from the First-Class
mailstream.
bill
more
that are
The Postal Service can
and should work to keep as much of this mail for as long as it can.
The Postal Service
has objected
to maintain
to the establishment
consumers
do not want
consumers
will try to use CEM stamps for other correspondence,
costly to educate consumers,
made of the “two-stamp
consumers
discounted
and that it complicates
problem.”
do not want to maintain
Service has produced
stamp.
two denominations
of CEM, arguing
of stamps,
two denominations
has argued
of stamps.
no credible evidence that consumers
And consumers
a huge revenue
shortfall.
Much has been
for years
Yet the Postal
who prefer to keep only one denomination
suggests,
however,
will still
The Postal Service has
would use CEM stamps on all correspondence
The evidence
that
do not want the option of a
be able to use full-price stamps for all of their correspondence.
also argued that consumers
that
that it will be too
the rate schedule.
The Postal Service
claiming
that
that consumers
and cause
overpay
Docket No. R2000-1
-2o-
postage far more often than they underpay
expect the introduction
In Docket
consumers
it. See Tr. 21/9166.
of CEM to change this.
No. R97-1,
the Commission
on the use of CEM.
spent for the purpose
intended.
Witness Willette estimated,
that $9.2 million would
consumers
about their choices in single-piece
All of the objections
and overcome.
already been offered.
be needed
million
to educate
based on Postal Service
mailing
to inform
First-Class Mail. OCA-T-7 at 15.
of the Postal Service to establishment
In a competitive
business
the low cost characteristics
with a discount.
$33
for a nationwide
Because of the postal monopoly,
not forced to recognize
consumers
earmarked
PRC Op. R97-1 at 326. This money has not yet been
testimony,
addressed
There is no reason to
environment,
CEM would have
however, the Postal Service is
of courtesy
CEM remains a workable
of CEM have been
reply mail and reward
solution to a volume erosion
problem facing the Postal Service.
B.
First-Class
Single-Piece
The OCA proposes,
Rates Should Be Held Constant
in the testimony
of witness Callow (OCA-T-6,
the Postal Service adopt a new approach for setting the single-piece
letters that would benefit both household
appears
to have adopted
concerns
of business
However,
more frequent
Over Two Rate
and business
mailers.
plans to adjust rates every two years,
First-Class
can be inconvenient
rate for
The Postal Service
in response
mailers for smaller, more frequent and predictable
rate changes
Part II), that
to household
to the
rate changes.
and smaller-
Docket No. R2000-1
volume mailers.
-21The approach
interests of household
1.
As proposed
be determined
proposed by the OCA would accommodate
the differing
and business mailers.
Adjusting the single-piece First-Class rate every other rate case
would accommodate
the differing interests of household
and
business mailers
by witness Callow, the single-piece
First-Class
without regard to the “integer constraint.”
(‘SPFC”)
The rate paid by households,
however, would be set at a whole cent, as in the past. The determination
rates other than single-piece
rate would
would be based on the “calculated
of First-Class
non-integer
rate” in
each proceeding.
In effect, the SPFC integer rate would be set so that sufficient
accumulate
in a “reserve account” to permit the single-piece
a period of two rate proceedings.
Revenues
would be used to cover any revenue
manner,
household
deficiency
Accommodating
respect to rate changes,
date of new rates.
issue in every case.
while preserving
rate period.
In this
business
rate adjustments.
and business mailers in this
Postal management’s
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
case period would permit the single-piece
rate cases.
during the first rate period
in the second
the differing interests of household
can be achieved
would
rate to remain the same for
mailers would enjoy greater rate stability, while allowing
mailers smaller, more frequent and predictable
manner
generated
revenues
is that revenues
First-Class
generated
to litigate any
in the first rate
rate to remain in effect over two
Docket No. R2000-1
2.
Changing
-22-
The single-piece First-Class rate proposal will have modest effects
on single-piece and workshare volumes
the SPFC rate every other rate proceeding
mail change
each rate case will cause volumes
workshare.
By holding
proposed,
the SPFC integer
the workshare
discount
while rates for workshare
to shift between
rate constant
through
“cycles” up and down compared
single-piece
and
two rate cases as
to the SPFC rate
with each rate case (although the amount of the discount relative to the calculated
integer rate is assumed
not to change).
