before the postal regulatory commission washington, d.c. 20268-0001...
TRANSCRIPT
BEFORE THE POSTAL REGULATORY COMMISSION
WASHINGTON, D.C. 20268-0001 _____________________________________ : POSTAL RATE AND FEE CHANGES, 2006 : Docket No. R2006-1 _____________________________________ :
INITIAL BRIEF OF THE UNITED STATES POSTAL SERVICE UNITED STATES POSTAL SERVICE By its attorneys: Daniel J. Foucheaux, Jr. Chief Counsel Frank R. Heselton Kenneth N. Hollies Eric P. Koetting Nan K. McKenzie Sheela A. Portonovo Elizabeth A. Reed Brian M. Reimer Scott L. Reiter David H. Rubin Michael T. Tidwell Keith E. Weidner 475 L'Enfant Plaza West, S.W. Washington, D.C. 20260-1137 (202) 268-2989 December 21, 2006
Postal Rate CommissionSubmitted 12/21/2006 3:54 pmFiling ID: 55476Accepted 12/21/2006
TABLE OF CONTENTS
PROCEDURAL HISTORY .............................................................................................. 1 I. THE POSTAL SERVICE’S REVENUE REQUIREMENT IS SUPPORTED ON
THE RECORD, IS REASONABLE, AND SHOULD BE THE BASIS FOR THE COMMISSION’S RECOMMENDATIONS............................................................. 6
A. Witness Loutsch Provides Substantial Evidence that the Present and Projected Financial Condition of the Postal Service Supports the Requested Increase in Rates and Fees..................................................... 6
B. Substantial Record Evidence Supports Postal Management’s Judgment that a Provision for Contingencies of One Percent of Total Estimated Costs Should Be Included in the Revenue Requirement ........................... 8
C. Witness Buc’s Testimony Fails to Provide a Rational Basis for Reducing Any Aspect of the Revenue Requirement Estimates ............................... 10
1. Projected savings in supervisor costs resulting from cost reduction programs are already excluded from the revenue requirement..... 10
2. Witness Buc’s arguments for reducing the contingency provision to zero are based on misapprehensions and misjudgments. ............ 11
3. Witness Buc’s arguments have been mooted by subsequent record evidence........................................................................................ 13
II. POSTAL SERVICE DATA SYSTEMS PROVIDE AN APPROPRIATE AND
LONG-ACCEPTED FOUNDATION FOR THE ESTABLISHMENT OF RATES, CLASSIFICATIONS AND FEES......................................................................... 15
A. The In-Office Cost System (IOCS) Provides Reliable and More Accurate Estimates of Employee Work Time Devoted to Office Functions and Certain Mail Categories ........................................................................... 17
1. The redesigned IOCS data collection instrument is improved substantially. ................................................................................. 18
a. Best practices for surveys were used to redesign the data collection instrument........................................................... 18
b. The redesigned instrument was tested extensively............ 19 c. The redesign is explained by substantial documentation. .. 20
2. The only challenge to the redesigned IOCS was to its cost estimates for Within-County Periodicals........................................ 21
a. The claim that the Postal Service method does not determine whether within-county rates are paid is incorrect. ......................................................................... 21 b. Witness Heath’s interpretation of regulations applicable to
non-subscriber copies is incorrect. ..................................... 22 c. Other critiques by witnesses Heath and Siwek do not identify
substantial errors................................................................ 23 d. Witness Siwek’s pooling proposal is inappropriate and likely
to strongly bias within-county periodical costs.................... 25
-i-
B. TRACS Provides A Reasonable And Sound Basis For Distributing Transportation Costs To Mail Categories................................................. 26
C. The Origin-Destination Information System and Revenue, Pieces and Weight (ODIS-RPW), the Bulk Mail Revenue, Pieces and Weight (BRPW) System, and the Revenue, Pieces and Weight Adjustment System (ARPW) Continue to Provide Reliable Data for the Postal Service Use and for the Ratemaking Process..................................................................... 28 1. Revenue, piece and weight estimates continue with low coefficients
of variation (high precision). .......................................................... 29 2. Within-county Periodicals RPW estimates remain sufficiently
precise for ratemaking purposes. .................................................. 30 D. The Carrier Cost Systems Provide A Reliable And Uncontested Means
For Distributing City And Rural Carrier Costs To Subclasses Of Mail...... 31 III. THE VOLUME FORECASTS INCLUDED WITH THE POSTAL SERVICE’S
FILING ARE PREDICATED ON THE WELL-ESTABLISHED FORECASTING METHODOLOGY EMPLOYED IN PREVIOUS CASES ..................................... 33
A. There Have Been Only Minimal Changes in the Postal Service’s Forecasting Methodology, and No Intervenors Propose Alternative Forecasts Based on Alternative Forecasting Methodologies ................... 35
B. GCA’s Witnesses Fail to Provide Any Basis to Alter the Forecasting Parameters Presented by the Postal Service .......................................... 37
1. Prof. Martin’s research approach is flawed, and his results do not support his conclusions................................................................. 38
a. The survey results fundamentally confirm the extremely minor role of postal rates in the greater scheme of electronic diversion. ............................................................................ 47
b. Prof. Martin’s results on the alleged triggering role of postal rates on electronic diversion are merely a function of his flawed research approach. ................................................. 48
c. Inherent deficiencies within the “trigger” questions invalidate their use to reach reliable conclusions. .............................. 50
2. Neither Dr. Clifton nor Prof. Kelejian offer any valid theoretical or empirical basis to rely on any estimates of own price elasticity other than those provided by witness Thress. ........................................ 56
a. The combination of serious flaws in economic theory and econometric practice has caused Dr. Clifton to produce an unusable model of the demand for single piece First-Class Mail..................................................................................... 56
b. The practical effects of the theoretical concerns raised by Prof. Kelejian are not material. ........................................... 59
-ii-
IV. THE POSTAL SERVICE’S SUBCLASS COSTING PRESENTATION ENHANCES UNDERSTANDING OF THE BEHAVIOR OF POSTAL COSTS
AND PROVIDES AN APPROPRIATE FOUNDATION FOR RATEMAKING ...... 63 A. The Postal Service Cost Models Provide the Most Accurate Available
Estimates of Mail Processing Volume-Variable Costs and Should Be Accepted.................................................................................................. 68
1. The Postal Service mail processing methods are well-grounded in the operational reality of sorting operations. ................................. 70
a. The presence of non-volume-variable costs in sorting operations is consistent with the structure of operations. ... 71
b. The number of sorts—measured by total piece handlings (MODS TPF and TPH)—is the relevant “volume” for determining labor usage in sorting operations.................... 73
c. Substitution of manual for automated processing is rare and becoming rarer. .................................................................. 74
d. The operational analysis points directly to the main features of the Postal Service analysis............................................. 75
2. Postal Service methods correctly apply economic theory to the measurement of sorting operations’ costs..................................... 76 a. The Postal Service models are motivated from a standard
microeconomic production framework. ............................... 76 b. The Postal Service model correctly applies the distribution
key method, which is appropriate and necessary to measure subclass volume-variable costs.......................................... 77
i. The distribution key method has long been shown to be an appropriate, feasible method for calculating subclass costs. ........................................................ 77
ii. No intervenor proposal offers an alternative to the distribution key method............................................ 78
iii. Prof. Roberts mischaracterizes the “proportionality assumption” embodied in the distribution key
method, and does not find legitimate evidence of its failure....................................................................... 79
3. The Postal Service variability models use appropriate and reliable data and estimation methods............................................ 82 a. The MODS data are suitable for estimating mail processing variabilities.......................................................................... 82 i. MODS directly measures hours and workloads from actual operations on a continuous basis.......... 82 ii. MODS data issues are routine for operating data, and permit the construction of data sets sufficient for estimation purposes................................................. 83 iii. The Postal Service analysis make appropriate use of other data sources needed for the mail processing models. .................................................................... 84
-iii-
iv. Dr. Neels’s analysis of MODS data quality issues is error-plagued, misstates the true data quality issues, and should be rejected. ........................................... 85 b. There is no dispute in this proceeding that panel data methods are appropriate for mail processing variability estimation. .......................................................... 89 c. The Postal Service models produce robust results using consistently-applied methods.................................... 90 d. The Postal Service translog/GLS model is the superior option for automated operations. .......................... 91 i. The Postal Service models make appropriate use of machine-counted workloads. ................................... 91 ii. Cross-operation effects have been shown to be negligible. ................................................................ 92 iii. There is no evidence of “attenuation” of the automated operations’ elasticity estimates. ............. 93 e. Instrumental variables estimation is appropriate for operations where MODS workloads are subject to conversion error. ................................................................ 94 i. Measurement processes for manual piece handlings (and FHP in general) are distinct from automated operations’ machine TPF and TPH counts. ............. 94 ii. The appropriate response to conversion error in manual workloads is to use “robust” instrumental variable estimation techniques. ........... 95 iii. The simpler log-linear specification for the instrumental variable models are appropriate. ... 95 iv. The Postal Service models successfully eliminate measurement bias. .................................................. 96 4. The reliable evidence from intervenor analyses in this proceeding supports the Postal Service’s demonstration that mail processing costs are less than 100 percent volume-variable. ......................... 98 a. Prof. Roberts’s models, correctly updated, yield results largely consistent with the Postal Service models. ............. 98 i. While significantly flawed, Prof. Roberts’s models, if properly implemented, are superior to the alternative of maintaining the 100 percent variability assumption. ............................................................. 98 ii. Should the Commission adopt a model based on Prof. Roberts’s work, it should employ the updated version of Prof. Roberts’s model presented by Dr. Bozzo....................................................................... 99 iii. Prof. Roberts’s own update is rendered unusable by major technical flaws, unjustified model changes, and accordingly implausible results. ............................. 100
-iv-
iv. Prof. Roberts’s “additional outputs” models point to potential improvements to the OCA models, but the OCA-T-1 implementation is terminally flawed for its apparent purpose................................................... 103 v. There is no reliable evidence suggesting failure of the distribution key method’s “proportionality assumption.” .......................................................... 104 b. Dr. Neels’s alternative model, correctly implemented for “allied labor” and at the “plant level,” supports the use of reduced variabilities for allied labor and miscellaneous cost pools................................................................................. 106 i. Dr. Neels’s aggregate model is conceptually inferior to
the Postal Service and OCA models for sorting operations.............................................................. 106
ii. Dr. Neels’s model has some utility as a model of allied labor and other non-sorting operations. ................. 107
iii. Correctly employed as an allied labor or whole-plant model, Dr. Neels’s model supports the Postal
Service treatment of variabilities outside of sorting cost pools. ............................................................. 107
d. If the Commission declines to adopt an econometric variability model for sorting operations, it should modify its mail processing cost method to treat setup and take-down costs as non-volume-variable using the methods proposed by Dr. Elliott. ..................................................................... 108 i. The record supports treating setup and take-down
costs as non-volume-variable. ............................... 109 ii. Data from the redesigned IOCS instrument provides a
reasonable basis for estimating the setup and take-down costs............................................................. 110
5. The Commission should accept the Postal Service partition of administrative costs in Cost Segment 3, and recognize that the Postal Service treatment of mail processing “administrative” costs as part of Cost Segment 3.1 is correct. ....................................... 111 6. The Commission should continue to distribute volume-variable costs to subclass using IOCS-based distribution keys established at the cost pool level. ...................................................................... 112 a. Witness Van-Ty-Smith implements the long-accepted IOCS/MODS-based distribution key method. ................... 112 b. The accuracy of IOCS “direct tally” data used in the distribution keys has been improved by the recent IOCS redesign............................................................................ 113 c. The IOCS/MODS-based distribution keys calculated by cost pool remain the best method for distributing mail processing volume-variable costs to subclasses under alternative variability methods............................................................ 114
-v-
B. The Postal Service’s Updated Study for Window Service Costs Should Be Adopted ................................................................................................. 115
1. Witnesses Kelley and Bradley demonstrate that the 2005 transaction study utilized a sound sample design which resulted in a reliable database...................................................................... 116
2. Witness Bradley’s recommended window service model is superior to all proposed alternatives. ........................................................ 118
C. For Purposes of This Proceeding, the Commission Should Once Again Use the City Carrier Street Time Cost Results Introduced in the Previous Rate Case.............................................................................................. 119
1. OCA witness Smith fails to provide any suitable alternative to the previous variabilities.................................................................... 121
2. The concerns expressed by Valpak witnesses Haldi and Mitchell concerning capacity constraints and other city carrier costing issues are not warranted. ....................................................................... 124
D. The Postal Service Proposes Appropriate Treatment of the Costs of the Postal Transportation Networks............................................................. 128
V. THE RATE LEVELS PROPOSED BY THE POSTAL SERVICE FOR EACH
SUBCLASS OF MAIL REFLECT A REFINED APPLICATION OF THE RELEVANT STATUTORY CRITERIA .............................................................. 134
A. The Postal Service Has Appropriately Considered And Applied the Relevant Pricing Factors........................................................................ 134 B. The Cost Coverages Proposed By Postal Service Witness O’Hara Satisfy the Incremental Cost Test...................................................................... 136 C. The Postal Service’s Proposed Cost Coverages Reflect A Fair And Equitable Allocation Of Institutional Costs And Give Proper Consideration
To All Of The Applicable Ratemaking Criteria........................................ 139 1. First-Class Mail – Letters and Sealed Parcels ............................ 139 2. First-Class Mail – Cards.............................................................. 141 3. Priority Mail ................................................................................. 142 4. Express Mail ............................................................................... 143 5. Outside County Periodicals......................................................... 144 6. Within County Periodicals ........................................................... 144 7. Standard Mail .............................................................................. 145 a. Regular and Nonprofit ...................................................... 145 b. Enhanced Carrier Route and Nonprofit ............................ 147 8. Package Services Mail................................................................ 148 a. Parcel Post ....................................................................... 148 b. Bound Printed Matter ....................................................... 149 c. Media and Library Rate Mail............................................. 150 D. The Intervenor Cost Coverage Proposals Are Lacking.......................... 150 1. UPS witness Geddes’ Priority Mail proposals ignore the realities of
the marketplace........................................................................... 151 2. Amazon.com witness Haldi misapplies the pricing criteria in
proposing his Bound Printed Matter cost coverage..................... 156
-vi-
3. Valpak’s nostalgic Standard Enhanced Carrier Route cost coverage proposal seeks to unfairly burden Standard Regular. ................. 157
4. The NAA post-discount approach to calculating the Within County Periodicals cost coverage should be rejected. ............................ 162
E. Conclusion ............................................................................................. 164 VI. THE RATE DESIGN PROPOSED BY THE POSTAL SERVICE WILL RECOVER
THE NECESSARY AMOUNT OF REVENUE FROM EACH SUBCLASS IN A MANNER WHICH COMPLIES WITH THE ACT............................................... 165
A. Several Important Principles Guide the Postal Service’s Overall Rate Design.................................................................................................... 165
1. There should be greater emphasis on shape in rate design. ...... 166 2. Overall rate design should reflect forward-looking operational
realities........................................................................................ 168 3. Efficient Component-Pricing should only be applied to worksharing
cost differences. .......................................................................... 169 a. Implications of the two approaches. ................................. 171 b. The broad view of the applicability of ECP is flawed and
should be rejected. ........................................................... 173 c. The strict interpretation of the applicability of ECP is
reasonable and should be adopted. ................................. 175 d. ECP is, at best, only a guide in setting pricing differentials. ...................................................................... 176 B. First-Class Mail ...................................................................................... 178 1. Postal Service proposals............................................................. 178 2. The Postal Service rate design is supported by more refined cost
analysis. ...................................................................................... 183 a. The mail processing cost methodology. ........................... 183 b. First-Class Mail delivery cost estimates............................ 185 c. BRM cost support. ............................................................ 187 3. Proposals for classification change. ............................................ 187 a. The Commission should recommend the shape-related
classification changes proposed by the Postal Service. ... 187 b. The Automation Carrier Route rate categories should be
eliminated. ........................................................................ 189 c. The Forever Stamp should be adopted. ........................... 190 d. The proposed classification changes satisfy the criteria of § 3623(c). ..................................................................... 192 4. The Commission should embrace the Postal Service’s “de-linking”
of Single Piece and Presort First-Class Mail rate design. ........... 195 5. The Commission should recommend the First-Class Mail rates
proposed by the Postal Service................................................... 201 a. The Postal Service’s initial ounce rates for single-piece
letters, flats and parcels merit approval. ........................... 201
-vii-
b. The Postal Service rate proposals for the remaining First-Class Mail single-piece and nonautomation presort letter categories should be recommended. ............................... 203
i. Qualified Business Reply Mail letter rate. .............. 203 ii. Nonautomation presort rates for letters and flats. .. 204 iii. The proposed additional-ounce rate reductions are
appropriate. ........................................................... 205 iv. Elimination of the nonmachinable surcharge is
consistent with shape-based rate differentials. ...... 206 c. The Postal Service First-Class Mail rate design for bulk automation-based worksharing letter categories affirms the importance of automation. ................................................ 207 i. Automation Letter Rates ........................................ 209 ii. Automation Flats Rates ......................................... 212 iii. Business Parcels ................................................... 212 iv. Additional-Ounce ................................................... 214 v. Heavy-Piece Deduction ......................................... 214 vi. Nonmachinable Surcharge .................................... 214 d. The Cards subclass.......................................................... 215 i. Single-Piece Card Rate ......................................... 215 ii. Qualified Business Reply Mail Card Rate .............. 216 iii. Nonautomation Presort Card Rate......................... 216 iv. Automation Card Rate Categories ......................... 217 2. The Commission should reject the alternative intervenor First-Class Mail rate proposals...................................................................... 219 a. APWU’s 41-cent basic letter rate proposal does not reflect consideration of relevant factors....................................... 219 b. GCA’s alternative rate design proposals should be rejected........................................................................ 222 c. There is insufficient record support for Pitney Bowes’s postage evidencing discount ............................................ 225 d. MMA witness Bentley and TW witness Mitchell rely upon an overstated QBRM cost avoidance. ................................... 229 e. The OCA additional-ounce rate design should not be recommended. ................................................................. 232 f. Mr. Carlson’s Forever Stamp concerns are easily addressed. ............................................................. 236 g. The GCA square envelope test and essay on aesthetics provide no basis for rate design. ...................................... 243 i. The GCA square envelope test is fatally deficient. 244 ii. The USPS Engineering test is the low-aspect-ratio
gold standard. ........................................................ 247 iii. Witness Liss’ musings on the aesthetics of squares
vs. rectangles are not compelling. ......................... 248
-viii-
h. Intervenors’ alternate approaches to First-Class Mail presort cost methodologies and cost estimates should be rejected............................................................................. 249 i. Intervenors’ mail processing cost estimates. ......... 249 ii. Delivery cost issues. .............................................. 254 C. The Commission Should Recommend the Postal Service’s Proposed
Priority Mail Classification and Rate Changes ....................................... 262 1. Proposed major classification changes include dim-weight pricing and a permanent classification for the Priority Mail flat-rate box. ................................................................................ 263 2. Other changes improve the Priority Mail rate structure. .............. 266 3. The Postal Service properly distributes certain Priority Mail
transportation costs on the basis of cube, not weight.................. 266 4. A new fee for on-call and scheduled pickup On-Demand® is
warranted. ................................................................................... 268 5. The Commission should not adopt the self-serving cost coverage
urged by UPS witness Geddes (UPS-T-3). ................................. 268 5. Conclusion. ................................................................................. 269 D. The Commission Should Recommend the Express Mail Rates Proposed
By the Postal Service............................................................................. 270 1. Witness Berkeley’s rate design is reasonable, supported by
substantial record evidence, and responsive to prior Commission concerns from R2005-1............................................................... 270
2. The Commission should maintain Same Day Airport service in the Classification Schedule. .............................................................. 272
3. The Commission should recommend the ungrouping of the combined one-and-two pound rate.............................................. 272
E. Standard Mail Rate and Classification Changes.................................... 273 1. Standard Mail Classification Proposals. ...................................... 274 a. Changes to subclass and rate category names................ 275 b. Standard Mail Regular/Nonprofit Regular......................... 276 i. Letters.................................................................... 276 ii. Flats....................................................................... 277 iii. Standard Regular Parcels...................................... 278 iv. Standard Regular Non Flat-Machinable Pieces (NFMs
or “Hybrid pieces”). ................................................ 279 v. Customized MarketMail (CMM). ............................ 281 c. ECR/Nonprofit ECR.......................................................... 281 i. ECR/NECR Letters. ............................................... 282 ii. ECR/NECR Flats. .................................................. 283 2. Intervenors’ classification proposals............................................ 284 a. PostCom’s proposals to raise the weight limit for Standard Mail automation letters from 3.5 to 4.0 ounces should be rejected............................................................................. 284
-ix-
b. Witness Horowitz’ proposal to expand the definition of Standard Mail to include advertising inserts beyond the 16 ounce limit fails to consider important issues with potentially harmful consequences and should be rejected. ............... 286 c. Witness Mitchell’s (VP-T-1) proposal to retain the automation basic rate category in ECR should be rejected................. 288 3. The Postal Service’s proposed Standard Mail classification changes meet the requirements of the Act and the Commission should recommend them............................................................. 290 4. The Postal Service’s rate proposals meet its revenue needs under the Act and appropriately reflect the policies and practical objectives embodied in its classification initiatives. ..................... 290 a. The Postal Service’s proposals meet its revenue needs by reasonably increasing rates in accordance with the Postal Reorganization Act (Act)................................................... 292 b. The proposed rates fairly and effectively balance multiple considerations. ................................................................. 293 c. The Standard Mail rates recognize important rate relationships. .................................................................... 294 d. Postal Service rate design recognizes appropriate cost distinctions........................................................................ 296 e. The rate design process fairly balances cost recognition and other considerations in light of the adverse effects of rate increases. ......................................................................... 297 f. The balancing of considerations present in the Postal Service’s rate design reasonably reflected worksharing efforts by mailers and send appropriate pricing signals................................................................... 299 g. The proposed rates effectively implement the Postal Service’s shape-based classification proposals. .............. 300 h. The Postal Service’s rate design promotes its automation programs and machinability of mail in general. ................ 302 i. The presort tree is not a necessary component of Standard Mail rate design or rate development methodology.......... 305 j. The Postal Service’s proposal for an alternative approach for charging for Standard Mail Forwarding is unopposed, and should be recommended. ................................................. 308 5. Intervenors’ Pricing Proposals..................................................... 309 a. The proposed parcel and NFM price increases are not unreasonably high, and the Commission should reject the opposition to, and alternatives for, the Postal Service’s Standard Mail shape-based rate proposals. ..................... 309 i. Witness Glick’s criticisms on behalf of PSA/PostCom do not withstand scrutiny. .............. 309
-x-
ii. Witness Knight’s and witness Horowitz’ claims that the proposed parcel and NFM rates will have adverse impacts on their businesses are not necessarily disputed, but are an insufficient reason to reject needed price adjustments...................................... 315
iii. Witness Wilbur’s proposal that the rate changes for parcels should be implemented gradually fails to address the many issues that need to be considered before phased rates can be recommended and so should be rejected. ................................................ 319
iv. Witness Angelides’ testimony that the price elasticity of Standard Mail parcels may be different from the subclass average is insufficient to support an alternative rate proposal. ....................................... 320
b. ECR proposals. ................................................................ 321 i. NAA witness Ingraham’s criticism of the ECR rate
design is without merit. .......................................... 321 ii. Valpak’s argument that the ECR basic letter rate
should be decoupled from the Standard Mail Regular rates is without merit.............................................. 324
c. Drop-ship alternate rate design. ....................................... 328 i. Intervenor proposals to increase Standard Mail letter
and flat dropship passthroughs to 100 percent fail to address adjustments already made in the rate design for lightweight pieces. ............................................ 328
ii. De-averaging of Standard Mail presort flats entails rate shock considerations that preclude recommendation of Postcom’s proposal to set the passthrough for the new 5-digit automation flats discount, a new rate category, to 100 percent. ...... 331
F. The Postal Service’s Package Services Rate Proposals Should Be Recommended ...................................................................................... 333
1. Parcel Post.................................................................................. 333 a. The rates designed by witness Kiefer are reasonable and
supported by substantial record evidence. ....................... 333 b. UPS witness Luciani’s criticism of witness Kiefer’s rate
design methodology is unfounded.................................... 334 c. Witness Miller’s Parcel Post cost model is reliable and
should not be used to justify a lower passthrough for Parcel Select. .............................................................................. 335
i. Witness Luciani’s view that various cost inputs are materially “outdated” is unsubstantiated on the record and is proven incorrect by witness Miller. .............. 336
ii. The size of the CRA adjustment factor is not a meaningful indicator of the model’s reliability. ....... 337
iii. Witness Luciani’s selective delivery unit
-xi-
parcel sortation cost pool revision should be disregarded............................................................ 338
d. Witness Luciani’s proposed revision to the Parcel Select window service cost savings model is inappropriate. ....... 339
2. Bound Printed Matter .................................................................. 339 a. Amazon.com witness Haldi’s proposal to allow CDs and DVDs to be mailed as Bound Printed Matter is fatally flawed..................................................................... 340 3. Media Mail and Library Mail ........................................................ 341 a. PostCom witness Angelides provides no basis for disturbing
witness Yeh’s Media Mail rate structure. .......................... 342 G. The Periodicals Rates Proposed by the Postal Service Are More Balanced
than any Alternatives, and Should be Recommended ........................... 343 1. The Postal Service’s proposals for the Outside County subclass
should be adopted....................................................................... 343 a. The proposed container rate promotes efficiency and lower
costs. ................................................................................ 343 b. The piece-pound split should be adjusted as proposed. .. 344 c. The Postal Service’s proposals will promote more
dropshipping..................................................................... 344 d. The Postal Service’s proposals promote co-mailing and co-
palletization. ..................................................................... 345 e. The proposed presort discounts should be recommended. ................................................................. 345 2. The Postal Service opposes the alternative Periodicals Outside
County proposals by Time Warner, Inc., the Magazine Publishers of America and Alliance of Nonprofit Mailers, and by the National Newspaper Association............................................................... 346
a. The MPA/ANM and TW rate proposals fall short of the balance found in the Postal Service proposal................... 346
b. MPA/ANM’s proposal for a 5-digit pallet discount should be rejected............................................................................. 349
c. The Postal Service’s proposed Ride-Along rate follows established ratemaking practice, and is superior to MPA/ANM’s alternative proposal. ..................................... 350
d. The container rate should apply to all Periodicals mailings, including those entered in flats tubs and in unsacked bundles............................................................................. 351
i. The record does not support witness Heath’s assertion that the container rate would be a material disincentive for mailers to switch from sacks to flats tubs........................................................................ 352
ii. The record indicates that the container rate will likely play little to no role in the usage of unsacked
bundles. ................................................................. 354
-xii-
e. The Commission should adopt Postal Service witness Miller’s flats mail processing cost model over those proposed by MPA/ANM and TW. ..................................................... 356
i. Arbitrary incoming secondary factors should not be included in the model............................................. 357
ii. The flats model should use CRA flats costs rather than combined flats and parcels costs................... 358
iii. Proportional cost pool classifications should be based on whether the tasks are modeled......................... 358
iv. The proposed selective cost pool adjustments should be rejected............................................................. 359
v. Witness Stralberg’s bundle breakage revision should not be accepted. .................................................... 360
3. The Postal Service’s proposed rate design for Within County Periodicals is reasonable and should be recommended. ............ 360
a. Witness Tang’s rate design is reasonable and balanced........................................................................... 360 b. NNA’s proposed revisions result in an imbalanced rate design and should be rejected.......................................... 362 i. NNA’s proposed passthrough for Carrier Route Basic is inconsistent with prior Commission rate design and leads to inordinate increases for non-carrier route mailers. .................................................................. 363 ii. The Postal Service’s proposed piece/pound ratio for Within County leads to a balanced increase between the piece and pound sides, whereas NNA’s does not...................................................... 366 VII. THE PROPOSED FEES AND CLASSIFICATIONS FOR SPECIAL SERVICES
ARE FAIR AND EQUITABLE, COST-BASED, AND CONSISTENT WITH THE OTHER STATUTORY RATE AND CLASSIFICATION CRITERIA ................... 368
A. The Proposed Fee Redesign for Address Correction Service Should Be Recommended ...................................................................................... 372
B. The Proposed Business Reply Mail Fees Should Be Recommended ... 373 C. The Proposed Fee Changes for Collect-On-Delivery (C.O.D.) Should Be
Recommended ...................................................................................... 376 D. The Postal Service Proposal for Confirm Service is the Only One Likely to
Cover Attributable Costs ........................................................................ 379 1. The Postal Service’s proposal improves fairness and equity. ..... 381 2. Unit-based pricing facilitates adding other information-based
services under the Confirm umbrella........................................... 382 3. The existing fee structure has so many shortcomings that it would
still fail to cover Confirm costs, even if fees are increased.......... 383 4. The Postal Service proposal would not diminish the utility of
Confirm service for service performance assessment................. 386
-xiii-
5. Witness Bentley’s proposal for a specific subscription just for workshared First-Class Mail may be worth examining, but it does not appear to be supported on the record. .................................. 386
E. The Enhancements to Insurance Service Allow Fee Reductions and Should Be Recommended ..................................................................... 387
F. The Proposed Classification Changes for Merchandise Return Should Be Recommended ...................................................................................... 389
G. The Proposal to Eliminate Meter Service Should Be Recommended .... 389 H. Registered Mail Fees Should be Based on Costs Estimated in Accordance
with the Postal Service’s Methodology................................................... 389 I. The Commission Should Recommend the Substantial Reduction in the
Electronic Return Receipt Fee Proposed by the Postal Service, But a Greater Reduction Is Not Justified ......................................................... 391
CONCLUSION
-xiv-
PROCEDURAL HISTORY
On May 3, 2006, the United States Postal Service filed with the Postal Rate
Commission (hereinafter “Commission”) the Request of the United States Postal
Service for a Recommended Decision on Changes in Rates of Postage and Fees for
Postal Services (hereinafter “Request”). This Request was filed in accordance with 39
U.S.C. §§ 3622 and 3623 and the Commission’s Rules of Practice and Procedure. 39
C.F.R. §§ 3001.1 et seq.
The Request, based on a test year of Fiscal Year (FY) 2008, stated that, without
increases in rates and fees, the Postal Service would incur a substantial revenue
deficiency in the test year, in contravention of 39 U.S.C. § 3621. The Postal Service
estimated that at current rates, its test year revenues would approximate $73,532
million, and its total costs $79,406 million, creating a test year deficiency of some
$5,874 million. Included among the proposed rates was a rate of 42 cents for the first
ounce of First-Class Mail, and 20 cents for the additional-ounce rate.
In addition to requested rate changes, the Postal Service proposed: (1) a new
classification for a “Forever Stamp,” a stamp that would always be valid for the first
ounce of First-Class Mail letters, regardless of subsequent rate changes; (2) new
shape-based rate structures in First-Class Mail and Standard Mail; (3) new Priority Mail
dimensional weighting rate structures; (4) a new container rate, as well as extension of
dropship discounts to editorial pounds, for Periodicals; and (5) enhancements for
address correction service, Confirm® service, and insurance.
1
The Request was accompanied by 47 pieces of direct testimony sponsored by 41
witnesses, with exhibits and workpapers related to these testimonies, as well as other
material responsive to Rule 54 of the Commission’s Rules of Practice. One additional
piece of direct testimony pertaining to the Postal Service’s “Forever Stamp” proposal,
USPS-T-48, was filed on July 14, 2006. The Commission granted the Postal Service’s
deferred filing of the “Forever Stamp” testimony in P.O. Ruling No. R2006-1/18 (July 18,
2006).
The Postal Service’s Request was set down for hearing by the Commission as
Docket No. R2006-1. By Order No. 1464, issued on May 5, 2006, the Commission
elected to sit en banc, and designated Shelley S. Dreifuss, Director of the Commission’s
Office of the Consumer Advocate (OCA), to represent the interests of the general public
in the proceeding. By separate order, Commission Chairman George A. Omas
designated himself to serve as Presiding Officer in the proceeding. Fifty-eight parties
filed notices of intervention.
The Commission scheduled an initial prehearing conference for June 16, 2006.
Following an opportunity to comment at the Prehearing Conference, the Presiding
Officer issued the procedural schedule in P.O. Ruling No. R2006-1/12. The Presiding
Officer set down special rules of practice for the proceeding in P.O. Ruling No. R2006-
1/11, as well as a special rule for materials submitted under protective conditions in
P.O. Ruling No. R2006-1/10.
During discovery, Postal Service witnesses and the Postal Service itself
responded to numerous written interrogatories, consisting of thousands of individual
questions. Most of these were filed during the regular discovery period on the
2
witnesses’ testimonies, which ended on July 14, 2006. The discovery period on the
Postal Service’s “Forever Stamp” proposal extended until August 7, 2006. Responses
to discovery requests to the Postal Service and its witnesses were generally provided
within 14 days, as prescribed by the Commission’s rules. Evidentiary hearings on the
Postal Service’s case began on August 3, 2006, and continued through August 30,
2006.
Pursuant to the procedural schedule, the direct cases of participants other than
the Postal Service were filed on September 6, 2006. In accordance with the rules for
this proceeding, intervenors responded to interrogatories within 14 days. The period for
filing discovery on participants’ direct cases ended on October 4, 2006. Evidentiary
hearings on these cases began on October 24, 2006, and continued through November
8, 2006.
A number of significant issues arose during the course of the proceeding. One
such issue concerned the relationship between the theory of Efficient Component
Pricing (ECP) and the Postal Service’s rate design for First-Class Mail and Standard
Mail, and was reflected in Notices of Inquiry (NOI) Nos. 2 and 3 (issued July 21 and July
26, 2006, respectively).1 Several parties, including the Postal Service, filed comments
in response to NOI Nos. 2 and 3 on August 17, 2006. This issue continued to be raised
and debated throughout discovery on the Postal Service’s direct case, in intervenor
testimony, and will likely be argued on brief.
1 NOI No. 1, issued June 5, 2006, requested comments on the different methodologies for determining the markup for the Periodicals Within County subclass. The Postal Service provided its comments on June 16, 2006.
3
The Presiding Officer issued a total of twenty-five Presiding Officer’s Information
Requests (POIR) directed at the Postal Service and selected intervenors. These POIRs
contained dozens of questions on a variety of issues. The Postal Service’s responses
to two POIRs, and the Presiding Officer’s designation of those responses for inclusion in
the evidentiary record, sparked a particularly contentious dispute. On October 16,
2006, the Presiding Officer designated the Postal Service’s responses to POIR No. 4,
Questions 4-12, and POIR No. 16, Questions 13-21 for inclusion in the record. One day
later, on October 17, 2006, eighteen intervenors jointly objected to the inclusion of the
responses in the record. The Presiding Officer certified the Joint Objection to the full
Commission for disposition.
The Postal Service’s POIR responses at issue concerned the Postal Service’s
City Carrier Street Time Study (CCSTS). In POIR No. 4, Questions 4-12, the Presiding
Officer asked the Postal Service to provide an updated version of the CCSTS with FY
2004 data and illustrate the effect the newer data would have on variability estimates.
The Postal Service provided its response on September 22, 2006. In POIR No. 16,
Questions 13-21, the Presiding Officer asked a series of follow-up questions to these
responses, and the Postal Service responded on October 12, 2006.
The Joint Objection filed on October 17, 2006, by eighteen intervenors, argued
that the responses provided by the Postal Service, if adopted, could require a
comprehensive revision of the Postal Service’s rate proposal. The Joint Objection
further contended that because of the complexity of the study, intervenors had
insufficient time to conduct discovery, cross-examine witnesses, or prepare rebuttal
evidence. In Order No. 1482, issued November 8, 2006, the Commission concurred
4
with the arguments raised in the Joint Objection, and ruled that the responses would
only be included in the record for illustrative purposes, not for purposes of establishing
the truth of the matters asserted.
Rebuttal testimonies were filed by the parties and the Postal Service on
November 20, 2006. Hearings on rebuttal testimony began on November 29, 2006, and
continued through December 7, 2006. The Postal Service presented 18 pieces of
rebuttal testimony, and the other participants presented 17 rebuttal witnesses. The
complete evidentiary record currently consists of more than 13,000 transcribed pages
plus the direct case of the Postal Service. Also, voluminous materials, including over
200 Library References, were incorporated by reference.
The Record of the proceeding was closed on December 19, 2006, subject to the
decision of the full Commission on a Joint Objection filed by several parties on
December 18, 2006, regarding the receipt into evidence of the response to POIR No.
25. P.O. Ruling No. R2006-1/129 (December 19, 2006). The date for filing briefs was
set for December 21, 2006, with January 4, 2007, set for filing reply briefs. The
opportunity for oral argument is available upon request and, if requested, is scheduled
for January 10, 2007.
Pursuant to 39 U.S.C. § 3624(c)(1), the Commission’s Opinion and
Recommended Decision is due no later than March 3, 2007.
5
I. THE POSTAL SERVICE’S REVENUE REQUIREMENT IS SUPPORTED ON THE RECORD, IS REASONABLE, AND SHOULD BE THE BASIS FOR THE COMMISSION’S RECOMMENDATIONS
The testimony of witness Richard G. Loutsch, USPS-T-6, together with
supplemental information on the record,1 provides the basis for the Postal Service’s
revenue requirement of $79.4 billion before rates in the test year (FY 2008). With
revenue at current rates estimated for the test year at $73.6 billion, that would leave a
revenue deficiency of $5.8 billion. The proposed rate and fee changes would produce
revenues of $77.6 billion to cover a total after-rates revenue requirement of $77.5
billion, resulting in a test year revenue surplus of $97 million.
A. Witness Loutsch Provides Substantial Evidence that the Present and Projected Financial Condition of the Postal Service Supports the Requested Increase in Rates and Fees
In addition to providing estimates of the Postal Service’s future needs that
underlie the overall moderate revenue increase requested in this case, Witness
Loutsch’s testimony describes the Postal Service’s current financial position and its
recent financial history. His testimony begins with a summary of the “uneven path” that
the Postal Service’s financial condition has followed over the last ten years. He
describes the first part of the ten-year period as one of “low, but increasing cost
inflation, combined with volume growth in both First-Class Mail and Standard Mail,
resulting in net incomes.” But the next few years were less bright: “Net income began
to decline in FY 1998 due to inflationary pressure on compensation and benefits costs,
1 Supplemental estimates and supporting documentation were provided in response to Presiding Officer’s Information Request No.16 and are contained in Postal Service Library Reference L-196. These estimates are updates to those provided in witness Loutsch’s revised testimony, including Exhibit USPS-6A (Statement of Revenue and Expense) and related documentation.
