BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON, D.C. 20268-0001
MAILING ONLINE SERVICE
DIRECT TESTIMONY
OF
MICHAEL K. PLUNKE-IT
ON BEHALF OF
UNITED STATES POSTAL SERVICE
Docket No. MC98-1
001140
CONTENTS
_-
AUTOBIOGRAPHICAL
I.
PURPOSE
SKETCH ........................................................................
ii
..........................................................................
1
OF TESTIMONY
II. PROPOSAL..
Ill. ANTICIPATED
REVENUES ...........................................................................
5
....................................................................
.5
A. PREMAILING
B. POSTAGE
REVENUES..
REVENUES..
IV. USER CHARACTERISTICS..
V.
PRICING
.I
.............................................................................................
........................................................................
.7
.......................................................................
.9
.I0
ISSUES .....................................................................................
A. POSTAGE
RATES ..............................................................................
B. POSTAGE
CALCULATION
C. INTERIM
.I0
.3
....................................................................
.I3
PRICES.. ..............................................................................
VI. CLASSIFICATION
14
CRITERIA .......................................................................
VII. PRICING CRITERIA..
.I7
................................................................................
.23
PRICES.. ..............................................
EXHIBIT A: MAILING
ONLINE
SAMPLE
EXHIBIT
B: MAILING
ONLINE
PROJECTED
EXHIBIT
C: VOLATILITY
EXHIBIT
D: PROJECTED
EXHIBIT
E: PRICING MATRIX ..........................................................................
REVENUES..
.25
...................................
.28
IN PAPER PRICES.. ....................................................
MAILING
ONLINE
POSTAGE
REVENUES..
.30
...................
33
--
MC98-1, USPS-T-5, page
i
001141
1
Direct Testimony
of
Michael K. Plunkett
AUTOBIOGRAPHICAL
2
.c,
My name is Michael K. Plunkett.
SKETCH
I am currently an economist
3
Pricing Office of Marketing.
4
letter carrier at the Dracut, Massachusetts
5
the Manchester,
6
customer services operations.
7
Intern program.
8
term assignments
9
assignments
in the
I began working for the Postal Service in 1984 as a
New Hampshire
Post Oftice.
In 1985, I transferred
Division where I held a number of positions in
In 1990, I was accepted
to the Management
As an intern, I rotated through a number of short to medium
in various organizational
units throughout
included positions in headquarters,
These
area, and district offices in
finance, human resources,
11
the office of Budget and Financial Analysis where I served as an Economist.
12
In February 1997, I transferred
13
include all aspects of fee design for various special services.
I received bachelor’s
operations,
the country.
10
14
to
and marketing.
to the office of Pricing.
degrees
15
Pennsylvania
16
degree in business administration
17
Pennsylvania,
to
My responsibilities
in finance and economics
State University in University
where I concentrated
In 1995, I transferred
Park, Pennsylvania,
from
and a masters
from the Wharton School at the University of
on finance and decision sciences.
MC98-1, USPS-T-5, page
ii
001112
1
I have presented
pricing testimony in two previous dockets.
2
Postal Service’s pricing witness in the Provisional
3
(Docket No. MC97-5),
4
various special services.
Packaging
I was the
Service case
and in the last omnibus rate case (Docket No. R97-I),
for
MC98-1. USPS-T-5, page
iii
001143
1
2
I. PURPOSE
OF TESTIMONY
My testimony presents pricing and classification
analyses of the Postal
3
Service’s proposals to establish both a market test and an experimental
4
classification
5
a market test and a later experiment.
6
the proposals,
7
revenues, fee design, and postage and fee calculation
8
explain how the proposals
9
Reorganization
10
II. PROPOSAL
11
for Mailing Online, and appropriate
means for setting fees for both
My testimony
followed by a discussion
begins with a description
of user characteristics,
anticipated
techniques.
meet the rate and classification
of
I then
criteria of the Postal
Act.
The Postal Service proposes
an experimental
classification
for Mailing
12
Online preceded by a market test. Mailing Online will allow customers who use
13
the Postal Service’s internet site to present electronic documents
14
subsequent
15
service will be stored electronically,
16
transmitted
to one or more commercial
17
documents
for entry at a designated
18
entry into the mail stream.
Docum,ents presented
for printing and
for Mailing Online
batched with other documents,
and
printers who will print and prepare the
postal acceptance
unit.
The Postal Service plans to offer Mailing Online users the opportunity
19
use either First-Class Mail or Standard
20
content of the document
21
the Postal Service is developing
22
customer’s
Mail Regular rates, depending
and the individual customer’s
service needs.
a means for verifying a Standard
to
on the
Further,
nonprofit
/-
elrgrbrlrty, so that category can be available for experimental
Mailing
MC98-1, USPS-T-5, page
1
001144
1
Online service.
In addition to choosing among these subclasses,
2
also identify their printing, finishing, and distribution
3
are summarized
preferences.
will
These options
in my Exhibit E.