In the first rate case, when the SPFC rate is
greater than the calculated
non-integer
theory, this should generate
more workshare
SPFC rate is less than the calculated
non-
rate, there is a larger workshare
discount.
In
mail. The opposite effect results when the
non-integer
rate after the second
rate case,
creating a smaller discount relative to the SPFC rate.
The shifting of volumes between single-piece
larger, especially
difficulties
and workshare
in a period of high or rising inflation.
for presort and pre-barcode
mail could become
Such an outcome could create
mailers and for the Postal Service.
In order to
minimize such difficulties (and to ensure that sufficient revenues are available to sustain
the SPFC rate) during the second rate case period, the OCA recognizes
that the SPFC
rate
under
may
need
circumstances.
to be increased
OCA-T-6 at 45-46.
in two
consecutive
rate
cases
certain
Docket No. R2000-1
C.
-23-
The Nonstandard
Surcharge
Nonstandard Letters
The Postal Service proposes
cents for First-Class
necessity
Mail.
Should
Be
to retain the current nonstandard
However, the nonstandard
for letter-shaped
mailpieces
reason, witness Callow (OCA-T-6,
Eliminated
surcharge
that are square
for
Certain
surcharge
of 11
is not an operational
or nearly square.
Part Ill) proposes that the nonstandard
For that
surcharge
for
such “low aspect ratio” letter mail be eliminated.
The nonstandard
surcharge
is no longer justified for low aspect ratio letter mail.
Advances
in technology
with respect to mail processing
surcharge
in the 1970’s have made the surcharge
since implementation
obsolete.
Callow, the Postal Service confirms that the presence
According
of the
to witness
of a barcode on a delivered
aspect ratio letter means that such mailpieces
were processed
the Postal
Id. at 57. As a result, consumers
Service’s
unfairly charged
automated
equipment.
low
partially or entirely on
extra for low aspect ratio letter mail, such as seasonal
greeting
are
cards
or invitations, that requires little (if any) special processing.
Moreover,
the Postal Service’s assumption
processed,
which
unrealistic.
According
the assumption
assumption
underlies
to witness
its cost
of 100 percent manual processing
ratio letter mail.
for the
surcharge,
Id. at 58.
aspect ratio for standard
mail-it
is
that
may not always be true in fact.
more realistic assumptions
These assumptions
letters move away from a square configuration
minimum
estimate
mail is manually
Callow, even the Postal Service acknowledges
As a result, witness Callow proposes
of low aspect
that all nonstandard
toward
Id.
about the processing
reflect the fact that as
an aspect ratio of 1:1.8-the
is likely that a higher percentage
of such
Docket No. R2000-1
- 24 -
letters will be presented
assumptions
for processing
on automated
are used to develop several reasonable
reveal such costs are less than the surcharge.
witness
Callow proposes
eliminating
ratio letters.
A change
Service.
stamps,
mail processing
unit costs that
surcharge
and equity for consumers
for low aspect
ratio
mailing low aspect
Id. at 67-68.
The Postal Service Should
First-Class Rates Chanae
D.
The more realistic
Id. at 63, Table 17. For these reasons,
the nonstandard
letter mail in order to promote fairness
equipment.
Provide
in postal rates places burdens
Consumers,
inconvenienced.
Make-Up
Stamps
mail and rely heavily on
Lines are long as consumers
stamps and new denomination
attempt
informational
to
stamps in time for the rate change.
The Postal Service should take the initiative to ease the burden of adjusting
rates by providing a nation-wide
When
on the mailing public and the Postal
who almost always send single-piece
are particularly
purchase “make-up”
Courtesy
to new
mailing that includes ten courtesy “make-
up” stamps to every delivery address.
The average household
Class Mail monthly.
significantly
OCA-T-1
sends approximately
at 8.
Providing ten courtesy
enlarge the time in which consumers
the surge of customers
twelve pieces of single-piece
“make-up”
stamps would
can purchase new stamps and reduce
at post offices just before and after the changeover
hassle of the rate change would be significantly
First-
reduced.
date.
The
At ihe same time, the Postal
Docket No. R2000-1
-25-
Service would benefit from positive public relations and would better manage the flow of
customers
at postal facilities.
Id. at 9.
The cost to the Postal Service of this outreach
Service is already seriously considering
Class rates next change.
ten courtesy
$16.0 million.