6
particularly benefits costs, leading to a small net loss in FY 2000.” 2 Then, in addition to
the tragic events of September and October 2001, First-Class Mail volume began to
stagnate, resulting in net losses in FYs 2001 and 2002.
Positive financial results followed, however, from FY 2003 through FY 2005. Mail
volume growth in FY 2004 and FY 2005, the enactment of the Postal Civil Service
Retirement System Funding Reform Act of 2003 (Public Law 108-18) and cost
reductions related to the initiatives described in the Transformation Plan, April 2002
were the prime contributors to this improved financial performance. For FYs 2003
through 2005, Public Law 108-18 temporarily lowered Postal Service funding of its Civil
Service retirement obligations to prevent continued over-funding. These factors created
financial conditions that allowed for the full restoration of equity by the end of FY 2004,
and the elimination of debt by FY 2005.3
Positive financial results are not expected to continue, however. In addition to
continuing financial obligations imposed on the Postal Service by Public Law 108-184
and by the Postal Accountability and Enhancement Act of 2006,5 the Postal Service
faces a number of challenges to its financial health. These include: continuing
electronic diversion, challenges in capturing future cost reductions, continued
inflationary pressure on salaries and benefit costs for employees, continued increases
2 Id. at 11-26. 3 Id. at 12. 4 See id. at 11, 18-21. 5 It appears that, although the Act eliminates the escrow payment and certain retirement contribution obligations in the test year, the new requirement to pre-fund health benefits and the loss of escrow interest outweigh those savings, thereby having a significant negative effect on estimated test year net income.
7
in retiree health benefit costs, as well as the need to maintain and expand the delivery
network to meet the universal service obligation.6
Witness Loutsch explained the projected financial consequences of these
obligations and circumstances:
Without a rate increase, the Postal Service is projected to incur combined net losses of $10.199 billion for the period FY 2006 through FY 2008. This will result in cumulative net loss of $7.860 billion and borrowing requirements that exceed the authorized annual debt limit in both FY 2007 and FY 2008.7
Witness Loutsch notes that “Incurring debt to finance current operations transfers the
funding of current year expenses to future years[,] … placing an unfair burden on future
ratepayers.”8 He concludes that, in light of increasing costs, which he discusses in
detail in his testimony,9 and his financial projections for the Test Year, “the only course
of action that will allow the Postal Service to fulfill its obligations under the Postal
Reorganization Act is to increase Postal Service revenues through a general increase in
rates.”10
B. Substantial Record Evidence Supports Postal Management’s Judgment that a Provision for Contingencies of One Percent of Total Estimated Costs Should Be Included in the Revenue Requirement
Witness Loutsch presents postal management’s financial policy decision to
include in the revenue requirement a provision for contingencies of one percent. In
management’s judgment, this amount is the minimum needed to provide a financial
6 Id. at 13. Witness Loutsch discusses the details of revenue and volume trends at pages 14-17, of productivity challenges at 21-22, and of compensation and benefit pressures at 22-24. 7 Id. at 14. 8 Id. at 26. 9 See id. at 27-61. 10 Id. at 26.
8
cushion against events that are unforeseeable or whose financial impact is not currently
knowable. As Postal Service rebuttal witness W. Ashley Lyons testified, the
contingency provision “is designed to maintain stability in achieving the break-even
mandate [of 39 U.S.C. § 3621], in light of the largely unpredictable consequences of an
interplay among a complicated array of economic, social, and political forces, as well as
accidents and natural disasters.”11
Witness Loutsch explained the risks and uncertainties associated with various
factors, including: the escrow provision and related assumptions concerning interest
income on escrow balances, the challenges of obtaining cost reductions from planned
programs, the expiration of postal labor contracts, fuel and energy costs, and potential
changes in workers’ compensation liability estimates.12 The risk of disruptive events,
whether perpetrated by humans or nature, always remains, although the size of
potential losses is hard to gauge.13 The passage of postal reform legislation brings new
uncertainties in the context of a changed business and regulatory environment.
A contingency provision of one percent is the minimum acceptable level of
protection, in the judgment of postal management in this instance and significantly
below the reasonable expected range for contingencies intended by the Act. As witness
Lyons explained, “the ultimate decision to include a provision for contingencies is
logically and necessarily judgmental, and represents a major policy choice by the Board
11 USPS-RT-13, at 10. 12 Id. at 62-63. 13 Id. at 63.
9
of Governors as to the level of risk with regard to unknown developments that the Postal
Service is willing to bear in the test year.”14
C. Witness Buc’s Testimony Fails to Provide a Rational Basis for Reducing Any Aspect of the Revenue Requirement Estimates
Witness Buc, on behalf of a group of mailers and mailer associations led by
DMA, argues that the Postal Service has underestimated cost reduction savings for
supervisors and that the one percent contingency is overstated. He also argues that the
proposed rates lead to an excessive surplus and that the revenue requirement should
be adjusted for actual results.15 The first two arguments are inconsistent with record
evidence, and the latter two arguments have been mooted by subsequent events and
information on the record.
1. Projected savings in supervisor costs resulting from cost reduction programs are already excluded from the revenue requirement.
Witness Buc argues that the revenue requirement should be reduced to reflect
reductions in supervisor costs in direct proportion to reductions in craft hours resulting
from cost reduction programs. He alleges that the Postal Service has failed to make
“any” reduction in supervisor costs. DMA-T-1, at 3. His facts, however, are wrong, and
his argument is contradicted by the record.
Witness Buc fails to demonstrate that supervisory costs, either in general or
specifically relative to cost reduction program implementation, are reduced in direct
proportion to craft labor costs; in fact, he admits that over certain time periods
supervisory costs do not decline in direct proportion to craft labor costs.16 No evidence
14 USPS-RT-13, at 10-11. 15 DMA-T-1. 16 Tr. 22/8044.
10
has been presented that cost reduction programs generate supervisory savings
proportional to craft savings.17 Witness Buc disregarded witness Loutsch’s testimony
that the Postal Service “specifically examines” each program’s cost savings
opportunities for supervisors and that most programs do not result in changes in
supervisory functions that lead necessarily to a reduction in supervisor hours.18 Postal
Service rebuttal witness Chris Oronzio explained that supervisory reductions are
already reflected, either in specific program estimates, or in the estimates of savings
through Breakthrough Productivity and Local Management initiatives.19 In light of these
facts, witness Lyons testified that “[t]o make further reductions, as witness Buc
proposes, would be unjustified and would result in an overstatement of expected
savings.”20 The Commission should decline witness Buc’s invitation to make this error.
2. Witness Buc’s arguments for reducing the contingency provision to zero are based on misapprehensions and misjudgments.
Witness Buc maintains that no amount for contingencies should be included in
the revenue requirement. He bases his argument on his perception of “the Postal
Service’s strong financial position.”21 Unfortunately, his perception, at least in this
regard, lacks factual foundation, and is inconsistent with statutory intention. As the
Commission well knows, the Postal Reorganization Act22 anticipates that the revenue
requirement include a reasonable provision for contingencies and the legislative history
cites a range of 3 to 5 percent as reasonable. The Postal Service has included
17 See USPS-RT-3, at 4. 18 See id. at 4-5, quoting USPS-T-6, at 31. 19 USPS-RT-15, at 5-8. 20 Id. at 5. 21 DMA-T-1, at 11. 22 39 U.S.C. § 3621.
11
contingency provisions ranging from 1 to 4 percent in its revenue requirement
estimates.23
In this case, witness Buc’s arguments do not support his proposed reduction of
the contingency provision to zero percent. First, his argument that the Postal Service
can cope with adverse events using its cash balance is based on a misreading of data
provided by witness Loutsch. Rather than a cash balance of $5.587 billion at the end of
the test year, as witness Buc presumes,24 witness Lyons explained that the Postal
Service will actually have a cash balance of only $1.0 billion, an amount “substantially
less than a single two week payroll disbursement.”25 As witness Lyons explained, this
amount is obtained through borrowing “in order to ensure that the payroll can be met”; it
“provides absolutely no cushion against adverse events.”26 The purpose of the
contingency is to prevent a net loss in the test year. Borrowed cash cannot prevent a
loss from occurring. If breaking even in the test year is the goal, a provision for
contingencies of at least one percent is essential.
Second, witness Buc’s argument that Postal Service’s equity is understated
because the appraised value of postal real estate may be higher than the value carried
on its books “ignores the legal and practical realities of postal operations.”27 As witness
Lyons explains, the Postal Service has a “universal service obligation and owns real
23 See USPS-RT-13, at 11. No contingency provision was added to the revenue requirement in Docket No. R2005-1. Unlike the instant case and all other omnibus rate cases, that case was narrowly designed to generate revenue to recover the known escrow requirement of Public Law 108-18, rather than to cover future estimated costs of postal operations, and the uncertainties associated therewith. 24 DMA-T-1, at 15. 25 USPS-RT-13, at 12. 26 Id. 27 id. at 13.
12
estate for the purpose of supporting and operating a nationwide service network for the
long term to satisfy that obligation.” It cannot “dispose of its real estate at will in order to
realize its market value without ignoring the needs of current and future customers.”28
Indeed, witness Buc confirmed that real property is of “no use in dealing with an
adversity that would require additional cash unless the properties are sold or borrowed
against.”29 He also performed no analysis of the time required to transfer processing
operations, close, and sell a mail processing facility.30 Accordingly, his argument
regarding the book value of real estate is a red herring in the aquarium of an
appropriate contingency provision.31
3. Witness Buc’s arguments have been mooted by subsequent record evidence.
In support of his proposal to eliminate the contingency provision, witness Buc
also argued that the Postal Service has overstated its loss in FY 2006 and that
estimates for FY 2007 and the test year should be adjusted accordingly.32 Witness
Lyons’s testimony contains a detailed discussion demonstrating that “the record and
recent events demonstrate that the Postal Service’s 2006 revenue requirement estimate
was appropriate, but indicates that 2007 may be understated.”33 Thus, the record, as it
currently stands, contradicts witness Buc’s argument.
28 Id. 29 Tr. 22/8019. 30 Tr. 22/8018. 31 Moreover, witness Buc’s argument that the END program will result in higher-than-estimate real estate profit is speculative and misplaced in time, since any such gains, if they materialize, are unlikely to affect the test year to any substantial degree. USPS-T-13, at 13. 32 DMA-T-1, at 10-11.
13
Witness Buc’s final argument was that a test-year after-rates surplus of $173
million, as estimated by the Postal Service at the time his testimony was prepared,
would be excessive.34 Subsequently, the estimate was revised to $97 million, as noted
by witness Lyons.35 Witness Buc agreed, during his cross-examination, that an amount
of this magnitude is consistent with the break-even requirement of the PRA.36
Substantial evidence on the record supports the Postal Service’s financial
estimates and judgments. For these reasons, the Postal Service’s revenue
requirement, as revised and updated, should be the basis for the Commission’s rate
and fee recommendations in this case.
33 USPS-T-13, at 9. 34 DMA-T-1, at 8. 35 USPS-RT-13, at 5-6. 36 Tr. 22/8047.
14
15
II. POSTAL SERVICE DATA SYSTEMS PROVIDE AN APPROPRIATE AND LONG-ACCEPTED FOUNDATION FOR THE ESTABLISHMENT OF RATES, CLASSIFICATIONS AND FEES
The Postal Service and the Commission both rely upon long-established data
systems that inform business and ratemaking decisions. In this docket, the Postal
Service documents four such data systems both in direct testimony and via “library
references relating to . . . statistical cost and revenue reporting systems, and their
primary outputs,” also known as Category 1 library references. Rule 31(b)(2)(i). These
complex, multi-layered systems capture information regarding the Postal Service’s
nationwide flow of mail and costs to provide service. While they are continually
improved, in the main they are relatively stable over successive ratemaking cycles.
The four main data systems include the In-Office Cost System (IOCS), the
Transportation Cost System (TRACS), the Revenue, Pieces and Weight System
(RPW), and the Carrier Cost Systems (CCS).
In this docket, witness Czigler (USPS-T-1) sponsors the cost estimates from the
In-Office Cost System (IOCS). IOCS was improved at the beginning of FY 2005 by the
introduction of a revised data collection instrument that is administered using a laptop
computer. Dr. Czigler summarizes the impacts of the revised questionnaire upon cost
estimates for city carriers and supervisors (USPS-T-1 at 12-13). Witness Bozzo
(USPS-T-46) describes the design process for the revision in light of the purposes of
IOCS and necessary data elements. He also addresses major changes in the data
collection procedures, testing and evaluation conducted prior to implementation, and
major changes in IOCS-based cost estimates for clerks and mail handler labor believed
to result from the new survey instrument. Dr. Bozzo later provided rebuttal testimony
16
(USPS-RT-1) that responded to criticisms of IOCS estimates for Within-County
publications lodged by National Newspaper Association witnesses Heath (NNA-T-1)
and Siwek (NNA-T-3).
Witness Hunter’s testimony (USPS-T-2) addresses the Transportation Cost
System (TRACS), a statistical information system used to distribute Base Year
purchased transportation costs to major mail categories. TRACS has four independent
subsystems, Highway, Freight Rail, Commercial Air and Network Air, each of which
entails a continuing, ongoing survey with its own design and estimation methodology.
Id. at 1. Witness Hunter presents estimates of transportation related costs by major
mail category, together with confidence intervals around major estimates.
The Origin-Destination Information System and Revenue, Pieces and Weight
(ODIS-RPW), the Bulk Mail Revenue, Pieces and Weight System (BRPW), and the
Revenue, Pieces and Weight Adjustment System (ARPW) are presented in the
testimony of witness Pafford (USPS-T-3). These systems are used to present unbiased
Base Year estimates of revenue, pieces and weight underlying the Postal Service
Request together with associated confidence intervals.
The Carrier Costing Systems (CCS) consist of the City Carrier Cost System
(CCCS), addressed in the testimony of witness Harahush (USPS-T-4), and the Rural
Carrier Cost System (RCCS), addressed in the testimony of witness Riddle (USPS-T-5).
Witness Harahush covers the general design of the CCCS, the types of estimates that
are produced, and tables showing the reliability of major estimates. Similarly, witness
Riddle covers the general design of RCCS, the types of estimates that are produced,
and tables showing the reliability of major estimates.
17
No participant in this rate case has challenged any of the data systems or the
estimates they produce, with one limited exception: The National Newspaper
Association (NNA) argues that IOCS based estimates of costs for Within-County
Periodicals constitute assumptions. As explained in greater detail, below – and in the
rebuttal testimony of witness Bozzo (USPS-RT-1) – NNA is unable to challenge the
accuracy of a single IOCS tally. Accordingly, Postal Service data systems continue to
provide reliable estimates of Base Year volume, revenues and costs as the foundation
for the proposals embodied in the Request.
A. The In-Office Cost System (IOCS) Provides Reliable and More Accurate
Estimates of Employee Work Time Devoted to Office Functions and Certain Mail Categories
The In-Office Cost System (IOCS) is a work sampling system designed to
estimate proportions of time (and hence cost) for various activities for sampled crafts,1
including subclass and other characteristics of mail handled in clerk, mail handler, and
city carrier in-office activities. IOCS, and its redesigned data collection instrument
(unveiled in a rate case for the first time in Docket No. R2006-1) are presented in the
testimonies of witnesses Czigler (USPS-T-1) and Bozzo (USPS-T-46). Library
references2 USPS-LR-L-9 and USPS-LR-L-10 document the sample design, estimation
methodologies and computer systems, and provide base year data. Detailed
descriptions of data collection procedures are provided in library references USPS-LR-
L-21 and USPS-LR-L-23. USPS-LR-L-128, a Category 2 library reference sponsored
1 Clerks, mail handlers, city carriers, supervisors, and technical personnel. USPS-T-1 at 2.
18
by Dr. Bozzo, supports his discussion of the redesign of the IOCS data collection
instrument and the impact of those changes.
1. The redesigned IOCS data collection instrument is improved
substantially.
a. Best practices for surveys were used to redesign the data collection instrument.
The redesigned IOCS data collection instrument deployed at the start of FY 2005
was the result of a lengthy development and testing process, incorporating advice from
the U.S. Census Bureau on best practices for survey questionnaire design. Among the
major improvements are (USPS-T-1 at 6-11):
• Data collectors “key what you see”, recording observable mailpiece
characteristics such as markings and barcodes;
• Use of ‘telescoping’, computer-directed branching, to focus questions on the
domain of interest;
• Fewer responses available for a given question, thereby reducing the chance of
selecting seemingly irrelevant, inconsistent, or rarely chosen options;
• Use of ‘first applicable option’, much reduced use of ‘all applicable options’;
• Context-dependent instructions, such as isolation and selection rules for
containers and mailpieces, displayed directly on-screen;
• Questions scripted for reading to telephone respondents;
2 Absent some over indication otherwise, library references identified in this IOCS section are Category 1 (reporting systems material).
19
• Activity questions conform to the facility type, and are better aligned with
operations;
• Route information from the Address Management System is integrated so that
the data collector need only enter the ZIP Code and route number in lieu of
determining the route type;
• When appropriate, supervisor questions explicitly obtain the craft of employees
for which subordinate supervisors are responsible; and
• More extensive validation checks to warn of inconsistencies in responses.
b. The redesigned instrument was tested extensively.
Dr. Bozzo documents the testing of the redesigned data collection instrument in
USPS-T-46, section III, at 17-26.
The software was field-tested in six to nine districts over a 16-month period. This
long beta-testing period provided time for investigation of shifts in the data, and for
incorporation of incremental improvements into the software.
Simultaneously, the Postal Service conducted a "photocopy study" where copies
of mailpieces sampled at the beta test sites were sent to Dr. Bozzo’s employer, LRCA,3
and re-keyed by experienced staff members. The photocopy study results show a clear
reduction in class-level error rates – from 2.6 percent to 1.0 percent – as improvements
were made to the software. USPS-T-46 at 22-24.4
Finally a "keying study" provided a direct comparison of the old and new data
collection software using a common set of test pieces. This demonstrated that the
3 Laurits R. Christensen Associates, of Madison, Wisconsin.
20
redesigned software had subclass-level error rates that were less than half of the old
version. USPS-T-46 at 25-26.
c. The redesign is explained by substantial documentation.
Extensive additional documentation concerning the redesigned data collection
instrument was provided in this docket, including:
• Descriptions of the instrument changes in USPS-T-1, section VI, at 5-11;
• For the first time, a detailed series of flowcharts displaying the logical flow of the
software and a data dictionary of the IOCS data fields in USPS-LR-L-9;
• A new Handbook F-45, “IOCS Field Operating Instructions” in USPS-LR-L-21
that provides screen-by-screen instructions to data collectors;
• Information on the motivation for the redesign and the process used to develop
the instrument, in USPS-T-46, sections I and II, at 2-16;
• Descriptions of the extensive software testing, in USPS-T-46, section III, at 17-
26, and in USPS-LR-L-128;
• Analysis of the impacts on In-Office City Carrier and Supervisor costs in USPS-T-
1, section VII, at 12-13; and
• Analysis of the impacts on Mail Processing costs, including effects on the
formation of cost pools for the mail processing model, at the mail class level in
USPS-T-46, section IV, at 12-13, and in USPS-LR-L-128.
4 Subclass-level error rates also declined markedly. See USPS-T-46 at 24.
21
2. The only challenge to the redesigned IOCS was to its cost estimates for Within-County Periodicals.
The only challenge to IOCS methods came from the National Newspaper
Association (NNA) regarding cost estimates for Within-County Periodicals. NNA
witnesses Heath and Siwek (NNA-T-1 and NNA-T-3, respectively) question the
longstanding methodology for identifying Within-County Periodicals tallies, which
originated with the testimony of witness Degen in Docket No. R94-1 (USPS-ST-12, Tr.
2356 - 2395). Witnesses Heath and Siwek raise a number of situations in which tallies
for Periodicals pieces that may appear to be eligible for Within-County rates may,
nevertheless, have paid Outside-County rates. However, a broader NNA challenge was
limited to cases in which non-subscriber pieces may be required to pay Outside-County
rates. Tr. 29/9673; see also USPS-RT-1 at 6. Dr. Bozzo shows that the remaining NNA
critiques encompass too few pieces to warrant relief. Additionally, the NNA’s proposed
solution of pooling data from the "old" and "new" IOCS instruments lacks technical
merit.
a. The claim that the Postal Service method does not determine whether within-county rates are paid is incorrect.
NNA witness Siwek claims that the Postal Service does not know if the particular
copies sampled by IOCS paid Within-County rates or not, only whether they are eligible
or not. However, the vast majority of IOCS Within-County tallies are confirmed using
mailing statement data indicating that the mailer actually mails at Within-County rates,
as described in Dr. Bozzo’s rebuttal testimony. USPS-RT-1 at 3. Witnesses Heath and
Siwek suggested that mailers might gain or lose eligibility on an issue-by-issue basis
during the course of the year, and further suggested that mailers might nevertheless
22
pay Outside-County rates even if eligible for Within-County rates. However, these
surmises are implausible, and no documentation of any such circumstances was
provided. Tr. 29/9594, 9673; see also USPS-RT-1 at 6. There is, otherwise, no dispute
that mailers would have a strong economic incentive to claim Within-County rates for
eligible subscriber and non-subscriber pieces.
b. Witness Heath’s interpretation of regulations applicable to
non-subscriber copies is incorrect.
NNA witness Heath claims that in several situations Within-County mailers must
pay Outside-County rates, including complimentary copies, expired subscription copies
and advertising copies. However, these are all circumstances where a piece becomes
a non-subscriber copy, and witness Heath has incorrectly leapt to the conclusion that
non-subscriber copies must pay Outside-County rates. In fact, these only pay the
higher Outside-County rate if the percentage of non-subscriber copies exceeds certain
thresholds, such as 10 percent of the total number of copies mailed at Within-County
rates. As Dr. Bozzo shows in USPS-RT-1, Table 1, at 10, the percentage of non-
subscriber copies that would be forced to pay higher Outside-County rates because of
exceeding the 10 percent threshold is only 0.1 percent. Thus, the likelihood of tally
misidentification is remote, and the impact on cost estimates is trivial. However, if
deemed necessary, it would be possible in the future to identify titles with large fractions
of non-subscriber copies and develop special procedures to reduce the possibility of
error.
23
c. Other critiques by witnesses Heath and Siwek do not identify substantial errors.
Witness Heath suggests that routes may wander across county boundaries,
leading to misidentification of Periodical tallies. He concedes that the issue is likely to
be “small”. In fact, an analysis of 9-digit ZIP Codes, which contains routes that are
located strictly within one county, indicates that the potential error due to this issue
would be a maximum of 1.5 percent. It is likely that the actual error is even less than
this since the routes most likely to cross county boundaries are more likely to be outside
of or on the outskirts of towns, and thus less densely populated. USPS-RT-1 at 12.
The Postal Service intended to address this issue by modifying the IOCS data
collection instrument and recording the 9-digit ZIP Code for Periodicals. However, H.R.
6407 now calls into question the need for such action. Section 1003 of that bill, passed
by both the Senate and the House early on December 9, 2006, adds to title 39, United
States Code, section 3626(g) a new subsection (3) which states:
(3) For purposes of this section and former section 4358(a) through (c) of this title, those copies of an issue of a publication entered within the county in which it is published, but distributed outside such county on postal carrier routes originating in the county of publication, shall be treated as if they were distributed within the county of publication.
This subsection indicates that at least part of the issue has been addressed by making
Within-County rates apply to pieces that could be said to have “wandered” into a
neighboring county to the county of origin/publication. That appears to leave in question
only those pieces on routes that do not originate in the county of origin/publication but
which do “wander” into the county of origin for some deliveries. Since the Postal
Service has not studied this issue in any depth, it will need to do so before making a
24
final decision on the merits of collecting addressees’ 9-digit ZIP Codes when Periodicals
pieces are sampled in IOCS.
Witness Siwek also contends that the directories of Periodicals, used to classify
tallies when PostalOne! data are not available, are outdated. However, the directories
are more timely than witness Siwek’s speculation suggests, as Dr. Bozzo shows in his
rebuttal testimony. USPS-RT-1 at 14. Furthermore there is little material change from
year to year in the data provided in the directories, USPS-RT-1, Table 2, at 15; Tr.
35/12337. This is as expected for the small, local publications (NNA members), who
are unlikely to experience wide swings in circulation.
Witness Siwek also suggested that two procedures used in IOCS to classify
tallies could lead to inaccuracies: i) the ‘local appeal’ criterion, and ii) the reuse of hand-
checked results from the previous two years. However, the few tallies that had been
classified with these procedures were re-checked by telephoning the local postmaster
and by using the most up-to-date information, and no tally changed its classification.
USPS-RT-1 at 16-18. This provides further evidence that IOCS procedures are, in fact,
accurate and reliable.
The failure of witnesses Heath and Siwek to document a single misclassified tally
(e.g., a tally of a Periodicals title that demonstrably did not employ Within-County rates),
together with Dr. Bozzo's demonstration that the NNA critiques apply to very few Within-
County pieces, confirm that the procedures used by the Postal Service to classify
Within-County Periodicals are reasonable and provide accurate estimates of costs.
USPS-RT-1 at 18.
25
d. Witness Siwek’s pooling proposal is inappropriate and likely to strongly bias within-county periodical costs.
Witness Siwek proposes that the alleged IOCS errors can be ameliorated by
pooling FY2005 with FY2004 data. However, his own analysis shows that the
estimated costs for FY2005 are larger than for FY2004, at a statistically significant level,
an increase for which he does not find an explanation. He avoids the obvious
conclusion that the increase is due, in part, to the improved IOCS data collection
instrument and that Within-County rates were understated in previous years. USPS-
RT-1 at 20-21. Moreover, witness Siwek himself accepts that it is not appropriate to
pool data from two significantly different populations. Tr. 29/9685 (response to
USPS/NNA-T3-17). Furthermore he agrees that FY2005 cost estimates should ideally
be based on FY2005 data rather than pooled multi-year data. Response to USPS/NNA-
T3-17(b), Tr. 29/9685. Pooling data would inappropriately bias the FY2005 cost
estimates downward, albeit in the direction that would tend to lower the total postage
NNA members would expect to pay.
Witness Siwek also claims that his pooling methodology is an application of
‘sequential sampling’. However, it transparently is nothing of the sort as Dr. Bozzo has
demonstrated. USPS-RT-1 at 22.
In recommending multi-year pooling of cost data, witness Siwek is asking for
"relief from costing errors he has not demonstrated exist, from a costing system he has
not demonstrated is inaccurate." USPS-RT-1 at 24. Since the edit processes that
identify Within-County Periodicals have not changed, pooling the IOCS data does not
even specifically address the alleged problems, insignificant as they may be. Therefore,
26
the Commission should continue to employ the accepted method for identifying Within-
County Periodicals costs in IOCS and reject NNA's proposal to pool costs from the FY
2004 and FY 2005 IOCS samples.
B. TRACS Provides A Reasonable And Sound Basis For Distributing Transportation Costs To Mail Categories
Transportation Cost System (TRACS) is a statistical sampling and data collection
system used to distribute Base Year (BY) purchased transportation costs to mail
categories. TRACS is composed of four independent subsystems: Commercial Air,
Network Air, Highway, and Freight Rail. These four subsystems are continuous
ongoing surveys, each with its own survey design and estimation methodology.
Postal Service witness Hunter’s testimony (USPS-T-2) and four of the Category 1
Library References he cites, USPS-LR-L-27, 29, 30, and 31, describe the sample
designs and estimation methodologies for these four subsystems. TRACS data
collection procedures can be found in Chapters 5, 6 and 8 of Handbook F-65, filed as
Library Reference USPS-LR-K-21/R2005-1. The data collection software, and
supplemental statistical programs policies and data collection instructions, are
documented in Category 1 library references USPS-LR-L-28 and USPS-LR-L-23,
respectively.
The Postal Service expanded TRACS sampling to include the FedEx Day Turn
network. TRACS now distributes those $1.1 billion volume variable transportation costs
to mail categories.
27
The Postal Service improved the TRACS documentation several cases ago,
including updated mathematical formulas for the distribution keys of the Highway,
Commercial Air, Network Air, and Freight Rail subsystems and modes within, allowing
participants to review the TRACS estimation methods without having to parse
thousands of lines of SAS programming code. The updated documentation promotes a
full and complete understanding of the TRACS design and estimation methodologies.
The Postal Service has also improved TRACS’ overall sample design and
allocation on Highway, Commercial Air, and Network Air modes since the last litigated
case (Docket No. R2000-1). As a result, CVs for major mail categories have been
reduced substantially.
The success of the improved TRACS documentation is confirmed by the fact that
no discovery was directed to Witness Hunter and no participant questioned any of the
TRACS cost estimates or their distribution to major mail categories. TRACS produced
the following estimates (USPS-T-2 at 14-21):5
Table 1. BY05 Inter-BMC Highway Estimated Costs and Confidence Intervals Table 2. BY05 Intra-BMC Highway Estimated Costs and Confidence Intervals Table 3. BY05 Inter-SCF Highway Estimated Costs and Confidence Intervals Table 4. BY05 Intra-SCF Highway Estimated Costs and Confidence Intervals Table 5. BY05 Freight Rail Estimated Costs and Confidence Intervals Table 6. BY05 Commercial Air Estimated Costs and Confidence Intervals Table 7. BY05 Network Air Day Turn Estimated Costs and Confidence Intervals Table 8. BY05 Network Air Night Turn Estimated Costs and Confidence Intervals.
5 Indeed, the biggest change in TRACS since Docket No. R2005-1 is that costs for Passenger Rail (AMTRAK) need not be estimated. Compare, USPS-T-2/R2006-1 with USPS-T-3/R2005-1.
28
The Commission should accordingly conclude that the TRACS estimators properly
reflect the selection probabilities and produce unbiased estimates for the costs
distributed in Tables 1-8.
C. The Origin-Destination Information System and Revenue, Pieces and Weight (ODIS-RPW), the Bulk Mail Revenue, Pieces and Weight (BRPW) System, and the Revenue, Pieces and Weight Adjustment System (ARPW) Continue to Provide Reliable Data for the Postal Service Use and for the Ratemaking Process.
ODIS-RPW is a data collection sampling system used to provide estimates of
revenue, pieces (volume) and weight for single-piece, for non-bulk entered mail
categories and development of associated unit costs. Data are collected by trained field
data collectors, entered in laptop computers and processed quarterly and yearly. From
the sample data, estimates of revenue, pieces and weight are used to distribute census
postage revenue to the measured categories of mail. BRPW provides estimates of
revenue, pieces and weight totals for bulk entered mail categories that have
corresponding postage revenues in the Postal Service’s accounting system. ARPW is
the system that combines ODIS-RPW and BRPW with other data to produce RPW
Report estimates that supply the revenues, volumes and weight for ratemaking
purposes.
Postal Service witness Pafford’s testimony (USPS-T-3) describes the ODIS-
RPW, BRPW and ARPW systems and describes the universe of related (Category 1)
RPW library references: USPS-LR-L-14, 15, 16, 17, 18, 19, 20, 23 and USPS-LR-K-
22/R2005-1. The RPW estimates produced from these systems are used throughout
the Postal Service’s Request.
29
1. Revenue, piece and weight estimates continue with low coefficients of variation (High Precision).
In this and prior proceedings, and as required by Rule 31(k)(2)(ii), the Postal
Service produces estimates of sampling variability (coefficients of variation or CVs).
Compared to RPW estimates from Docket No. R2005-1, sample sizes remained
relatively constant in the ODIS-RPW sampling system (USPS-T-3 at 5), and BRPW
(USPS-LR-L-17, table 1 and USPS-LR-K-17/R2005-1, table at 2). Sample sizes are
one of the key inputs to sampling variability (equation (8) in USPS-LR-L-14). Through
continued use of large samples, and with the limited updates described by witness
Pafford (USPS-T-3 at 4-9), the Postal Service continues to maintain coefficients of
variation of less than 1 percent for most major mail categories (Tables 1, 2 and 3,
USPS-T-3 at 10-12). The use of census revenue, pieces and weight data, with its
concomitant absence of sampling variability from postage statements entered through
PostalOne! and the BRPW System, contribute to the high precision of the estimates and
low CVs.
The National Newspaper Association (NNA) made sure these facts were
documented in interrogatory responses. Witness Pafford, responding to NNA
interrogatories NNA/USPS-T3-12, and 20-21 (Tr. 9/2260, 2273-92, 2300-01),
specifically identified the worksheets showing the respective estimates of revenue,
pieces and weight from the ODIS-RPW sampling system (worksheet ‘drpw’) and the
primarily census-based BRPW system (worksheets ‘brpw’, ‘auto’ and ‘nonauto’). A
study of these worksheets shows, for example, that 100 percent of the Standard Mail
estimate comes from the primarily census-based BRPW system. The estimates of
30
revenue, pieces and weight that support the ratemaking process accordingly maintain
their high levels of consistency and precision.
2. Within-County Periodicals RPW estimates remain sufficiently
precise for ratemaking purposes.
NNA consistently focuses in rate cases upon the RPW estimates for Within-
County Periodicals. In this docket, witness Pafford responded to 27 interrogatories from
NNA. In these responses, witness Pafford noted 1) the continued importance of the use
of census PostalOne! data (Tr. 9/2257 (response to NNA/USPS-T3-9)), 2) the large
office counts of automated offices used for census revenue, pieces and weight counts
(Tr. 9/2259 (response to NNA/USPS-T3-11)), 3) the controlling of revenue estimates to
census Periodical AIC revenue accounts (Tr. 9.2254 (response to NNA/USPS-T3-6)), 4)
the consistency of the non-automated panel office probability-based strata and sample
sizes from base year 1999 to Base Year 2005 (Tr. 9/2255, 2299 (responses to
NNA/USPS-T3-7,19), and 5) the growing contribution of the automated office panel to
the total Within-County estimates of revenue, pieces and weight. In base year 1999, 49
percent of Within-County Periodicals volume estimates were driven by the census
based automated office panel while in Base Year 2005 this percentage increased to
60.6 percent (Tr. 9/2306, 2256 (responses to NNA/USPS-T3-27 and NNA/USPS-T3-8,
respectively). The Postal Service remains committed to providing reliable and precise
estimates for ratemaking purposes, including Within-County mail.
31
D. The Carrier Cost Systems Provide A Reliable And Uncontested Means For Distributing City And Rural Carrier Costs To Subclasses Of Mail.
The Carrier Cost Systems consist of the City Carrier Cost System (CCCS) and
Rural Carrier Cost System (RCCS), and are described in the testimonies of witnesses
Harahush (USPS-T-4) and Riddle (USPS-T-5), respectively. In turn, the sample design
and computer system processing are detailed in Category 1 library references USPS-
LR-L-11 and USPS-LR-L-12 for CCCS and RCCS. Handbook F-65, Chapters 3 and 4,
in Category 1 library reference USPS-LR-K-21/R2005 describe data collection
procedures. Supplemental data collection policies and instructions appear in Category
1 library reference USPS-LR-L-23, Supplemental Statistical Programs Policies & Data
Collection Instructions. CODES software is documented in Category 1 library reference
USPS-LR-L-13, CCCS-RCCS CODES Computer System Documentation and Source
Code.
The City Carrier Cost System is a probability sample of city carrier letter routes,
used to estimate the numbers of actual stops, potential stops, and the distribution of
mail by shape and subclass. The data are used to distribute attributable costs for city
carrier street time to subclasses of mail.
The Rural Carrier Cost System is a probability sample of rural carrier routes. For
each sampled route, all collected mail and a sample of all delivered mail are counted
and recorded. Mail characteristics collected on sampled, delivered mail include class,
subclass, and compensation category (shape or special service). The data are used to
distribute attributable costs for rural carriers to subclasses of mail.
32
The quality of data from the Carrier Cost Systems has been uncontested in this
proceeding. Estimates for most categories are very precise, with coefficients of
variation (CVs) less than one percent for major categories. See USPS-T-4, Tables 1-5,
and USPS-T-5, Tables 1-4. The estimates of attributable costs for subclasses of mail
from these systems are highly reliable inputs to the Postal Service Request.
Witnesses Milanovic (USPS-T-9, base year costs) and Kelley (USPS-T-30,
delivery costs by rate category) are the primary users of output from the Carrier Cost
Systems. The Postal Service and the Postal Rate Commission have previously and
should again rely upon the Carrier Cost Systems in this docket.
III. THE VOLUME FORECASTS INCLUDED WITH THE POSTAL SERVICE’S FILING ARE PREDICATED ON THE WELL-ESTABLISHED FORECASTING METHODOLOGY EMPLOYED IN PREVIOUS CASES To obtain its test year volume forecasts in this proceeding, the Postal Service
relies upon familiar expert witnesses employing familiar forecasting procedures. The
testimony of witness Thress appears as USPS-T-7, and the testimony of witness
Bernstein appears as USPS-T-8. Both of these witnesses have over a decade of
intensive experience working on postal demand research with their colleague, Prof.
George Tolley, and presenting rate case testimony on forecasting and forecasting-
related topics. As those witnesses explain, test year forecasts are based primarily on a
careful examination of the markets in which mail services are offered, the factors which
have explained mail volume changes historically, and the best available information as
to how those factors are expected to change going forward. Such a forecasting
procedure has in the past generally proven highly accurate in providing mail volume
forecasts over the typical rate case time horizon.
One feature of the Postal Service’s forecasting presentation in this case is a
continuing focus on the impact of technological diversion on the Postal Service. Both
witness Bernstein and witness Thress address trends in technological diversion, and
witness Thress explains current efforts to actually integrate the expected impact of such
technological diversion into the test year forecasts. Their testimonies in this case on
these issues clearly build on their previous testimonies to the Commission addressing
the same topics. For example, just in the last rate case, see the testimony of witness
Bernstein (Docket No. R2005-1, USPS-T-8) at pages 22-35 and 45-50, and the
testimony of witness Thress (Docket No. R2005-1, USPS-T-7) at pages 23-33, and 296-
33
304. In Docket No. R2001-1, as in this case, the primary focus of the testimony of
witness Bernstein (Docket No. R2001-1, USPS-T-10) actually was on the impact of
technological diversion. The testimonies of witnesses Thress and Bernstein in this case
jointly show why technological diversion due to innovations such as the Internet is likely
to be a major concern for the foreseeable future.