The Postal Service expects to offer Mailing Online service first as a
4
5
market test, and then as an experimental
6
decision to request permanent
7
conduct a further experiment
8
period.
9
that is treated as a separate product for pricing purposes.
service for a period of two years.
classification
customers
11
services.
Any
changes for Mailing Online, or to
would be made prior to the end of the two year
Mailing Online service is proposed
10
12
customers
as an independent
special service
Mailing Online
would be charged existing postage rates plus a fee for premailing
In lieu of a set fee schedule for the Mailing Online experiment,
the establishment
the Postal
13
Service proposes
of a markup, which would be applied to the
14
actual printer costs - as determined
I5
Service and the contractors
16
Service’s internal system development
17
a markup as opposed to a fee schedule,
18
The flexibility provided by a preset markup would allow the Postal Service to
19
signal customers
20
substantially
21
growth of Mailing Online leads to the establishment
22
the use of a markup will allow the Postal Service to reflect local printing cost
by the written contracts
providing pre-mailing
costs.
the Postal
services - plus the Postal
There are reasons for proposing
the first being printer cost variations.
correctly regarding the cost of printing.
by region due to differences
between
Printing costs may vary
in labor and real estate costs. As
of additional
printing sites,
MC98-1, USPS-T-5, page
2
001145
.-
1
variations
2
a customer whose documents
3
California
4
documents
5
the Postal Service with a mechanism
6
reflected equitably
7
directly in the fees charged to Mailing Online customers.
For example,
are sent to a printing location in Southern
might pay different fees for the same service than if the same
were sent to a printer in Indianapolis.
whereby
This flexibility would provide
local differences
in cost can be
in Postal Service fees.
Passing through printing costs in this manner is also likely to produce the
best outcome for customers
9
geographically
variable costs, the Postal Service will be forced to use an average
10
national price.
In areas where prevailing prices are low relative to the Postal
11
Service fee, price sensitive customers
12
Service volume.
13
volume would tend to increase the unit cost of the service, which would raise
14
prices for customers
15
high cost areas, where a price based on average national costs would be
16
relatively low, the effect could be unfairly detrimental
17
comparable
18
and printers.
In the absence of a markup over
8
might use other providers, reducing
Due to the nature of contracts
Postal
in this industry, a reduction
in
, and impair the viability of Mailing Online in these areas.
In
to existing providers of
services.
The fact that Mailing Online customers
will contact the Postal Service via
19
the internet indicates that they are likely to value convenience,
20
with different internet service and product offerings
21
Campanelli,
22
choose mailing options from several menus and, once the customer
USPS-T-8,
p. 2).
and to be familiar
(see testimony
of witness
The Mailing Online system will allow customers
to
has supplied
MC98-1, USPS-T-5,
page
3
001146
1
the necessary
address, service, and feature information,
2
quote showing
an itemized list of fees for the set of features chosen.
3
are included in my
4
Exhibit A.
5
While simplifying
the transaction
from the customer’s
6
markup is also intended to enable continued
7
introduced,
8
that may be triggered
9
contracts.
administration
Examples
standpoint,
the
if new features are
when contracts are renewed, and for changes in Postal Service costs
by automatic escalator
clauses standard
in printing
For instance, standard printing industry contracts allow for the
10
agreed-upon
11
predetermined
12
quickly provide a price
prices to change if the Paper Price Index varies by more than a
amount.
In addition to these advantages,
the proposed
markup system has other
13
merits. The markup guarantees
that Mailing Online will cover its costs. As
14
indicated above, unforeseen
15
escalation
16
common in the printing industry.
17
changes in input costs, Mailing Online will cover its costs and make a
18
contribution
19
to change prices, the time required to prepare and litigate such a request might
20
be prohibitively
21
Volatility in the Price of Paper).
changes in materials costs could result in an
in Postal Service costs due to the nature of contracting
to institutional
costs.
practices
The markup ensures that, despite unforeseen
While the Postal Service can submit a request
long given the volatility in the price of paper (see my Exhibit C:
MC98-1, USPS-T-5, page
4
001147
1
III. ANTICIPATED
2
A. Premailing
3
Revenues
For the Postal Service, Mailing Online is an experimental
entry into a
4
market that has just begun to form. While it goes without saying that the Postal
5
Service would not offer the service without the expectation
6
will develop, the ultimate size of the market for services like Mailing Online is
7
unknown.
8
(USPS-T-8,
9
Postal Service entry into this market because they share the belief that a postal
Notwithstanding,
that a viable market
as reflected in the testimony
of witness Hamm
p. 2, lines 20-21 ), members of the digital printing industry favor
10
presence will serve to increase the overall market size. This uncertainty
11
the eventual size of the market, combined with a dearth of empirical data, makes
12
projection of volumes and revenues difficult.
13
relied on market research (USPS-T+,
14
Service managers
In developing
forecasts, we have
and on the judgment
and analysts developing
Mailing Online revenues,
about
of the Postal
the product.
15
In estimating
16
Seckar’s testimony,
17
Witness Seckar’s costs are used in Exhibit A to illustrate how the markup system
18
outlined above will work.