“make-up”
a nation-wide
Id. at 10. The additional
stamps,
Id. at 10-13.
stamp purchase transaction,
informational
mailing when First-
the revenue foregone,
as many consumers
If 30 percent of households
is estimated
to be
stamps would reduce
would be able to avoid an extra
and businesses
avoid an extra
the Postal Service stands to save $17.9 million and thus to
offset the cost of providing the courtesy “make-up” stamps,
VII.
The Postal
cost of a mailing that would include
But provision of courtesy “make-up”
the number of window transactions
visit to their post office.
including
would be modest.
Id. at 14.
REDUCTION
IN FEES FOR MONEY ORDERS;
ELECTRONIC
MONEY
ORDERS; INSURED MAIL FEES: ELECTRONIC DELIVERY CONFIRMATION
FOR INDIVIDUALS
OCA witness Sheryda C. Collins urges the Commission
to reject the proposal of
Postal Service witness Mayo (USPS-T-39)
to increase the fees of domestic and military
money orders.
Collins proposes
On the contrary,
each of these fees.
witness
a reduction
of 5 cents for
OCA-T-8 at 9. Domestic money order fees should be reduced from
the current 80-cent level to 75 cents; and military money order fees should be reduced
from their present 30-cent level to 25 cents.
for low-income
Id. at 9-10.
individuals,
Money orders are essential
financial
instruments
rural customers,
and
any
other
customer
who needs a secure method of payment that is almost as easy to use as
Docket No. R2000-1
cash.
- 26 -
Ms. Collins notes that the Commission
should be priced so that the service’s
system-wide
average.
Collins’ reduction
coverages
cost coverage
is considerably
in fees comports with the pricing criteria of the Act and with past cost
In addition,
by the Commission.
witness
Id. at 9.
Collins recommends
that the Postal Service establish
money order service that would be available
partnership
lower than the
Id. at 8-9. The 123 percent cost coverage resulting from witness
recommended
electronic
has long held the view that money orders
with private
Internet
companies.
on the Internet,
Id. at 11.
an
possibly
The Postal Service
in
could
become a major player in the new market for money orders which is being driven by
Internet sales.
Id. at 10. Ms. Collins notes that electronic
as a convenient,
secure means for purchasing
Witness Collins urges the Commission
goods.
money orders can function
Id.
not to raise insurance
fees as proposed
by Postal Service witness Mayo, but to maintain these fees at their present level.
at 15.
Furthermore,
carefully
consider
she advocates
the possibility
values than the $100 currently
serious consideration
with an appropriate
that the Postal Service
of establishing
in place.
different,
and the Commission
and larger,
incremental
For insured articles valued at over $1000,
should be given to establishment
adjustment
Id.
of increments
of $250 or $500,
in the per increment fee. Id.
Ms. Collins notes that the Postal Service is engaged
in a beta test of a web-
based program that will allow individuals
and small volume shippers to use electronic
delivery
Internet
confirmation
delivery confirmation
service.
Several
to individuals
at no charge.
companies
are offering
Id. at 16. Because
electronic
it would be no
more costly for individuals to access that service than bulk users, witness Collins urges
Docket No. R2000-1
- 27 -
the Postal Service to make Priority Mail electronic delivery confirmation
public on its website at no charge.
available to the
Id. at 17.
CONCLUSION
For all the reasons
should
recommend
attribution
continuation
mailpieces;
surcharge
set forth in the OCA’s Direct Testimony,
rates based on a one-percent
of mail processing
of the present
allowance;
and city carrier costs to rate classes
33-cent
First-Class
rate stability for single-piece
for letter mail; provision
change in the First-Class
contingency
the Commission
of courtesy
and categories;
rate; a three cent discount
First-Class Mail; elimination
“make-up”
stamps
at the time of a
ADVOCATE
.
S&U
Ted P. Gerarden
Director
Emmett Rand Costich
Shelley S. Dreifuss
Kenneth E. Richardson
Attorneys
1333 H Street, N.W.
Washington, D.C. 20268-0001
202) 789-6859; Fax (202) 789-681 g
for CEM
of the nonstandard
rate; and lower fees for money orders and insurance.
OFFICE OF THE CONSUMER
increased
CERTIFICATE
OF SERVICE
I hereby certify that I have this date served the foregoing
participants
of record in this proceeding
in accordance
with section
document
12 of the rules of
practice.
&ewaeL&w
Emmett Rand Costich
Washington, D.C. 20268-0001
June 29,200O
upon all