While the forecasting witnesses provided hundreds of pages of context and
discussion, the actual volume forecasts are essentially summarized in Table 1 on pages
9-10 of the testimony of witness Thress. For each mail category, actual volume is
shown for FY 2002 and FY 2005, along with the average annual growth rate over that
period, and forecast volume is shown for the test year (FY 2008) assuming current rates
(denominated as TYBR), and for the test year assuming implementation on May 6, 2007
of the Postal Service’s proposed rates (denominated as TYAR), along with the implicit
annual growth rates associated with each forecast. Table 1 shows that, on a TYAR
basis, the Postal Service is expecting volume declines in First-Class Mail, Priority Mail,
Express Mail, and Periodicals, and volume growth in Standard Mail, Package Services,
and Special Services. Overall, the growing subclasses are expected to generate
slightly fewer additional pieces than the declining subclasses are expected to lose, with
a consequent forecast of total domestic mail pieces decreasing so slightly as to be
essentially flat (in the -0.1 annual percent range) between FY 2005 and FY 2008.
These figures show growth that cannot be considered robust in comparison with
historical averages over the decades of the 1980s and 1990s, and serve to highlight
significant evolutions in the postal environment in the last several years.
34
A. There Have Been Only Minimal Changes in the Postal Service’s Forecasting Methodology, and No Intervenors Propose Alternative Forecasts Based on Alternative Forecasting Methodologies
As witness Thress indicated, there have been no major general methodological
changes relative to the presentation sponsored by him and relied upon by the
Commission in Docket No. R2005-1. USPS-T-7 at 13. Several new explanatory
variables, however, were introduced in one or more of the demand equations
presented. Id. In addition, for this case, separate demand equations were estimated for
single-piece and workshared First-Class cards and for Standard Nonprofit and Nonprofit
ECR mail volumes. Id. Lastly, several minor changes were made which could be
considered methodological in nature. These include a redefinition of the Internet
variable used to model the demands for First-Class single-piece letters and cards, and a
change to the methodology used to develop separate forecasts for First-Class and
Standard automated versus non-automated mail volumes. Overall, however, none of
these constitute major departures from the approach to demand analysis and
forecasting adopted by the Commission in previous cases.
Moreover, no direct testimony in this proceeding explicitly presents any
comprehensive alternative volume forecasts based on an alternative forecasting
methodology or demand analysis. APWU witness Kobe, for example, does present an
alternative volume forecast, but she merely uses witness Thress’ forecasting
methodology to illustrate anticipated volume and revenue consequences of her
alterative rate proposals for First-Class Mail. APWU-T-1 at 11-13. PostCom witness
Angelides, on the other hand, suggests that an elasticity other than the Standard
Regular subclass elasticity may be more appropriate for forecasting Standard Regular
35
parcels. Postcom-T-4.1 Although he has an exercise which he presents as an
illustration of the potential effects of using a higher elasticity, he never claims that the
elasticity he uses in that example is correct. Moreover, his simplistic exercise bears
little resemblance to the actual methodology used by the Postal Service (which involves
both witnesses Thress and Kiefer) to derive volume forecasts at the level of
disaggregation of interest to Dr. Angelidies, and he certainly never purports to offer it as
a formal alternative forecast proposal. Id. at 9-10. Thus, while Dr. Angelides questions
the accuracy of the Postal Service’s forecast of Standard parcel volumes, he
acknowledges the lack of sufficient data to recommend any concrete improvements. Id.
at 8-9. Finally, even though Dr. Clifton and other GCA witnesses challenge two of the
1 The basic argument of Dr. Angelides is that, since parcels are such a small
part of the subclass, factors more relevant to categories other than parcels are likely to be driving the subclass elasticity, making that elasticity less likely to be applicable to parcels than the other more dominant parts of the subclass. Id. at 4-6, 7-8. It is difficult to argue with the logic of his suggestion that a specific elasticity for parcels might well be different from the aggregate subclass elasticity. His further argument, however, that the much more elastic estimate for Destination Entry Parcel Post might be considered a proxy for the unknown elasticity of Standard Regular parcels is not convincing. See id. at 6-7. For example, the point that Standard parcels are entered in bulk is a feature comparable to Destination Entry Parcel Post, but is likewise a comparable feature of the dominant parts of the Standard Regular subclass as well. Similarly, the fact that parcel shippers have non-postal alternatives does not distinguish Standard parcel mailers from the mailers of other types of Standard Mail, who also have non-postal alternatives for functions such as advertising. Dr. Angelides, however, has not studied other parts of Standard mail (Tr. 27/9368), and therefore cannot draw any conclusion that the availability of substitutes makes Standard parcels more price sensitive than other Standard Mail. Moreover, Dr. Angelides was not aware of any alternative carriers who specifically target Standard parcels by offering lower rates for parcels under one pound. Tr. 27/9368-69. This makes the availability of non-postal alternatives much less comparable than it would be, for example, with respect to the private carriers who vigorously compete directly in the same market as Destination Entry Parcel Post. Overall, Dr. Angelides may be correct that the price sensitivity of Standard parcels might deviate from that implied by the overall subclass elasticity, but he has not shown that it is necessarily higher.
36
price elasticities estimated by witness Thress, Dr. Clifton presented no alternative
forecast based on different demand parameters in his direct testimony. GCA-T-1. His
focus in that testimony was clearly on the use of demand parameters for the purposes
of pricing and rate policy. Id. at 56-60. In any event, as discussed at length in the
following section, his testimony and analysis are seriously flawed.
Thus, to meet its need for before-rates and after-rates forecasts, the Commission
should once again rely on the comprehensive forecasts and forecasting methodology
sponsored by witness Thress. That workproduct, in conjunction with the testimony of
witness Bernstein, constitutes a thorough and comprehensive effort to address the
challenges of forecasting based on a rigorous and systematic analysis of historical data,
and balanced and well-reasoned judgments regarding the likely course of future
developments. It represents continuation of the forecasting approach mutually and
successfully relied upon by the Postal Service and the Commission over many cases.
To the extent that witnesses for GCA attempt to challenge specific components of the
demand analysis, as discussed next, their attempts fail and provide no basis to deviate
from the Postal Service’s proposed methodology for forecasting.
B. GCA’s Witnesses Fail to Provide Any Basis to Alter the Forecasting
Parameters Presented by the Postal Service GCA (ultimately) submitted the testimony of three witnesses to challenge the
forecasting presentation sponsored by the Postal Service – Clifton (GCA-T-1), Martin
(GCA-T-2), and Kelejian (GCA-T-5). The position that GCA is attempting to advocate
through these witnesses is that the demand for single-piece First-Class Mail is much
more price sensitive than reflected in the own price elasticity estimated in this case by
37
Postal Service witness Thress. Importantly, the elasticity estimated by witness Thress
in this case is broadly consistent with the general level of the estimates jointly relied
upon by the Postal Service and the Commission over many cases, including as recently
as last year in Docket No. R2005-1. While there have been improvements in
methodology over those cases, and some resulting variation in the elasticity estimates,
the overall estimated level of price sensitivity has remained broadly consistent (in the
general neighborhood of -0.2) ) for many years.
The picture which the GCA witnesses attempt to paint (with the exception of Prof.
Kelejian, whose testimony is confined to technical econometric issues) is that, as
electronic alternatives have developed as substitutes for correspondence and
transaction previously carried as First-Class Mail, the natural result of these
technological and market changes must be that such mail has become more price
sensitive. While this argument may seem to have some superficial appeal, it withstands
neither critical scrutiny nor empirical analysis. Review of the testimonies of GCA
witnesses Martin and Clifton reveals the shortcomings which render this argument
hollow.
1. Prof. Martin’s research approach is flawed, and his results do not
support his conclusions. On behalf of GCA, Prof. Martin conducted research to examine emerging
competitive substitutes for First-Class letter mail. GCA-T-2 at 1. His work included both
survey research, and examining information and data from other sources. Id. His focus
was to examine the potential impact of postal rates on usage of such alternatives. Id. at
1-2. Prof. Martin, however, made a critical error in his approach to his research. He
38
insists that, for purposes of assessing the impact of future postal rate changes on
electronic diversion, it is “not germane” to consider how much diversion would occur in
the absence of postal rate increases. Tr. 21/7523. In his view, attempting to explore
the amount of diversion that would occur without rate increases is “not the question
before the house,” and he therefore apparently believes it can reasonably be ignored.
Tr. 21/7616-17.
Prof. Martin is simply mistaken in this approach. It is impossible to identify the
“impact” of postal rate changes on the amount of electronic diversion in the absence of
a reasonable basis to understand the amount of diversion that would occur without rate
changes. It is for exactly this type of reason that Commission Rule 54(j)(5) requires
separate and distinct volume forecasts for a “before-rates” scenario and an “after-rates”
scenario, and that the Postal Service includes estimates of electronic diversion in both
its before-rates and after-rates forecasts. By failing to structure his research
accordingly, Prof. Martin has precluded an adequate foundation to support his alleged
conclusions.
Ironically, Prof. Martin’s own testimony begins with an acknowledgment that
previous researchers exploring the development of electronic alternatives have not
identified postal rate increases as playing any role in that process, much less a critical
role. GCA-T-2 at 1. Prof. Martin, however, refuses to draw the logical inference that
postal rates were not mentioned in the previous studies he examined because those
researchers did not identify postal rate changes to be a key factor in the emergence of
electronic alternatives. Tr. 21/7520, 7551-53. Rather than admit that previous
researchers might have omitted mention of postal rates simply because they found
39
other factors as much more important in driving the adoption of electronic alternatives,
Prof. Martin expressed an inability to reach any such judgment. Tr. 21/7553.
Prof. Martin’s unwillingness to draw this logical inference, however, should not
impede others from doing so. Witness Bernstein, for example, explicitly made the point
that one reason why he believes that factors other than postal rates are dominant in
terms of explaining the growth in electronic alternatives is the numerous studies he has
examined on the topic that do not mention postal rates. Tr. 6/1443-44. Prof. Martin was
given ample opportunity to provide some other explanation for this significant
divergence between his work and that of previous studies, and his inability to do so
demolishes the credibility of his attempts to avoid admitting the obvious. Prof. Martin
refuses to concede the point because to do so would only highlight the fundamental flaw
in his research approach. If factors other than postal rates largely explain electronic
diversion, then there is little role left for the only factor in which he professes any
interest.
Contrary to Prof. Martin’s claim, however, that “no attention” was paid to the
potential role of postal rates in earlier studies (GCA-T-2 at 1), that potential role was
very explicitly examined and rejected over 12 years ago in testimony presented to the
Commission by Prof. Daniel Spulber. As discussed with Prof. Martin at Tr. 21/7553-55,
Prof. Spulber presented testimony in Docket No. R94-1 on behalf of various parties.
See Rebuttal Testimony of Daniel F. Spulber on Behalf of AMMA, MASAI, DMA, and
MOAA (AMMA et al.-RT-2), Sept. 7, 1994 (Docket No. R94-1, Tr. 19/9183-9239). Prof.
Spulber, with a background in regulated industries including telecommunications,
conducted “an economic analysis of the effectiveness of adjusting first-class (sic) postal
40
rates as a competitive response to the diversion of some types of first-class mail (sic) to
electronic forms of transmission.” (AMMA-et al.-RT-2 at 2, Docket No. R94-1, Tr.
19/9185). Prof. Spulber’s conclusions in Docket No. R94-1 were plainly stated:
Technological and market changes are increasing the benefits and reducing the costs of electronic transmission. These factors are responsible for the rapid expansion of electronic transmission. These ongoing and fundamental changes are entirely independent of postal rates. They can no more be diverted or slowed by a change in postal rates than a reduction in the cost of feeding horses would have halted the development of the automobile.
(AMMA-et al.-RT-2 at 12, Docket No. R94-1, Tr. 19/9195). In this docket, another witness with substantial telecommunications expertise
appeared, Prof. Sidak, who actually has co-authored two books with Prof. Spulber. Tr.
32/10873. Although unaware of Prof. Spulber’s earlier testimony, Prof. Sidak endorsed
the thrust of the conclusions by Prof. Spulber quoted above. Tr. 32/10875-77. That it is
the increasing benefits and declining costs of electronic transmission which are
responsible for its rapid expansion seems to Prof. Sidak to be “pretty uncontroversial.”
Tr. 32/10876. He further states that he has no basis to disagree with Prof. Spulber’s
contention that these developments are independent of postal rates. Id.
One significance of Prof. Spulber’s earlier testimony is that, as noted above, it
directly refutes the claim by Prof. Martin that he is breaking new ground by attempting to
examine the relationship between postal rate changes and the growth in electronic
diversion. More importantly, though, the broader significance of the Spulber testimony,
and the similar testimony in this docket from Prof. Sidak, is that they underscore why
Prof. Martin’s research strategy is fundamentally flawed. By professing no interest in
the amount of electronic diversion that would occur independent of postal rate changes,
41
witness Martin is intentionally ignoring what the other experts have determined to be its
critical drivers. Looking only in the wrong places, Prof. Martin is unavoidably going to
reach the wrong conclusions.
In his defense, Prof. Martin might argue that Prof. Sidak did not testify in this
case until the round after Prof. Martin’s testimony was prepared and presented, and that
he was unaware of Prof. Spulber’s earlier testimony. (Indeed, Prof. Martin declined to
comment on the limited portions of Prof. Spulber’s testimony presented to him during
hearings on the basis that he was unfamiliar with the totality of the work. Tr. 21/7554-
55.) But Prof. Martin already had available other earlier studies he cites, which likewise
identified factors other than postal rate as being the ones that would influence the pace
and intensity of electronic diversion. A clear example of this is the material prepared in
2003 by Greg Schmid for the President’s Commission on the United States Postal
Service. Prof. Martin cites Mr. Schmid in his conclusion in support of his claim that
postal rates are a triggering device for customers to examine electronic alternatives.
GCA-T-2 at 56.
As Prof. Martin agreed during cross-examination, however, Mr. Schmid did not
identify any role for postal rate changes, either in the quote presented by Prof. Martin on
page 56 of his direct testimony, or in Mr. Schmid’s discussion of various scenarios that
could result in greater or lesser diversion. Tr. 21/7599-7607. Mr. Schmid instead
identified other factors that he suggested would have an impact on diversion, and Prof.
Martin further agreed that such factors could to some extent play a role similar or
related to the “triggering device” role he is ascribing to postal rate changes. Tr.
21/7605-06. Yet in presenting neither the factors that could lead to a higher-diversion
42
scenario, nor the factors that could lead to a lower-diversion scenario, does Mr. Schmid
even mention postal rates. Tr. 21/7607.
Thus, for Prof. Martin to quote Mr. Schmid in support of his assertion that postal
rates are a triggering device for electronic diversion is, at best, puzzling. It is even more
puzzling when one examines the substance of the quote from Mr. Schmid that appears
on page 56 of GCA-T-2. In that quote, (which actually appears on page 9 of Mr.
Schmid’s report, rather than page 29 as indicated in the footnote in Prof. Martin’s
testimony), Mr. Schmid highlights the extremely large inherent cost advantages in an
electronically-based payment system versus a paper-based system, quoting an order of
magnitude figure of three-to-one. Stating the obvious, Mr. Schmid then notes that it is
such inherent cost differentials that will fuel diversion, giving companies significant
incentives to induce their customers to embrace an electronically-based system. In
making such observations about the broader relative costs and benefits of an electronic
versus paper system for companies and consumers, Mr. Schmid is following exactly the
same tack taken earlier by witness Spulber. (See, e.g., Docket No. R94-1, Tr. 19/9210-
12, 9218-20.)
When questioned orally regarding how the quote from Mr. Schmid relates to the
portion of his testimony in which it was presented, Prof. Martin responded that what he
sought to draw from the quote was reflected in the three sentences in his testimony
immediately following the quote. Tr. 21/7600. Certainly there is no disagreement about
the first of those sentences. (“In other words, the diversions of either consumers or
businesses are interactive with and upon one another.”) What is startling appears in the
next two sentences (the concluding sentences of Prof. Martin’s direct testimony):
43
And diversion is driven by inherent and important factors for both consumers and businesses that out weigh any offered by traditional mailing of payments and billing statements. The solution is obviously not found in raising First Class postage prices, which seems to trigger even more diversion.
GCA-T-2 at 56. Compare those two sentences from Prof. Martin’s testimony with two
sentences from the earlier testimony of Prof. Spulber:
The argument that electronic diversion is sensitive to first-class (sic) postal rates is fundamentally flawed since it is inconsistent with technological and market developments in computers and telecommunications. As a consequence of these developments, electronic transmission provides a number of advantages that override any effects of small changes in the price of first class mail (sic).
AMMA-et al.-RT-2 at 2, Docket No. R94-1, Tr. 19/9185.
Two things are quite striking about these quotes. First, both witnesses are in
absolute agreement that electronic transmissions offer benefits and advantages that
overwhelm (“out weigh” and “override”) the comparable features of paper-based
systems, and that these inherent benefits and advantages are the factors driving
diversion. Second, despite the complete congruence of their stated beliefs on those
facts, they draw diametrically opposite conclusions on the relationship between future
postal rate changes and diversion. Prof. Martin’s erroneous conclusion regarding postal
rate increases as triggering events clearly does not flow from anything he earlier draws
from Mr. Schmid, because it represents a clear departure from even his own
assessment (presented just one sentence earlier) of what is actually driving diversion,
an assessment which he shares not only with Mr. Schmid, but with Prof. Spulber and
Prof. Sidak as well (to say nothing of witnesses Bernstein and Thress).
44
Prof. Martin, therefore, has only his survey research to fall back upon as a basis
for his assertions on the “triggering device” hypothesis. That hypothesis is proffered at
numerous points in the testimony, and articulated most fully as follows:
Postal rates seem to be a future trigger for diverting from mailed bill payments. That data suggest that, once motivated to switch from the mailed payments by the price (or changes in the price) of postage, major mailers then use other competitive attributes for the switching or diversion decision. . . . As with major mailers, postal rates seem to be a future trigger for minor mailers diverting from mailed bill payments. The data again suggests that minor mailers then use other competitive attributes for the switching or diversion decision.
GCA-T-2 at 23, 27 (Emphasis in original). Prof. Martin uses similar variations on the
“trigger” theme as the major thrust of the conclusions he purports to draw from his
survey research. Id. at 2, 21, 24, 25, 28, 51, 56.
The statements quoted above, however, present a gross distortion of Prof.
Martin’s survey. The notion that his survey respondents indicated to him that other
competitive attributes come into play only after postal rate changes have motivated a
switch is absurd. No such inquiry was put to them. The reality of his survey is quite
different, and underscores three points. First, every reported category of survey
respondents ranked postal rate changes as the least important factor when deciding
what method of bill payment to use. Second, even if the survey otherwise shed any
light on respondents’ actual reactions to potential postal rate changes, it cannot be
construed to identify the true “triggers” leading to diversion, because respondents were
offered no opportunity to indicate any “triggers” other than postal rate changes. Third,
poor wording of the survey’s “trigger” questions in fact precludes those questions from
45
shedding any light even on how respondents might react to specific postal rate
changes.
Before addressing these points, however, it is perhaps necessary to summarize
the structure and flow Prof. Martin’s survey. For consumers, he first obtains information
about what portion (if any) of their bill are still paid by mail, and on the basis of their
responses he segments consumers into one of four categories (hard core mailer who
pay all bills by mail, major mailer who pay over half their bills by mail, minor mailers who
pay over half their bill electronically, and electronic mailers who pay all of their bills
electronically). GCA-T-2 at 19, E-2 – 3. Next, he asks consumers to rate 10 potential
factors that might affect the method they use to pay bills. Id. at E-4 – 6. The factors are
cost, convenience, timing, delivery assurance, due date receipt, provider preference,
security of payment, time involvement, tracking payment, and future postal rate
increases. Id. Only after eliciting these rankings of competitive attributes does the
survey ask consumers two subsequent questions about potential stamp prices at which
they would seriously consider switching to electronic payment, and about how likely
they would be to switch if they knew the Postal Service was planning regular (e.g.,
annual) increases in postal rates. Id. at E-7. (For ease of reference, these two
questions are referred to in this discussion as the “trigger” questions, as they were in
the cross-examination of Prof. Martin. Tr. 21/7608-09.) The structure and flow of the
business portion of the survey were similar, although business respondents were
grouped as either primarily business-to-business mailers or business-to-consumer
mailers, and one of the trigger questions preceded the competitive attribute question,
and one followed. Id. at 35-36, G-6 – 9.
46
a. The survey results fundamentally confirm the extremely
minor role of postal rates in the greater scheme of electronic diversion.
Returning to point number one, the most noteworthy result of Prof. Martin’s
survey (indeed, the only noteworthy result of his survey in terms of this case) is the plain
fact that, for every consumer and business segment for which he reported results,
“future postal rate increases” ranked as the least important factor potentially affecting
choice of payment method. Id. at 22, 26, 30, 47. Given the opportunity to indicate how
postal rate changes compare to a variety of other factors, each respondent category
rated postal rate changes lower than every other possibility suggested – the tenth of
ten. To assess how damaging these findings are to the themes that Prof. Martin would
prefer to espouse, one need only consider how far Prof. Martin was willing to go to try to
avoid having to acknowledge them. See Tr. 21/7526, 7580-85, 7628, 7637.
Moreover, nothing in the manner in which these questions were posed provides
any basis whatsoever to support the assertion that switching based on a comparison of
these attributes occurs only after being triggered by a change in postal rates. Prof.
Martin makes that erroneous claim on pages 23 and 27 of his direct testimony (as
quoted above), and repeated it on the stand at Tr. 21/7606. Yet not only did both
consumer and business respondents rank the postal rate increase factor lower than all
others, but, as Prof. Martin later admitted, the order of the questions was such that
consumer respondents had not even been asked the trigger questions regarding postal
rates when asked to rate the competitive attributes. Tr. 21/7611. There simply is
nothing in the survey or its results which could possibly support any linkage between
how respondents’ switching decisions are influenced by the nine non-postal-rate factors
47
in the list of competitive attributes, and the presence or absence of postal rate changes.
Id. Prof. Martin creates such a linkage out of whole cloth.
The absurdity of any claim to the contrary is readily confirmed by consideration of
the evolution of electronic diversion to date. For example, with great reluctance, Prof.
Martin eventually confirmed that the share of mailed bill payments declined by more
between 2003 and 2005, a period in which there were no (nominal) postal rate changes,
than it did between 2000 and 2003, a period in which the basic rate for First-Class Mail
went from 33 cents to 37 cents. Tr. 21/7535-36, 7594-99. Obviously, electronic
diversion has been ongoing, both in periods of postal rate changes and in periods of
nominal postal rate stability. Surely Prof. Martin would not suggest that electronic
diversion between 2000 and 2003 was driven by the effects of the competitive attributes
he was asking his respondents to rate, once consideration of such factors was
motivated by postal rate changes, but unaffected by such attributes between 2003 and
2005 in the absence of any postal rate changes. Or that there were some other set of
factors affecting electronic diversion between 2003 and 2005. Any suggestions along
these lines would be so clearly untenable as to merit no further discussion.
b. Prof. Martin’s results on the alleged triggering role of postal
rates on electronic diversion are merely a function of his flawed research approach.
In terms of point number two, Prof. Martin’s flawed research approach destroys
his ability to draw meaningful conclusions from his survey regarding the actual “triggers”
of electronic diversion. Having spent substantial amounts of effort both studying and
reporting in his testimony the myriad of factors that potentially relate to the pace and the
depth of electronic diversion in various applications and in various specific sectors of the
48
economy (see, e.g., GCA-T-2 at 1-3, 9-15, 33-35, 37-41, 51-54), Prof. Martin looks as if
he actually would have been in a good position to conduct meaningful research on the
topic of future events that might alter the course of electronic diversion.2 For example,
the report presented by Mr. Schmid, and other materials cited by Prof. Martin,
suggested numerous types of technological and market developments that could act as
potential “triggers,” the likely reactions to which could have been explored with the
survey respondents. Tr. 21/7605-07, 7612-14. So he could have probed respondent’s
reaction to further shifts in the consumer cost of access to broadband, for example, or
major improvements in Internet security. Instead, Prof. Martin consciously chose to limit
his inquiry to changes in postal rates. Tr. 21/7615.
It was therefore a foregone (albeit an invalid) conclusion that postal rate changes
would be the only “trigger” emerging from the survey responses. In particular, there is
no possibility of comparing responses to questions about postal rate “triggers” with
responses regarding other potential non-rate “triggers.” Since such a comparison in the
context of the competitive attributes questions unambiguously reveals that other types
of factors totally dominate postal rates, the inability to do such a comparison with regard
to potential “triggers” immediately renders the postal rate “trigger” results suspect at
best and meaningless at worst.
In terms of research design and structure, one final point can be made regarding
why Prof. Martin’s emphasis on the “trigger” questions is so misplaced. Among
2 There is, however, the troubling issue of why Prof. Martin has such a high proportion of respondents without a high school diploma. Tr. 21/7521. Prof. Martin’s refusal to acknowledge any expectations regarding whether the percentage of bill payers without a high school diploma would be higher or lower than the adult population generally represents a transparent attempt to paper over what might be indicative of a potentially serious problem with the survey sample. Tr. 21/7549-50.
49
consumers, Prof. Martin posed the “trigger” questions to respondents in the minor
mailer, major mailer, and hardcore mailer categories, but skipped the question for those
in the electronic payer category. GCA-T-2 at E-7, Tr. 21/7618. Consequently, Prof.
Martin has nothing in his survey which relates to the relationship between postal rate
changes and the decision to switch entirely to electronic payment by these former
mailers except for the competitive attribute question. Tr. 21/7618-21, 7625-27. Prof.
Martin tried to point (id. at 7618-19, 7625-26) to satisfaction level scores regarding
electronic payment service, but, unlike the “trigger” questions and the “future rate
changes” question in the attributes list, the level of satisfaction with electronic payment
service question plainly has nothing to with postal rate changes. Prof. Martin states his
expectation that electronic payers would provide a rich base for understanding their
selection of the electronic payment mechanism. GCA-T-2 at 29. But regarding postal
rate changes and this important respondent category, the only information we have is
that its respondents (like those in all other categories) rated changes in postal rates as
the least important factor affecting their switch (GCA-T-2 at 30), which runs totally
contrary Prof. Martin’s “trigger” hypothesis.
c. Inherent deficiencies within the “trigger” questions invalidate
their use to reach reliable conclusions. In terms of point number three, in addition to their other flaws, the “trigger”
questions are so inartfully drafted as to preclude any meaningful interpretation of the
results. The first “trigger” question discussed by Prof. Martin reads as follows:
If you had reason to believe or knew that the postal service was planning regular increases in the price of postage for paying your bills, such as every year, what effect would this have on you switching to electronic payment of your bills? Again, use a scale of one to seven to predict what
50
you’d do. A seven indicates you would definitely switch to electronic payment and the other end of the scale, a one would indicate you would definitely continue using a pay by mail system.
GCA-T-2 at 21. The glaring problem with this question (other than its focus on a factor
which respondents already indicated was the least important of the 10 factors
suggested) is that it does not convey any indication to respondents of the magnitude of
the hypothesized “regular” increases. This deficiency was discussed with Prof. Martin
orally and in writing. Tr. 21/7522, 7555-61. In the absence of such information in the
question, a highly plausible interpretation would be that what is being hypothesized is a
rapid acceleration in the level of postal rates. Prof. Martin’s attitude seems to be that he
did not care how respondent interpreted the question. Tr. 21/7558-61. But, regardless
of whether Prof. Martin is willing to admit it or not, useful reliance on respondents’
answers must be conditioned on an understanding of how they interpreted the question.
For example, if respondents who indicated they would definitely switch had in mind
regular increases of 5 cents, and those who indicated they would definitely not switch
had in mind regular increases of 1 cent, the pattern of responses would merely be
indicative of the inherent ambiguity in the question. Prof. Martin’s failure to pose an
unambiguous question precludes any reliance on the results of this question to suggest
that, in practical terms, plausible postal rate strategies could serve as triggers for
material amounts of diversion.
The other “trigger” question is to some extent the flip side of the same coin. It
reads as follows:
Going back to your use of using the mail for your payment of bills. I’m going to read you some stamp prices for mailing those payments. Please stop me at a price where you would seriously consider switching to some form of electronic payment instead of using the mail.
51
1 42¢ 2 45¢ 3 50¢ 4 60¢ 5 75¢ 6 $1.00 7 DK/Refused
GCA-T-2 at E-7. It represents the flip side because, in this instance, the question
specifies the magnitude of the hypothesized increases, but does not specify the time
frame involved. It is impossible to know whether respondents viewed this series of
hypothetical rate levels as ones that would be implemented immediately, or over some
unknown period of the future. Once again, the ambiguity was discussed with Prof.
Martin orally and in writing. Tr. 21/7525, 7576-80. Once again, his attitude towards
respondents and their understanding of his questions (or lack thereof) was that he did
not “crawl in their heads.” Tr. 21/7579. Yet he also appeared to suggest that, based on
their past experience, respondents could assume that “the 50¢ level could be reached
by 2010 or sooner.” Tr. 21/7526. Prof. Martin, though, while apparently willing to
attribute to his respondents an implicit understanding that a 50-cent rate could be reach
by 2010, was himself unaware that the most recent historical cumulative increase of as
much as 11 cents (the difference between the current rate of 39 cents and the
hypothetical rate of 50 cents) had occurred not in a period of less than 4 years, but in a
period of more than 15 years, going back prior to the Docket No. R90-1 implementation
of the 29-cent rate in February of 1991. Tr. 21/7578.
There are other difficulties with this question as well. For example, there is no
indication in the consumer questionnaire (pages E-1 – 8) that respondents were
reminded that the current stamp rate is 39 cents, as a benchmark by which to assess
52
the hypothetical rate levels proposed. A respondent who was confused and might have
mistakenly thought that the current rate was, for example, still 37 cents, may have had
an unwarranted reaction to the 42-cent rate level. This becomes even more of a
problem for the business respondents, since they could currently be paying some type
of workshare rate which actually is less than 39 cents, and the prices hypothesized
could represent even higher increases relative to their current rate. Tr. 21/7567-7570.
Once again, Prof. Martin was oblivious to the problems this would create for a
meaningful interpretation of his results. Id.
Another significant issue relates to interpretation of the results of an inquiry which
ask respondents to identify a price at which they would “seriously consider switching to
some form of electronic payment instead of using the mail.” Would all of the
respondents who indicate merely that they would seriously consider switching actually
switch? On the one hand, Prof. Martin at one point suggests that the percentages he
reports as “seriously consider switching” can be directly applied to mail volumes to
generate, for example, a result that “forecasts a loss of more than 2 billion pieces of
billing mail from small business firms.” Tr. 21/7528. More typically, though, he
emphasizes that that a response indicating serious consideration of switching cannot be
equated with a statement that such respondents will switch. Tr. 21/7524, 7529, 7570-
72, 7575-76. He rejects the suggestion that researchers or respondents can know,
“with complete certitude,” respondents’ future behavior. Id. at 7570.3 Nevertheless, he
3 Taken at face value, Prof. Martin’s concern about respondents’ inability to know their future behavior “with complete certitude” is another factor that would clearly undermine confidence in the responses he received on the other “trigger” question regarding regular rate increases. As shown on page 21 of GCA-T-2 (and reproduced above), it contemplates self-identification of respondents who “would definitely switch to electronic
53
apparently sees no contradiction with using a response that someone will seriously
consider switching as the basis for forecasting that the respondent will switch. As best
can be discerned, his reasoning seems to run something along the lines that a forecast
is just a statement of what probably will happen, rather than a guarantee of what will
happen. Tr. 21/7576. Ultimately, though, Prof. Martin had to concede that he is treating
a response that someone would seriously consider switching as a statement of intent to
switch. Tr. 21/7636-37.
Finally, one element of this question does not create a problem, per se, but puts
a major limitation on the usefulness of the results. In choosing his price points, Prof.
Martin moved immediately from the 42 cents proposed by the Postal Service in this
case to a hypothetical rate, 45 cents, that represents an increase (6 cents) that is
double that proposed (3 cents). Prof. Martin can therefore shed no light on whether his
respondents would have indicated a material difference in their rates of serious
consideration of switching at a rate merely 1 cent higher than the Postal Service’s
proposal (43 cents), or at a rate 1 cent lower (41 cents). He has not one iota of
evidence to offer relative to either of these two alternative rates, including the 41-cent
rate proposed by GCA witness Clifton, nor does he identify a rate change of any smaller
magnitude that would successfully avoid becoming what he calls a triggering device.
Obviously, as a matter of survey design, one can understand why it would be difficult to
expect respondents to differentiate between potential rates that differ by what would
appear to them to be such a trivial amount relative to the decision they are being asked
to evaluate. But that, of course, is exactly the point correctly made by Prof. Spulber
payment,” and respondents who “would definitely continue using a pay by mail system,” as well as those in between.
54
twelve years ago – small changes on the margin of First-Class Mail rates are not going
to have a material impact on electronic diversion determinations.
To summarize the overall deficiencies in Prof. Martin’s testimony, the conclusions
he attempts to draw simply do not explain why electronic diversion occurs fairly steadily
during times of nominal postal rate stability and times of nominal postal rate increases.
Other experts have identified what is driving electronic diversion, and, essentially, it is
not postal rates. Given a fair opportunity to compare the importance of the effects of
postal rates with the importance of the effects of other factors, his respondent
categories rated postal rates as the least important factor with perfect consistency. On
the other hand, restricting their choice to only postal rates, and presenting questions
that could be interpreted to suggest potential postal rate changes that far surpass what
has been typical historically or has been proposed in this case, Prof. Martin shows that
it is possible that some respondents will express concern in the form of a willingness to
seriously consider switching to electronic bill payment. The Postal Service has never
doubted or denied that, on the margin, some mailers will consider changing their
behavior in response to rate changes, and a portion of those mailers will actually do so.
That is a far cry, however, from Prof. Martin’s spurious claims that postal rate changes
(of any magnitude, apparently) are a trigger for electronic diversion, and that other
vastly more influential competitive factors only come into play once triggered by postal
rate changes.
55
2. Neither Dr. Clifton nor Prof. Kelejian offer any valid theoretical or empirical basis to rely on any estimates of own price elasticity other than those provided by witness Thress.
The testimonies of GCA witnesses Clifton and Kelejian are closely related, but
differ in scope. Prof. Kelejian’s testimony is narrowly limited to econometric theory,
providing criticisms of the econometric technique of witness Thress and identifying what
he believes are a few potential problems, but offering no quantification of potential
impact, or any alternative estimations. GCA-T-5. Dr. Clifton, on the other hand,
attempts to address what he believes to be trends in the market, what impact he
expects those trends should have on the own-price elasticity of single piece First-Class
Mail, and then attempts to offer his own estimates of the own price elasticities of single
piece First-Class Mail and Standard Regular. GCA-T-1. As shown in the rebuttal
testimony of witness Thress, however, neither of the two GCA witnesses ultimately
provides any basis to question reliance on the own price elasticities estimated and
employed by witness Thress. USPS-RT-2.
a. The combination of serious flaws in economic theory and
econometric practice has caused Dr. Clifton to produce an unusable model of the demand for single piece First-Class Mail.
Since Dr. Clifton has the testimony with the broader scope, it is necessary to
begin with him. Dr. Clifton spends a fair portion of his direct testimony discussing what
he believes to the relevant markets in which single piece First-Class Mail competes.
GCA-T-2 at 10-17. In Dr. Clifton’s view, one relevant market is the (non-cash)
payments market, rather than the bill payment market. Id. at 14; Tr. 29/10022. Witness
Thress explains the fallacy of this view. USPS-RT-2 at 3-8. The Postal Service does
56
not compete in the payments market, but rather in the market for the delivery of bill
payments. Id. at 4. For payments made at the point of sale, which historically never
generated a bill or delivery of any payment by mail, there is minimal (if any) affect on
postal volumes if, for example, customers switch their payment method for groceries
from check to credit card. Id. at 4-5. Prof. Clifton, moreover, had to acknowledge that
under his definition of the relevant market, even a switch in grocery payments from cash
to credit card would be interpreted as a decline in the Postal Service’s market share.
Tr. 29/10010-11. This makes no sense.
As witness Thress explains, checks are not an adequate proxy for bill payments
by mail, and with 81 billion non-cash payments and only approximately 15 billion bill
payments, the payments market and the bill payments market are very distinct. USPS-
RT-2 at 6. The bottom line is that the only appropriate market to examine is the bill
payment market, the Postal Service has examined that market (see testimony of
witness Bernstein, USPS-T-8 at 51), and there is no disagreement that the Postal
Service’s market share is declining. USPS-RT-2 at 6-8. Dr. Clifton’s misguided attempt
to drag the broader payments market into the picture does nothing to enhance the
credibility of his arguments.
Another primary thrust of Dr. Clifton’s testimony is his repeated (but erroneous)
insistence that economic theory dictates that the introduction of more substitutes (such
as electronic payment alternative) into the market requires an increase in the own-price
elasticity. See GCA-T-1 at 37-49. As witness Thress indicated even prior to the
submission of Dr. Clifton’s testimony, all else equal, economic theory might tend to
support that suggestion, but all else is never held equal in the real world, and other
57
factors must be taken into account. Tr. 6/1226. In his rebuttal testimony, witness
Thress cites a well-documented example of pharmaceuticals as another industry in
which the introduction of previously unavailable substitutes did not have the effect which
Dr. Clifton is postulating. USPS-RT-2 at 13-15. Moreover, directly with respect to the
First-Class Mail and the increasing availability of electronic alternatives, Prof. Sidak,
testifying on behalf of NAA, likewise agreed that the net effect of the emergence of such
alternatives could be constant or decreasing price sensitivity of the remaining postal
customers. Tr. 32/10879-80. Therefore, Dr. Clifton’s opinion that the own price
elasticity estimated by witness Thress cannot be reconciled with economic theory is
groundless. As witness Thress testified (USPS-RT-2 at 15), the interrelationships
between all of these market factors must be evaluated empirically, which is exactly what
witness Thress has done.
Dr. Clifton also attempted to construct an empirical model of the demand for
single piece First-Class Mail, but the model he presents is not useable. Witness Thress
highlights a number of reasons why this is so in USPS-RT-2 (at pages 37-50), but in
some sense, one need look no further than the first reason he discusses. As witness
Thress observes, Dr. Clifton’s recommendation in this case is to reduce the proposed
single piece (i.e., non-workshare) letter rate by one cent, and to leave the proposed
workshare rates unchanged. USPS-RT-2 at 42 (citing GCA-T-1 at 59). Yet Dr. Clifton
concedes that, using his demand model, the effect of implementing his proposal
(reducing the single piece rates by one cent, holding the workshare rates constant and
therefore also reducing the average worksharing discount by one cent), would be to
decrease single piece volume. Id. at 43 (citing Tr. 29/9932). Witness Thress draws the
58
obvious conclusion: this result makes no sense, and the model must be fatally flawed.