19
F.
REVENUES
I have used the costs in witness
and the market research presented
Based on the volume distribution
in LR-2/MC98-1.
by number of pages, witness Seckar
20
estimates that Mailing Online will produce 5.505 billion impressions
21
3.391 billion pages during the experimental
22
Exhibit A, pp. 9-10).
on a total of
phase of Mailing Online (USPS-T-2,
Using the unit costs also presented
in the testimony of
MC98-1, USPS-T-5, page
5
001148
1
witness Seckar, these volumes would result in costs of approximately
2
million including paper and transportation
3
Postal Service revenues from Mailing Online would therefore
4
(Exhibit B)‘.
5
Practical application
$151.4
costs. At a markup of 25 percent,
be $189.2 million
of the markup depends upon the costs used as the
6
basis for the markup.
Witness Seckar’s unit costs include information
7
costs (both fixed and variable) which would not be included in the costs resulting
8
from contracts with private printers.
9
these costs comprise a relatively small portion of the total unit costs of the
10
service (Exhibit
11
to ready application
12
problem would be to add an adjustment
13
printer contracts to account for these costs.
14
experimental
15
cents per impression
16
USPS-2A,
pp. l-2).
As witness Seckar’s testimony
of the proposed
period, information
indicates,
However, they present a practical obstacle
markup system.
One solution to this
factor to each impression
charge from
For instance, during the
systems costs add an average increment of 0.1
(Exhibit USPS-2A,
Exhibit B shows projected
systems
p. 2).
revenues for Mailing Online and compares
17
revenues when systems costs are marked up with revenues if only printer costs
18
are used. The effect is minor.
19
while projected
20
Given the negligible impact of excluding these costs an alternative
21
applying the markup to the contracted
Cost coverage is reduced by less than 3 percent,
revenues during the experiment
are reduced by 2.4 percent.
approach
of
printing costs only could be considered.
--
’ These costs and revenues also include the cost of envelopes marked up at 25 percent. Postage
(continued..
.)
MC98-1, USPS-T-5, page
6
081149
.-.
1
Mailing Online customers will be able to choose from several finishing
2
options: stapling, stitch binding, tape binding, tabbing, or no finishing. The
3
market research from which the Mailing Online volumes are derived did not
4
attempt to quantify customer interest in different finishing options, nor is there
sufficient empirical data from the operations
test on which to base projections.
As the cost model used by witness Seckar assumes only the purchase
finishing equipment,
estimate.
of inline
finishing materials cost are not included in my revenue
Because these costs are not expected to be a significant
total Mailing Online costs, their exclusion
10
impact on the projected
11
B. Postage
portion of the
is not expected to have a material
revenues for Mailing Online.
Revenue
~?.-12
A.
By making it easier for customers
to produce mail, Mailing Online is
13
expected
to result in a net increase in mail volume.
14
that 38 percent of Mailing Online pieces would not have been mailed in the
15
absence
16
Mailing Online has made
17
month (USPS-T-7,
18
revenue includes this revenue from new pieces, but must account for revenue
19
leakage as a result of making discounted
20
customers.
of the service (LR-2/MC98-1,
Market research indicates
p. 38) and witness Wilcox affirms that
it possible for her to create additional
mailings each
p.2). The overall impact of Mailing Online on postage
rates available to Mailing Online
Exhibit E estimates the postage revenue impact of Mailing Online.
(...continued)
revenue is excluded.
MC98-1. USPS-T-5, page
7
001150
1
In estimating
revenue from new volume, I have assumed that 38 percent
2
of volume in each class will be new to the Postal Service (LR-2/MC98-1,
3
Additional
4
volume into different ounce increments,
5
Standard
6
These assumptions
7
assumptions
regarding the weight per page are used to segregate
and to calculate per pound charges for
Mail pieces that exceed the breakpoint
are explained
weight of 3.3362 ounces.
in the notes to exhibit E.
To estimate revenue leakage from volume that would have been mailed
8
absent the availability of Mailing Online, I have assumed that customers
9
have paid the highest applicable
10
Customers
11
piece rate, while Standard
12
automation
13
sending First-Class
Mail pieces are assumed to have paid the single-
Mail customers
basic rate categories
are assumed to be using the non-
with no destination
entry discount.
As Exhibit E indicates, the overall net impact of Mailing Online on Postal
Service postage revenue is relatively modest at $38.6 million during the
15
experimental
16
Reliable estimates of the net contribution
17
be virtually impossible,
18
costs avoided due to the distribution
19
Garvey’s testimony
20
IV. USER CHARACTERISTICS
22
would
rate for the pieces they are sending.
14
21
p. 38).
period.
It should be pointed out that this is gross revenue.
from postage for Mailing Online would
given the lack of empirical data necessary
(USPS-T-l)
of printing sites. Appendix
discusses
document
A to witness
plans to collect this information.
Mailing Online service will provide customers
internet and electronic
to estimate
preparation
who have access to the
capabilities
a convenient
way to
MC98-1, USPS-T-5,
page
8
OQ1151
,-~
1
prepare and send mailable matter to their customers.