Id. While witness Thress is able (id. at 37-42) to pinpoint the source of this
unacceptable result (Dr. Clifton’s misunderstanding of the function of the workshare
discount variable, and the economic logic which requires this variable to be negative in
the single piece equation), the more important point is that Dr. Clfiton’s model simply
cannot be used to forecast First-Class Mail volumes in this proceeding.
Witness Thress, however, also identifies a number of other flaws in the model.
First, by virtue of the testimony of GCA’s own expert econometrician, Prof. Kelejian, Dr.
Clifton’s autocorrelation correction procedure is not correct. USPS-RT-2 at 43-44.
Second, Dr. Clifton’s linear specification is not correct, based on the empirical test
recommended by Prof. Kelejian. Id. at 44-48. Third, other empirical tests indicate that
Dr. Clifton should have made some type of non-linear transformation of the internet
variable in his model. Id. at 48-50. The cumulative effect of these problems renders Dr.
Clifton’s model clearly inferior to that of witness Thress. Id.4
b. The practical effects of the theoretical concerns raised by
Prof. Kelejian are not material. On the other hand, with respect to Prof. Kelejian, witness Thress shows that the
potential theoretical issues identified by Prof. Kelejian raise no material concerns with
reliance on the estimates presented by witness Thress. Id. at 50-63. Prof. Kelejian
raised two concerns with the Box-Cox procedure. With respect to the simultaneous
estimation of lambda and the stochastic restriction, witness Thress re-estimated his
4 As witness Thress also testified, the same types of theoretical and econometric errors likewise undermine any reliability on Dr. Clifton’s Standard Regular model as well. USPS-T-2 at 44, 46-47, 48.
59
model to incorporate this feature of Prof. Kelejian’s recommendation, and there was no
material affect on the estimates. Id. at 51-53.
With respect to the Box-Cox specification, witness Thress acknowledges the
difference in this case between the model he specified and a “correct” or conventional
Box-Cox specification. But he then presents the results of statistical test which show
that his modification of that conventional Box-Cox specification can be justified on
statistical grounds. Id. at 53-55., 59-60, 62-63. Yet to be as thorough as possible,
witness Thress presents the results (after making all applicable modifications based on
Prof. Kelejian’s criticisms) of both his version of the Box-Cox transformation, and the
conventional one. Once again, the differences in estimated own-price elasticity (relative
to witness Thress’ original estimate) are not material. Id. at 63. To the extent that Dr.
Clifton is suggesting (see, e.g., GCA-T-1 at 50) that anything questionable Mr. Thress
might have done with his Box-Cox transformation is explaining why the Postal Service’s
own price elasticity estimate is (at least in Dr. Clifton’s mind) so low, these results show
any such suggestion to be empirically wrong.
Prof. Kelejian also criticized the implementation by witness Thress of his imposed
symmetric condition. To address Prof. Kelejian’s theoretical concern, Mr. Thress
followed the professor’s recommendations and redid his own analysis. Once again, the
result was no material change in the estimated elasticity. USPS-RT-2 at 55-57. A
similar conclusion of no material effect follows when witness Thress changes his
autocorrelation correction procedure in response to Prof. Kelejian’s testimony. Id. at 57-
59.
60
Prof. Kelejian’s criticism of the model selection procedure applied by witness
Thress stands on a different footing than his other criticisms. Boiled down to its
essence, Prof. Kelejian would prefer something that he would consider a more formal
statistical procedure. On the other hand, the Mean Square Error minimization criterion
certainly has the elements of a formal procedure as well. Tr. 38/13107-08, 13112-13.
But the primary point is, debate over model selection criteria only has relevance in
circumstances in which different model specifications are being advocated based on
different model selection criteria. In this case, while grousing about the criterion
employed by witness Thress to select his model, neither Dr. Clifton nor Prof. Kelejian
identify any other model as superior, based on any different criteria or the same
criterion. As witness Thress justifiably concludes, in this instance, the entire discussion
has no pragmatic relevance to any live controversy. Id. at 60-61.
Consistent with Prof. Kelejian’s recommendation, witness Thress employed the
same test that Dr. Clifton’s linear model failed in order to evaluate whether his own log-
linear model was empirically justified. The results show that the choice by witness
Thress to use the constant elasticity (log-linear) specification is correct. Id. at 61-62.5
Finally, to test empirically the hypothesis that the single piece own-price elasticity has
been increasing over time, witness Thress presents the results of a serious of
experiments he conducted to explore that hypothesis. The results of these experiments
provide no support for the supposition that there have been material increases in the
own-price elasticity caused by the factors suggested by Dr. Clifton. Id. at 63-67.
5 Of course, the Commission itself has long commented favorably on the log-log functional form for demand analysis. E.g., Docket R97-1, Op. & Rec.Dec., Vol. 2, App. H at page 31; Docket No. R90-1, Vol. 2, App. H at page 2; Docket No. R84-1, Vol. 2, App. H at page 2.
61
Overall, witness Thress adjusted his model to incorporate as many of Prof.
Kelejian’s suggestions as he could translate into concrete alternative procedures, and
presented those results in his rebuttal testimony. All of the alternative single piece own-
price elasticities he estimates, however, fall in a very narrow band around his original
estimate of -0.184. A review of the rebuttal testimony shows that every one of the
estimated own-price elasticities is found in a range between -0.16 and -0.20. Id. at 53-
67. The conclusion of witness Thress, that correction of whatever valid problems Prof.
Kelejian has identified causes no material change in his results, is eminently justified.
The Commission can properly rely on the demand and forecasting models presented by
witness Thress in USPS-T-7.
62
63
IV. THE POSTAL SERVICE’S SUBCLASS COSTING PRESENTATION ENHANCES UNDERSTANDING OF THE BEHAVIOR OF POSTAL COSTS AND PROVIDES AN APPROPRIATE FOUNDATION FOR RATEMAKING
The bedrock of postal ratemaking has been and remains the estimation of
subclass costs. Section 3622(b)(3) requires each subclass to cover the costs caused
by the provision of that service. Accurate subclass costing allows compliance with this
requirement of the Act, improves forecasts of accrued costs in future periods, and
creates a framework against which subclass revenues and the allocation of institutional
costs resulting from the pricing process can be evaluated. A significant part of the
Postal Service’s evidentiary presentation in this proceeding, consisting of the testimony
of numerous witnesses as well as extensive supporting documentation, is devoted to
the development and explanation of appropriate subclass costs. This body of material
constitutes a comprehensive foundation of cost information that, in conjunction with the
pricing analyses addressed subsequently in this brief, supports the rates proposed by
the Postal Service.
The Postal Service’s subclass costing presentation in this case closely parallels
similar costing presentations made in numerous previous rate cases. It begins with the
monumental amount of information collected and processed through the Postal
Service’s extensive data collection systems. That body of information is first used to
estimate the costs for each subclass in the base year. Base year subclass costs, in
turn, are then employed in the rollforward process to derive estimates of subclass costs
in the test year. The testimonies and other documentation relating to each of these
portions of the subclass costing process are described below.
64
The base year for costing purposes employed in this proceeding was FY 2005,
the most recent year for which an audited Cost and Revenue Analysis (CRA) report is
available. In presenting its base year costs, the Postal Service seeks to address two
distinct levels of subclass cost causation -- the causation of costs at the margin, and the
incremental costs caused by provision of the entire volume of a particular subclass or
service. This formulation of the subclass costing inquiry follows the economic structure
presented by Prof. Panzar in his testimony (USPS-T-11) in Docket No. R97-1, and is
consistent with the structure used by the Postal Service in that case and ever since.
Such an explicit economic structure was most recently endorsed by the Governors of
the Postal Service in their first Decision in Docket No. R2000-1, dated December 4,
2001.
In this proceeding, the causation of costs at the margin is reflected in the volume
variable subclass costs estimates provided by witness Milanovich in USPS-T-9.
Incremental cost estimates, on the other hand, are presented by witness Pifer in USPS-
T-18.1 In their exhibits and workpapers, both of these witnesses provide subclass
1 No intervenor witness presents any alternative estimation of incremental cost, or quantifies any proposes adjustments to witness Pifer’s estimates. On behalf of Valpak, however, Dr. Haldi describes at some length theories according to which he claims that some non-volume-variable setup and take-down costs in sorting operations may constitute incremental costs for certain classes of mail and other product categories. VP-T-2 at 39-47. As established in Dr. Bozzo’s rebuttal testimony, Dr. Haldi’s argument fails for several interrelated reasons. USPS-RT-5 at 5-11. First, the setup costs clearly are not volume-variable (i.e., “attributable” as marginal costs). Id. at 6-8. Second, a significant portion of the setup costs Dr. Haldi discusses cannot be assigned to any class of mail as incremental cost, and even those costs that may be class-specific are not, in general, the incremental costs of any subclass. Id. at 8-9. Thus, methods intended to distribute pools of volume-variable cost to subclasses in order to represent marginal costs will have little application to these non-volume-variable costs. Id. Finally, it should be noted that the Postal Service incremental cost model includes “inframarginal” variable costs, so the possibility that setup costs may represent costs
65
information for the cost segments and components into which postal costs are
disaggregated. Their overall subclass results, by virtue of the cumulative process by
which they are constructed, incorporate both the effects of the base year input data
generated by the relevant upstream data collection systems, and the conclusions
reached by a substantial body of current and past research into the behavior of specific
cost segments and components. As discussed next, in their testimonies in this
proceeding, several witnesses sponsored those new analyses that caused the relatively
modest changes in the Postal Service’s base year costing methodologies.
Cost attribution witnesses focused on the variability and/or the distribution of the
costs in specific cost segments. As in the last case, witnesses Van-Ty-Smith (USPS-T-
11) and Bozzo (USPS-T-12, USPS-RT-5) address issues pertaining to mail processing
costs (C/S 3), as does witness Smith (USPS-T-13), who also discusses facility costs
(C/S 15). Witnesses Bradley (USPS-T-14, USPS-RT-4), Stevens (USPS-T-15), and
Kelley (USPS-T-30) discuss aspects of carrier costing, which involves C/S 6, C/S 7, and
C/S 10. Transportation costing (C/S 14) issues are primarily addressed by witnesses
Kelley (USPS-T-15), Nash (USPS-T-16), and Bradley (USPS-T-14). Witnesses Bradley
(USPS-T-17, USPS-RT-4), Nieto (USPS-T-24), and Kelley (USPS-RT-6) present and
defend an updated study of Window Service (C/S 3.2) variability.
In this case, to further aid the understanding of the operational networks across
which postal costs are incurred, the Postal Service expanded further the panel of that may vary with volume in some respects, but not “on the margin,” is already incorporated in the incremental cost estimates. Id. at 8. Dr. Haldi’s testimony thus lacks either practical or theoretical significance, and Mr. Pifer’s incremental cost estimates are the only appropriate measures presented on this record for the purposes of cross-subsidy tests.
66
witnesses sharing their operational expertise. Consequently, witnesses McCrery
(USPS-T-42, USPS-RT-14), Oronzio (USPS-RT-15) and Laws (USPS-RT-16) present
testimony on various aspects of operation of the mail processing network, while witness
Hintenach (USPS-T-43) explains relevant operational developments concerning the
retail network. Witness Coombs (USPS-T-44) performs that role regarding the delivery
network, as does witness Pajunas (USPS-T-45) with respect to operation of the
transportation networks.
In developing this case, as with previous cases, the Postal Service starts with
base year costs and uses the rollforward process to estimate for the test year both total
accrued costs and costs by subclass. Witness Waterbury is the rollforward witness, and
the total accrued and subclass volume variable cost estimates presented in her
testimony (USPS-T-10) are developed, using essentially the same new software
platform that she successfully introduced in the last case, in a process that follows the
very familiar pattern of previous pieces of rollforward testimony.2 That is to say, various
factors are applied to the base year costs in order to arrive at estimated test year costs.
Those factors, which have remained unchanged for many years, are cost levels, mail
volumes, nonvolume workload, additional workdays, cost reduction programs, and other
programs. Also incorporated into the analysis are Workyear Mix Adjustments and Final
2 In the instance of incremental costs, witness Pifer actually provides both base year and test year incremental costs. In providing his test year estimates, however, he relies extensively on the same inputs as those used by witness Waterbury.
67
Adjustments.3 As is customary, witness Waterbury provided test year costs on both a
before-rates (TYBR) and an after-rates (TYAR) basis.
Thus, in its case as filed, the Postal Service presents fully-integrated subclass
costs estimates for the test year based on the best information available at the time of
case preparation. As is often the case, those estimates reflected a wide variety of
management plans and programs intended to improve the performance of the Postal
Service moving into the future. Moreover, in both the before-rates and after-rates
versions, the estimates were predicated, obviously, on the levels of mail volume
anticipated under the current and proposed rate regimes. Witness O’Hara, the rate
policy witness (USPS-T-31), then used the test year cost estimates provided by
witnesses Waterbury and Pifer, in conjunction with the pricing criteria of the Act, to
support the rate levels proposed by the Postal Service and presented in his testimony.
The sections that follow discuss subclass costing issues as they relate to various
new or updated costing presentations involving specific types of costs. The
Commission should adopt the subclass costs proposed by the Postal Service. Many
aspects of the Base Year cost presentation appear to be acceptable to all parties and
have not been challenged. But to the extent that intervenor witnesses challenge certain
methodologies or results of the Postal Service’s subclass costing analyses, as
discussed below, those challenges should be rejected.
3 The Final Adjustments used by witness Waterbury come from witness Page (USPS-T-23).
68
A. The Postal Service Cost Models Provide the Most Accurate Available
Estimates of Mail Processing Volume-Variable Costs and Should Be Accepted
The Postal Service provides accurate estimates of mail processing volume
variable costs, showing that such costs are not one hundred percent variable with
volume. Witnesses McCrery (USPS-T-42) and Bozzo (USPS-T-12) describe the
operational basis for the presence of non-volume-variable costs in sorting operations,
and the results of witness Bozzo’s model indicate their presence. Dr. Bozzo’s results
are confirmed by the results of different models used by witnesses Roberts and Neels
which, when properly implemented, also indicate the presence of non-volume-variable
costs in mail processing. The major results are summarized in the table below.
69
Model Weighted Average Variability Bozzo, Postal Service BY 2005, USPS-T-12 at 3
0.85
Roberts (March 2006 model, letter and flat-shape operations), updated in USPS-T-12 at 104
0.852
Neels (UPS-T-1 model), applied to LDC 17, USPS-RT-5 at 42
0.84
Neels (UPS-T-1 model), applied to "whole plant," USPS-RT-5 at 42, 44
0.82/0.903
Elliott (MPA et al.-RT-2 at 6, 13), IOCS-based method including setup and take-down
0.92/0.944
Bozzo, IOCS-based method including setup, take-down, and container handing; USPS-T-12 at 80
0.88/0.875
Dr. Bozzo develops his model as follows. He, witness McCrery, and witness
Oronzio (USPS-RT-15) show that MODS total piece handling measures are related to
sorting operations costs, and Dr. Bozzo applies relevant economic theory to measuring
sorting operations costs by applying a standard microeconomic production framework to
model the actual structure of Postal Service mailflows. See Section 2, below. He uses
MODS data from actual postal mail processing operations to measure the associated
hours and workloads. Since these data contain errors routinely found in operating data,
witness Bozzo screens them to mitigate the effect of errors, providing a data set
appropriate to estimating mail processing cost variability, and otherwise selects
appropriate estimation techniques given the characteristics of the data. Processing the 2 Letter and flat sorting only. 3 First figure is LDCs 11-14 and 17 (NWRS workhours); second is MODS "function 1" hours (LDCs 10-18), including supervisory workhours. 4 First figure is sorting cost pools analyzed in USPS-T-12; second is all other operations. 5 First figure is letter sorting cost pools; second is flat sorting cost pools.
70
data through his econometric model yields accurate mail processing volume variable
costs that should be accepted by the Commission. See Sections 3-4, below. In
addition, the record in this case indicates that the Postal Service's treatment of
"administrative" costs in mail processing cost pools is correct and should be adopted by
the Commission. See Section 5, below.
The costs are distributed to subclass using long-standing distribution key
methods, which now benefit from more accurate subclass identification in tallies
recorded with the redesigned IOCS data collection instrument. See Section 6, below.
1. The Postal Service mail processing methods are well-grounded in
the operational reality of sorting operations. Dr. Bozzo depicts the major mailflows within letter- and flat-shape operations and
describes a partition of the activities in the MODS sorting cost pools. He explains in
detail the connection between each activity, MODS total piece handling measures, and
other factors that determine costs and the activities that comprise the associated sorting
cost pools. USPS-T-12 at 11-20, 26-32. Witness McCrery describes how, given
network effects and related factors, the expected consequences of volume changes are
"less than proportionate" changes in mail processing workhours. USPS-T-42 at 34-40.
Witness Oronzio describes how the Postal Service employs its sorting operations during
high-volume periods and indicates that first-handling pieces (MODS FHP) data are
considered by operations experts to be less reliable than machine-counted total piece
handlings as indicators of sorting workloads. USPS-RT-15 at 10-13. Together, the
Postal Service witnesses provide a solid operational foundation for the Postal Service
modeling approach and results.
71
a. The presence of non-volume-variable costs in sorting operations is consistent with the structure of operations.
Dr. Bozzo describes a partition of sorting cost pools into several constituent
activities, which he calls runtime, "quasi-allied labor," setup and take-down, waiting for
mail, "overhead" activities (breaks and clocking in or out), and other activities not
involving handling of mail. USPS-T-12 at 26. Using FY 2005 IOCS data, Dr. Bozzo
identifies the proportions of time for each activity in each of the cost pools covered by
the Postal Service volume-variability analysis. Runtime, the time spent sorting mail or
operating running sorting machinery (including feeding mail and sweeping mail during
the run) is, unsurprisingly, the main activity in all of the cost pools, accounting for nearly
two-thirds of time in letter- and flat-sorting operations.6 Among non-overhead activities,
"Quasi-allied labor" (container handlings and other handling of mail outside of runtime)
and setup and take-down time are of similar magnitudes in letter and flat sorting;
cancellation, manual parcel, and manual Priority Mail sorting involve relatively high
fractions of container handlings. Waiting time and other not-handling activities are
generally small fractions of sorting operations. Overhead activities comprise up to a fifth
of the operations' total workhours. USPS-T-12 at 27-32.
Of these activity categories, only waiting time traditionally has been classified as
non-volume-variable. However, setup and take-down time is as large as, or even
larger, than waiting time in all of the operations studied in Dr. Bozzo's analysis. Id. at
27. Witness McCrery builds on witness Kingsley's description of the "schemes effect" in
6 The structure of the IOCS questionnaire for cancellation operations is such that "runtime" of cancellation equipment is categorized as "other handling."
72
Docket No. R2001-1, indicating that relatively few schemes are run on multiple sorters
and that, in most cases, it is "neither necessary nor desirable" to do so. Most schemes
are set up and taken down once a day, regardless of volume, and the associated costs
are therefore non-volume-variable.7 Rather, network-related factors that are largely
independent of volume determine the setup and take-down costs. USPS-T-42 at 36.
Operational considerations also suggest that the degree of variability of container
handlings will tend to be less than 100 percent. Witness McCrery observes that many
destinations receive one container per processing cycle, regardless of volume, so the
costs of handling the containers will vary little with routine changes in the volumes going
to those destinations. USPS-T-42 at 38, lines 29-31; USPS-T-12 at 29, lines 18-20.
While container operations are a relatively small fraction of letter- and flat-sorting
operations, they are much more prominent in parcel, Priority, and cancellation
operations that the Postal Service analysis shows (and systematically has shown) to
have lower-than-average variabilities. USPS-T-12 at 27. Witness McCrery's
observations also apply to setups, take-downs, and container movements in LDC 17
allied labor cost pools; in particular, allied labor operations by definition involve
considerably larger proportions of container handling time than sorting operations.
Thus, variabilities greatly exceeding 100 percent are extremely difficult to square
with operational considerations. As Witness McCrery states, "[F]ixed costs are not just
a theory debated among economists; they are a reality that we live with every day in our
distribution operations." USPS-T-42 at 39. Dr. Bozzo further notes that, while certain
setup costs may in principle respond to some volume changes, they do not vary with 7 Note that sweeping processed mail during the course of a scheme run is part of the "runtime," not the setup and take-down time. Tr. 35/12530, lines 4-6.
73
volume changes on the margin and should not be classified as volume-variable costs.
Rather, they are more properly treated as "inframarginal" costs in the incremental cost
model. USPS-RT-5 at 6-7; Tr. 35/12398-9.
b. The number of sorts—measured by total piece handlings
(MODS TPF and TPH)—is the relevant "volume" for determining labor usage in sorting operations.
Dr. Bozzo notes that the runtime and quasi-allied labor activities both explicitly
depend on the cost pools' total piece handlings (MODS TPF, or TPH for manual
operations). USPS-T-12 at 28-29. By definition, TPF and TPH count the number of
sorts carried out (or attempted) in the sorting operations, and there is by necessity a
direct engineering relationship between runtime and total piece handlings measures. Id.
at 28. In machine-paced (constant throughput) operations, Dr. Bozzo shows that
runtime is, in fact, 100 percent variable with TPF. Id., lines 8-10. Likewise, the relevant
volumes for determining "quasi-allied labor" are also total handlings, since each piece
must be brought to and taken from a sorting operation once per sort. Id. at 29, lines 14-
17. Dr. Bozzo's analysis of IOCS data shows runtime and quasi-allied labor activities to
constitute 70 percent of time in letter-sorting cost pools and 72 percent in flat-sorting
cost pools. USPS-T-12 at 27. This is the vast majority of non-overhead time in the
sorting cost pools. Consequently, there is little avenue for other cost pools' workloads
to affect labor requirements in the sorting cost pools.
Most of the remaining non-overhead time is in activities that have little relation to
volumes of any sort, including setup and take-down activities, waiting time, and small
fractions of time spent in other activities, such as incidental "administrative" work.
USPS-T-12 at 30-31.
74
Insofar as sorting operations' direct labor consists of activities which either have
a strong engineering relationship with total piece handlings (by far the largest part) and
those which are driven by network and other non-volume factors, it follows that "within-
operation sorting volumes [TPF or TPH] should be the primary if not the exclusive
volume-related factors determining sorting operations' workhours." USPS-T-12 at 94,
lines 4-5. As is discussed further below, Dr. Bozzo did not merely assume the absence
of cross-effects from other cost pools' workloads, despite the strong prior case against
them, but also tested for cross-effects, and found no evidence of large or statistically
significant effects. Id. at 93-95.
c. Substitution of manual for automated processing is rare and
becoming rarer. The Postal Service's automated letter and flat sorting equipment can sort pieces
at much lower cost than manual operations, so "mail is directed to sorting operations on
the basis of physical characteristics, most significantly automation compatibility and [for
letters] barcode presence." USPS-T-12 at 14. Witness McCrery notes that manual
processing in plants is generally limited to physically nonmachinable pieces and
machine rejects. USPS-T-42 at 11-12, 19. Witness Oronzio further describes that
Postal Service operating procedures seek to minimize the need for manual processing
of machinable pieces, and notes that seasonal fluctuations in manual operations' usage
depends primarily on seasonal variations in mail characteristics rather than volume per
se. USPS-RT-15 at 12; Tr. 36/12294-12297.
As most letter- and flat-shape mail is automation compatible, the vast majority of
sorts are carried out on automation. In BY 2005, mail processing facilities carried out
75
364.0 billion letter sorts (MODS TPH) on automation, versus 13.7 billion manual letter
sorts (96.4 percent automation); in flats, there were 32.9 billion automated sorts versus
6.9 billion manual sorts (82.7 percent automation). Tr. 10/2568, 2570, 2573. While
automated and manual processing technically may be substitutable to some extent,
manual and automated processing actually are not close economic substitutes. As
should be obvious, directing even small fractions of automatable mail to manual would
vastly increase the Postal Service's costs, and thus not constitute a good use of
managerial "discretion." Thus, "manual sorting is not… an economical substitute for
automated sorting when the latter is technically feasible." USPS-T-12 at 22.
d. The operational analysis points directly to the main features
of the Postal Service analysis. The major features of the Postal Service variability analysis are clear from the
operational analysis. First and foremost, the analysis clearly points to the existence of
non-volume-variable costs. The network-related factors that bring about the non-
volume-variable costs, as well as other cost-causing factors such as facility layouts, will
tend to be idiosyncratic to plants and therefore require that site-specific factors be taken
into account in the analysis, hence the fixed-effects econometric model. The
engineering relationship between sorting workhours and workloads indicates that total
piece handlings are the appropriate characterization of sorting operations' "output," and
imply limited roles for other operations' handlings in determining labor requirements.
Finally, the cost differentials between automated and manual sorting technologies is
such that intervenor theories that posit widespread substitution of manual for automated
processing as a justification of increased variabilities are not defensible.
76
2. Postal Service methods correctly apply economic theory to the
measurement of sorting operations' costs.
a. The Postal Service models are motivated from a standard microeconomic production framework.
Dr. Bozzo's testimony describes in detail the links between his estimated labor
demand equations and the product transformation function from economic cost theory.8
In this model, mail processing plants produce sorts and other handlings (i.e., handlings
in cost pools not covered by Dr. Bozzo's models) which, under the Postal Service's
operating plan, are "intermediate" outputs used in the Postal Service's "final outputs,"
which are RPW-type end-to-end volumes (sometimes referred to by intervenors as
"delivered pieces"). USPS-T-12 at 48-49.
The most general form of Dr. Bozzo's product transformation function (Id. at 48,
equation 12) makes no specific assumptions on the structure of sorting operations, but
warrants imposing additional structure. In particular, certain labor and capital inputs
clearly produce some sorts, but not others. As Dr. Bozzo notes, committing labor to one
sorting operation implies the labor is unavailable to sort mail in other operations: for
example, the labor of a clerk "feeding mail at a BCS does not (indeed cannot)
simultaneously sort mail at a manual case." Id. at 49; see also USPS-T-12 at 21-23.
Thus, manual sorts properly are not considered outputs of automated operations, and
vice-versa. The cost pool-level production functions, specifying the sorts carried out in
the pools as "outputs," appropriately reflect the non-joint nature of the inputs and sorting
8 Product transformation functions are generalizations of production functions for production processes with multiple outputs.
77
outputs. Using operation-level piece handlings as the explanatory variables in the
empirical labor demand functions follows from the operation-level production functions.
b. The Postal Service model correctly applies the distribution
key method, which is appropriate and necessary to measure subclass volume-variable costs.
i. The distribution key method has long been shown to be an appropriate, feasible method for calculating subclass costs.
The Postal Service method for calculating volume-variable costs by subclass is
an example of the "volume-variability/distribution key" cost method ("distribution key"
method for short). See USPS-LR-L-1, Appendix H. Witness Van-Ty-Smith determines
the total cost associated with each mail processing cost pool using a combination of pay
data, compensation amounts from the Postal Service's general ledger, MODS
workhours, and IOCS tally data. USPS-T-11 at 7. Dr. Bozzo estimates cost elasticities
for a group of sorting operations (and cancellation) and recommends application of the
sorting operation average to other cost pools. USPS-T-12 at 3. The products of the
total costs by cost pool and the associated volume-variability factors are the volume-
variable costs to be distributed. The costs are then distributed to subclass using IOCS-
based distribution keys calculated by witness Van-Ty-Smith. USPS-T-11 at 7; USPS-T-
12 at 33-35. This method yields volume-variable costs that, when unitized, approximate
the correct (but unobservable) marginal costs by subclass.9 USPS-T-12 at 34. The
9 The approximation is exact when the "cost driver" is a linear function of volumes. Dr. Bozzo shows that, given an "operating plan" of the Postal Service, this is approximately true. The "constructed marginal cost" method of estimating volume-variable costs directly using subclass volumes is infeasible. USPS-T-12 at 34.
78
Commission's accepted cost method employs the 100 percent variability assumption10
in lieu of econometric variabilities and modifies witness Van-Ty-Smith's cost pool and
distribution key calculations, but conceptually is similar.
Because it constitutes a mathematical approximation to the correct marginal
costs, use of the distribution key method should not be controversial. Indeed, as Dr.
Bozzo notes, the distribution key method as a general approach to computing economic
costs was validated by the Data Quality Study (DQS),11 which concluded:
The Postal Service uses an economically sound approach grounded in activity based
concepts to determine its sub-class unit volume variable costs (UVVCs) on which Postal
Rates are based. The categories of data collected and analyzed are sufficiently
detailed and appropriate to arrive at the sub-class UVVCs. (USPS-RT-5 at 63, Tr.
35/12455, quoting Data Quality Study, Technical Report #1: Economic Analysis of Data
Quality Issues at 32.)
ii. No intervenor proposal offers an alternative to the distribution key method.
The most obvious sign of the emptiness of intervenor critiques of the distribution
key method is indicated by the critics themselves. Dr. Neels and Prof. Roberts actually
employ the distribution key method in the methods they advocate for calculating 10 In the "100 percent variability" method employed by the Commission, certain activities as indicated in IOCS are considered "fixed" costs. For the sorting cost pools under consideration, the implicit variabilities under the Commission method range from 95 percent to 99 percent. USPS-T-12 at 126. 11 The DQS did not address specific elasticity methods, though its authors did encourage replacing the 100 percent variability assumption with empirical elasticities. See, e.g., Summary Report, at 76; Technical Report #4, at 41-42. Dr. Bozzo discusses the Postal Service response to the Study's recommendations related to the IOCS-based mail processing distribution keys in USPS-T-46 at 4-10.
79
subclass volume-variable costs. USPS-RT-5 at 62, Tr. 35/12454. Dr. Bozzo recounts
that in Docket No. R2000-1, Dr. Neels criticized the method even as he and UPS
witness Sellick advocated an implementation of the distribution key method using the
Postal Service's MODS and IOCS-based cost pools and distribution keys in conjunction
with the 100 percent variability assumption. USPS-RT-5 at 62. Prof. Roberts, likewise,
describes a distribution key method for computing subclass costs using his model,
complete with an untested "proportionality assumption" between FHP and RPW
volumes needed to equate the computed unit volume-variable cost with the
"constructed" marginal cost. Id. at 62-63; 69-70.
At such future time as an actual example of the "constructed marginal cost"
method for estimating subclass volume-variable costs is proffered, it would be
appropriate for the Commission to consider the practical merits and demerits of that
approach against the distribution key method. Presently, all of the competing volume-
variable cost methods, including the Commission's accepted method, are examples of
the distribution key method. Criticisms of the distribution key method, both as per se
inappropriate, and as failing specific assumptions, are misguided at best. Subject to
appropriate methodological choices in the details, the distribution key method should be
recognized as a valid approach to approximating the correct marginal costs.
iii. Prof. Roberts mischaracterizes the "proportionality
assumption" embodied in the distribution key method, and does not find legitimate evidence of its failure.
Prof. Roberts introduces his analysis purporting to show failure of the
"proportionality assumption" by asserting that the Postal Service models assume "that
the aggregate output in each operation, TPF, is used in a fixed proportion to the volume
80
of mail in the plant." OCA-T-1 at 9, emphasis added. Prof. Roberts's claim is
fundamentally erroneous in that he specifies the wrong volume concept: the
"proportionality assumption" is made explicitly with respect to subclass RPW volumes
(i.e., the "final outputs" of the Postal Service), not the "volume of mail in the plant."
USPS-T-12 at 105-106, 33-34.
The "proportionality assumption" controversy arose from Dr. Neels's critiques in
Docket No. R97-1 that the Postal Service methods failed to determine the relationship
between costs and delivered volumes. See, e.g., Docket No. R2000-1, UPS-T-1 at 31;
USPS-RT-6 at 12-13. As a theoretical matter, Dr. Neels's criticism was inappropriate,
as the express purpose of the distribution key method is to provide a valid
approximation to marginal (unit volume-variable) costs when it is not possible to
estimate marginal costs directly from subclass volumes. USPS-LR-L-1, App. H., at H-3.
The approximation (the "assumption") is exact when the cost drivers are linear functions
of subclass volumes. Id. at H-5; see also USPS-T-12 at 107. (That this approximation
method is unobjectionable is key to the DQS assessment of the approach, quoted
above.) While the key results were published in 1993,12 Prof. Roberts goes so far as to
deny that the "proportionality" in the distribution key method is with respect to RPW
volumes. Tr. 23/8293.
Prof. Roberts's views on the relationship between MODS workloads and RPW
volumes are not reliable. Prof. Roberts claimed that equations in USPS-T-12
(equations 8 and 9, at pages 45-46), separately specifying relationships between TPF 12 Michael D. Bradley, Jeff Colvin, and Marc A. Smith, "Measuring Product Costs for Ratemaking: The United States Postal Service," in Regulation and the Evolving Nature of Postal and Delivery Services, ed. M.A. Crew and P.R. Kleindorfer (Kluwer Academic Publishers, 1993).
81
and RPW volumes and between FHP and RPW volumes, were "not correct" because
Prof. Roberts does "not use piece handlings." Tr. 23/8293. Prof. Roberts subsequently
agreed that, to calculate volume-variable costs as he proposed, an assumed
relationship between FHP and RPW volumes was, in fact, required. Tr. 23/8429-8432.
Asked to contrast the FHP and RPW volume concepts, Prof. Roberts manages to both
incorrectly define FHP (which he calls the "volume of mail in each processing plant"
rather than the correct "number of pieces sorted in each processing plant") and also to
fail to note that ODIS-RPW destinating volumes may include mail that bypasses the
plant. Response to USPS/OCA-T1-4(b), Tr. 23/8293. Later, asked to provide his own
views on the relationship between FHP and RPW volumes (to determine whether they
actually differed from Dr. Bozzo's equation), Prof. Roberts disclaimed sufficient
knowledge of RPW volume methodology, even to state a relationship between volumes
and FHP, except for the trivial case of volumes that totally bypass mail processing. Tr.
23/8340-8341. Being unable to make reliable basic definitional statements regarding
the volume and workload concepts under discussion, Prof. Roberts is unable to
disagree authoritatively with Dr. Bozzo on the relationship between MODS workloads
and mail volumes.
Nor is Prof. Roberts's critique valid even as a redefinition of the "proportionality
assumption." In Docket No. R2000-1, Dr. Neels purported to show a failure of
"proportionality" based on estimates of the relationships between total piece handlings
and first handling pieces. In addition to demonstrating econometric flaws in Dr. Neels's
analysis, Dr. Bozzo demonstrated that a TPF-FHP "proportionality" adjustment was
irrelevant. Based on that analysis, Dr. Bozzo shows mathematically that any TPF-FHP
82
disproportionality must be cancelled out (to a first approximation) by an offsetting FHP-
volume effect. USPS-T-12 at 107-108. The latter effect is unmeasured by Prof.
Roberts. Tr. 23/8325-8327, 8331. As such, Prof. Roberts's analysis is simply a rehash
of Dr. Neels's discredited analysis.
Finally, Prof. Roberts's econometric analysis of the relationship is deficient.
USPS-RT-5 at 63-68. This subject is discussed further in section 4(a)(v), below.
3. The Postal Service variability models use appropriate and reliable
data and estimation methods.
a. The MODS data are suitable for estimating mail processing variabilities.
i. MODS directly measures hours and workloads from
actual operations on a continuous basis. MODS is an operating data system that partitions plant operations and records
workhours and, where possible, workloads for those operations. For sorting operations,
the workload measures are counts of pieces receiving a first sort in the plant ("first
handling pieces," or FHP), counts of the number of successful sorts ("total piece
handlings," or TPH), and the number of attempted sorts ("total pieces fed," or TPF,
recorded for automated and mechanized operations only). See USPS-T-12 at 23-25.
These data have the advantage of being collected directly from operations every day,
around the clock, at hundreds of mail processing facilities. MODS data, therefore,
provide a rich data set covering many more sites over much longer time periods than
would be available from special studies of operations. The "cost" is that as MODS is a
tool designed for local management use, care must be taken in developing econometric
analysis based on MODS data. Given appropriate choice of econometric techniques,
83
there is no fundamental obstacle to employing the MODS data to model mail
processing, and indeed Dr. Bozzo and – in a milestone for the mail processing analysis
– Prof. Roberts both are able to recommend econometric results based on the MODS
data. OCA-T-1 at 2; Tr. 23/8300-8301. Even Dr. Neels advances (but does not exactly
recommend) an analysis of MODS data as constituting "new evidence" on mail
processing variability, despite his criticisms13 of MODS data quality. UPS-T-1 at 49-54.
ii. MODS data issues are routine for operating data, and
permit the construction of data sets sufficient for estimation purposes.
MODS, like any data system, is not perfect. MODS data are subject to several
well-known error processes, including measurement error in the FHP conversion
process (and the associated manual TPH), errors in the 3-digit operations to which data
are recorded, and data transmission and aggregation errors. These have been
acknowledged since the Postal Service began presenting econometric analysis of
MODS data in Docket No. R97-1. See, e.g., Docket No. R97-1, USPS-T-14 at 27-33.
Many of the analytically relevant errors can be corrected or eliminated in the
process of constructing the estimation data sets. Combining 3-digit MODS operations
into analytically relevant cost pools, for instance, corrects situations where data are
recorded to operation A instead of to operation B within the same cost pool. Response
to USPS/UPS-T1-11(e) Tr. 23/8484-8485. Indeed, Dr. Bozzo reports a specific
anomaly in certain data for BCS operations that is corrected by pooling. USPS-T-12 at
50; USPS-RT-5 at 24-26, Tr. 36/12416-12418. Clearly erroneous observations not
corrected by pooling can be, and should be, eliminated by appropriately chosen 13 Which, as will be discussed below, are greatly overstated.
84
screens. USPS-T-12 at 63; OCA-T-1 at 18. Finally, errors that are inherent in the data,
such as conversion error in FHP and manual TPH data, should be addressed by
appropriate estimation techniques. USPS-T-12 at 51.
Dr. Bozzo, synthesizing past intervenor and Commission critiques, concludes
that a reasonable screening philosophy is to eliminate obvious errors from the
estimating data sets while treading lightly on data that are merely anomalous. USPS-
RT-5 at 21, Tr. 36/12413. Indeed, he directly addressed the tensions in regression
sample selection in describing the screening approach in the Postal Service models,
which uses operational information to identify clearly invalid observations, while seeking
to avoid inconsistency due to sample truncation. USPS-T-12 at 63-64.
iii. The Postal Service analysis makes appropriate use of
other data sources needed for the mail processing models.