It is expected,
based on
the results of our market research, that most users will be small office or home
3
office (SOHO) businesses
4
produce their own documents
5
research also indicates that Mailing Online customers
6
announcements,
7
is further expected that most Mailing Online customers
8
Mail or Standard Mail Regular, with a small number qualifying for Standard
9
Nonprofit rates. Additional
10
11
with the capability to use desktop computers
in run sizes of fewer than 5,000 copies.’
invoices and statements,
information
to
Market
will use the service to mail
newsletters,
forms, and advertising.
It
will use either First-Class
regarding the expected
Mail
market for Mailing
Online is included in the testimony of witness Garvey (USPS-T-l).
Approximately
62 percent (LR-2/MC98-1,
p. 38) of the mail projected for
12
Mailing Online would have been prepared and entered as mail notwithstanding
13
the availability of Mailing Online.
14
easy-to-use,
15
(ibid.) of Mailing Online volume is material that, in the absence of Mailing Online,
16
would either not have been produced,
17
means other than the mail. For these customers,
18
savings offered by Mailing Online create incentives to use the Postal Service for
19
the conduct of their business.
* See testimonies
For these customers,
low-cost way to prepare their mailings.
Mailing Online offers an
The remaining
or would have been produced
the convenience
of witnesses Wilcox (USPS-T-7) and Campanelli
38 percent
and sent by
and cost
(USPS-T-8)
MC98-I.
USPS-T-5,
page
9
1
VI. PRICING ISSUES
2
A. Postage
3
Rates
During the experimental
offering of mailing online, customers
4
between First-Class
5
the relevant qualification
6
part, the availability of these options is driven by the characteristics
7
intended users of Mailing Online and the pieces they are likely to produce.
8
indicated in the market research,
9
produce mailable matter that would, in the absence of Mailing Online, be sent as
10
11
either First-Class
Mail and Standard
standards
Mail mailers who meet
will be able to use nonprofit rates.3 In large
Mailing Online customers
Mail or Standard
During the experimental
Mail. Standard
can choose
Mail.4
offering of Mailing Online, the Postal Service
intends to gather information
13
Online volume.
14
implement
15
time the Postal Service proposes to use existing rate categories.
16
17
on the cost causative characteristics
Once this information
rate category
has been collected,
or categories
The issue of which rate categories
relationship
between
As
are expected to
12
a separate
of the
it may be desirable to
for Mailing Online, but at this
to use is complicated
Mailing Online customers
of Mailing
by the
and the Postal Service.
In
‘As discussed above, Nonprofit rates will not be available until procedures are established for
verifying nonprofit eligibility.
’ One exception is the possible use of Mailing Online for distribution of newsletters. Market
research indicates that this will account for a mere 4.8 percent of MOL volume. At this time, the
need to maintain a relatively simple product offering weighs against making Periodicals rates
available: however, should experience during the experiment or further research indicate a greater
demand for this kind of document, the possibility of offering MOL customers the option of using
Periodicals rates will be considered.
MC98-1, USPS-T-5, page
10
1
general, customers
2
they have prepared their mail. In the case of Mailing Online, the degree of
3
preparation
4
mailing but on the characteristics
5
particular printing location.
6
allow smaller customers
7
Service proposes to offer discounts
8
Online pieces.
9
Automation
Basic rates during the experiment.
10
Automation
Basic DBMC rates would be used for both the Regular and Nonprofit
11
subclasses.
12
qualify for a given discount based on the degree to which
that is possible will depend not on the characteristics
of a particular
of the batched job stream that is sent to a
Because one of the goals of Mailing Online is to
the ability to take advantage
For First-Class
that reflect the characteristics
Mail, the Postal Service proposes
These rates are appropriate
by Mailing Online.
of automation,
of Mailing
to use
In the case of Standard
given the characteristics
All document
the Postal
Mail, the
of the mail pieces
13
produced
mailing lists will be checked against
14
the Postal Service’s current AIS database
to ensure accuracy,
15
will conform to all of the criteria necessary
to qualify for the relevant discounts.
16
Moreover,
17
to ensure qualification
18
in some cases a printer’s daily volume, especially
19
not exceed the 500-piece
20
I am therefore
21
available for Mailing Online, even in the exceptional
22
than 500 pieces.
and addressing
printers will be required to maintain quality control practices sufficient
for appropriate
proposing
discounts
at the point of entry.
early in the experiment,
minimum volume established
a classification
However,
for the automation
change making the automation
may
rates.
rates
case in which volume is less
MC98-1, USPS-T-5, page 11
001154
1
If Mailing Online volume exceeds expectation,
2
concentrated
3
with volumes large enough to qualify for larger discounts than those offered via
4
Mailing Online.
5
automation
6
still apply.
7
mail entry procedures
8
actual with potential
9
in a particular area, it is conceivable
or is in any way
In the event that this happens,
the predetermined
basic for First-Class and automation
Witness Garvey’s testimony
rates, ie.,
DBMC for Standard Mail would
contains a more detailed description
and the data collection
rates (USPS-T-l,
that printers will be presented
procedures
Appendix
that will compare
A).
A similar issue exists with respect to entry within a given BMC service
10
area. During the market test phase, customers
11
proximity to the print site. However they will be able to mail to any address
12
irrespective
13
service areas outside of the northeastern
14
destination
15
allow Mailing Online customers
16
irrespective
17
of mail at the designated
18
such, DBMC rates represent
19
B. POSTAGE
20
of
of its geographical
location.
BMC. We are therefore
will be chosen based on
.-
As a result, mail destined for BMC
United States will not be entered at the
proposing
a change to the DMCS that will
to qualify for the DBMC discounted
of entry within a BMC service area.
Conversely,
rates
in some cases entry
postal facility would qualify for DSCF discounts.
an appropriate
As
compromise.
CALCULATION
As mentioned
above, customers
will be quoted a price, including postage,
21
when they have finished specifying the features that they want for their
22
document.
The postage portion of the customer
charges is calculated
by the
MC98-1. USPS-T-5,
page 12
00115s
1
Mailing Online system based on the number of pages in the document,
2
finishing option selected, and the type of envelope(s)
3
printers will be required to use a specific grade paper and envelopes,
4
ensure uniformity.
5
of a customer’s
6
piece, and apply the appropriate
7
customer.
8
C. INTERIM PRICES
used. Mailing Online
which will
Based on standard unit weights for the physical components
mail piece, the Mailing Online system will calculate a weight per
As explained
9
the
rate given the subclass chosen by the
by witness Garvey, the Postal Service has been conducting
10
an operations
test during which customers
11
while paying single-piece
12
been adequate
13
users as is proposed would result in the Postal Service incurring significant
14
costs.
15
authorization
First-Class
have received free printing services
Mail rates. While this arrangement
has
F.~
16
,-
for limited testing purposes,
opening the system to thousands
of
In order to offset these costs, the Postal Service is requesting
to establish a fee schedule during the market test of Mailing Online.
At the time of this filing, the Postal Service is considering
in the Northeastern
bids from
17
printing contractors
United States, and a contract award is
18
expected within 30 days. The Postal Service requests that at the time the
19
contract is awarded,
20
stipulated within the contract, plus the variable information
21
presented
22
matrix that contractor
a fee schedule be established
by witness Seckar (Exhibit USPS-2A,
based on the unit costs
systems costs
p. 1). Exhibit E contains a
proposals will populate, along with 3 additional columns
MC98-1, USPS-T-5, page
13
1
(the three rightmost columns) that illustrate how printer prices would be
2
converted
3
into Mailing Online fees for the purposes
While the outcome of the procurement
of the market test.
process is not known at this time, it
4
is expected that the resulting unit costs will not differ markedly from the
5
estimates
presented
6
presented
in Exhibit A are an indicator of the fees that customers
7
the interim period.
8
VII. CLASSIFICATION
9
in witness Seckar’s testimony.
As a result, the sample fees
CRITERIA
This proposal satisfies the classification
criteria of section 3623 (c) of Title
10
39, United States Code, which requires that classification
11
accordance
12
13
14
15
16
17
18
19
20
21
22
23
24
would pay in
changes
be set in
with the following factors:
1. the establishment and maintenance
classification system for all mail;
of a fair and equitable
2. the relative value to the people of the kinds of mail matter entered into
the postal system and the desirability and justification for special
classifications and services of mail;
3. the importance of providing classifications
of reliability and speed of delivery;
with extremely
high degrees
4. the importance of providing classifications which do not require an
extremely high degree of reliability and speed of delivery;
25
26
27
5.
the desirability of special classifications
the user and the Postal Service; and
28
29
6.
such factors as the Commission
from the point of view of both
may deem appropriate.
MC98-1, USPS-T-5,
page
14
00115'7
1
By offering Mailing Online, the Postal Service joins the ranks of,
2
businesses
3
the internet.
Mailing Online offers customers
4
transactions
with the Postal Service without leaving their home or workplace.
5
Witnesses
6
this docket (LR-l/MC98-I),
7
take advantage
8
Thus, Mailing Online satisfies criterion 2.
9
and governmental
agencies offering services to their customers
Wilcox and Campanelli,
the opportunity
to conduct
along with the market research presented
provide evidence that customers
of this technology
via
in
are prepared to
to transact business with the Postal Service.
Mail entered via Mailing Online will have an extremely high degree of
10
reliability (Criterion 3). For instance, all mail pieces will be automation
11
compatible
12
Mailing Online will ensure that all Mailing Online volume is sorted in conformity
13
with the most current sort plans available, and with the greatest possible depth.
14
To the extent that Mailing Online pieces would have been mailed in the absence
15
of the service, it is expected that many or most such pieces would have been
16
entered at single-piece
17
quantities
18
existing discount structure. Consequently,
19
decidedly
20
number of diverse customers to take advantage
21
the postage discounts associated
22
also improve speed of delivery due to the dispersed
at the time of entry.