Fully specifying labor demand equations for mail processing operations requires
data from sources other than MODS. The Postal Service models incorporate data from
a number of data systems to construct variables representing delivery network
characteristics, capital input, and hourly labor rates. Additionally, variables not used
directly in the model, but used as instrumental variables, are included in the data sets.
USPS-T-12 at 55-63. Dr. Neels and Prof. Roberts also employ certain of these data in
their models.14
The main controversy regarding the data from sources other than MODS
concerns the equipment inventory data used to construct capital input variables. In his
14 Dr. Neels omits capital variables from his model; Prof. Roberts does not include delivery network variables.
85
March 2006 paper, Prof. Roberts noted apparent lags between the commencement of
operations as indicated by the MODS data and the appearance of related equipment in
the inventory data. This particularly affects the AFSM 100 operation, which involved the
major equipment deployment over the period under study. Prior to the filing of this rate
case, Dr. Bozzo initiated an investigation of the timing issue, and found that there was
some lag between equipment installation and reporting to the relevant databases, but
that the timing issue could be mitigated to a significant extent by increasing the
frequency with which the inventory data are checked for new equipment. USPS-T-12 at
100. While Prof. Roberts seemed to find this solution unsatisfactory, even though his
method omits observations from operations' start-up and wind-down periods from the
regression samples for other reasons (Tr. 23/8370-8372), Dr. Bozzo notes that a
comprehensive solution may be obtained (at some one-time processing cost) by
employing equipment deployment schedules to determine the actual installation timing.
USPS-RT-5 at 56, Tr. 36/12448.
iv. Dr. Neels's analysis of MODS data quality issues is error-plagued, misstates the true data quality issues, and should be rejected.
Dr. Neels presents a variety of analyses in which he claims to demonstrate the
presence of serious errors in the MODS data. This includes a comparison of IOCS
activity data with the MODS operations recorded on IOCS tallies, tables listing
observations from the MODS data set exhibiting "data errors," and tabulations indicating
effects of various claimed errors on sample sizes by operation. UPS-T-1 at 12-23.
However, a variety of failings lead Dr. Neels's analysis to greatly overstate the extent
86
and seriousness of MODS data issues. More than a little ironically—given Dr. Neels's
original criticisms of Prof. Bradley for applying "excessive" screens in Docket No. R97-1,
coupled with his accompanying contention that anomalous data may contain the most
information of greatest interest (Docket No. R97-1, UPS-T-1 at 27)—Dr. Neels's
analysis fails by its absence of any signs of efforts to distinguish analytically significant
errors in the estimating data sets from mere anomalies that may either be quantitatively
insignificant or even correctable by proper data handling. A variety of other definitional
errors also serve to inflate the appearance of errors in Dr. Neels's account. USPS-RT-5
at 12-28. Accordingly, the Commission should accept the recommendation of Prof.
Greene from Docket No. R2000-1 that researchers should focus on extracting useful
information out of MODS, rather than simply seeking to discredit the data. Docket No.
R2000-1, USPS-RT-7 at 5-6. In this proceeding, while Prof. Roberts does not go so far
as to endorse Prof. Greene's recommendation (Tr. 23/8375), Prof. Roberts evidently
does not view MODS data issues as fundamental obstacles to recommending MODS-
based econometric results to the Commission.
Dr. Neels's analysis purporting to show serious misclocking problems in MODS
sorting operations suffers from major conceptual and technical errors, which when
resolved show MODS and IOCS activities to be substantially in agreement. Dr. Neels's
intent was to match IOCS activities with the MODS operation groups defined for Dr.
Bozzo's econometric analysis, but Dr. Neels inappropriately omitted several significant
operations15 such that they were misclassified as potential clocking errors when the
15 Mail processing barcode sorter (MPBCS) operations in the D/BCS operation groups; linear integrated package sorter (LIPS) operations in the SPBS operation groups, and cancellation "allied labor" operations. Tr. 23/8470-8471.
87
IOCS and MODS operations actually were consistent. USPS-RT-5 at 12-13, Tr.
36/12404-12405. Dr. Neels also presented the results of his data so as to
inappropriately imply that certain overheads and other activities that are part of sorting
operations were indicative of misclocking. Id. at 13. Incorporating the technical
corrections mentioned above, Dr. Bozzo shows that, for the sorting cost pools, the IOCS
and MODS activities are fully consistent for 93 percent of weighted tallies, and a
majority of the remaining tallies are in related sorting activities. Id. at 14. Given that
any inaccuracies in either system would contribute to the relatively small proportion of
anomalous observations, the correct conclusion is that the systems are substantially
consistent. Id. at 15.
Dr. Neels's analysis of the MODS data set fares little better than his IOCS
analysis. Taken at face value, Dr. Neels's analysis would suggest that the MODS data
for manual sorting data are better than that for automated operations. UPS-T-1 at 22-
23; USPS-RT-5 at 20. As witness Oronzio testifies, that is contrary to the experience of
Postal Service operations experts and field managers, who regard FHP and other
volumes subject to conversions as less reliable than machine counted data. USPS-RT-
15 at 12-13. Dr. Neels achieves the result in large part by identifying as "anomalous"
observations in which FHP exceeds TPH and/or TPF, which he claims should not occur
by definition. However, as Dr. Bozzo and Prof. Roberts both note, the combination of
independent measurement methods for FHP and automated TPF (and TPH) and
measurement error in FHP means that the definitional relationship Dr. Neels imposes
need not hold in practice. USPS-RT-5 at 22; Tr. 23/8326. Comparing automated FHP
to TPF cannot, in itself, discern whether there is any error in either variable other than
88
the conversion error, and Dr. Neels performed no analysis to determine whether the
"anomalies" actually represented errors. USPS-RT-5 at 22-23; Tr. 23/8473-8474. And,
perversely, this criterion would tend to identify more errors in cases where FHP and
TPF (or TPH) were close in principle, and hence where the FHP-TPF anomaly could
result from relatively small FHP measurement errors. USPS-RT-5 at 23. The
independent measurement methods for FHP and automated operations' TPF and TPH
imply that the magnitudes of FHP errors are irrelevant to evaluating the quality of the
machine-counted piece handling data used in the Postal Service models. Id. Indeed,
the relevance of FHP errors generally is questionable given that the instrumental
variable procedures are specifically intended to be robust to the FHP measurement
process. Id. at 27-28.
Dr. Neels identifies additional MODS data anomalies without due regard to
whether the issues in question are relevant for estimation purposes. Dr. Neels screens
for errors below the cost pool level defeating, at least to some extent, the purpose of
pooling MODS operations. In some such cases, Dr. Bozzo had indicated specifically
that investigation of the anomalies in question had revealed that the errors were
amenable to correction by pooling (i.e., the data were booked to operaton A instead of
operation B in the same pool). USPS-RT-5 at 24-26. Dr. Neels included the effects of
screens for any errors in the weekly data in his assessment of the quarterly
observations in the MODS data set, even though the weekly observations are small
relative to the quarterly data (about 1/13th, on average), and theory indicates that
relatively small measurement errors are less likely to have material consequences for
estimation. Id. at 26-27. He also employed screening procedures designed to identify
89
anomalies in cost pool-level TPF and TPH (via TPF/TPH productivity screens) in his
alternative "plant-level" model even though his explanatory variables were shape-level
FHP. UPS-T-1 at 51-52. Given the aforementioned differences in measurement
methods and volume concepts, Dr. Neels's screening procedures stand in sharp
contrast to Prof. Roberts's approach, which actually sought to identify actual errors in
the FHP and workhour data entering Prof. Roberts's labor demand models. Tr.
23/8370-8372.16
The general impression of Dr. Neels's review of the MODS data is that he was
driven to identify any and all anomalies without regard to whether they posed any
analytically significant problems. The criteria Dr. Neels employed to assess MODS data
quality in this proceeding are, indeed, excessive and inappropriate by the terms Dr.
Neels himself established in Docket No. R97-1.
b. There is no dispute in this proceeding that panel data
methods are appropriate for mail processing variability estimation.
Another milestone reached in this proceeding is that there is no significant
dispute among the Postal Service and intervenor experts over the use of the panel
data/fixed effects econometric model, a major source of controversy in the R97-1 and
R2000-1 rate cases. Prof. Bradley and Dr. Bozzo have consistently maintained that the
panel data/fixed effects approach is appropriate; standard statistical test results have
just as consistently supported their positions. See, e.g., USPS-T-12 at 73-74.
In Docket No. R2000-1, the noted econometrician Prof. William Greene testified: 16 It would be helpful to other researchers, however, if Prof. Roberts systematized his screening procedures; it is difficult to discern exactly what Prof. Roberts found to be wrong about the data he eliminates in some cases.
90
The Commission should have taken a much more favorable view [of the fixed effects
model] in 1997, and should at this time consider the panel data, fixed effects form of
econometric analysis an appropriate platform for continuing work on developing a model
for mail processing costs. (Docket No. R2000-1, USPS-RT-7 at 5, quoted at Tr.
23/8376.)
Prof. Roberts, who has also consistently employed panel data/fixed effects
models within his framework, expressly agrees with Prof. Greene. Tr. 23/8376. Dr.
Neels's alternative model also employs the panel data/fixed effects estimation method.
UPS-T-1 at 52. Given the absence of dispute regarding the appropriate estimation
framework, the Commission should, at a minimum, adopt Prof. Green's
recommendation that future analysis of mail processing costs employ the panel data
methods that have been consistently supported by econometric theory and specification
test results.
c. The Postal Service models produce robust results using
consistently-applied methods. The Postal Service's mail processing models have employed consistent methods
for BY 2004 and BY 2005, and as Dr. Neels observes, have consequently produced
results that are "substantially the same" for the two years. UPS-T-1 at 9; USPS-RT-5 at
28, Tr. 35/12420. While Dr. Neels may not intend a compliment, consistent results from
consistent methodology – well-grounded operationally and econometrically – implies
robustness of the results, and that normally is desirable.
Dr. Neels cannot be accused of consistency in his approaches to mail processing
modeling. While in this proceeding Dr. Neels has not tried to buck standard
91
econometric practice and employed a panel data econometric method (albeit one that is
badly flawed as he implements it), he attempts the feat of trying to prop up his previous,
incommensurable, and demonstrably inappropriate modeling approaches from the R97-
1 and R2000-1 rate cases. Tr. 23/8502-8503.
Prof. Roberts's major model changes, for the most part, have represented
evolutionary changes within a consistent framework. Nevertheless, were Prof. Roberts
trying to show that his models are unstable and unreliable, the double-digit changes
between his March 2006 results and the OCA-T-1 recommendations would accomplish
the goal in impressive fashion. However, as discussed below, Prof. Roberts's update
incorporated a major specification error, among other unjustified changes; subject to the
well-justified updates carried out by Dr. Bozzo, Prof. Roberts's two-output models yield
relatively stable results. USPS-RT-5 at 48-59, Tr. 36/12440-12451.
d. The Postal Service translog/GLS model is the superior
option for automated operations.
i. The Postal Service models make appropriate use of machine-counted workloads.
Total piece handlings (MODS TPF and TPH) in automated operations are directly
measured from machine counts of pieces. USPS-T-12 at 23-26. Thus, in contrast with
FHP and manual TPH variables, automated total piece handlings are not subject to the
process of converting weight to pieces or to the resulting measurement error. As a
result, it is not necessary to employ instrumental variables methods to address errors-
in-variables issues with the automated TPF. Id. at 87-88. Nor, as discussed in Section
1 (above), is there a prior operational reason to believe that total piece handlings are
92
"endogenous" because plant managers use their "discretion" to decide the processing
paths for pieces in any significant way. Thus, the Postal Service models can use the
flexible translog functional form while providing estimates that are efficient relative to
instrumental variables estimates using simpler log-linear specifications.
ii. Cross-operation effects have been shown to be
negligible. The operational structure of sorting operations provides little reason to expect
significant cross-operation effects—i.e., where costs one operation are affected by
sorting workload in another operation—as discussed above. Nevertheless, Dr. Bozzo
checked for the presence of cross-effects in automated letter and flat-sorting operations.
USPS-T-12 at 93-95. The estimated cross-effects uniformly are small and statistically
are insignificant in seven out of the eight cases, supporting the operational analysis that
within-operation TPF are the relevant explanatory variables for sorting operations'
workhours. Id.
Dr. Bozzo also investigated the presence of cross-operation and cross-shape
effects in the context of the alternative models advanced by Dr. Neels and Prof.
Roberts. Dr. Neels claims that there may be, contrary to the Postal Service operational
analysis, substantial cross-operation and even cross-shape effects in sorting operations'
workhours. UPS-T-1 at 49-50. Dr. Neels had, further, attempted to describe
mechanisms by which such effects might arise. Tr. 23/8457-8460. However, the cross-
effects he describes are minor in principle and, more significantly, are absent from the
data. USPS-T-12 at 93-95; USPS-RT-5 at 37-40, Tr. 36/12429-32.
93
That cross-operation effects are negligible within shapes had already been
addressed by Dr. Bozzo, as described above, and Dr. Neels conspicuously failed to
investigate model specifications that might have explicitly demonstrated such effects.
USPS-RT-5 at 39, Tr. 36/12431. Dr. Bozzo estimated a letter-shape version of Dr.
Neels's model showing no effect of non-letter FHP on letter-shape sorting operations'
workhours, contrary to Dr. Neels's claimed suspicions. Id at 40, Tr. 36/12432. The
empirical result is consistent with the treatment of the shape-based mailstreams as
analytically separate in the Postal Service and OCA models.
Similarly, Dr. Bozzo's investigation of Prof. Roberts's models with additional FHP
"outputs" shows the expected result that manual volumes – which do not flow to
automated processing – have no statistically significant effect on automated operation
workhours, though at a considerable efficiency cost relative to the translog/GLS models
using machine-counted piece handlings. Id. at 60-61, Tr. 35/12452-3. Both operational
considerations and the empirical results support the long-held Postal Service position
that within-operation total piece handlings (MODS TPF) are the correct output variables
for automated operations.
iii. There is no evidence of "attenuation" of the
automated operations' elasticity estimates. Dr. Bozzo likewise investigated instrumental variables formulations of the labor
demand models for automated operations, rather than simply assuming an absence of
bias in the translog models. USPS-T-12 at 87-89. The results show no systematic
direction to the differences between the results at the cost pool level, while the weighted
average elasticities are barely different – 0.88 for the translog method, 0.89 for
94
instrumental variables.17 However, the individual instrumental variables elasticities have
considerably larger standard errors. Id. at 88. Dr. Bozzo notes that it is undesirable to
choose a statistically inefficient estimation method such as instrumental variables based
on differences in the details that may largely relate to increased sampling variability.
Moreover, he notes that extremes – low as well as high – of the cost pool-level
instrumental variables elasticities are difficult to square with operational considerations.
Id. Thus, the more statistically efficient and more plausible translog results are
preferable. Id. at 89.
e. Instrumental variables estimation is appropriate for
operations where MODS workloads are subject to conversion error.
i. Measurement processes for manual piece handlings
(and FHP in general) are distinct from automated operations' machine TPF and TPH counts.
In contrast to automated operations' machine counts of sorted pieces for total
piece handlings (TPF and TPH), manual TPH—and FHP in all operations—employ
conversion methods rather than exact piece counts. For letter- and flat-shape
operations, mail is weighed and the weight of mail is converted to pieces according to
national conversion factors that vary by the mail's "source/type" code. Parcel and
Priority Mail operations involve conversions of container counts to pieces. Tr. 10/2559-
17 Prof. Roberts estimates an alternative set of instrumental variables models using TPF, which while labeled "USPS Model" is actually a separate implementation devised by Prof. Roberts, and finds qualitatively similar results. OCA-T-1 at 13 (Table 1, column "USPS Model"); Tr. 23/8302-8304.
95
2561; MODS Handbook M-32, section 2-2.2.1 (filed as USPS-LR-L-150). Witness
Oronzio reports that the Postal Service is "experimenting with methods to eliminate
weighing in the computation of FHP" (USPS-RT-15 at 13). However, in general,
analysis of manual TPH data and all FHP data must allow for the presence of
conversion error in the data.
ii. The appropriate response to conversion error in
manual workloads is to use "robust" instrumental variable estimation techniques.
Since all manual piece handling (FHP and TPH) data will depend to some extent
on conversions of weight or (for parcels) containers to piece counts, it is not possible—
in contrast to automated operations—to eliminate the analytically relevant errors in
manual piece handlings by screening out specific observations with errors.
Consequently, the Postal Service models for manual operations employ instrumental
variable estimators to obtain statistically consistent elasticity estimates in the presence
of measurement error. USPS-T-12 at 51; see also Docket No. R2005-1, USPS-T-12 at
26-27. Dr. Neels and Prof. Roberts both employ related instrumental variable
estimation methods to deal with the presence of measurement error in the FHP
variables used as "outputs" in their respective models. OCA-T-1 at 3; UPS-T-1 at 52.
Thus, there is no significant disagreement over the use of instrumental variable
methods where needed to address measurement error issues.
iii. The simpler log-linear specifications for the
instrumental variable models are appropriate. The instrumental variable models estimated by Dr. Bozzo, Dr. Neels, and Prof.
Roberts all employ estimating equations that are log-linear in hours and "outputs."
96
USPS-T-12 at 51; Tr. 23/8467 (Neels); Tr. 23/8328 (Roberts). While the models differ in
many details, the functional form of the equations in this broader regard is justifiable and
has not been (and should not be) a matter of significant controversy. Dr. Bozzo noted in
Docket No. R2005-1, "Selection of instrumental variables for higher-order and
interaction terms of output is not a trivial matter… loss of the translog form's improved
approximation properties is likely to be less important than obtaining variabilities that are
robust to the measurement error problem." Docket No. R2005-1, USPS-T-12 at 30,
cited at Docket No. R2006-1, USPS-T-12 at 51.
iv. The Postal Service models successfully eliminate
measurement error bias. Comparing his recommended instrumental variable models to alternative GLS
models, Dr. Bozzo concludes that the instrumental variable procedure is warranted for
manual operations, and that the procedure is successful in addressing attenuation of
the elasticities due to measurement error. USPS-T-12 at 86-87.
Dr. Neels presented a table in which he purported to show that "weak
instruments" issues with the Postal Service models may result in significant bias despite
the use of instrumental variables methods. UPS-T-1 at 30. Dr. Neels's "analysis" is
unfounded and must be rejected. While Dr. Neels had cited a well-known paper on the
"weak instruments" problem in his testimony, he admitted that his conclusion that the
Postal Service models could be biased was not based on any formal statistical test. Tr.
23/8486. Accordingly, as Dr. Bozzo states, "it is impossible to evaluate whether the
criteria Dr. Neels employed are valid." USPS-RT-5 at 33-34. Nor, as Dr. Bozzo
97
observes, is there any evidence that Dr. Neels took into account significant findings
from the paper Dr. Neels himself cited. Id. at 34.
Nor does Dr. Neels's judgment appear to have been reliable. A recent paper
provides an explicit formula with which the possibility of bias may be assessed from the
information Dr. Neels had at hand. The bias of two-stage least squares, relative to
ordinary least squares, is )~
/( 2Rnl , where l is the number of instruments, n is the sample
size, and 2~
R is the partial R-squared reported by Dr. Neels. 18 As shown in the table
below, the Postal Service IV models for manual operations eliminate 89-98% of the OLS
models' bias. Dr. Neels's judgment regarding the Postal Service instrumental variable
models is not reliable.
Line Cost Pool Manual
Letter Manual Flat
Manual Parcel
Manual Priority
Source
1 Partial R2 0.0103 0.0106 0.0056 0.0101 UPS-T-1 at 30
2 # inst (l) 2 2 3 3 USPS-LR-L-56 at 9 (footnote 6)
3 N 7180 8451 4846 5520 USPS-T-12 at 73
4 Rel. Bias )
~/( 2Rnl
2% 3% 11% 5% L2/(L1 x L3)
5 % of OLS Bias eliminated
98% 97% 89% 95% 1-L4
18 Michael P. Murray, "Avoiding Invalid Instruments and Coping with Weak Instruments," Journal of Economic Perspectives Vol. 20, No. 4 (Fall 2006), at 124.
98
4. The reliable evidence from intervenor analyses in this proceeding supports the Postal Service’s demonstration that mail processing costs are less than 100 percent volume-variable.
a. Prof. Roberts's models, correctly updated, yield results
largely consistent with the Postal Service models.
i. While significantly flawed, Prof. Roberts's models, if properly implemented, are superior to the alternative of maintaining the 100 percent variability assumption.
In March 2006, Prof. Roberts presented a major extension and update of the mail
processing model he developed for the OCA in 2002. Dr. Bozzo commends Prof.
Roberts for having "greatly improved his models by incorporating a refined
characterization of sorting output that partly accounts for the amount of sorting
improvement in addition to the number of unique pieces sorted." USPS-T-12 at 7.
However, Prof. Roberts's continued use of MODS FHP to measure sorting
operations' output remains problematic. Prof. Roberts's theoretical model considers
measuring costs for a large number of products distinguished by required sort depth,
other cost-causing characteristics, and rate categories, which is conceptually valid but
infeasible Id. at 8 (esp. footnote 8). Dr. Bozzo observes that both FHP and total piece
handlings (TPF and TPH) differ from Prof. Roberts's theoretical output characterization
in some ways, though total piece handlings by definition track differences in net sort
depth not captured by FHP, and therefore not reflected in Prof. Roberts's empirical
models. Id. at 7-8. Dr. Bozzo compares the FHP and total handling measures in detail,
and notes that the measures can provide "reasonably consistent" characterizations of
sorting output. Id. at 8, 35-43. Consequently, it is not surprising that Prof. Roberts's
March 2006 results generally resemble those of the Postal Service models in BY 2004
and BY 2005. Id. at 8.
99
While the Postal Service models are "most consistent with the structure of
operations and… most demonstrably robust," Dr. Bozzo regards Prof. Roberts's March
2006 models, updated for BY 2005 in USPS-T-12, as an "acceptable alternative."
USPS-RT-5 at 75; Tr. 35/12467; see also USPS-T-12 at 101-104.
ii. Should the Commission adopt a model based on Prof.
Roberts's work, it should employ the updated version of Prof. Roberts's model presented by Dr. Bozzo.
As part of the Postal Service's direct case, Dr. Bozzo estimated an updated
version of Prof. Roberts's March 2006 two-output model. Dr. Bozzo added FY 2005
data, adjusted the BCS cost pool structure, and implemented improved capital variables
to address data issues raised by Prof. Roberts. USPS-T-12 at 101. The results of the
update, including back-casting of the updated model to the FY 1999-FY 2004 period
analyzed by Prof. Roberts for the March 2006 paper, were elasitcities for combined
letter and flat operations in the narrow range of 0.85-0.90. Those results are generally
consistent with the corresponding results from the Postal Service models, and well
within the margin of sampling error for Prof. Roberts's March 2006 results, which
showed an overall elasticity of 0.89 with a standard error of 0.06. Id. at 104.
Dr. Bozzo noted that his modifications eliminated some anomalous BCS results
from Prof. Roberts's March 2006 paper on the letter side, and appropriately adjusted the
relative influence of the elasticities for the AFSM 100 and now-defunct FSM 881
operations on the flat side, resulting in some convergence of the results from the
Roberts and Postal Service models. The results were "reasonably stable" from FY
2004 to FY 2005, which would normally be considered a positive result for a new and
relatively untested model. Id. at 102-103.
100
Insofar as Prof. Roberts made no mention of Dr. Bozzo's update of Prof.
Roberts's model in OCA-T-1, somewhat to the surprise of the Postal Service, Prof.
Roberts was asked whether he had considered it, and if so, why he rejected it. Tr.
23/8606-8. Prof. Roberts's explanation was even more surprising. As Dr. Bozzo notes,
the factors Prof. Roberts cites did "not support rejection of the Postal Service updates,
as the factors… [were] not actually defects of the USPS-T-12 update." USPS-RT-5 at
55, Tr. 35/12447. The factors Prof. Roberts cited included signs of the stability of his
model, the aforementioned improvements to the capital data, elasticity weighting
changes that Prof. Roberts actually adopted for his recommended results from OCA-T-
1, and the BCS cost pool change (regarding which, Prof. Roberts does not actually
claim that Dr. Bozzo's approach was incorrect, and Dr. Bozzo notes that he had
provided results using Prof. Roberts's methodology, which do not substantially alter the
results). Id. at 56-57, Tr. 35/12448-9.
iii. Prof. Roberts's own update is rendered unusable by
major technical flaws, unjustified model changes, and accordingly implausible results.
Prof. Roberts provides his own update of the March 2006 two-output models in
OCA-T-1, incorporating a number of changes which form the basis for his
recommended results. OCA-T-1 at 5-8. Prof. Roberts's update introduces a significant
error into his econometric implementation, unjustifiably changes other previous
modeling decisions, and in some cases palpably reduces the quality of his results, and
therefore should be rejected.
The outright error, partly acknowledged by Prof. Roberts, was including quarterly
dummy variables as "excluded" instruments to help identify his labor demand models.
101
OCA-T-1 at 5. In effect, Prof. Roberts did half the job of determining whether the
quarterly dummies were good candidates to serve as instruments. Instruments should
be correlated with the variable subject to measurement error (which, as Prof. Roberts
explains, is satisfied) but also should be properly excluded from the model. Indeed,
omitted variables can be problematic in instrumental variables estimation even in
circumstances where they are not troublesome in least squares estimation, so
"researchers [should] be doubly vigilant about omitted variables when doing
instrumental variable estimation."19
Prof. Roberts had justified his omission of the quarterly dummies on the grounds
that Postal Service operations experts had not mentioned them. USPS-RT-5 at 51,
citing Roberts 2006 at 59. In this, Prof. Roberts was insufficiently vigilant, since Postal
Service operations witness Moden had discussed seasonal factors affecting both
workloads and workhours in Docket No. R97-1. USPS-RT-5 at 51-52. Indeed, Prof.
Roberts himself had included quarterly dummy variables in his 2002 analysis based on
an argument similar to witness Moden's (Id. at 52), though he incorrectly (and
unfathomably) claims not to have previously included those variables. Tr. 23/8412.
Regardless of the reasons for the retrogression of Prof. Roberts's methods, though, he
correctly admits that the failure of over identifying restrictions tests for models using the
quarterly dummy variables as excluded instruments implies that those models are not
appropriate. Tr. 23/8312-8313.
Prof. Roberts's other major change was to significantly shorten the sample period
employed in his models, from seven years of quarterly observations in Roberts 2002
19 Murray, op. cit., at 118.
102
and six years of quarterly observations in Roberts 2006, to four years in the OCA-T-1
models. Tr. 23/8419. The main stated justification is to separate the pre- and post-
AFSM 100 periods in flats processing, though Prof. Roberts applies the same sample
period to letter-shape and other labor cost pools where changes to operations have
been relatively minor. OCA-T-1 at 6; USPS-RT-5 at 49-51.
The changes implemented for OCA-T-1 appear particularly arbitrary as Prof.
Roberts had, in his 2002 paper, taken some pains specifically to justify the use of a
longer sample in the face of considerable changes to letter-sorting operations owing to
implementation of the letter automation plan, concluding that incorporation of control
variables for sorting technologies was an appropriate solution. Roberts 2002 at 19-21;
USPS-RT-5 at 50-51. Particularly insofar as the technology controls remain a feature of
Prof. Roberts's models, the drastic reductions in sample size are not justified by Prof.
Roberts's own logic.
Prof. Roberts's changes also are not justified by clear improvements in results.
Prof. Roberts explains the much higher manual letters elasticity, compared to his earlier
results, as a possible consequence of diverting automatable pieces to higher-cost
manual processing. Tr. 23/8300, 8445-8447. However, as witness Oronzio explains,
automated letter-sorting operations have sufficient capacity that the need to send
automation-compatible pieces to manual is extremely limited. USPS-RT-15 at 10-12;
Tr. 36/12278-12280.
In flat operations, the volatility of results that prevents Prof. Roberts form
recommending elasticities from his flat-shape models is confined largely to the FSM
1000 cost pool, where as Dr. Bozzo notes the elasticities are very imprecisely
103
estimated, such that it is far from clear that there is a difference in the correct elasticities
based on the shorter sample period. USPS-RT-5 at 50. Moreover, the updated flats
elasticities show a far stronger effect of outgoing flats FHP on workhours, compared to
Prof. Roberts's March 2006 results, despite flats workhours and workloads being highly
concentrated in incoming operations. The OCA-T-1 results are inconsistent with Prof.
Roberts's explanation for his March 2006 results, in which Prof. Roberts had reasonably
observed the small contribution of outgoing flats volumes to flat operations' total
workloads. Roberts 2006 at 49; USPS-RT-5 at 58.
Prof. Roberts's econometric errors and faulty model selection logic render his
results from OCA-T-1 unusable. Dr. Bozzo's update, showing robust results relative to
Prof. Roberts's March 2006 paper without anomalous results, is clearly preferable
among the models derived from Prof. Roberts's research.
iv. Prof. Roberts's "additional outputs" models point to
potential improvements to the OCA models, but the OCA-T-1 implementation is terminally flawed for its apparent purpose.
A fundamental shortcoming of Prof. Roberts's models has been the failure of the
FHP measures he specifies to reflect systematic differences in work content associated
with many types of mail, since MODS FHP provides limited information on the
processing modes and amount of sorting that is performed. While he has not gone to
the logical conclusion of employing MODS variables that reflect the amount of sorting
(i.e., total piece handlings), Prof. Roberts has at least recognized the importance of
representing systematic differences in work content (and hence cost) cost differences
between various categories of mail in his labor demand models. OCA-T-1 at 20-24.
104
Such considerations motivate his models with "additional outputs" reflecting what he
characterizes as automation and non-automation volumes. Tr. 23/8287-8288.
While conceptually a step in the right direction, Prof. Roberts's implementation is
rendered useless by a gross technical flaw: he fails to distinguish automation from non-
automation volumes. USPS-RT-5 at 59. Specifically, Prof. Roberts's "nonautomation"
volume combines manual mail with non-prebarcoded volumes that would be handled in
the automation mailstream and thus have costs consistent with automation rather than
manual mail. Tr. 23/8381-8383, 8404.
Indeed, as Dr. Bozzo notes, automation-compatible volumes are a majority of
Prof. Roberts's "non-automation" category. Accordingly, it is not surprising that Prof.
Roberts would have had difficulty reliably distinguishing the cost effects of the
respective categories. The correct approach to identifying the categories as Prof.
Roberts labeled them would have been to separate manual from automation-compatible
FHP, to obtain mail categories with more properly distinguished cost characteristics.
USPS-RT-5 at 60.
v. There is no reliable evidence suggesting failure of the
distribution key method's "proportionality assumption." In addition to being conceptually faulty in considering the wrong "volume"
measures, Prof. Roberts's analysis purporting to show failure of the "proportionality
assumption" also incorporates two major econometric errors.
First, Prof. Roberts's erroneous use of quarterly dummy variables in the OCA-T-1
instrumental variable analysis extends to the models of piece handlings with which he
purports to test the assumption. USPS-RT-5 at 63-64. Dr. Bozzo shows that the
105
"overidentifying restrictions" tests that Prof. Roberts's initially-recommended labor
demand models fail, are also conclusively failed by the piece handlings models. Id. at
64; USPS-LR-L-192, file USPSmod_threestep.log. Thus, Prof. Roberts's piece handling
models are invalidated by the same considerations that weigh against the use of the
quarterly dummy variables as instruments in the labor demand models. See Tr.
23/8312-8313. Prof. Roberts's error also invalidates the analysis (OCA-T-1 at 8-17) in
which he purports to reconcile TPF- and FHP-based models using the TPF-FHP
elasticities, as the results upon which it is based are econometrically inappropriate.
Prof. Roberts does not provide alternative piece handling results unaffected by
the instrument selection error, though such models would not, themselves, be adequate
to model the relationship between TPF and FHP. Prof. Roberts's piece handling models
are clearly misspecified, assuming a common effect of all shape-level FHP on cost pool-
level TPF, when the true specification must allow for differing amounts of subsequent
handlings both by FHP source and by site. For example, Prof. Roberts agrees that
manual FHP will not cause subsequent handlings in automated operations (Tr.
23/8299), which implies that manual FHP are not an explanatory variable for automated
TPF (USPS-RT-5 at 66), but he does not specify his automated handling models
accordingly. Indeed, Prof. Roberts asserts that he does not have to account for
mailflows in his piece handling models (Tr. 23/8325-8326), effectively claiming that he
can freely impose false restrictions into his models without biasing his results. While, as
Dr. Bozzo notes, there are some special cases in which Prof. Roberts's model is
sufficient—i.e., the manual/automation mix is constant over time—data provided by
106
Prof. Roberts actually shows declining manual shares in FHP in both letter and flat
operations. Tr. 23/8382-8383; USPS-RT-5 at 66-67.
In order to avoid the problem of accounting for the complexities of mailflows in
the piece handling models, it is possible to employ shape-level aggregates, which Dr.
Bozzo did in response to Dr. Neels's analysis in Docket No. R2000-1. Prof. Roberts did
not estimate such models, but Dr. Bozzo did so using Prof. Roberts's original instrument
specification and an alternative specification, and finds no evidence of statistically
significant violations of TPF-FHP "proportionality." USPS-RT-5 at 67-68.
b. Dr. Neels's alternative model, correctly implemented for "allied labor" and at the "plant level," supports the use of reduced variabilities for allied labor and miscellaneous cost pools.
i. Dr. Neels's aggregate model is conceptually inferior to
the Postal Service and OCA models for sorting operations.
Dr. Neels presents a model of sorting operations aggregated over shapes that he
styles a "plant-level" variability model. UPS-T-1 at 49-54. As a model of sorting
operations, Dr. Neels's model is inappropriately specified. Dr. Neels's model abandons
the shape-based structure common to the Postal Service and OCA models based on
vague suspicions of cross-shape effects with operational foundations that are tenuous
at best and which, more significantly, are not borne out by the data as noted above in
Section 3. Meanwhile, by only considering shape-level FHP aggregates as sorting
"outputs," Dr. Neels's model is unable to reflect a variety of patterns of cost causation—
107
e.g., cost differences between automation and non-automation pieces—that he agrees
are characteristics of the operations, and which Prof. Roberts at least agrees could be
desirable to reflect in properly-specified labor demand models. USPS-RT-5 at 36-40;
see also Section 4(a)(iv), above.
ii. Dr. Neels's model has some utility as a model of allied
labor and other non-sorting operations. While Dr. Neels's model is inadequate for sorting operations, it does have
potential applicability to allied labor operations and, potentially, as a means of
characterizing overall variability for plant operations. In that context, Dr. Neels's model
is a relative of Dr. Bradley's allied labor models from Docket No. R97-1, which
incorporated multiple cost drivers representing shape and machinability characteristics.
USPS-RT-5 at 41, Tr. 35/12433. Employing multiple cost drivers is necessary in this
case because the allied labor operations generally support all of the shape-based
mailstreams. See also USPS-T-12 at 84, lines 5-9. Dr. Neels's choice of functional
form is reasonable in this application, and despite data handling errors such as using
TPH productivity screens while specifying the model with FHP, Dr. Bozzo concludes
that "the broad outlines of the model are acceptable." USPS-RT-5 at 41, line 19; Tr.
35/12433.
iii. Correctly employed as an allied labor or whole-plant
model, Dr. Neels's model supports the Postal Service treatment of variabilities outside of sorting cost pools.
Dr. Neels believed himself unable to estimate his model for allied labor
operations. UPS-T-1 at 49. However, as Dr. Bozzo notes, Dr. Neels was incorrect, and
108
NWRS workhour data for the allied labor Labor Distribution Code (LDC 17) had been
available from the beginning in USPS-LR-L-56. USPS-RT-5 at 42, Tr. 35/12434.
Dr. Bozzo estimated Dr. Neels's model using the LDC 17 allied labor workhours,
and the resulting 0.84 elasticity differs minimally from the 0.85 sorting operation average
employed in the Postal Service mail processing models. Id. Dr. Bozzo also estimated
Dr. Neels's model using two definitions of plant-level workhours, one from NWRS
incorporating LDC 13 and 17 workhours not covered in Dr. Neels's implementation, and
another using a broader set of MODS workhours incorporating all "Function 1"
operations plus supervisory workhours. USPS-RT-5 at 42-44, Tr. 35/12434-12436.
The range of the resulting elasticities, 0.82-0.90, brackets the 0.85 sorting operation
average employed by the Postal Service and does not differ significantly from the
sorting operation average; the elasticities from Dr. Neels's model applied at the plant
level are lower than 100 percent by statistically significant amounts. Id. Consequently,
Dr. Neels's model, correctly applied to allied labor or the entire plant level, actually
supports the variability levels employed in the Postal Service mail processing model.
d. If the Commission declines to adopt an econometric
variability model for sorting operations, it should modify its mail processing cost method to treat setup and take-down costs as non-volume-variable using the methods proposed by Dr. Elliott.
The record amply supports adoption of the Postal Service variability models or, in
the alternative, Prof. Roberts's models as updated by Dr. Bozzo, for the reasons stated
above. If the Commission, nevertheless, does not accept econometric variability
models at this time, it should modify its existing method, based on the partition of
activities identified in IOCS into 100 percent variable and non-volume-variable
109
categories, to reflect activities that the record shows to be non-volume-variable as
recommended by Dr. Bozzo and Dr. Elliott. USPS-RT-5 at 75-76; MPA et al.-RT-2 at 3-
5.
i. The record supports treating setup and take-down
costs as non-volume-variable. As discussed above, witness McCrery explains that setup and take-down costs
for sorting schemes are substantially non-volume-variable, instead depending primarily
on network-related factors. Witness McCrery notes that relatively few schemes are run
on multiple machines, and the great majority of schemes (especially incoming
secondary schemes) are very rarely, if ever, run on multiple machines for technical or
other practical concerns, e.g., the lack of technology to collate the output of identical
delivery point sequencing schemes run in parallel. As a result, it is patently incorrect to
conclude that the number of schemes run, and hence setup and take-down times,
would vary directly with volumes. USPS-T-42 at 36. Witness McCrery provided results
from a nationwide query of End-of-Run System data that confirm his account. Tr.
11/2895-97; see also MPA et al.-RT-2 at 3, USPS-RT-5 at 6-7.