Moreover,
Postal Service software used for
rates by mailers who mail in relatively small bulk
and who therefore
may not have the technical expertise to utilize the
Mailing Online should have a
positive effect on the overall classification
therewith
system by enabling a large
of worksharing
opportunities
and
(Criterion 1). Mailing Online should
network of printers available
MC98-I,
USPS-T-5, page
15
001158
1
to Mailing Online customers.
2
or near, the point of destination,
3
faster delivery than they would likely otherwise
4
Mailing Online will normally allow next day entry at,
thereby providing Mailing Online customers
receive.
Of course, subject to existing content restrictions,
customers
who do not
5
require immediate delivery can choose options that will enter pieces at Standard
6
Mail rates (Criterion 4). This will allow customers
who meet the necessary
7
content restrictions,
with delivery speed, an
8
opportunity
9
improve the match of demand with processing
10
11
and who are less concerned
to save on postage expense,
and will allow the Postal Service to
capacity at the point of entry
(Criterion 5).
The Postal Service has developed
businesses.
Mailing Online to meet the needs of
12
small, independent
In its historical
role as a public service, the
13
Postal Service has long striven to provide mailing and communications
14
that meet the needs of individuals and small businesses.
15
Reorganization
16
worked together to develop products and price incentives that have allowed
17
larger mailers to reduce mailing costs by taking advantage
18
opportunities.
19
have further allowed small and medium-sized
20
of worksharing.
21
home office (SOHO) customers.
22
small nonprofit customers
services
Since the Postal
Act, the Postal Service and the Postal Rate Commission
The concurrent
growth of presorting
of worksharing
and consolidation
businesses
have
industries
to share in the benefits
But these industries may not meet the needs of some small and
In addition to allowing individual, SOHO, and
an easier means of accessing
postal services, Mailing
MC96-1, USPS-T-5,
page
16
1
Online offers an opportunity
2
to take advantage
3
worksharing.
4
VIII. PRICING CRITERIA
5
for these customers,
of worksharing,
who might otherwise
be unable
to reduce their mailing costs through a form of
Mailing Online meets the criteria of section 3622 (b) of Title 39, United
6
States Code, which requires that postal rates and fees be set in accordance
7
the following factors:
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
1.
the establishment
schedule.
and maintenance
with
of a fair and equitable
2. the value of the mail service actually provided by each class
or type of mail service to both the sender and the recipient;
3. the requirement that each class of mail or type of mail service
bear the direct and indirect postal costs attributable to that
class or type plus that portion of all other costs of the Postal
Service reasonably assignable to such class or type;
4. the effect of rate increases upon the general public, business
mail users, and enterprises
in the private sector of the
economy engaged in the delivery of mail matter other than
letters;
5.
the available alternative means of sending and
letters and other mail matter at reasonable costs:
receiving
6. the degree of preparation of mail for delivery into the postal
system performed by the mailer and its effect upon reducing
costs to the Postal Service;
7.
simplicity of structure for the entire schedule and simple,
identifiable relationships between the rates or fees charged
for the various classes of mail for postal services;
8.
the educational, cultural, scientific, and informational
the recipient of mail matter; and
value to
MC98-1, USPS-T-5, page
17
001160
1
2
3
4
9. such other factors as the Commission
deems appropriate.
The Postal Service proposes that a markup of 125 percent be established
5
for Mailing Online.
The markup would be applied to the actual premailing
6
of each customer’s
transaction,
7
depending
8
that Mailing Online will cover its attributable
9
cover institutional
resulting in premailing
fees that would vary
on the options selected by the customer. This markup guarantees
costs.
costs and provide a contribution
Moreover, at the proposed
to
markup, revenues from
10
Mailing Oniine will exceed costs during the market test and experimental
11
(Criterion
12
costs
periods
3).
Mailing Online enhances
convenience.
125 percent is reasonable
Its proposed
13
approximately
14
in favor of a moderate
15
as an experimental
16
the viability of the product under conditions
17
permanent
18
particular goal in a number of ways.
19
indicates that Mailing Online’s target customers
20
1, Table 16). and a relatively low markup during the introduction
21
will help to build use among the target customers,
22
Service to measure salient factors such as customer satisfaction,
23
and impact on operations.
service.
and appropriate.
cost coverage of
Several factors weigh
cost coverage at this time. Mailing Online is being offered
service, the purpose of the experiment
being to determine
which are likely to obtain for a
A relatively modest markup facilitates
attainment
of this
The Postal Service’s market research
are price sensitive (LR-2/MC98of the product
thereby allowing the Postal
product quality,
In turn, this will improve the Postal Service’s and the
MC98-1, USPS-T-5, page
18
001161
1
Commission’s
abilities to evaluate the merits of Mailing Online in the event that
2
the Postal Service requests a permanent
3
Online experiment
4
Postal Service, and intervenors
5
should the Postal Service request a permanent
6
introduction
7
Standard
8
own markup, Mailing Online will indirectly improve postal finances to the extent
9
that the service attracts new volume to these subclasses.
classification.
Because the Mailing
would be available for only two years, the Commission,
will have an opportunity
Mail volume. Therefore,
to revisit fees soon,
classification.
of Mailing Online will produce additional
the
Moreover, the
First-Class
Mail and
in addition to providing contribution
through its
Finally, because
10
Mailing Online mail will be entered close to the point of destination,
the cost to
11
the Postal Service of handling these pieces will tend to be lower than would
12
otherwise
,.--
13
P
be the case.
As mentioned
above, Mailing Online is intended to serve small mailers by
14
offering these customers
a way to take advantage
of worksharing
15
However, while Mailing Online performs a service that is analogous
16
Mailing Online customers
17
because of the size of a typical Mailing Online mailing.
18
Mailing Online’s introduction
19
minimal.
20
Mailing Online could lead to the development
21
intermediaries
22
documents
opportunities.
to presorting,
are unlikely to be current users of presorting services,
As a result, the effect of
on existing presort volumes is expected to be
Indeed, though such effects are difficult to anticipate,
between smaller businesses
for use with Mailing Online.
of businesses
the availability of
acting as
and the Postal Service by preparing
The effect of Mailing Online on the
MC98-1, USPS-T-5, page
19
001162
1
general public, and on business mail users, is expected to be highly beneficial
2
(Criterion 4). Mailing Online offers mail users the convenience
3
preparation
4
Furthermore,
5
million annually on printing services (see Exhibit B), the introduction
6
Online will greatly benefit printing and document
7
of bundled mail
and mailing services that can be accessed from the desktop.
with the Postal Service expected
Application
ultimately to spend over $230
preparation
businesses.
of Criterion 5 to Mailing Online is complicated.
8
combines elements
of both traditional
9
albeit imperfect ones, abound.
and electronic
could elect to print and
10
prepare mailings themselves,
11
use existing mail classes consistent with their needs.
12
difference
13
cost to the customer,
14
Conversely,
15
Postal Service’s web site, are presumed
16
the extent that these customers
17
customers,
18
cases, Mailing Online may be preferable to e-mail in enhancing
19
or impact of a document.
20
Mailing Online
mail. As such, alternatives,
Mailing Online customers
at which point these customers
would be able to
There may be some
in the rates customers would pay. However, the difference
including preparation
Mailing Online customers,
e-mail represents
of Mailing
in the total
costs, defies precise quantification.
by virtue of their ability to access the
to have access to electronic
maintain electronic
a viable substitute
mail. To
address lists of their
for Mailing Online.
In some
the appearance
As indicated above, the Postal Service proposes to charge automation
21
basic rates for pieces sent via Mailing Online.
22
the mail directly to meet the automation
The customers
requirements.
will not prepare
In order to qualify for
MC98-1, USPS-T-5,
page 20
001163
1
Mailing Online, customers
2
They must present a document
3
Postal Service’s online document
4
this manner by customers
5
economies
6
origin as a result of the destination
7
(Criterion 6).
8
9
are required to meet a different set of standards.
and mailing list in a form that can be used by the
batching system.
Preparation
of documents
allows the Postal Service to take advantage
in
of
of scale which lower printing costs, and to bypass handling costs at
entry that mailing online pieces will receive
Mailing Online makes use, where possible, of the Postal Service’s existing
rate schedules
and, because it relies on a markup over actual costs, will not
10
require fee changes as a result of changes in the rates for mail classes with
11
which Mailing Online will be offered. Thus, the addition of Mailing Online to the
12
DMCS will in no way add unnecessary
13
schedule
complexity to the Postal Service’s rate
(Criterion 7).
14
MC98-1, USPS-T-5,
page 21
002.164
Exhibit USPS-SA
Sample Mailing Online Fees
MC98-1, USPS-T-5, page 22
i
EXHIBIT A
SAMPLE MAILING ONLINE PRICES
(4
0
$
o.mE2 $
o.co98 $ o,cm $
0.0325 $ 0.039 $
O.MO $ 0.049 $ 0.270 $ 0.319
$
0.2824 0
0.0534 0 0.045 $
0.001 $ 0.282 $
O.CS $ 0.477 $ 0.740 $ 1.217
5
0.1223 $
o.aY4 $ 0.m
$
o.ml $ 0.147 s
0.037 $ 0.184 $ 0.219 $ 0.403
0
l.om
0.1174 $ 0.046 $
0.03 $ 1.239 $
0.310 $ 1.549 $ 0.313 $ 1.862
$
Cc)
MC98-1, USPS-T-5, pqe
_.
Tq
_
-
-.