While Dr. Haldi raises situations in which setup and take-down costs may vary
with volume in some respects, he admits that it would generally take a large increment
of volume to lead to a change in the number of schemes. Tr. 23/8613. Small changes
in volume on the margin are not sufficient to vary the number of schemes. USPS-RT-5
at 7. Thus, to the extent that a portion of setup and take-down costs may be variable
with volume in some sense, it is in the sense of "inframarginal" costs, which are a
component of incremental costs that the Postal Service incremental cost model
110
accounts for. The costs in schemes that are necessarily run on a single sorter are
"fixed" with respect to the entire volume of mail, and thus not properly considered
variable or volume-variable at all. Id. at 7-8. Dr. Haldi, too, states that it is important not
to confuse marginal (volume-variable) costs with incremental costs. Tr. 23/8614-8615.
Accordingly, the treatment of the setup and take-down costs as non-volume-variable is
conceptually correct, possible incremental cost issues notwithstanding.
ii. Data from the redesigned IOCS instrument provides a
reasonable basis for estimating the setup and take-down costs.
In prior proceedings, it had been difficult to comprehensively quantify the amount
of time spent in setup and take-down activities, and hence the magnitude of the
"schemes effect." When Postal Service witness Kingsley sought to quantify the effect in
Docket No. R2001-1, in the absence of systemwide data she used data on automated
sorting operations for two plants. USPS-T-42 at 35-36. In BY 2005, the redesigned
IOCS data collection instrument includes response categories that permit the
quantification of setup and take-down time.20 USPS-T-42 at 35-36; USPS-T-12 at 27.
While the IOCS processing does not currently assign an activity code to
specifically identify setup and take-down time, it is conceptually straightforward to
identify the tallies directly from the IOCS question 18 responses. Dr. Elliott's testimony
provides the results of such calculations for the cost pools covered by the econometric
analysis (MPA et al.-RT-2 at 6), and Dr. Bozzo additionally provides results applicable
to the remaining mail processing cost pools. MPA et al.-RT-2 at 7; Tr. 10/2545-6. 20 Moreover, the setup and take-down time is identified separately from sweeping mail from machines or cases during the run, which is considered part of the (volume-variable) runtime in Dr. Bozzo's activity partition. Tr. 36/12530, lines 4-6.
111
5. The Commission should accept the Postal Service partition of
administrative costs in Cost Segment 3, and recognize that the Postal Service treatment of mail processing "administrative" costs as part of Cost Segment 3.1 is correct.
In the course of his analysis purporting to show the existence of significant
clocking errors in MODS, Dr. Neels cited past controversy over the existence of a
considerable number of IOCS tallies that are assigned to mail processing cost pools
despite bearing IOCS "administrative" operation codes, and suggested that the
Commission might again need to shift those tallies to the administrative clerks cost
segment (cost segment 3.3). UPS-T-1 at 14. The record supports treating the
"administrative" tallies as part of the mail processing cost pools to which they are
assigned by witness Van-Ty-Smith.
Dr. Neels admits that it is not unexpected to encounter certain IOCS
"administrative" activities in mail processing operations. Tr. 23/8510, 8548-8551. In
sorting operations, most of the administrative tallies simply represent workers clocking
in or out of the operations; such tallies, Dr. Bozzo notes, are always assigned
administrative operation codes in IOCS tally processing. USPS-RT-5 at 16. The
remaining administrative tallies constitute less than one percent of sorting operation,
well within the range of what can be expected for incidental activities within the sorting
cost pools. Id. at 16-17. Dr. Neels agrees that small fraction of administrative tallies
would not be analytically significant either way. Tr. 23/8552.
In fact, Dr. Bozzo shows that the vast majority of the "administrative" tallies in
mail processing cost pools – 73 percent – appear in just 17 three-digit operations that
are clearly defined for administrative and miscellaneous activities in mail processing.
112
He also notes that there are significant administrative tallies in additional operations with
record-keeping or clerical activities (e.g., mail acceptance operations). Last, the
definitions of the cost pools are such that all of the tallies in question are recorded at
finance numbers corresponding to mail processing facilities. USPS-RT-5 at 18-19.
Since the evidence indicates that these administrative tallies are correctly included in
Cost Segment 3.1, the Commission should accept the Postal Service's assignment of
those tallies as recommended by Dr. Bozzo.
6. The Commission should continue to distribute volume-variable
costs to subclass using IOCS-based distribution keys established at the cost pool level.
a. Witness Van-Ty-Smith implements the long-accepted
IOCS/MODS-based distribution key method. Witness Van-Ty-Smith describes the calculations that implement the calculations
of volume-variable costs by subclass using the IOCS/MODS-based method employed
by the Postal Service since BY 1996 of Docket No. R97-1, and also adopted by the
Commission (with modifications) in that proceeding. USPS-T-11 at 2-20. Witness Van-
Ty-Smith implements a number of changes to the details of the calculations, to ensure
that the cost pool definitions are consistent with the current structure of operations and
to incorporate current input data. Id. at 4-6; 8. Witness Van-Ty-Smith's general
methods for computing costs and distribution keys are substantially unchanged in this
113
proceeding, and accordingly there are no significant methodological issues before the
Commission related to the distribution key calculations.
b. The accuracy of IOCS "direct tally" data used in the
distribution keys has been improved by the recent IOCS redesign.
For BY 2005, the IOCS-based distribution keys use, for the first time, data from
the redesigned IOCS instrument. Dr. Bozzo explains that IOCS "measures the
concepts of interest for the cost distribution methodology." IOCS "handling mail" tallies
provide information on the proportions of time for employees handling pieces and
containers of mail in all mail processing operations, and IOCS sampling methods further
ensure that appropriate mailpiece data are collected from automated operations in
which employees may not physically touch the mail while working. USPS-T-46 at 5-10.
Using the IOCS data collection instrument to reinforce IOCS sampling rules increased
"direct" tallies with subclass information from 43 to 48 percent of mail processing
observations, with an accompanying reduction in "not-handling" tallies. USPS-T-46 at
27-28. Also significantly, testing of the redesigned IOCS question 23 (which collects
class and subclass data) shows that the redesigned instrument improves accuracy of
the subclass-level data relative to "old" IOCS. Id. at 25-26. The sampling variability of
the IOCS-based volume-variable costs by subclass also improve somewhat in excess of
what would be expected from returning IOCS test sites to the production samples. Id. at
42.
The Postal Service expects to research additional improvements to the IOCS
distribution key data in line with the Data Quality Study's recommendations, most
notably development of sub-sampling methods for mixed-mail containers to reduce the
114
need for mixed-mail subclass distribution assumptions in the distribution key
methodology. USPS-T-46 at 4.
c. The IOCS/MODS-based distribution keys calculated by cost
pool remain the best method for distributing mail processing volume-variable costs to subclasses under alternative variability methods.
Prof. Roberts outlined an alternative method for computing volume-variable costs
by subclass based on his sorting operation models that would use volume-based
distribution keys to assign costs to subclass. Tr. 23/8337-8740; USPS-RT-5 at 69.
Should the Commission adopt sorting operation variabilities based on Prof. Roberts's
models, it should continue to use the accepted cost distribution method. USPS-RT-5 at
76. Even Prof. Roberts's FHP-based two-output mdoels for sorting operations clearly
do not account for all variations in work content of pieces (due to, e.g., varying presort
level and/or finalization level) that would be relevant for accurate subclass distribution.
Thus, it would be appropriate to use a distribution key source such as IOCS that does
reflect those cost differences. Id. at 70-71. As Dr. Bozzo observes, Prof. Roberts's
method can be computed using existing cost pool totals, with appropriate IOCS-based
distribution keys reflecting the incoming-vs.-outgoing operations that underlie the
estimated elasticities. USPS-RT-5 at 73-74. Beyond the incoming/outgoing
disaggregation for sorting distribution keys, no wholesale changes to cost pool
formation and/or distribution key methods would be necessary or, indeed, desirable.
115
B. The Postal Service’s Updated Study for Window Service Costs Should Be Adopted
The Postal Service is presenting an updated set of supply side variabilities for
window service transactions. In order to provide this update, the Postal Service was
required to sponsor a new field study of transaction times and to re-estimate the
established econometric equation. In addition, a review of the established methodology
for calculating variabilities revealed that the computational formula used is not correct.
The correct formula was derived and applied.
The established methodology is based upon the testimonies of Postal Service
witnesss LaMorte (in Docket No. R90-1) and Brehm (in Docket No. R97-1.)21 Starting in
1997, The Postal Service began a rollout of a new point-of-sale system. Direct
Testimony of Michael D. Bradley on Behalf of the United States Postal Service, Docket
No. R2006-1, USPS-T-17 at 3. Known as POS (Point of Service) ONE, it was designed
to replace integrated retail terminals with commercial off-the-shelf hardware and
software, along with support services and training. Id. at 4. With the deployment of
POS ONE, the Postal Service was able to capture detailed transaction data and
transmit that information to support sales and marketing efforts, as well as improve
operations. Direct Testimony of Frederick J. Hintenach, III, on Behalf of the United
States Postal Service, Docket No. R2006-1, USPS-T-43 at 2.
The introduction of the POS ONE system raised the possibility that the “supply
side” nature of window service transactions had changed. Specifically, with a new
21 See, Direct Testimony of Michelle LaMorte on Behalf of the United States Postal Service, Docket No. R90-1, USPS-T-6 and Direct Testimony of Christopher Brehm on Behalf of the United States Postal Service, Docket No. R97-1, USPS-T-21.
116
technology used for processing transactions, it is possible that the relationship between
transactions and transaction time was modified. If so, the transaction supply side
variabilities will have changed. This provides an important reason for updating the
established econometric equation.
In addition, the existence of a new, more comprehensive data set relating to
window service transactions raises the possibility that a more detailed, perhaps more
accurate, product costing analysis could be performed. Transactional data captured
through the POS ONE system has far more extensive data about window transactions
and could be a potentially valuable data source. See USPS-T-43 at 2. For these
reasons, the Postal Service decided to initiate an update and possible refinement of the
established methodology.
The update and refinement of the established variabilities required the Postal
Service to field a new transaction time study which would take advantage of the recent
technological advances to provide accurate data that would meet the Commission’s
requirements for rate case studies. That study is sponsored by witness Nieto. Direct
Testimony of Norma B. Nieto on Behalf of the United States Postal Service, Docket No.
R2006-1, USPS-T-24. It follows the study methodology as the approved study from
Docket No. R97-1, but applies more recent technology to produce more accurate
transaction times.
1. Witnesses Kelley and Bradley demonstrate that the 2005 transaction study utilized a sound sample design which resulted in a reliable database.
Only one party raised concerns about the Postal Service’s window service costs
study, and that party was the Office of the Consumer Advocate, through its witness, J.
117
Edward Smith. Direct Testimony of J. Edward Smith on Behalf of the Office of the
Consumer Advocate, Docket No. R2006-1, OCA-T-2. Witness Smith raised five
concerns about the transaction time study conducted by witness Nieto. See id. In their
rebuttal testimonies, witnesses Kelley and Bradley addressed and soundly dismissed
each of these concerns. Rebuttal Testimony of John P. Kelley on Behalf of the United
States Postal Service, Docket No. R2006-1, USPS-RT-6; Rebuttal Testimony of Michael
D. Bradley on Behalf of the United States Postal Service, Docket No. R2006-1, USPS-
RT-4 at 28-44.
After thoroughly reviewing the sample design and data quality issues for The
2005 Transaction Time Study, witness Kelley concludes that a sound and defensible
process was used for each in developing the final database of 7,915 transactions.
USPS-RT-6 at 18-19.
According to witness Kelley, first, the preparation for the study involved a
thorough investigation of the coverage and scope of the frame (POS-ONE offices). The
frame used to select offices provided ample coverage of the universe (ninety percent of
revenue) and contained a diverse mixture of transaction types which were necessary for
the construction of a defensible econometric model. Id.
Second, the sample design utilized by the 2005 Transaction Study can easily be
justified, and it was implemented the way it was designed. A common sample design,
stratified random, was used, and revenue per office and geographic area were
employed as stratification variables. The result was a design that ensured that both
large and small revenue offices across all geographic areas were included in the final
sample of twenty-seven post offices. Id.
118
Third, the use of Palm Pilots to collect the data was instrumental in collecting
accurate information from the study. They provided the data collectors with a simple
method for recording important instances during a transaction with the touch of a button.
They also allowed data collectors to easily inspect the information record so that many
inconsistencies or errors could be fixed by the data collector. Id.
Lastly, the ability to match and validate collected data with the POS-ONE
transaction database was critical to the success of the study. Each piece of information
recorded by the data collectors was matched with the POS-ONE database. Information
that could not be matched with POS-ONE was dropped from the final dataset. As a
result, the final dataset of 7,915 transactions is highly likely to be accurate. Id.
Witness Bradley reviews the concerns that witness Smith voices with the new
transaction time study database as they relate to calculation of variabilities, and finds
that his concerns about the updated data set are speculative and not substantive, and
do not have the effects on the variabilities that he asserts. USPS-RT-4 at 29-41. Dr.
Bradley’s rebuttal testimony thoroughly describes how witness Smith’s speculations
about possible problems in the transactions time study database for calculating
variabilities are wide of the mark, why walk time is not part of transaction time and
should not be included in the estimated equation (and indeed shows how witness
Smith’s own estimation demonstrates this point), and how witness Smith’s outlier
analyses are mechanistic, ineffective, excessive, and should not be used. Id.
2. Witness Bradley’s recommended window service model is superior to all proposed alternatives.
Witness Bradley’s review of witness Smith’s alternative econometric analyses
identifies important deficiencies, and shows that none of witness Smith’s alternatives
119
are preferred to Dr. Bradley’s recommended model. Of the five variants presented by
witness Smith, three of those variants should be rejected because they include walk
time. Four of those variants should be rejected because they apply mechanistic and
unevaluated outlier screens. As a result of these deficiencies, none of witness Smith’s
alternatives are preferred to the recommended window service model. USPS-RT-4 at
28-44.
C. For Purposes of This Proceeding, the Commission Should Once Again Use the City Carrier Street Time Cost Results Introduced in the Previous Rate Case
In Docket No. R2005-1, the Postal Service presented a new and extensive study
of city carrier street time which provided significant improvements over the old series of
special studies. Despite the limited nature of that case, the city carriers street time
study (CCSTS) was vigorously tested on the record and the Commission was able to
provide a complete, thorough, multi-section review and analysis of the Postal Service
study. While expressing some concerns with the data collection effort and econometric
model, the Commission tentatively accepted the study and its results.
Docket No. R2006-1 was filed immediately on the heels of Docket No. R2005-1.
Prof. Bradley explained in his direct testimony the extreme time constraint which
precluded the Postal Service from even attempting any methodological improvements
between issuance of the Commission’s Opinion in Docket No. R2005-1 and the date by
which variabilities had to be locked in for the Docket No. R2006-1 base year
presentation. USPS-T-14 at 10. Consequently, the Postal Service proposes to rely on
the established model, as indicated by the Commission in Docket No. R2005-1.
Nevertheless, all parties had an opportunity to again examine and review the Postal
120
Services' R2005-1 CCSTS study through written discovery, cross examination of Prof.
Bradley, and presentation of their own testimony. In essence, Docket No. R2006-1
gave all parties a second bite at the apple.
Only one party, the OCA, provides any testimony presenting criticisms of or
alternatives to the Postal Service study. The OCA’s testimony was presented by Dr. J.
Edward Smith (OCA-T-3). As discussed in detail in the following section, rebuttal
testimonies by witnesses Bradley and Crowder show that Dr. Smith’s testimony is
riddled with major mistakes, and his proposed alternatives are fatally flawed. Dr. Smith
simply provides no basis to depart from the CCSTS variabilities accepted in the last
case.
Also during this proceeding, however, the Postal Service provided two large
databases on city carrier street time. The first was an extensive extract taken directly
from the DOIS database that was requested by the OCA, provided as USPS-LR-L-160,
and analyzed by Dr. Smith. The second was a 2004 data collection effort that was
requested by the Presiding Officer and preliminarily analyzed by Prof. Bradley. See
Response of Postal Service Witness Bradley to Item 11 of POIR No. 4; USPS-LR-L-179
and L-180. Neither of the efforts using these two other databases, however, provide
results superior to those adopted by the Commission in Docket No. R2005-1.22 In sum,
while there is need for ongoing research in this area, and, time permitting, the Postal
Service plans to analyze the comments provide by the Commission in Docket No.
R2005-1, there is nothing on the record in this case which provides a feasible
22 Moreover, in Order No. 1482 (Nov. 8, 2006), the Commission limited use of the POIR responses and the 2004 data to illustrative purposes in this proceeding.
121
alternative to the established model. The Commission should continue to rely upon it to
estimate costs and recommend rates in this proceeding.
1. OCA witness Smith fails to provide any suitable alternatives to the previous variabilities.
The only witness in this case actually proposing any deviation from the
variabilities used in the last case is OCA witness Smith (OCA-T-3). Dr. Smith, however,
presents his recommendations with no great enthusiasm. Some of his reservations
about current work, and his agreement with the consensus regarding the need for future
work, are reproduced in the rebuttal testimony of witness Crowder. MPA et al.-RT-1 at
11-12. In fact, Dr Smith recommends two different sets of variabilities, and yet appears
to offer no guidance as to which of the two is preferred. See id. at 1. This in and of
itself might be problematic, if Prof. Bradley and witness Crowder had not already
demonstrated that none of Dr. Smith’s alternative variabilities compare favorably with
the variabilities used in the last case.
Dr. Smith’s testimony presents the results of two distinct research efforts. The
first utilizes the same database (CCSTS) as that used by Prof. Bradley in the last case
to estimate the existing variabilities. OCA-T-3 at 3-15. The second utilizes DOIS data
provided in USPS-LR-L-60 in response to OCA/USPS-T14-8. Id. at 16-22. Unlike the
CCSTS data, the DOIS data are operating data, not specifically collected for cost study
purposes. Dr. Smith presents the results of a variety of different model specifications
and functional forms using each database, and then recommends one equation from
each set as his choice from within that set. As noted above, Dr. Smith makes no
pretense of having definitive results, as he advocates that the Commission view the
appropriate variabilities as an open question. Id. at 23.
122
Two witnesses rebut Dr. Smith’s testimony, Prof. Bradley on behalf of the Postal
Service (USPS-RT-4), and witness Crowder on behalf a consortium of mailers (MPA et
al.-RT-1). Their criticisms overlap to some degree. For example, witness Crowder
shows that Dr. Smith’s analysis of the density variable flies in the face of operational
reality. RT-1 at 8-10. Dr. Bradley makes the same point, and further demonstrates that
Dr. Smith’s opinions on density also run contrary to the practices successfully employed
by leading researchers in the field. RT-4 at 1-9. Prof. Bradley has a detailed discussion
of why Dr. Smith’s attempts to re-estimate the CCSTS model contain errors in both
theoretical specifications and econometric practice. RT-4 at 13-20. Likewise, witness
Crowder faults Dr. Smith on his failure to conduct more review of the CCSTS database,
his lack of an appropriate conceptual structure, and various econometric problems. RT-
1 at 5-8.
With respect to the DOIS models, the problems are even more fundamental.
Prof. Bradley cites criteria previously articulated by the Commission for purposes of
evaluating the adequacy of operational data, and shows in substantial detail how Dr.
Smith has patently failed to address, much less meet, these criteria. RT-4 at 21-25.
Witness Crowder reaches the same conclusion. RT-1 at 14-17. It is not, moreover, as
if the OCA has had no time to explore the properties of DOIS. The Postal Service, both
formally and informally, generated very substantial amounts of background information
about DOIS at the OCA’s request in Docket No. R2005-1. See, e.g., Responses of
Postal Service Witness Lewis to OCA Interrogatories (OCA/USPS-T30-1 – 7) (May 18,
2005). Moreover, the Postal Service provided a sizeable extract of DOIS data in that
case, also at the OCA’s request. USPS-LR-K-152 (Sept. 22, 2005). Follow-up
123
questions that arose from examination of that material between 2005 and 2006 could
have been posed in the ample discovery period in this case, during which the OCA was
pursuing (and obtaining) the DOIS data base against which Dr. Smith ran his equations.
And while the Postal Service is by no means attempting here to understate the amount
of effort that would be required to obtain sufficient working knowledge of how DOIS is
put together to understand what reported DOIS data represent, or otherwise to fault the
diligence of the OCA, if proposals are made to base cost variabilities on operating data,
certain questions have to be addressed and resolved before such a proposal can
reasonably be entertained by the Commission. That simply has not been done in this
instance. Replacing the variabilities relied upon in the last case with any of Dr. Smith’s
variabilities based on his preliminary research with DOIS is not a viable option in this
case.
Dr. Bradley and witness Crowder identify other serious problems with the DOIS
models. Data on key variables are missing, and this causes major conceptual and
econometric problems. RT-4 at 25-26, RT-1 at 15-16. Also, Dr. Smith does not provide
the cost pools and distribution keys to which his variabilities, even if acceptable (which
they are not), could be applied. Id. Finally, Prof. Bradley demonstrates why Dr. Smith’s
allegations regarding mail collection by carriers are totally off the mark. RT-4 at 26-27.
Thus, both Prof. Bradley and witness Crowder properly conclude that none of the
results presented by Dr. Smith could remotely be considered suitable replacements for
the existing variabilities. All witnesses, even Dr. Smith, agree that more work needs to
be done. Until opportunities for further research are realized, based on the record in
124
this proceeding, the only prudent course is to maintain reliance on the same variabilities
used by the Commission in Docket No. R2005-1.
2. The concerns expressed by Valpak witnesses Haldi And Mitchell concerning capacity constraints and other city carrier costing issues are not warranted.
In this case, Dr. Haldi resurrects the same type of capacity constraint arguments
that he attempted to raise in the last case. VP-T-2 at 56-73. Dr. Haldi proposes no
specific adjustments to any costs, however, and his concerns therefore remain largely
theoretical. Perhaps more importantly, however, they are unfounded.
Dr. Haldi insists that capacity constraints which limit the ability of city carriers to
take all saturation ECR directly to the street as an extra bundle are an issue of great
importance to the proper costing of saturation ECR mail. Id. at 56. In the real world,
though, the issue lacks the importance that Dr. Haldi wishes to attach to it. At the top of
page 69, he states that “No information is available on how often the Postal Service is
faced with conflicts of the type discussed here.” In fact, based on her experience,
witness Coombs, the Postal Service’s delivery operations expert, describes such
conflicts as “highly unlikely,” “not common,” and “rare.” Tr. 13/3710, 3717, 3718, 3721.
On page 67, Dr. Haldi suggests that “Based on the testimony of witness Lewis (USPS-
RT-2) in Docket No. R2005-1 and witness Coombs in this docket, it would appear that
collation is the preferred alternative, but casing may be required where it cannot be
determined that the two mailings are being sent to identical lists of addresses.” Earlier
in the same paragraph, though, Dr. Haldi acknowledges that it may be possible for both
mailings to be taken directly to the street by using the same tray for both mailings. And
in response to VP/USPS-T44-17.b (Tr. 13/3717), witness Coombs indicated that, rather
125
than collate, “On a purely curbline route, and in the rare circumstances where both sets
of saturation flats had to be delivered on the same day, the carrier would most likely
take both sets of flats directly to the street.” Thus, Dr. Haldi’s statement regarding
collation as the apparent preferred alternative would not apply (and, in fairness to him,
perhaps was not intended to apply) to purely curbline routes, where neither collation nor
casing is the preferred alternative.
Saturation Mailers Coalition and Advo witness Crowder has an entire section of
her rebuttal testimony explaining the flaws in Dr. Haldi’s capacity constraint contentions.
SMC-RT-1 at 33-40. She identifies the evidence of record in this case and the last case
showing that any capacity constraints are not as binding on carrier operations as Dr.
Haldi suggests. Id. at 36-38. Moreover, she testifies that the presence or absence of
saturation flats is not what is causing saturation letters to be handled in the DPS
operation. Id. at 38-39. Witness Crowder even questions Dr. Haldi’s assertion that
more DPS processing would increase saturation letter costs. Id. at 39-40. Overall, she
demonstrates that Dr. Haldi has exaggerated the importance of the matter.
Witness Crowder also challenges the “fairness” argument raised by Valpak
witness Mitchell in VP-T-3, which relates closely to Dr. Haldi’s allegations on capacity
constraints. Even Mr. Mitchell concedes that, for example, if saturation flats are not the
cause of the higher DPS costs for letters hypothesized by Dr. Haldi, then Mr. Mitchell’s
fairness concerns do not arise. Tr. 22/8078. As described above, witness Crowder
shows why Dr. Haldi’s hypothesis on that chain of causation is erroneous. Moreover,
she identifies other flaws in Mr. Mitchell’s presentation. SMC-T-1 at 41-45. Mr.
Mitchell’s testimony professes only to pose questions, and not answer them. VP-T-3 at
126
12. Witness Crowder’s testimony shows why Mr. Mitchell fails to achieve even this
much more modest objective in any meaningful fashion.
Before leaving the Valpak witnesses and city carrier costing issues, one more
topic merits mention. On page 70 of his direct testimony (VP-T-2), Dr. Haldi suggests
that “[w]ith respect to city carrier street costs (Cost Segment 7), Postal Service witness
John P. Kelley (USPS-T-30) states that his Segment 7 unit costs constitute valid base-
year marginal costs only at the subclass level,” and next quotes an interrogatory
response from witness Kelley supposedly in support of that statement. Dr. Haldi then
continues with a lament that “pricing decisions need to reflect marginal costs,” thus
implying that the Cost Segment 7 information provided by the Postal Service below the
subclass level is inadequate for ratemaking. This suggestion is not correct.
The interrogatory response quoted by Dr. Haldi was a portion of the response of
witness Kelley to VP/USPS-T30-26(e). VP/USPS-T30-26 was a follow-up question to
VP/USPS-T30-10, and part (e) of question 26 was specifically seeking an interpretation
of the unit costs provided in response to VP/USPS-T30-10. The unit costs provided in
response to VP/USPS-T30-10 (and reproduced in the response to question 26) were
the ratio of volume variable city street time costs to the volume delivered on city routes,
or the unit cost per delivered piece, as opposed to the unit costs shown in USPS-T-30,
which are per originating (or RPW) piece. In his response to question 10, witness
Kelley emphasized that distinction as follows:
For the purpose of answering this question, I make three assumptions: 1) street costs refer to volume variable street costs with piggybacks included; 2) the scope of your questions refers to ECR; and 3) the unit costs requested are per CCCS piece.
127
The last assumption requires a bit more discussion. USPS-LR-L-67 includes data that allows unit costs per CCCS piece to be computed. However this is not the purpose of the delivery cost model. The purpose is to derive delivery costs per originating piece. USPS-LR-L-67 disaggregates the delivery costs from the CRA from the subclass level to the rate category level. Unit cost analysis within the CRA is done per originating piece and that is repeated in USPS-LR-L-67. Since the objective of USPS-LR-L-67 is not to derive unit delivery costs as you define them, I do not endorse the unit delivery costs provided in the table below.
Tr. 12/3450. Therefore, when witness Kelley stated in response to VP/USPS-T30-26(e)
that he could not determine “if these disaggregated costs are valid estimates of the
marginal street costs” (as quoted on page 70 of Dr. Haldi’s testimony), the specific
disaggregated costs to which he was referring were unit delivery costs per delivered
piece.
In contrast, in his answer to VP/USPS-T30-11(a), in response to Valpak’s inquiry
as to where in this case the marginal street time costs of letters is provided, witness
Kelley stated that “a thorough explanation of the manner in which the total volume
variable street time marginal costs are attributed to rate categories appears in USPS-
LR-L-67.doc starting on page 16. For a specific rate category the base-year street time
costs can be found by adding the costs in columns H and I for the desired rate category
(which are in the rows) in workbook UDCModel.USPS.xls worksheet ‘11SummaryBY’.”
Tr. 12/3453-54. This response, therefore, confirms the explicit statement by witness
Kelley in his direct testimony that the test year unit costs by rate category “listed in
Table 1 [reproduced on the next page of this testimony] represent marginal costs.”
USPS-T-30 at 3.
Thus, the concern Dr. Haldi raises on page 70 of his testimony regarding the
unavailability of marginal street time (Cost Segment 7) delivery costs below the
128
subclass level applies only to the marginal cost per delivered piece, but not to marginal
cost per originating piece. As correctly stated by witness Kelley in his direct testimony
and in response to Valpak question 11(a), the relevant marginal costs, those per
originating piece, are broken out at the rate category level within his library reference.
D. The Postal Service Proposes Appropriate Treatment of the Costs of the Postal Transportation Networks
Transportation costing (C/S 14) issues were primarily addressed by witnesses
Kelley (USPS-T-15), Nash (USPS-T-16), and Bradley (USPS-T-14), and the outputs
were provided to witness Milanovic (USPS-T-9). For this cost segment, the Postal
Service followed established methodologies, with an exception for non-fuel transport
costs on the Fed-Ex Day-turn operation.
The Postal Service's treatment of costs on the Fed-Ex Day-turn, as described
below, recognizes the variability that exists in non-fuel transport costs, the marginal
costs for flying classes of mail on the day-turn, and assures that Priority Mail and First-
Class Mail cover their incremental costs. As explained below, the Commission should
adopt the Postal Service's treatment of these costs, and not the treatment urged by
UPS witness Neels (UPS-T-1).
As background information, witness Pajunas (USPS-T-45) testified that the
FedEx day-turn operation was originally sized to carry Priority and First Class Mail.
USPS-T-45 at 1. About 75 percent of the capacity was allocated for Priority and about
25 percent of the space was allocated for First Class Mail. Id. The day-turn network
has a minimum capacity guarantee. Id. This means that the Postal Service is obligated
to pay for a prescribed amount of cubic capacity whether it uses the capacity or not. Id.
129
The Postal Service currently exceeds the original minimum guarantee by about
70% on a daily basis and has been doing so since the beginning of the contract. Id.
The Postal Service contracts for capacity above the minimums approximately every 12
to 18 months in the form of contract addendums. Id. The Postal Service also exceeds
the increased capacity reflected in those minimums by approximately 10 percent to 20
percent on a schedule period basis. Id. at 1-2. The contract minimums are well below
the volume of Priority and First Class Mail that must fly on the FedEx network in order to
meet their service obligations. Id. at 2. The Postal Service has been able to acquire
capacity above the original contract minimums at a reduced rate per cubic foot. Id.
There are several tiers of discounted rates available that are dependant on the amount
of volume tendered. Id.
Because of the discount tier rate structure witness Pajunas testified that he was
unaware of any less costly alternatives that were available during 2005 that would have
met the Postal Service's service requirements for mail products that flew on the FedEx
Network. Id. Additional volume can be added to the day turn network without taking
other volume off. Id. As a result of the lack of the reliability and availability of much of
the commercial passenger airline service, the use of the FedEx day and night turn
networks is required to meet Postal Service product service commitments. Id. Even if
Priority Mail was eliminated as a product offering the Postal Service would still have a
need for a network such as the FedEx Network to meet its First Class Mail service
obligations. Id.
Witness Bradley (USPS-T-14) testified about the bases for costing the FedEx
Day-turn. He noted that the existence of a declining block rate structure in an air
130
transportation network will lead to a volume variability of less than 100 percent. USPS-
T-14 at 4. He also discussed circumstances under which an air network constructed
using dedicated equipment could generate a premium cost. Id. at 4-6. He noted that
there are two essential requirements for a premium cost to arise. Id. at 5. First, the
minimum size network must be larger than the capacity required to carry the mail for
which the network was designed. Id. Second, the cost of transporting that mail must be
more expensive on the air transportation network than on the alternative. Id.
As witness Pajunas testified, however, there is no extra capacity on either the
FedEx day turn or the FedEx night turn, as both are contracted networks that do not
require dedicated aircraft. USPS-T-45 at 1-2. Witness Bradley testified that this
situation means that they are not subject to the classic minimum efficient size network
constraint. USPS-T-14 at 5. As witness Pajunas further testified, the minimum on the
FedEx day-turn is well below the amount of Priority Mail and First Class Mail that must
fly on it for service and security reasons. USPS-T-45 at 1-2. While Professor Bradley
testified that a premium could still arise in a contracted network if the contract specified
a minimum amount of capacity that the Postal Service would have to purchase and that
capacity was routinely greater than the capacity needed to move the mail that had to fly
on the network for service and security reasons, USPS-T-14 at 5-6, this condition does
not arise. Accordingly, he concluded that there is no premium cost to be attributed for
either of the FedEx networks. USPS-T-14 at 6.
Professor Bradley then explained the proper cost attribution for the situation that
arises on the day-turn, where the air transportation network was created essentially for
the transportation of a group of products: First-Class Mail and Priority Mail. When a
131
network is created for a group of products, the volume variable costs for all products
would be computed in the traditional way. USPS-T-14 at 7. The non-volume variable
cost for that network should be included in the incremental cost for that group of
products. Id.
Witness Kelley (USPS-T-15) calculated the variability factor for the FedEx Day-
turn non-fuel transport costs. He noted that, under the FedEx contract, the Postal
Service incurs expenses relating to a variety of activities provided by FedEx, falling into
three categories: handling; fuel; and non- fuel transport. USPS-T-15 at 2. Handling
charges are incurred for each item handled and scanned at FedEx hubs, and are
treated as fully variable with volume because the expenses increase proportionately
with the number of scans. Id. Similarly, a fuel charge is assessed for each cubic foot of
capacity purchased, and because increases in mail volume result in proportionate
increases in cubic feet of capacity required to handle the volume, fuel charges are also
treated as fully variable with volume. Id. Witness Kelley testified that as the contract
was originally written, non-fuel transport charges were incurred at a fixed rate per cubic
foot of capacity purchased, and were treated as fully volume variable. USPS-T-15 at 2.
In the fall of 2001, however, the Postal Service complied with a directive issued
by the Transportation Security Agency to remove all mail in excess of a certain weight
that had not been subjected to a pre-boarding security screening, resulting in a
substantial increase in the cubic volume of mail flown on the FedEx Day Turn network.
USPS-T-15 at 2. As a result, there have been addenda to the contract, which feature a
declining block rate structure -- after a certain cubic capacity threshold is reached, the
non-fuel transport charge for additional capacity decreases by a fixed amount to a lower
132
rate per cubic foot, and as more capacity is added and higher thresholds are reached
the rate steps down. Id. This rate structure results in a marginal cost that declines with
increases in capacity purchased, and, in the higher tiers, the marginal cost is less than
the average cost. Id. at 2-3.
Witness Kelley then explained that volume variability is defined as the cost
elasticity with respect to volume. When there is a single cost driver, the variability can
be shown to equal the ratio of marginal cost (MC) to average cost (AC). Said otherwise,
when MC < AC then the variability MC/AC is less than one. Id. at 3.
Witness Bradley in Docket No. R2005-1 (USPS-T-31, Section II) presented the
analytical method for calculating a variability when costs are characterized by declining
block rates. On the basis of this theoretical construct, witness Kelley described the
development and application of the variability using FedEx operational and contractual
data. USPS-T-15 at 3.
Using actual invoicing data, witness Kelley calculated the average daily cubic
volume of mail by FedEx schedule block, and then flowed the schedule block average
daily volumes through the rate tiers to determine the marginal cost (simply the last tier
rate). USPS-T-15 at 3. To find the variability, the marginal cost was multiplied by the
average daily volume and then divided by the total cost for transporting the entire
average daily volume based on the declining rate structure. Id.
Aggregating across quarters, he calculated the quarterly marginal and average
costs, resulting in quarterly variabilities of 0.7409, 0.7356, 0.7229, and 0.7583 for
quarters one through four, respectively. USPS-T-15 at 4. He applied these factors to
the accrued costs for non-fuel transport charges in Cost Segment 14. Id.
133
Witness Kelley testified that, as the variability is less than one, there will be some
non-volume variable costs incurred in the provision of the network. USPS-T-15 at 4.
Relying on witness Bradley (USPS-T-14), he explained that these non-volume variable
costs should be included in the incremental costs of the group of products that caused
the FedEx Day Turn network to arise -- First Class Mail and Priority Mail. Id.
The only non-postal witness to address this costing issue was UPS witness
Neels (UPS-T-1), who did not challenge the Postal Service's calculation of volume
variability. UPS-T-1 at 60. He argued, however, that the costs which the Postal Service
treats as non-volume variable should be included in the baseline attributable costs of
Priority Mail and First-Class Mail, UPS-T-1 at 61, or that the costs of the Day-turn
network should be shared among all classes of mail in proportion to their respective
capacity usage. UPS-T-1 at 63.
Witness Neels has not, however, argued that costs which the Postal Service
treats as non-volume variable are marginal to either Priority Mail or First-Class Mail.
Because they are not marginal in relation to any class of mail, the Postal Service
respectfully submits that its treatment of them as incremental to the group of products
comprised of First-Class Mail and Priority is appropriate and should be adopted by the
Commission.
134
V. THE RATE LEVELS PROPOSED BY THE POSTAL SERVICE FOR EACH SUBCLASS OF MAIL REFLECT A REFINED APPLICATION OF THE RELEVANT STATUTORY CRITERIA
A. The Postal Service Has Appropriately Considered And Applied The Relevant Pricing Factors In the two-tier postal ratemaking process established by Congress, pricing
follows costing as the second tier. The cornerstone of pricing is the application of the
policies in 39 U.S.C. ' 3622(b) to determine how much revenue to seek from each
subclass, in excess of the incremental costs identified as having been caused by that
subclass during the costing process. Allocation of institutional cost burden among the
various subclasses and special services is designed so that the Postal Service can
achieve financial breakeven.1
The pricing exercise is accomplished by a consideration and application of the
nine enumerated postal ratemaking criteria in 39 U.S.C. § 3622(b):
(1) the establishment and maintenance of a fair and equitable schedule; (2) the value of the mail service actually provided each class or type of mail service to both the sender and the recipient including, but not limited to the collection, mode of transportation, and priority of delivery; (3) the requirement that each class of mail bear the direct and indirect postal costs attributed to that class 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;
1 After rate policy issues are resolved and a target revenue has been set for each subclass, rate design is the subsequent pricing task necessary to determine how to split that revenue burden among the various rate categories and rate elements of the subclass.
135
(5) the available alternative means of sending and receiving letters and other mail matter at reasonable costs; (6) the degree of preparation of mail for delivery into the postal system 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 the various classes of mail for the postal services; (8) the educational, cultural, scientific and informational value to the recipient of mail matter; and (9) such other factors as the Commission may deem appropriate. The Postal Reorganization Act mandates that each subclass must objectively satisfy the
requirement in Criterion 3 that its revenue target meet or exceed the sum of its direct
and indirect attributable costs. All of the other criteria are judgmentally applied.