001166
Exhibit USPS-5B
Projected Mailing Online Revenues
MC98-1. USPS-T-5, page 24
Exhibit B Page 1
REVENUES INCLUDING VARIABLE
Note
(1)
Impression Costs
Paper costs
Pages prinled on 8.5~11 paper
COSI
Pages printed on 8.5~14 paper
cost
Pages printed on 11x17 paper
cost
Total Pages
Total Paper Cost
Envelope Costs
Letter Size Pieces
cost
Flat Size Pieces
cost
Total Envelopes
Total Cost
19991
39.648.674
(2)
I:;
I;;
(3)
(4)
(3)
(4)
(3)
Subtotal Paper 8 Envelope Cost
Transportation Costs
First-Class letters
First-Class Rats
Standard (A) letters
Standard (A) flats
Subtotal Transpollation
INFORMATION
2001 I
20001
68,239.796
103,503.425
974.425.779
4.762,993
108,818.495
580,568
152,049,453
1.552,851
1.235,293,727
6.896.412
1.700,634,621
8,578,708
108,818,495
599,147
214,963,422
2.265631
2,024.416,538
11,443,486
2.651.498,717
13.696,269
106,816,495
613,526
297.340.049
3.209,oeo
3.057,657,262
17.516,855
260.096.523
108,308
35.538.936
1,672,832
295.635,459
1.781,140
453,936.269
195,076
62,024,986
3.012.966
515,Q63,255
3.208.042
8.677.553
SYSTEMS COSTS
20021
141,786.141
Total 1s
2003 t
169,486,OQQ $
107.888,470
3.716.985.759
19.660.024
108,818,495
628,864
389,646.856
4,310.419
4,215,451.110
24,619.307
4.341,778,237
2.675,060,399
13.341,702
23,562,763 5
217,636.991
108,818,495
644,586 $
1,179.715
443.774.777
367.012.875
5,031.933 $
3818,481
4,894.371.509
3.259.710,265
29.239,262 $
l&339,696
707,745,640
311.447
96,704.588
4,810,327
804.450.22.3
5,121.774
992,148.497
447,515
135.564,680
6,911.908
1.127.713.177
7,359,423
1.158,919,896
535,807
.156.351.906
8,275.502
1,317,271,802
8811.389
14.651.528
22,640,630
31,978,730
38.050,671
44,258
9,182
216,052
388.760
658.252
76,293
15.827
372,430
670,144
1.134.695
113.766
23,602
555.359
999,303
1.692.030
115,359
23,932
563,134
1,013.293
1,715.718
116,974
24,267
571,018
1.027,479
1.739.739
55,880,691
95.469,504
145.354,940
200,099,897
238.517,791
$
714.034.792
303,384
97,563.922
4,685.798
811,59&714
4.989.183
$
23.329,080
$
5
(5)
Costs
Total Costs
Revenue @ 25% Markup
$
69.651.113
$119,336.660
$161.693,675
$ 250.124.871
0 298,147.238
120,551
25,009
588.482
1.058,904
1.792,947
$
151,350.395
$
189,187,994
Notes
(1) USPS-T-Z, Exhibit 1, p. 2. Excluding fixed information systems costs
(2) USPS-T-Z, Exhibit 1, p. 10
(3) USPS-T-Z, Exhibit 1. p. 29
(4) USPS-T-Z, Exhibit 1. pp. Q-IO
(5) Transportation costs are derived by multiplying the expected volumes for each type of mail by the appropriate cost factor
volumes are from LR-2/MC98-1. p.39, costs are from USPS-T-Z, p. 8
MC98-1, USPS-T-5, page
25
Exhibit B Page 2
REVENUES EXCLUDING VARIABLE
INFORMATION
SYSTEMS COSTS
MC98-1, USPS-T-5, page 26
_-
-
).
.”
-
.-
Exhibit USPS-SC
Volatility In Paper Prices
MC98-1, USPS-T-5, page 27
0011’;‘O
Selected
Paper Price indices*
1994-l 99%
1994
Pulp, Paper, and Products. Excluding Building Paper
1995
1996
1997
1998(est)
4.3%
1.634
22.8%
1.497
-8.4%
1.447
-3.3%
1 SO2
3.8%
Paper Except Newsprint
1.217
1 .O%
1.584
30.2%
1.446
-8.7%
1.4
-3.2%
1.437
2.6%
Paper. Unwater Marked Bond No. 4 Grade
1.201
3.7%
1.608
33.7%
1.431
-10.9%
1.392
-2.7%
1.481
6.4%
1.331
*Source: Standard 8 Pooh DRI Short Range Cost and Price Review, Second Quarter 1998. p. 81
.-
MC98-1. USPS-T-5, page 28
0011.71
Exhibit USPS-SD
Mailing Online Postage Revenue
MC98-1, USPS-T-5,
page 29
Estimated Mailing Online Postage Revenue
0
h
Estimated Mailing Online Postage Revenue
.._
._ _ -
-
-
_.
“.
.
Exhibit USPS-SE
Pricing Matrix
MC98-1, USPS-T-5,
page 32
PRICING MATRIX
USPS System
61
Cl
11x17 20_
Notes:
1. Exhibit USPS-ZA. p. 1
2. Fee is the sum of the contractor price and USPS system costs X (l+Markup)
MC98-1, USPS-T-5, page
33