National Association of Greeting Card Publishers v. United States Postal Service, 462
U.S. 810, 820 (1983).
In this case, as in previous cases, the Postal Service has provided a rate policy
witness to explain why the rate levels proposed for each subclass and service are in
accord with the statutory factors that guide the pricing process. The rate policy witness
in the instant case was witness Donald O’Hara.2
Careful review of Dr. O’Hara’s testimony will reveal that his rate level proposals
rest on evaluations of the statutory factors that are consistent with previous applications
of the criteria by his predecessors. Like the analyses of his predecessors, witness
2 Docket No. R2006-1, Direct Testimony of Donald J. O’Hara On Behalf of United States Postal Service, USPS-T-31.
136
O’Hara’s testimony reflects similar concerns and a similar considered weighing of the
various statutory criteria that have been the hallmarks of the analyses relied upon in the
past by both the Postal Service in developing its rate proposals, and the Commission in
recommending rates to the Governors.
The Postal Service has provided an additional analysis with its filing in this case,
designed to enhance the Commission's ability to fulfill its statutory mission. Postal
Service witness Dion Pifer (USPS-T-18) produces a comprehensive set of incremental
subclass cost estimates for consideration. Taking account of witness Pifer’s analysis,
witness O’Hara has proposed rate levels that meet all of the relevant statutory criteria in
a reasonable and rational fashion. His allocation of institutional costs also ensures that
each subclass covers its incremental costs.
On the other hand, intervenor witnesses who make alternative proposals or
suggest alternative pricing procedures rely upon analyses with substantial
shortcomings. In this section of its Brief, the Postal Service will review the proper
economic and statutory framework for pricing, will demonstrate why the rate levels
proposed by witness O’Hara best fit within that framework, and will show why the
proposals of opposing intervenors should be rejected.
B. The Cost Coverages Proposed By Postal Service Witness O’Hara Satisfy The Incremental Cost Test
Relying on the same methodology as was presented in Docket No. R2005-1, the
Docket No. R2006-1 testimony of witness Pifer (USPS-T-18) fulfills the Commission's
137
directive3 that the Postal Service develop incremental cost estimates that would allow
the Commission to perform a cross-subsidy analysis on that basis. On behalf of the
Postal Service, witness O’Hara (USPS-T-31) explains that “incremental cost is the cost
savings that would result from completely eliminating a subclass (holding volume in
other subclasses constant).” USPS-T-31 at 11-12. He testifies:
In general, incremental cost for a given volume of mail will be greater than the corresponding volume-variable cost, and thus this test is more stringent than comparing revenue to volume-variable cost. If a subclass’s revenue equals or exceeds its incremental cost, that subclass imposes no burden on other subclasses (i.e., it is not cross-subsided by other subclasses), and the more its revenue exceeds incremental cost, the more it reduces the amount of institutional cost that must be covered by other subclasses. Id. By ensuring that, for each subclass, the proposed rates lead to revenues in excess
of the incremental costs for that subclass, Dr. O’Hara ensures that the requirements of '
3622(b)(3) are satisfied.
3 See, PRC Op. R94-1, Appendix F, at 24, &170.
The Postal Service has presented significant refinements to its In-Office Cost
System, and improved its volume-variable window service and mail processing cost
analysis. See the direct testimonies of witnesses Bozzo (USPS-T-12 and USPS-T-46),
Bradley (USPS-T-17), and Nieto (USPS-T-24), which are discussed above in Section V
of this Brief. These improvements are important to the application of the ' 3622(b)(3)
requirement that each class of mail or type of service bear the direct and indirect postal
costs attributable to that class.
The proposed cost coverage of each subclass is a summary index of the many
138
considerations in ' 3622(b) that are weighed to determine the proper share of
institutional cost allocated to that subclass. A discussion of why the specific cost
coverages put forth by Dr. O’Hara warrant approval by the Commission will be
facilitated by first describing the methodology used to arrive at the proposed cost
coverages, and why such an approach is appropriate.
As the Postal Service's witness on rate policy, Dr. O’Hara determines how
institutional costs should be allocated among the classes and subclasses of mail such
that total revenues equal total cost. His approach to that task is spelled out in his direct
testimony, USPS-T-31.
Dr. O’Hara’s proposed rate levels are the product of a comprehensive process,
covering all aspects of the various postal subclasses. He applies his expertise in a
manner prescribed by the specific pricing criteria established by Congress, and the
evolution of the interpretation of the Act through the Commission's recommended
opinions, decisions of the Governors and judicial precedent. Dr. O’Hara makes no
pretense that his was anything other than an iterative, judgmental approach to pricing.
His methodology is consistent with the Postal Reorganization Act and Commission
precedent. See PRC Op. R87-1 at 378-89, ¶4063. Judicial review of this approach
confirms its validity. See Direct Marketing Association v. United States Postal Service,
778 F. 2d at 102.
139
C. The Postal Service’s Proposed Cost Coverages Reflect A Fair And Equitable Allocation Of Institutional Costs And Give Proper Consideration To All Of The Applicable Ratemaking Criteria
In the preceding subsection, the Postal Service described the basic approach
taken by witness O’Hara and has demonstrated why it is the most appropriate method
on record in this proceeding for fairly and equitably allocating institutional costs. Below,
subclass-by-subclass, the Postal Service will explain how Dr. O’Hara’s proposed cost
coverages reflect the proper application of that methodology. Dr. O’Hara ensures that
each subclass meets the requirement of ' 3622(b)(3). He applies his judgment to
allocate institutional costs, based upon his consideration of the remaining ' 3622(b)
criteria. A summary of his analysis is presented below.
1. First-Class Mail – Letters and Sealed Parcels
The Postal Service's proposed rates for First-Class Mail (letters and sealed
parcels) reflect a cost coverage of 229 percent and an average 7.1 percent rate
increase, well below the 8.5 system average and the smallest percentage increase
proposed for any subclass. USPS-T-31, at 17. For single-piece letters, the increase is
7.7 percent, taking into consideration the proposal of a three-cent increase in the basic
rate and reduction of the additional-ounce rate, as well as the proposed shape-based
rate design. Although the average rate increase proposed by Postal Service witness
Altaf Taufique (USPS-T-32) for single-piece letters is 7.7 percent compared to a 6.4
percent average for presort letters (USPS-T-32 at 3), this difference is largely a result of
the higher proportion of flats and parcels in single-piece. USPS-T-32 at 17. The value
of service of First-Class Mail, by any standard, is high. With the exception of Express
140
Mail and Priority Mail, First-Class Mail receives the most expeditious transportation and
delivery of all the mail classes. The existing collection network provides a major
convenience to many First-Class Mail users. First-Class Mail is forwarded without
additional cost. The contents of First-Class Mail pieces are normally free from any
postal inspection, thereby providing privacy of communication. Id. at 17-18. These
factors clearly enhance its value from the perspective of senders and recipients.
Although Dr. O’Hara testifies that the First-Class Mail letters subclass is also
characterized by a relatively low price-elasticity, he emphasizes that its elasticity may be
influenced by the application of the Private Express Statutes (18 U.S.C. '' 1693-1699;
39 U.S.C. '' 601-606). Id. at 18.
The proposed rates ensure that the class continues to recover its volume-
variable and incremental costs, and that it makes a substantial contribution to
institutional costs. At the same time, in accordance with 39 U.S.C. '3622(b)(5), the
proposed coverage was influenced by the restrictions upon available alternatives which
result from the application of the Private Express Statutes, as well as the increased
availability of electronic alternatives to First-Class Mail. Id. at 18-19.
In accordance with ' 3622(b)(6), Dr. O’Hara appropriately considers the degree
of pre-mailing preparation and the impact of his rate proposals on the mail preparation
industry in formulating the rates for various First-Class Mail presort and automation-
related rate categories. USPS-T-31 at 19. His analysis reflects consideration of the
impact of the proposed shape-based rate redesign on mailers of flats and parcels. Id. at
18. He also gives consideration to the Commission’s past evaluations of the
141
educational, cultural, scientific and informational (ECSI) value of First-Class Mail. Id. at
19.
The Postal Service's proposed First-Class Mail letter rate structure is fair and
equitable. It satisfies all applicable '3622(b) criteria and merits the approval of the
Commission.
2. First-Class Mail – Cards
The Postal Service's proposed rates for First-Class Mail cards reflect a cost
coverage of 176 percent. Dr. O’Hara analyzes cards in comparison to letters as part of
determining the appropriate cost coverage for cards. Id. at 19.
After some analysis, witness O’Hara concludes that the intrinsic value of service
for cards is less than it is for letters. Id. at 19-20. The Postal Service's proposed card
rates will also ensure that the tradition of a lower per-piece institutional cost contribution
for cards is maintained, reflecting the lower value of cards compared to letters.
Reviewing the impact of the proposed increase on mailers and competitors, Dr.
O’Hara testifies that the proposed percentage rate increase for cards (10.5 percent) is
relatively higher than that for letters and for the system average. Dr. O’Hara took
account of the broader availability of alternatives for cards, in relation to letters. Id. at
20. The degree of presortation within the rate structure for cards is nearly parallel to the
structure for letters, leading him to conclude that degree of preparation performed by
the card mailers and the complexity of the schedule are at a similar, acceptable level as
well, and consistent with ' 3622(b)(6) and (b)(7). Id.
Dr. O’Hara carefully considered the relevant pricing criteria of '3622(b). His
142
First-Class Mail post card cost coverage deserves the concurrence of the Commission.
3. Priority Mail
Dr. O’Hara proposes a 13.6 percent rate increase for Priority Mail, which reflects
a 163 percent cost coverage. Id. at 21. At over 13 percent, the proposed Priority Mail
rate increase is well above the proposed system average increase of 8.5 percent.
As the name of the service implies, Priority Mail receives preference in handling
and dispatch. It enjoys a higher priority in processing and dispatch than First-Class Mail,
and receives even greater use of air transportation. Compared to First-Class Mail,
Priority Mail enjoys expanded two-day service commitment zones and the availability of
Delivery Confirmation on all piece shapes. Id. at 21. On the other hand, its price
elasticity is considerably higher than that of First-Class Mail, indicating a lower
economic value of service. Id. Priority Mail does not have as much access to the postal
collection system as does First-Class Mail. Id. And it faces an increase in retail
customer access to competing services. Id. The proposed sharp increase in Priority
Mail rates is driven largely by the steep increase in volume-variable costs. Priority Mail
will experience a percentage rate increase which is considerably higher than the
system-wide average. The proposed cost coverage clearly ensures that Priority Mail
covers its attributable costs and makes a significant contribution to institutional costs.
This cost coverage also ensures that proposed rates are not designed to harm
competition. Id. at 22.
Current Priority Mail rates are based upon the weight of a package and (except
where the rates are unzoned) the distance it will travel. In this regard, the rates are
143
relatively simple for the public to use. As Dr. O’Hara observes, Postal Service witness
Scherer (USPS-T-33) proposes the introduction of dim-weight pricing to certain
segments of Priority Mail as a supplement to the current weight-distance structure, in
order to more properly align the rates for bulky, lightweight packages with their costs.
Id. at 22. The Postal Service's Priority Mail cost coverage proposal should be
recommended by the Commission.
4. Express Mail
Dr. O’Hara proposes an Express Mail cost coverage of 191 percent, resulting in a
12.5 percent average rate increase for the subclass. He testifies that Express Mail's
value of service is very high, when intrinsic factors are considered. Express Mail
receives the highest delivery priority, extensive air transportation, and a significant
collection system, though not as extensive as the general collection system for First-
Class Mail. USPS-T-31 at 23. Express Mail also benefits from a service guarantee and
tracking capability. On the other hand, its price-elasticity indicates an extremely low
economic value of service. Id. The proposed increase will clearly have an effect on
mailers. In view of Express Mail's relatively small market share and modest recent
growth, the increase should not have an unfair effect on competition. Id. Witness
O’Hara noted that a number of private sector alternatives, with relatively attractive
service features, are available to Express Mail users.4 He also testifies that the deposit
or pickup of pieces at post offices reduces postal costs and constitutes a form of mailer
4 For individuals and small volume business users, these alternatives may only be available at a higher price, with additional features. USPS-T-31 at 23-24.
144
preparation recognized by separate rate schedules. Id. at 24. His application of the
statutory criteria should be approved.
5. Outside County Periodicals
Dr. O’Hara proposes a cost coverage of 106 percent for Outside County
Periodicals, which results in an average rate increase of 11.7 percent. These figures
incorporate the impact of applying the five percent rate discount from the editorial pound
rate for qualified Nonprofit and Classroom Periodicals. USPS-T-31 at 24.
Witness O’Hara considers the value of service of Periodicals, taking into account
intrinsic characteristics, as well as comparisons to other mail classes. He observes that
the own-price elasticity translates into a high value of service. Id. at 25. He accounts
for the educational, cultural, scientific and informational (ECSI) value of Outside County
Periodicals in the cost coverage. Id. Another factor he analyzes is the availability of
alternatives. However, he notes that the degree to which they exist for different
publications varies. Id.
Because it reflects the means by which Periodicals mailers reduce postal costs
through various forms of mail preparation, the Periodicals rate schedule reflects
consideration of ' 3622(b)(6). Although witness O’Hara observes that the Periodicals
rate structure is relatively complex, he notes that Postal Service witness Tang (USPS-
T-24) is proposing some rate design initiatives intended to eliminate some complex
requirements associated with co-palletization. Id. at 25-26. The results of Dr. O’Hara’s
analysis should be embraced by the Commission.
145
6. Within County Periodicals
Section 3626(a)(3) requires that the markup for the Within County Periodicals
subclass shall be equivalent to half the markup of for the Outside County subclass.
This has been calculated before the application of the five percent Nonprofit and
Classroom discount. In its response to NOI 1, the Postal Service explained why this is
appropriate.
Thus, . . . using preferred rate revenue before the discounts, is appropriate if one is willing to assume that the mere fact that a Periodicals publication is classified as regular rate, nonprofit, or classroom does not have any intrinsic effect on its costs. Periodicals mail pieces with identical characteristics should have the same costs, regardless of how they are classified. This approach is consistent with the legislative intent of the current version of section 3626, to reflect a rate preference (e.g., a reduced share of institutional costs), rather than any intrinsic cost differences between regular-rate and preferred rate pieces. Senate Report No. 106-468 confirms that the intent of the nonprofit and classroom discounts is to continue rate preferences previously established through other procedures. Moreover, the “50 percent markup” rule is similarly
intended to reflect rate preferences for Within County periodicals. Assuming similar cost characteristics, if the discounts for nonprofit and classroom are not added back to the revenues before calculating the “50 percent” markup, then the net result would be an excessive Within County rate preference, caused by layering the Within County preference on top of the nonprofit and classroom rate preference. Thus, the first option, the before-discount approach, makes sense and is consistent with the legislative intent.
USPS Response to NOI 1 at 3-4 (June 16, 2006). That undiscounted cost coverage is
approximately 107 percent, which leads Dr. O’Hara to propose a cost coverage of 103.5
percent for Within County Periodicals. The result is an average rate increase for the
subclass of 24.2 percent. USPS-T-31 at 26. But, as Dr. O’Hara observes, the formula
leaves no room for mitigation. Id. The result is in accord with the policies of the Act.
146
7. Standard Mail
a. Regular and Nonprofit
Dr. O’Hara proposes a cost coverage of 176 percent for the Regular subclass
(including Nonprofit), which results in an average increase of 9.6 percent for the
subclass. USPS-T-31 at 27. He considers the value of service for Standard Regular
subclass mail, taking into account such factors as delivery generally being subject to
deferral, the use of ground transportation, and lack of access to the collection system.
Id. He observes that Postal Service attempts to satisfy mailer-specific delivery windows
typically require advance coordination by mailers. Id. Dr. O’Hara evaluates the price
elasticity for Standard Mail Regular as falling between that of First-Class Mail and
Enhanced Carrier Route, suggesting an intermediate economic value of service. Id. at
27.
The proposed 9.6 percent average rate increase for Standard Regular is above
the systemwide average increase and has a tolerable impact on users. Id. at 27-28.
Importantly, witness O’Hara notes that the proposed percentage increase, combined
with the proposed cost coverage, establish that competitors also are not being unfairly
targeted. Id.
Dr. O’Hara discusses the availability of alternatives, particularly other
demographically targeted communications media. He also compares the Regular
subclass to Enhanced Carrier Route (ECR), which has more of a geographic focus. He
testifies that the Regular subclass has a substantial degree of mailer preparation, but
less than ECR. Id. at 28. Because the Standard Regular rate schedule is designed to
147
offer a range of rates to accommodate the varying ways in which mailers may choose to
perform worksharing in accordance with ' 3622(b)(6), it is relatively complex.
Nevertheless, it maintains reasonable and identifiable rate relationships, as required by
' 3622(b)(7) and is not overly complex for the sophisticated mailers who use it.
The Postal Service’s Standard Regular cost coverage analysis should be
affirmed by the Commission.
b. Enhanced Carrier Route and Nonprofit
Dr. O’Hara advocates a cost coverage of 214 percent for the Enhanced Carrier
Route (ECR) subclass, which results in a 8.9 percent average rate increase for the
subclass, just over the 8.5 percent systemwide average. USPS-T-31 at 29.
ECR mail has a relatively high degree of preparation, as much of it must be
tendered in either line-of-travel or walk-sequence. The geographic density of ECR mail
creates opportunities for alternative delivery firms and newspaper inserts to serve as
viable competitive options for advertisers. Id. at 30. The proposed cost coverage
reflects Dr. O’Hara consideration of the intrinsic value of service for ECR, which is
relatively low, since it lacks access to the collection system, receives ground
transportation, and is subject to delivery deferral. Id. He testifies that, although the
Postal Service is sometimes able to accommodate mailer requests for delivery within a
specified window, this requires mailer preparation, coordination, and planning.5 The
price-elasticity of ECR is much higher than for First-Class Mail, Periodicals, and
5 For high-density and saturation mailings, this is also facilitated by the regularity with which many of these mailings occur. USPS-T-31 at 39.
148
Standard Regular, indicating a relatively low economic value of service as well. Id.
Given the near-average percentage rate increase and the proposed cost
coverage over 200 percent, Dr. O’Hara concludes that the proposed increase cannot be
said to unfairly compete with private sector enterprises in the business of delivering
geographically targeted solicitations. Id. at 29-30.
Witness O’Hara testifies that consideration of many of the pricing factors might,
at first blush, lead one to rush to the judgment that a lower cost coverage than he has
proposed is warranted. However, he emphasizes that ECR must make a reasonable
contribution to institutional costs, notwithstanding the high degree of preparation that
drives down its unit volume-variable costs, compared to Standard Regular mail. Thus,
he has proposed a cost coverage for ECR -- 214 percent -- which results in it making a
similar unit contribution to institutional cost as Standard Regular, for which, as noted
above, he proposes a 176 percent cost coverage. Taking all of the factors into
consideration, Dr. O’Hara’s approach is fair and equitable, and should be endorsed by
the Commission.
8. Package Services Mail
a. Parcel Post
Dr. O’Hara proposes a Parcel Post cost coverage of 115 percent, which
corresponds to an average rate increase of 13.2 percent for the subclass. USPS-T-31
at 31. Parcel Post exhibits a low intrinsic value of service, low priority of delivery, and
generally relies upon surface transportation. Because of security concerns, stamped
Parcel Post no longer has access to the collection system. It does not have many of the
149
standard features of competitors’ services, like free insurance, tracking and pickup.6
Parcel Post’s own-price elasticity indicates a low economic value of service. Id.
Alternatives abound for large-volume business mailers, and the accessibility to these
alternatives for household mailers and small businesses has been significantly
expanded by the growing number of UPS Stores and FedEx/Kinko’s centers. Id. at 32.
Commercial package sending agencies, where accessible at the retail level, often
charge a premium over competitors' rates for use of Parcel Post. For many mailers in
remote areas, alternatives to Parcel Post may be relatively inaccessible and/or
expensive. Id. at 32.
The relatively high percentage rate increase implied by Dr. O’Hara’s proposed
Parcel Post cost coverage is driven by the need to ensue that the subclass covers its
increasing costs. While this may have some adverse impact on Parcel Post users, it
cannot be judged as having an adverse or unfair impact on competitors. Id. at 31-32.
The results of witness O’Hara’s analysis should be affirmed.
b. Bound Printed Matter
The proposed cost coverage for this subclass is 125 percent, resulting in an
average rate increase of 11.9 percent. USPS-T-31 at 32. As with Parcel Post, the
intrinsic value of Bound Printed Matter is relatively low. Conversely, its own-price
elasticity suggests a moderately high economic value of service. Id.
The proposed nearly 12 percent rate increase will obviously affect users of
6 The availability of Delivery Confirmation for Parcel Post may increase its value for some customers. However, unlike with Priority Mail, single-piece Parcel Post customers must pay extra for this added feature.
150
Bound Printed Matter negatively. Witness O’Hara has applied the statutory criteria in a
manner designed to mitigate the impact of the Bound Printed Matter cost increases
which have occurred since Docket No. R97-1. The above-average proposed rate
increase and the proposed 125 percent cost coverage establish conclusively that the
Postal Service is not attempting to unfairly target competitors. Id. at 33.
Dr. O’Hara considers the alternatives available to Bound Printed Matter users.
For book mailers, the Media Mail subclass is an alternative. He also examines the
limited availability of alternative delivery for catalogs and telephone directories. Id. at
33. His cost coverage proposal reflects consideration of the relevant pricing criteria and
merits the Commission's approval.
c. Media and Library Rate Mail
The proposed cost coverage for this subclass is 109 percent. The result is an
average rate increase of 18 percent for Media Mail and an 18.2 percent increase for
Library Rate. USPS-T-31 at 34. As with other Package Services subclasses, the
intrinsic value of the Media Mail subclass is relatively low. Its price elasticity suggests a
low value of service. Id. Bound Printed Matter is available as an alternative for
business mailers. For individuals, alternatives are more limited and more costly. Id.
Nevertheless, the relatively steep percentage rate increases proposed for Media and
Library Rate mail mirror the substantial volume-variable cost increases; and the
resulting revenue provides only a small margin above those costs. Id. Materials such
as books, films, and sound recordings give the Media Mail subclass a high ECSI value
in Dr. O’Hara’s judgment, and he reflects this in his proposed cost coverage. Id.
151
Witness O’Hara’s application of the pricing criteria for the Media and Library Rate
subclass should be approved.
D. The Intervenor Cost Coverage Proposals Are Lacking
1. UPS witness Geddes’ Priority Mail proposals ignore the realities of Priority Mail’s place in the package delivery market. On behalf of United Parcel Service, witness Richard Geddes presents a rate and
cost coverage proposal for Priority Mail that would result in a 23.6 percent increase in
Priority Mail rates. UPS-T-3 at 12, line 9. To justify this rate proposal, Dr. Geddes
asserts:
This is the same markup that the Postal Service recommends. It is also close to the markup of 62 percent recommended by the Commission in Docket No. R2000-1, the last fully litigated rate case. UPS-T-3 at 12 (footnotes omitted). Dr. Geddes also discusses the Priority Mail
marketplace at length to justify UPS’s self-serving rate proposals. However, as Postal
Service rebuttal witness Maura Robinson notes, his discussion “fails to provide the
market and rate context needed to inform the Commission’s recommended decision.”
USPS-RT-10 at 16.
The Postal Service agrees that, in some respects, Docket Nos. R2001-1 and
R2005-1 were not typical postal rate cases. But, in many ways, every omnibus rate
docket, those two included, provides the Postal Service and the Commission with
unique circumstances that each agency must consider in developing pricing and rate
design proposals that must meet the criteria of § 3622 and other pertinent policies of
the Act. The Postal Service strongly disagrees with witness Geddes’ assertion that the
Docket No. R2001-1 and R2005-1:
152
rate cases did not provide an opportunity for the Commission to receive testimony and hear debate from all of the large number of interested parties who normally participate in an omnibus rate case.
UPS-T-3 at 7. The procedural history in each docket refutes the assertion that any of
the score s of parties who intervened were denied the opportunity to raise any issue for
consideration by the Commission.7 It is not the number of pages or the number of lines
on a page devoted to a topic that defines substantial record evidence; it is the quality of
evidence that influences the Commission’s determinations. Dr. Geddes’ summary
dismissal of the outcomes in Docket Nos. R2001-1 and R2005-1 devalues the
Commission’s careful deliberations and its clear determination to fully evaluate the
merits of all positions advocated by parties in those cases, especially those parties who
disagreed that settlement of issues in those cases was appropriate.
Moreover, Dr. Geddes characterization of Docket No. R2001-1 seems to be at
odds with UPS’ contemporaneous description of that case:
In light of this clear fact [that the discounts APWU criticizes do not exceed properly measured avoided costs] the Commission should not venture into the thicket of deciding fundamental ratemaking principles of the type raised by APWU when, as here, that is not necessary to reaching a proper decision. That is especially so since, given the all but unanimous support for the Settlement rates, other parties have not addressed those issues fully.
Docket No. R2001-1, UPS Reply Brief at 3. (Emphasis added.) UPS clearly believed
that the Commission could reach a proper decision that was consistent with the Act,
7 What parties choose to do with their opportunities is something different altogether. In every rate docket, each intervenor makes judgments about the degree to which it disagrees with the Postal Service’s request and the degree to which it will seek to challenge it and/or offer alternatives. Docket Nos. R2001-1 and R2005-1 were not exceptional in this regard.
153
absent an exhaustive debate among the parties on every conceivable issue, and also
clearly understood that parties such as APWU (and presumably UPS itself) had the
opportunity to advocate for their preferred outcomes. Simply asserting in Docket No.
R2006-1, as Dr. Geddes does (UPS-T-3 at 7), that the rate relationships adopted in the
last “fully litigated” rate case (Docket No. R2001-1) are “presumptively reasonable,”
ignores the value of the Commission’s deliberations during the intervening two dockets.
The Commission, however, cannot ignore history and the evolution of rates and rate
relationships over the past six years. In presenting its Docket No. R2006-1 rate
proposals, the Postal Service has carefully examined all relevant variables and
presented rate proposals that are fair and equitable, and that balance all of the § 3622
pricing criteria. Admittedly, UPS witness Geddes, on the surface, has presented a
similar analysis. However, his proposals must be viewed through the lens of UPS’s
self-interest. As Postal Service rebuttal witness Robinson explains, “witness Geddes
fails to provide the market and rate context needed to inform the Commission’s
recommended decision.” USPS-RT-10 at 16. Specifically, he proposes a Priority Mail
cost coverage that he justifies as appropriate, based on an assertion that (1) it is close
to that recommended by the Commission in Docket No. R2000-1; and (2) it is that
proposed by the Postal Service in this docket. UPS-T-3 at 12. When questioned
further, Dr. Geddes claims that “the best recommended cost coverage is not dependent
on the cost basis utilized.” Tr. 26/9122.
Clearly, this has not been the Commission’s viewpoint. For example, in
154
discussing the principles embodied in the pricing criteria and its application of these
criteria, the Commission clearly considers whether costing methodologies differ:
Once the Commission has completed the process of analyzing the extent that Postal Service costs can be directly or indirectly attributed to classes of mail and services consistent with the appropriate interpretation of [§ 3622](b)(3), the attribution level for each class is reviewed. Particular attention is focused on understanding differences in attribution between cases. If the attribution level for certain classes has changed significantly, the impact of that change on rates should be understood. If changes in attribution level are likely to affect inter- class rate relationships, this possibility also should be recognized.
PRC Op. R87-1 at 371, ¶4041. Ignoring these factors (and analogously ignoring
differences between the Postal Service’s proposed costing methodology and that used
by the Commission in previous dockets) as UPS witness Geddes does, can only lead to
simplistic and fatally defective proposals for the allocation of institutional costs.
Taking a broader perspective, Postal Service rebuttal witness Robinson
demonstrates that Dr. Geddes’ proposed cost coverages would result in a rate increase
that is excessive in light of the history of Priority Mail rate increases over the past
decade. USPS-RT-10 at 16; Tr. 32/10715. Admittedly, greater-than-average rate
increases are often necessary, for example, due to cost pressures and the need to meet
the mandate in § 3622(b)(3). In fact, the Postal Service’s proposed Priority Mail rate
increase is greater than average by a substantial amount and is driven, in part, by
Priority Mail cost trends. In weighing the effect on customers of a larger Priority Mail
rate increase in this docket, Postal Service rate levels witness O’Hara (USPS-T-31)
determines that it would not be appropriate. On behalf of UPS, Dr. Geddes second-
guesses this conclusion based, in part, on an overly optimistic assessment of the
155
marketplace. Apparently a relatively short-term improvement in Priority Mail volume, in
Dr. Geddes’ view (UPS-T-3 at 17, Table 1) offsets a 27 percent reduction in Priority Mail
volume from FY 2000 to FY 2005. As Postal Service witness Robinson explains, such
an analysis is inconsistent with sound ratemaking and the Commission’s stated
principles regarding consideration of the effect on customers of a proposed rate change.
Dr. Geddes also asserts that the Priority Mail cost coverage should not be lowered in
order to protect the Postal Service’s market share. UPS-T-3 at 9. Again, the
Commission has made a clear determination that moderating cost coverage to protect
customers and to avoid harm to the Postal Service’s market position is appropriate,
despite UPS’ arguments to the contrary. See, PRC Op. R2000-1 at 313, ¶5317. It has
been observed that:
As to §3622(b)(5), the Commission has consistently, and reasonably, held that it authorizes a reduction in rates to maintain the position of the Postal Service as a competitor in the mail delivery industry.
United Parcel Service v. United States Postal Service, 184. F.3d 827,845 (D.C. Cir.
1999).
Despite all of Dr. Geddes’ posturing to the contrary, Postal Service witness
Scherer’s description of the competitive position of the Priority Mail in the marketplace
has not been refuted. Priority Mail’s market share has dropped substantially and its
volume has fallen (USPS-T-33 at 8), while that of UPS has grown. See designated
institutional response of UPS to interrogatory USPS/UPS-T3-7. The -1.02 own-price
elasticity measured for Priority Mail by witness Thress (USPS-T-7) is also significantly
156
higher than the levels found in Dockets Nos. R2000-1 and R2001-1. Like the decline in
market share, this suggests a deterioration of Priority Mail’s competitive position. The
Commission should weight these facts accordingly and dismiss UPS witness Geddes’
self-serving pricing proposals.
2. Amazon.com witness Haldi misapplies the pricing criteria in proposing his Bound Printed Matter cost coverage.
On behalf of Amazon, witness John Haldi (AMZ-T-1) suggests that the
Commission reduce the cost coverage for Bound Printed Matter from the level proposed
by the Postal Service (125 percent) to about 114 percent, based on his view that Postal
Service witness O’Hara (USPS-T-31) has not appropriately applied the pricing criteria to
Bound Printed Matter.8 AMZ-T-1 at 28-34. Dr. Haldi points to pricing Criterion 8 (the
educational, cultural, scientific, and informational value of the mail, ECSI) to argue that,
in part, because the Bound Printed Matter subclass includes books, it should be
assigned a higher ECSI value than Parcel Post. Consequently, Dr. Haldi views the
appropriate ordering of cost coverages for the commercial Package Services
subclasses to be one that results in a lower coverage for Media Mail than for Bound
Printed Matter which, in turn should be less than that of Parcel Post. He further
proposes this ordering be achieved by reducing the cost coverage for Bound Printed
Matter to about 114 percent.
8 Amazon witness Haldi (AMZ-T-1) also proposes a classification change which would remove certain content restrictions on mail set as Bound Printed Matter. Postal Service rebuttal witness James Kiefer (USPS-RT-11) explains why this proposal should not be recommended.
157
Amazon witness Haldi’s proposal fails to recognize the full circumstances
surrounding the relative pricing and cost coverage proposals for Bound Printed Matter.
Postal Service witness O’Hara (USPS-T-31) proposes an 11.7 percent rate increase for
Bound Printed Matter, lower than the proposed 13.2 percent rate increase for Parcel
Post. Dr. O’Hara’s proposal is consistent with the application of all of the pricing criteria,
including recognition that Bound Printed Matter has been given “some ECSI
consideration in setting rate levels.” USPS-T-31 at 33. What Dr. Haldi fails to consider
is that factors other than relative ECSI value are incorporated in the Postal Service’s
proposal. Specifically, Postal Service witness O’Hara indicated that the Postal Service’s
Parcel Post rate proposal has been influenced by consideration of the potential adverse
effect on customers of a greater increase, balanced against the increasing costs of
providing Parcel Post service. USPS-T-31 at 31.
Consideration of the cost coverage for Bound Printed Matter is not an exercise in
“ranking” the criteria based solely on ECSI or any other single consideration. Rather,
the Commission must consider the full range of factors affecting all subclasses, and
balance all factors within the context of a comprehensive pricing recommendation. As
the Commission has often noted, evaluating the appropriate cost coverage for all
subclasses, including Bound Printed Matter, does not result in a ordinal ranking of
coverages along a single dimension such as ECSI.
3. Valpak’s nostalgic Standard Enhanced Carrier Route cost coverage proposal seeks to unfairly burden Standard Regular. Reminiscent of the swallows upon their return to Mission San Juan Capistrano,
158
Valpak witness Mitchell (VP-T-1) returns to another Postal Rate Commission docket to
testify that that Enhanced Carrier Route (ECR) subclass cost coverage proposed by the
Postal Service is too high and should be lowered to levels idealized in Docket No.
MC95-1. The Postal Service commends the Commission to contrast witness Mitchell’s
longing for the rate level relationships of yester-year with the rebuttal testimony of
Newspaper Association of America witness Gregory Sidak (NAA-RT-1; Tr. 32/10819 et
seq.) which, at least, argues that institutional cost allocations in this docket should be
based on current and anticipated mail volume trends and market realities, as opposed
to hopes expressed in the mid-1990’s.
The recurring refrain in witness Mitchell’s testimony is that the Commission
should moderate the proposed Enhanced Carrier Route subclass cost coverage. He
proposes that Standard Mail ECR rates should decrease by nearly 8.5 percent, while
Standard Regular rates increase by over 17.5 percent. VP-T-1 at 97. In contrast, under
Dr. O’Hara’s proposal on behalf of the Postal Service, Standard Regular rates would
increase 9.6 percent, compared to 8.9 percent for Standard ECR. Exhibit USPS-31D.
And both subclasses would make equivalent unit contributions to institutional cost.
USPS-T-31 at 30; Tr. 17/5125.
It is noteworthy that, except in the circumstances relating to its across-the-board
proposal for meeting its unusual Docket No. R2005-1 escrow revenue requirement, the
Postal Service has generally proposed price increases for Standard ECR that were
below the system average, and below the proposed increases for Standard Mail
Regular. The Postal Service’s Docket No. R2006-1 application of the § 3622(b) criteria,
159
again, continues this trend. Witness O’Hara (USPS-T-31) applies the criteria to allocate
institutional costs in such a way that the average percentage rate increase for the
Standard ECR subclass is below the average percentage increase for Standard Mail
Regular. Exhibit USPS-31D. Over time, the cost coverage for Standard ECR, relative
to the systemwide average coverage, has been declining. Tr. 17/5122-24.
Even if one were to accept Valpak witness Mitchell’s claim that ECR cost
coverage is “too high,” his “solution” is to place all the burden of his “correction” on the
Standard Mail Regular subclass. In contrast, a fair and equitable adjustment in
institutional costs and relative rates of this magnitude should involve a complete
reconsideration and potential recalibration of the cost coverages of all subclasses.
Standard ECR, while a separate subclass, bears many of the characteristics of a
worksharing category. For example, Standard Regular mail that has 10 pieces per
carrier route can become eligible for ECR solely by the application of additional mailer
worksharing. As is well known, all else being equal, the cost coverage on workshared
mail is higher than that of comparable non-workshared mail because the unit cost of
workshare mail is lower. Thus, it cannot be said that the Standard ECR cost coverage
bears an aberrational relationship with that of Standard Regular.
Nevertheless, witness Mitchell doggedly asserts that, somehow, the goals of
Docket No. MC95-1 have not been achieved, because the cost coverage for Standard
Mail ECR has not been reduced below that of Standard Mail Regular. He cites the
Commission’s paraphrasing of Postal Service witness Moeller’s Docket No. MC95-1
suggestion that ECR cost coverage should be lower (see, e.g., VP-T-1 at 29); however,
160
witness Mitchell does not provide any direct evidence that the Commission has
established a long-term policy aimed at reducing Standard Mail ECR cost coverages to
the levels he suggests.
In fact, in its first opportunity to adjust Standard Mail ECR cost coverages
following Docket No. MC95-1:
[t]he Commission . . . [agreed] with the Service that even though several of the statutory factors might indicate a low ECR cost coverage, on balance the record supports an ECR cost coverage that is well above average.
PRC Op. R97-1 at 447, ¶5550. In its Docket No. R97-1 recommended decision, and in
each subsequent recommended decision, the Commission has balanced the often
conflicting factors embodied in the pricing criteria and reached the conclusion that a
greater-than-average Standard Mail ECR cost coverage is consistent with the policies of
the Act. In its current proposal, the Postal Service has carefully weighed the statutory
pricing criteria and provided substantial evidence supporting the conclusion that a
greater-than-average Standard Mail ECR cost coverage is justified. This proposal
should be accepted.
Eventually, witness Mitchell is able to let go of the past to discuss postal reform
legislation that was pending at the time of his testimony. At pages 96-97 of VP-T-1, he
asserts that since the legislation, if enacted, would be expected to change the way that
postal prices are set, any pricing inequalities that exist today must be eliminated now,
before the new pricing regime is instituted, otherwise inequities might be permanently
baked in.
The Postal Service submits that the Commission has repeatedly recommended
161
above-average cost coverages for ECR, seeming to suggest that whatever
misalignment that might exist between its recommended coverage and some unknown
ideal, the “discrepancy” was not so great that it required immediate correction. Mr.
Mitchell’s assertion that ECR is entitled to some form of pre-reform correction should be
summarily dismissed. In this regard, Standard ECR has no special status and is
entitled to no more of a pre-reform “nip/tuck” before the Postal Accountability and
Enhancement Act is in full effect than any other subclass. Adoption of his proposal
would be highly disruptive and would lead to unreasonably high increases for some
categories of Standard Mail Regular. There is no compelling basis, rooted in the
upcoming legislative change or elsewhere, for raising their prices so severely and
heedless of the impacts on mailers.
Moreover, witness Mitchell’s belief that statutory changes to the ratemaking
process may preclude further adjustment of ECR’s cost coverage before the ratemaking
process changes turns out to have been a miscalculation. New section 3622(f) in the
Postal Accountability and Enhancement Act contains a provision that permits the Postal
Service to file a rate case under the Commission’s existing rules during the one-year
period that begins on the date of its enactment:
Transition Rule. -- For the 1-year period beginning on the date of enactment of this section, rates and classes for market-dominant products shall remain subject to modification in accordance with the provisions of this chapter and section 407, as such provisions were last in effect before the date of enactment of this section. Proceedings initiated to consider a request for a recommended decision filed by the Postal Service during that 1-year period shall be completed in accordance with subchapter II of chapter 36 of this title and implementing regulations, as in effect before the date of enactment of this section.
Moreover under new §3622(a), the Commission has up to 18 months to establish the
162
implementing regulations governing the pricing of market dominant products, which
includes Standard Mail:
(a) AUTHORITY GENERALLY. -- The Postal Regulatory Commission shall, within 18 months after the date of enactment of this section, by regulation establish (and may from time to time thereafter by regulation revise) a modern system for regulating rates and classes for market-dominant products.
Thus, it is not beyond the realm of possibility that an opportunity to revisit all of these
issues again could arise before the Commission’s new rules are implemented.
4. The NAA post-discount approach to calculating the Within County Periodicals cost coverage should be rejected.
The proposed cost coverage for Within County Periodicals is half that of the
Outside County cost coverage, calculated using total Outside County revenue (that is,
Regular Rate revenue plus Nonprofit and Classroom revenue before the application of
the 5 percent discount applicable to those preferred rate categories). The Postal
Service, in its June 16, 2006, response to Notice of Inquiry (NOI) No. 1, explains why
using this Outside County pre-discount cost coverage is the appropriate way to
determine the markup for Within County for purposes of the “half markup rule” of
§ 3626. NNA, on the other hand, argues for a post-discount approach. See Response
of the National Newspaper Association to the Commission Notice of Inquiry No. 1 (June
16, 2006).
The recent enactment of the H.R. 6407, the Postal Accountability and
163
Enhancement Act (PAEA) raises a question as to the continued applicability of the “half
markup rule.” The PAEA revises § 3626 to eliminate the statutorily hard-wired “half
markup rule” and replaces it with discretionary language that states that Within County
rates should simply reflect the subclass’ “preferred status as compared to the rates for
the most closely corresponding regular-rate category mailing.” See PAEA, § 1003. An
open question is whether this revision to § 3626 is effective immediately, or whether the
“half markup” rule still governs rate modifications for another year under the transition
provision found at § 201 of the PAEA. The Postal Service believes that there is no need
to answer this question now. Instead, for purposes of this proceeding the Commission
should simply utilize the Postal Service’s pre-discount approach, which satisfies both
the “half markup rule” and is within the Commission’s discretion under the new standard
of the PAEA.
Whether the “half markup rule” is still statutorily mandated or is adopted by the
Commission for purposes of satisfying, for this proceeding, the PAEA’s new “preferred
status” language, the Postal Service’s response to NOI No. 1 demonstrates why the
pre-discount approach used by witnesses Tang and O’Hara is preferable to the post-
discount approach urged by the NNA. As the Postal Service notes, using a pre-
discount Outside County cost coverage appropriately assumes that the unit costs for
similar regular and preferred rate pieces are the same. Response of Postal Service to
NOI No. 1, at 3-4. The post-discount approach, on the other hand, implicitly assumes
the opposite. Since there is no reason to believe that the Nonprofit and Classroom
discounts are set in order to offset intrinsic cost differences between similar preferred
164
and regular rate periodicals, a pre-discount approach is a better estimate of the regular-
rate markup. Id. at 4-5.
E. Conclusion
The cost coverages proposed by the Postal Service represent a fair and
equitable allocation of institutional costs. Dr. O’Hara’s approach is the only balanced
and comprehensive application of the various statutory criteria to each subclass of mail.
He takes into account the relevant statutory criteria while analyzing each specific
subclass and ensured that the institutional cost contributions of the various subclasses
are fair and equitable in comparison to each other. The result of his analysis is an
allocation of institutional costs which treats mailers and competitors fairly, takes into
account the unique characteristics of each subclass, and best allows the Postal Service
to meet the needs of the mailing public. Some intervenor witnesses offered cost
coverages proposals for only one or a few subclasses of mail. These proposals, made
in isolation with self-serving intent, are not comprehensive and did not provide the
means by which to balance the revenue burden so as to achieve financial breakeven.
Accordingly, the Postal Service urges the Commission to give full support to the
proposals advanced by Dr. O’Hara.
165
VI. THE RATE DESIGN PROPOSED BY THE POSTAL SERVICE WILL RECOVER THE NECESSARY AMOUNT OF REVENUE FROM EACH SUBCLASS IN A MANNER WHICH COMPLIES WITH THE ACT
A. Several Important Principles Guide the Postal Service’s Overall Rate Design After the Postal Service determines the appropriate cost coverage for each
subclass of mail, it must design rates for each subclass which generate sufficient
revenue to ensure that the ratio of per-piece revenue to per-piece volume-variable cost
equals the prescribed cost coverage. The revenue burden for each mail subclass or
service must be spread across each rate category of that subclass or distinct element of
that service offering in a fair and equitable manner. As is evident from the preceding
chapter of this Brief, Postal Service witness O’Hara (USPS-T-31) accords each
subclass an independent application and weighting of the appropriate statutory policy
considerations. Only a comprehensive subclass-by-subclass approach, such as his, will
ensure that all of the relevant costing and pricing criteria have been reasonably
considered and fairly applied.
The Postal Service has presented substantial record evidence which reflects a
strict adherence to the fundamental principles of postal ratemaking. The product of this
effort is a comprehensive, integrated and harmonious rate schedule. The Postal
Service's proposed rates for each subclass are discussed below and are contrasted
with the pricing proposals of the intervenors. The record in this proceeding
demonstrates that the Postal Service's rate proposals ensure that the Postal Service's
revenue requirement will be met in a manner which is fair and equitable to mailers and
competition. The rates proposed by the Postal Service are consistent with the public
166
interest and should be preferred by the Commission to those suggested by the various
intervenors.
Before embarking on a class-by-class discussion of rate design matters, it may
be helpful to review some general principles that guided the Postal Service in its
broader approach to rate design in this docket. The Postal Service urges the
Commission to consider them as it develops its rate recommendations.
1. There should be greater emphasis on shape in rate design.
The Postal Service seeks a rate and classification schedule that reflects greater
recognition of mailpiece shape. The objective of this policy is to encourage more
efficient preparation of mail and to help assure that distinct categories make a
contribution to the institutional cost burden borne by their respective subclasses.
To the extent that it is possible to choose among shape formats for sending
letters, merchandise or other items, the pricing proposals submitted here for review
encourage efficient choices. Of course, some articles that are mailed require a
particular shape format. For example, a sleeve of golf balls cannot be configured into a
letter or flat mailpiece. However, an unfolded document currently mailed in a flat-
shaped envelope could possibly be folded and sent in a letter-shaped envelope. It is
this latter example that shows how a price difference could lead to production of mail
that can be handled at a lower cost. To the extent any net additional cost of producing
a letter instead of a flat (e.g., the additional cost of folding and inserting) is lower than
the price difference, the mailer may consider choosing the letter format. Ultimately, that
decision will also incorporate any value gained by having the recipient receive an
167
unfolded document, and in a larger mailpiece that might garner more attention. In any
event, by having a price difference, there is heightened consideration to the selection of
the shape format. Likewise, if the rate for mailing a package is based only on weight
and distance, then there is little reason to be mindful of the size of the box that may be
used. By incorporating a price element that acknowledges the “fullness” or the density
of a package, the Postal Service encourages mailers to use mailing boxes that, all else
considered, are not larger than necessary. A conscious decision to use a smaller box
can lead to a lower price, and will help make the postal system more efficient overall.
To the extent that it is not possible to choose among shape formats for sending
messages or other mailable articles, the proposals are advantageous in that they result
in a more equitable distribution of the institutional cost burden within a subclass. As
noted above, the physical nature of what is being sent may make it incompatible with
the standards for a more efficiently-processed shape. Also, even if it were possible to
reconfigure an item into another mailing shape, doing so might harm the content, or
otherwise make the mailpiece less beneficial to the sender and recipient. In such
instances, the mailer will be expected to decide to retain the more effective mailpiece
shape, even though the applicable postal rate is higher. In the end, though, that higher
rate helps that rate category cover its costs, and helps the subclass meet its individual
revenue target.
168
2. Overall rate design should reflect forward-looking operational realities. Ideally, the Postal Service can avoid requiring mailers to do more mail
preparation work than is necessary by offering prices that induce the appropriate level
of preparation. All parties have an interest in making the postal system more efficient.
A rate schedule with prices that require mailers to do more work than necessary is
counter to that objective. For instance, if the postal processing of a certain type of mail
is initially conducted at a mail processing plant, then mailers should not be encouraged
to undertake expensive activities designed to result in entry of that mail deeper into the
system, at a delivery unit. Likewise, if the initial postal processing is on a machine with
a sortation scheme that does not require a fine level of presort, it is counter-productive
to have a mailer presort that mail to a level beyond that which is necessary for entry into
the mailstream for postal processing. The Postal Service’s rate design proposals
embody this sensible acknowledgment of the operational environment, and result in a
more efficient overall mail production, processing, and delivery system.
It is appropriate for rate design and prices to acknowledge changes in the postal
mail processing environment. As in past postal rate cases, the proposed rates and
classifications reflect a cognizance of recent operational changes and their ongoing
development. The testimonies of Postal Service operations experts Marc McCrery
(USPS-T-42) and Joyce Coombs (USPS-T-44) describe the mail processing and
delivery environments. The proposed Domestic Mail Classification Schedule includes
many new rate categories designed to better align prices with these operational realities
and plans. And the prices proposed for these new categories, as well as the existing
169
categories, are mindful of the efficiency that can be gained when the prices signal the
most advantageous mail preparation.
3. Efficient Component-Pricing should only be applied to worksharing cost differences.
During this docket, the Commission requested views of the parties on the
applicability of efficient component-pricing (ECP) to price differences in costs between
different categories of mail within the same subclass. NOI No. 2 at 7 (July 21, 2006)
and NOI No. 3 at 6-7 (July 26, 2006). Many participants responded to one or both of the
NOIs, giving their views on how ECP was applicable in pricing intra-subclass rate
categories.1 In addition, several witnesses addressed ECP, either explicitly or implicitly
in their testimonies. See, e.g., PB-T-1 (Panzar), NAA-T-1 (Sidak), SMC-RT-1(Crowder),
(USPS-RT-10) Robinson , USPS-RT-11 (Kiefer), VP-RT-1(Mitchell), PSA/PostCom-T-1
(Glick) and ABA-RT-1 (Kent).
The Commission’s NOI Nos. 2 and 3 provide the same general description of the
ECP concept:
Consider that Baumol and Sidak define the efficient component price as the input’s direct per-unit incremental cost plus the opportunity cost to the input supplier of the sale of a unit of output.
NOI No. 2 at 7; NOI No. 3 at 6. Another definition that sets ECP within its appropriate
context is given in the response of Association for Mail Electronic Enhancement et. al.
to NOI No. 3:
The Efficient Component Pricing Rule, a specialized rule for productive efficiency in the pricing of individual components of vertically integrated
1 Some participants responded to the NOIs but did not specifically address the question of the applicability of ECP to pricing intra-subclass cost differences.
170
goods or services offered by a regulated monopolist, requires that the components available from competing suppliers be priced at their marginal (or average incremental) cost.
Response of Association for Mail Electronic Enhancement et al. (AMEE) to NOI No. 3 at
14. This definition supplies useful context: the producer subject to the ECP rule is, first
of all, a regulated monopoly, it is vertically integrated, and it competes with outside
suppliers for the supply of some components of its final product.
NOI Nos. 2 and 3 invited respondents to address the question of how ECP
applies to pricing cost differences between categories within a subclass. NOI No. 2 at
7; NOI No. 3 at 6-7. The respondents who addressed this question (either responding
directly to either or both NOIs, or in testimony) generally fall into two groups. The first
group (which includes the Parcel Shippers Association, the Association for Mail
Electronic Enhancement, the Association for Postal Commerce, Pitney Bowes, and the
Saturation Mailers Coalition) holds that the ECP pricing rule should be applied broadly.
See Responses of PSA to NOI No. 2 and AMEE et. al. to NOI No. 3; PSA/POSTCOM-
171
T-1, PB-T-1, SMC-RT-1).2 These commenters do not limit ECP only to pricing
worksharing activities.3
The second group of respondents argues for a more strict interpretation of ECP.
They assert that ECP is appropriately applied for costs that can be avoided directly by
mailer activities, that is, by worksharing as traditionally defined. This second group
includes the Postal Service, Newspaper Association of America, Time Warner, United
Parcel Service, and Valpak. (See Response of Time Warner to NOI Nos. 2 and 3 at 3-4,
including footnote 4; Response of UPS to NOI Nos. 2 and 3, Response of the Postal
Service to NOI No. 2 and Response of the Postal Service to NOI No. 3, Response of
Valpak to NOI Nos. 2 and 3; NAA-T-1).
a. Implications of the two approaches.
In general, application of ECP in the top-down approach that the Commission
customarily uses for pricing worksharing cost differences “would entail a 100 percent
2 Saturation Mailers Coalition witness Antoinette Crowder’s rebuttal testimony clearly asserts a broad view of ECP (SMC-RT-1 at 6-8, 21-23) and she reiterated that stance upon cross examination (Tr.35/11815, line 23 to 11816, line 6). Yet witness Crowder also clearly qualified her advocacy of a broad applicability for ECP. Cases where there are known, but not necessarily quantifiable, differences in value within a subclass, “it is useful, very useful, to depart from ECP….” Tr. 35/11807; see also at 11808, line 17 to 11809, line 6. And witness Crowder does not agree that only cost differences should be used to price below the subclass level, stating “I do agree that if you don’t have any other information on price sensitivity, that ECP is the best that you’re going to be able to get to, unless you’re making some judgments about those 3622(b) factors….” Tr. 35/11830 (emphasis added). 3 Witness Panzar (PB-T-1) achieves this broadening, at least in part, by broadening the definition of worksharing. See PB-T-1 at 7. Association for Mail Electronic Enhancement, et. al. do not explicitly claim that ECP should be used for non-worksharing avoided costs, but argue that the Postal Service’s calculation of avoided costs is too narrow and should be more broad. Response of AMEE et. al. to NOI No. 3 at 4-5.
172
passthrough of avoided cost for all cost-causing characteristics.” NOI No. 2 at 7, n. 6.
The broad interpretation of ECP applicability implies that all cost differences must be
recognized at 100 percent, which is equivalent to stating that all pieces within a
subclass should have the same unit contributions (regardless of shape and other non-
worksharing differences). See Tr. 35/11820 (Crowder); USPS-RT-11 at 8-9.
The strict interpretation of ECP applicability recognizes that 100 percent of
worksharing cost differences should be passed through into rates, but that ECP “is not
an appropriate concept to use in calculating shape-based rates in the same manner that
would be used to determine worksharing discounts.” NAA-T-1 at 11; see also NAA-T-1
at 10, lines 3-4; Postal Service Response to NOI No. 2 at 3-5; and Valpak Response to
NOI Nos. 2 and 3 at 13. Therefore, pieces within a subclass that differ by shape, zone
or weight need not make equal unit contributions. USPS-RT-11 at 9, 18-19; Tr.
33/11161-62; Valpak Response to NOI Nos. 2 and 3 at 14-16.
Related to this discussion is the notion of price discrimination. NOI No. 2 posits a
definition of price discrimination from Professor Stigler’s textbook that suggests price
discrimination is present when the price minus the marginal cost is not the same for two
products. This is mathematically equivalent to a 100 percent recognition (or
passthrough) of cost differences. NOI No. 2 at 5-6. Professor Stigler also offers
another, preferred, definition of price discrimination, where discrimination occurs where
two similar products have differing ratios of price to marginal cost. Postal Service
Response to NOI No. 2 at 6-8. Professor Stigler’s preferred definition “does not equate
173
price discrimination with deviations from 100 percent passthroughs of costs.” Postal
Service Response to NOI No. 2 at 7 (emphasis in original).
An important qualification in Professor Stigler’s definition is that the two products
being compared be “similar.” Postal Service Response to NOI No. 2 at 7. No
participant in this docket has provided concrete evidence sufficient to determine that
shape differences among postal classifications are similar enough to trigger either of
Professor Stigler’s definitions of price discrimination.
b. The broad view of the applicability of ECP is flawed and should be rejected.
NAA witness Sidak clearly testifies that ECP cannot be applied to shape based
differences in the same way it is applicable to worksharing differences. NAA-T-1 at 11.
Dr. Ingrahm, another NAA witness, agrees. Tr. 24/8720. This is because mail shapes
do not generate avoidable costs for the Postal Service similar to worksharing. Although
mailers may have a choice of mail shape to use, “it is not a choice between the mailer
or the Postal Service performing a particular function in the type of scenario to which
ECP is intended to apply.” NAA-T-1 at 11-12. With differences based on mail piece
characteristics, like shape, that are not worksharing, there is no transformative service
performed by the Postal Service that a “more efficient” mailer can avoid. Postal Service
Response to NOI No. 2 at 4.
Witness Panzar supports broad applicability for ECP. Part of the justification for
this broad applicability is an expanded definition for worksharing. PB-T-1 at 7. Witness
174
Panzar’s expanded definition is unreasonable.4 It potentially could include under the
worksharing umbrella changing any mail piece characteristic that can be affected by
mailers that can affect postal costs, whether or not any work or costs are avoided by the
Postal Service. Moreover, witness Panzar’s broad applicability for ECP can potentially
produce problematic results and lead to undesirable real-world consequences. See
USPS-RT-11, Chapter V, especially at 18-19.5
No other party has provided any theoretical underpinning to support the broad
view of ECP applicability. SMC witness Crowder appeals to Pitney Bowes witness
Panzar for her theoretical support, but even her own testimony reveals that her view of
the applicability of ECP outside of worksharing is significantly qualified.6 PSA/PostCom
4 It likewise does not appear to be consistent with the definition of worksharing included in the reform legislation recently passed by Congress. See Postal Accountability and Enhancement Act, 39 U.S.C. § 3622(e). 5 For example, in response to USPS/PB-T1-5, Prof. Panzar himself identifies a very practical limitation on his testimony when he acknowledges that it “sets forth the arguments in favor of instituting a system of cost-based discounts at the subclass level,” but that it “does not specifically address the issue of how one makes changes from an existing system of discounts that are less than avoided costs.” Tr. 26/9159. Postal Service rebuttal witness Robinson cites this as an example of why mechanistic application of theoretical rules that fail to take account of the myriad factors of the Act must be approached with caution. USPS-RT-10 at 6. 6 SMC witness Crowder claims that NAA witness Sidak also supports broader applicability for ECP. SMC-RT-1 at 6. But her interpretation of witness Sidak’s responses to two ADVO interrogatories (ADVO/NAA-T1-4 and -5) goes well beyond the rather limited nature of witness Sidak’s responses. Moreover, witness Crowder has provided no evidence that the qualifying situation mentioned in witness Sidak’s two responses—where two products have the same “value”—actually holds in practical circumstances where a rate maker must set rates between products having different shapes. Witness Crowder also goes beyond witness Sidak’s testimony when she asserts that he agrees with the extension of ECP to weight and shape based on assuming products have the same value. A fairer interpretation of witness Sidak’s testimony would be that extension of ECP might be warranted if products’ values were measured and found to be the same. Regardless, witness Crowder has provided no
175
witness Glick also implicitly supports application of ECP to shape-based cost
differences. PSA/POSTCOM-T-1 at 3-4. But neither witness Glick, nor PSA’s response
to NOI No. 2 provide any evidence (other than mere assumption) to support the
applicability of ECP to shape-based costs. See USPS-RT-11 at 10.
Furthermore, applying the ECP rule to non-worksharing cost differences might
limit the ability of the Postal Service and the Commission to use reasonable judgment to
reflect information (such as shape-based demand and impact information) in setting
rates below the subclass level. USPS-RT-11 at 19. Even where products are similar,
applying ECP to non-worksharing cost differences does not guarantee that price
discrimination is being avoided. Using Professor Stigler’s definition for price
discrimination, applying ECP to shape-based cost differences to achieve 100 percent
recognition of cost differences would not ensure against price discrimination. Response
of the Postal Service to NOI No. 2 at 7.
c. The strict interpretation of the applicability of ECP is reasonable and should be adopted.
The strict interpretation is consistent with NAA witness Sidak’s testimony
regarding the applicability of ECP to worksharing and to shape-based differences in
costs. NAA-T-1 at 8-12. In addition, it does not treat cost differences arising from
different shapes and mail processing paths as transformative changes. Postal Service
Response to NOI No. 2 at 4. Mailers do not regard shape as a characteristic that can
evidence to support even the assumption that the same “value” between different mail shapes is reasonable. See USPS-RT-11 at 17, line 18, to 18, line 5.
176
be easily changed in response to price changes. USPS-RT-11 at 15-16; see especially
n. 6.
The strict interpretation recognizes that subclasses are not homogeneous. Postal
Service Response to NOI No. 3, Chapter II; USPS-RT-11 at 16-18. With heterogeneity
within subclasses, the strict view of ECP applicability allows the recognition of additional
information (both cost and non-cost) that might reasonably be incorporated into pricing.
Postal Service Response to NOI No. 3 at 3, 8; USPS-RT-11 at 19.7
The strict interpretation of ECP applicability does not raise price discrimination
concerns. Price discrimination between products requires products to be similar. USPS
Response to NOI No. 2 at 7. Mail shapes are at least prima facie dissimilar products,
and no participant in this docket has provided evidence sufficient to demonstrate that
dissimilar-shaped mail categories are “similar” enough to trigger the likelihood of price
discrimination. There is no solid basis on the record to claim that different shape-based
mail categories exhibit price discrimination solely because certain rate differentials do
not equate to the corresponding cost differentials. Postal Service Response to NOI No.
2 at 8.
d. ECP is, at best, only a guide in setting pricing differentials.
Even for pricing worksharing, ECP is only a guide in pricing. Postal Service
Response to NOI No. 2 at 2, 3. The Commission has recognized that justifications often
exist for deviating from pure productive economic efficiency, which is the sole focus of
177
ECP. NOI No. 2 at 2, Postal Service Response to NOI No. 2 at 16-17. Efficiency
considerations must be balanced by non-economic policy factors to reach an
appropriate pricing recommendation. The use of ECP, and other theoretical rules, to
postal pricing must be tempered by considering a variety of non-economic factors and
public policy goals. Postal Service Response to NOI No. 3 at 3.
The Postal Service does not operate in a purely theoretical world where narrow
application of any single theoretical economic model, like the ECP rule, is sufficient for
pricing. The Postal Service recognizes the need to send appropriate efficiency signals
in its pricing. In this, ECP can offer guidance. But more than ECP must be considered.
The pricing criteria and other policies of the Act require consideration of a wide range of
non-economic policy factors. The Postal Service’s current pricing proposals have
carefully weighed the often contradictory policy objectives embodied in the statutory
pricing criteria. The Postal Service’s pricing proposals look at the totality of the situation
and appropriately balance economic efficiency and other policy factors. Postal Service
Response to NOI No. 3 at 11-12.
Even proponents of the broader applicability of ECP recognize that it has
limitations. 8 SMC witness Crowder believes that factors other than ECP must be
considered when pricing. Tr. 35/11830, lines 4-7; see also 11830, line 25 to 11831, line
4. She says it is sometimes very useful to depart from applying ECP in pricing. Tr.
7 SMC witness Crowder, although she supports a more expansive application of ECP, clearly has some misgivings about going too far. See Tr. 35/11830, lines 4-7 and 11809, lines 3-6. 8 Prof. Panzar himself continues to recognize justifications for deviations from ECP. See Tr. 26/9154-57.
178
35/11806, line 25 to 11807, line 6. One cannot apply ECP as a hard and fast rule.
Each circumstance will tell how ECP (or other theories) may be applied. Tr. 35/11809.
Thus, in summary, ECP is a pricing theory promoting economic efficiency that
should only be applied to worksharing cost differences, not to shape-based cost
differences. Theories like ECP must be applied by looking at the totality of the situation,
which the Postal Service has done. The Postal Service has given appropriate
consideration to economic efficiency, including theories like ECP in its pricing. NAA-T-1
at 8-11; Postal Service Response to NOI No. 3 at 11-12. The merits of the Postal
Service’s rate design are explained in detail below.
B. First-Class Mail
1. Postal Service Proposals
The Postal Service’s First-Class Mail rate and classification proposals are
depicted in the Docket No. R2006-1 Request of the United States Postal Service For A
Recommended Decision On Changes In Rates Of Postage And Fees For Postal
Services, at Attachments A (pages 4-7) and B (pages 1-3 and 5) (May 3, 2006). The
justification for these proposals is explained in the two direct testimonies of Postal
Service witness Altaf Taufique, USPS-T-32 and USPS-T-48.9
9 Docket No. R2006-1, Direct Testimony of Altaf H. Taufique On Behalf Of United States Postal Service, USPS-T-32 and USPS-T-48.
179
First-Class Mail is generally divided into three subclasses, witness Taufique
proposes prices for the Letters and Sealed Parcels, and Cards subclasses. Witness
Thomas Scherer (USPS-T-33) proposes Priority Mail. For the Letters and Sealed
Parcels subclass, the proposed rate design by witness Taufique reflects an average
rate increase of 7.1 percent and a cost coverage of 228 percent. USPS-T-32 at 3. For
the Cards subclass, he proposes an average rate increase of 10.5 percent and a cost
coverage of 176 percent. For First-Class Mail as a whole, the proposed cost coverage
is 226 percent and the average rate increase is 7.2 percent. USPS-T-32 at 3; Exhibit
USPS-32A.
A significant feature of witness Taufique’s First-Class Mail rate design is his
proposed change in the foundation for the design of workshare discounts. He
advocates an approach based upon “de-linking” of the rate design for the various
workshare rate categories from the rate design for the single-piece rate categories.
USPS-T-32 at 12. Witness Taufique also proposes the establishment of new rate
categories within the Letters and Sealed Parcels subclass on the basis of shape -- for
letters, flats and parcels. USPS-T-32 at 17-18.10 Witness Taufique also proposes that
the Automation Carrier Route rate categories within the Letters and Sealed Parcels and
Cards subclasses of First-Class Mail be eliminated. Last but not least, he proposes the
establishment of a “Forever Stamp” classification. USPS-T-32 at 26-27; USPS-T-48.
10 In conjunction with this shape-based redesign, witness Taufique advocates two related classification changes. The first is the elimination of the heavy piece discount for presorted and automation mail. Secondly, in lieu of the current nonmachinable surcharges applicable to certain one-ounce First-Class Mail letters, witness Taufique
180
Under this concept, mailers would be authorized to use a specially designed stamp
(purchased at a value equivalent to the initial-ounce letter rate) and use it as valid
payment of postage on any one-ounce First-Class Mail letter, even after the applicable
rate for that letter is later increased to a point above the purchase of the stamp.11 All of
witness Taufique’s specific rate design proposals, including these proposed
classification changes, are summarized and discussed below.
For the Single-Piece and Nonautomation Presort categories of First-Class Mail,
witness Taufique proposes the following rate and classification changes:
The current rate for the first ounce of a basic First-Class Mail letter should be
increased from 39 cents to 42 cents. In line with his proposal to reclassify First-Class
Mail on the basis of shape, witness Taufique proposes that rates of 62 cents and $1.00
be established for one-ounce single-piece flats and parcels, respectively. In conjunction
with shape-based rate de-averaging, witness Taufique advocates that the 24-cent
additional-ounce rate currently applicable to single-piece First-Class Mail (letters, flats
and parcels) be decreased to 20 cents. He proposes that the current 3.2-cent discount
for the first ounce of a Qualified Business Reply Mail (QBRM) piece be reduced to 2.5
cents, resulting in the QBRM initial-ounce letter rate increasing from 35.8 to 39.5 cents.
In lieu of a stand-alone surcharge for nonmachinable single-piece letters, witness
proposes that such pieces simply pay the higher rate proposed for corresponding one-ounce flats. USPS-T-32 at 19. 11 Although the stamp is intended for use on one-ounce letters, its use on other mail pieces, at a value equivalent to the First-Class Mail one-ounce letter rate prevailing at the time of use, also will be tolerated.
181
Taufique proposes that such letters pay the proposed rate for one-ounce single-piece
flats -- 62 cents. USPS-T-32 at 6, 19.
Witness Taufique proposes that the current 37.1-cent initial-ounce rate for
nonautomation Presort letters be increased to 40.0 cents, and that the corresponding
rate for flats be increased from 42.912 to 51.9 cents. With the creation of the First-Class
Mail Business Parcels rate category, Nonautomation Presort mail is proposed to include
only letter- and flat-shaped pieces. And, as mentioned earlier in conjunction with
shape-based rate de-averaging, witness Taufique advocates that the 23.7-cent
additional-ounce rate currently applicable to such letters and flats also be decreased to
20 cents. USPS-T-32 at 8.
For Automation Letters, witness Taufique proposes the following initial-ounce
rate changes: the Mixed AADC rate should be increased from 32.6 to 34.6 cents. The
AADC rate should be increased from 31.7 to 33.5 cents. The current 3-digit and 5-digit
rates, 30.8 and 29.3 cents respectively, should be increased to 33.1 and 31.2 cents,
respectively. Witness Taufique advocates that the 23.7-cent additional-ounce rate
currently applicable to such letters be decreased to 15.5 cents. USPS-T-32 at 6.
Witness Taufique proposes the following changes for Automation Flats initial-
ounce rates:13 the Mixed ADC rate should be increased from 41.7 to 46.5 cents. The
12 The current non-automation presort first ounce rate applicable to flats is discussed here in terms of the sum of the currently applicable initial ounce rate and the 5.8-cent nonmachinable surcharge. 13 The current Automation Flats initial ounce rates are discussed here in terms of the sum of the currently applicable initial ounce rate for each category and the 5.8-cent nonmachinable surcharge.
182
ADC rate should be increased from 40.9 to 43.3 cents. The current 3-digit and 5-digit
rates, 39.7 and 37.6 cents respectively, should be increased to 42.3 and 39.8 cents,
respectively. Witness Taufique advocates that the 23.7-cent additional-ounce rate
currently applicable to such flats be decreased to 20.0 cents. USPS-T-32 at 7.
Assuming the establishment of the new Business Parcels rate categories,
witness Taufique proposes that the following initial-ounce rates be adopted:14 the ADC
rate should be increased from 42.9 to 72.7 cents. The current rate of 42.9 cents
applicable to 3- and 5-Digit presorted parcels should be increased to 71.7 cents for
parcels sorted to 3-Digit and 64.3 cents for parcels sorted to 5-digit. Witness Taufique
advocates that the 23.7-cent additional-ounce rate currently applicable to such parcels
also be decreased to 20.0 cents. USPS-T-32 at 7. Under his rate design, Business
Parcels that do not meet specified automation requirements would be subjected to a 5-
cent surcharge.15
Within the Cards subclass, witness Taufique proposes that the single-piece
rate be increased from 24 to 27 cents and that the rate for QBRM cards be increased
from 21.1 cents to 24.5 cents. Under his design, the rate for Nonautomation Presort
cards would be increased from 22.3 to 24.1 cents. For the various Automation rate card
categories, witness Taufique proposes that the Mixed AADC rate be increased from
20.4 cents to 22.2 cents, that the AADC rate be changed from 19.7 cents to 21.5 cents,
14 The rates currently applicable to pieces that would qualify for the proposed presorted Business Parcels categories are expressed in terms of the sum of the currently applicable initial ounce rate for each category and the 5.8-cent nonmachinable surcharge.
183
that the current 19.3-cent 3-digit rate be increased to 21.1 cents, and that the 5-digit
rate be changed from 18.6 cents to 20.4 cents.
2. The Postal Service’s rate design is supported by more refined cost analysis.
a. The mail processing cost methodology
To estimate mail processing costs First-Class Mail letters, Witness Abdirahman
(USPS-T-22) utilizes a cost methodology similar, in many respects, to the one the
Commission employed in past dockets. He uses a “hybrid” cost methodology that relies
on both CRA mail processing unit costs and model-based mail processing unit costs to
develop mail processing unit cost estimates by rate category. He analyzes shape-
specific CRA mail processing unit cost estimates developed from the Presort Letters
and Sealed Parcels CRA category. The CRA mail processing unit costs for the First-
Class Mail Presort Letters are each subdivided into 63 cost pools. Each cost pool
represents a specific mail processing task performed at Bulk Mail Centers (BMC),
Management Operating Data System (MODS) plants, or non-MODS plants. The costs
are “mapped” to each cost pool, as described in USPS-LR-L-55.
Consistent with past methodology, witness Abdirahman then models the costs in
order to de-average the CRA mail processing unit costs for “First-Class Mail Presort
Letters” into cost estimates by rate category. Each of these cost models consists of two
spreadsheets: a mail flow spreadsheet and a cost spreadsheet. A weighted model cost
for all the rate categories being de-averaged is then computed using base year mail
volumes and is tied back to the CRA using the adjustment factor. The sum of the CRA
15 With the exception of parcels sorted to the 5-digit level. USPS-T-32 at 37.
184
proportional cost pools is then divided by this weighted model cost in order to calculate
the CRA proportional adjustment factor. This factor is then applied to the model costs in
order to estimate the total mail processing unit costs by rate category. The costs for the
remaining cost pools (i.e. the fixed cost pools) are summed and used as fixed
adjustments.
Witness Abdirahman’s cost models have a number of methodological changes.
The models combine the automation and nonautomation cost because of the issues
discussed in the response to in Docket No. R2005-1 to POIR No.1, Question 1(a) (May
9, 2005). See also Docket No. R2006-1, USPS-T22 at 5-6. The models no longer use
Bulk Metered Mail unit costs in the First-Class Mail letters mail processing cost analysis.
Id. at 6. In the past, the mail processing cost models have used two CRA adjustment
factors and three cost pool classifications: proportional, worksharing related fixed, and
nonworksharing related fixed. With the de-linking pricing approach, only one CRA
factor is needed. Moreover, the distinction between worksharing-related and
nonworksharing-related cost pools is eliminated because, as witness Abdirahman
explains:
All analyses of workshare-related activities are constrained within the self- contained CRA set of costs associated with Presort letters.
USPS-T-22 at 6. In the cost models in this case, witness Abdirahman uses two cost
pool classifications: proportional and fixed. Id. at 6. Nevertheless, the Postal Service’s
approach to cost pool classifications in this docket is consistent with the approaches
adopted by the Commission in previous dockets. Each cost pool is classified as being
proportional or fixed. The “proportional” cost pools contain the costs for tasks that are
185
actually modeled. The bar code sorter (“/BCS”) cost pool is an example of a proportional
cost pool. The “fixed” cost pools represent tasks that have not been modeled. The
Express Mail (“EXPRESS”) cost pool is an example of a fixed cost pool. A cost pool is
classified as proportional only when the associated mail processing activities identified
within that cost pool are understood to vary in known ways by presort level, i.e., the
more finely presorted a piece is, the less the cost of processing in a given cost pool.
USPS-RT-7 at 10-11. Tr. 35/11957-58.
b. First-Class Mail delivery cost estimates
In the instant proceeding, the Postal Service revises the way in which it produces
rate category delivery unit cost estimates. The revision is based upon a re-evaluation of
the factors that impact delivery and what about these factors is known and unknown.
The re-evaluation reveals that machinability is the one characteristic of a mail-piece that
has a quantifiable impact on delivery unit costs. Machinable mail pieces are dispatched
to delivery units as part of the Delivery Point Sequence (DPS) mail, while the
nonmachinable mail pieces are dispatched with the residual (non-DPS) mail that
required manual processing. Postal Service delivery cost witness Kelley (USPS-T-30)
provides separate delivery unit cost estimates for machinable and nonmachinable mail
pieces to First-Class Mail rate design witness Taufique (USPS-T-32).16
This approach differs from the one employed in past dockets, where separate
delivery unit cost avoidance estimates by rate category were provided. Under the
previous methodology, the delivery cost avoidances were derived by applying delivery
186
point sequence (DPS) percentages, by rate level, to the delivery costs. The DPS
percentages were by-products of the mail processing models. Both the Postal Service
and the Commission used this method to derive delivery cost savings by rate level.
For the current docket, the Postal Service rejects the past methodology as
lacking a sufficiently reliable foundation. There is no conclusive basis determining that
the DPS percentages actually vary among the machinable rate categories. USPS-RT-7
at 6; Tr. 35/11953. Furthermore, because the presort letters that fail to be DPS’d are
not individually marked to indicate their specific presort level, it would not be possible to
conduct a field study to estimate those percentages. By comparison, there is now a
conclusive basis for determining that machinability directly impacts delivery costs.17
Broadly speaking, there are no material differences in Docket Nos. R2005-1 and
R2006-1 in the way that the Postal Service disaggregates subclass estimates of
delivery cost. Rather than construct his own estimate of DALs, however, witness Kelley
updated the estimate derived on the record in Docket No. R2005-1. USPS-T-30 at 1-
14. (This has no impact on First-Class Mail, as no DALs are used by First-Class Mail.)
Witness Kelley also describes his treatment of DPS percentages in this docket. Id. at 5-
7. At the level of disaggregation employed in his direct testimony, witness Kelley notes
that his use of carrier cost systems rather than mail processing models as the source of
DPS percentages has only minimal impact because of the similarities in the estimates
16 Once again, the details of witness Kelley’s calculations and results are presented in USPS-LR-L-67. 17 The misuse of the DPS percentages methodology by several intervenor witnesses is discussed below.
187
from both systems. Id. at 7. The unit delivery costs by rate category estimated by
witness Kelley appear in his Table 1. Id. at 4, 17.
c. BRM cost support Witness Abdirahman (USPS-T-22) also provides the cost avoidance estimates
that underlie the Postal Service’s proposed rates for Qualified Business Reply Mail
(QBRM) letters and cards, and the various fees for Business Reply Mail BRM. His cost
studies are contained in USPS-LR-L-69. Witness Abdirahman examines the costs of a
handwritten, single-piece First-Class Mail reply mail piece and a preapproved,
prebarcoded single-piece First-Class Mail reply mail piece, and limits the QBRM cost
avoidance analysis to the costs incurred up to the point at which each mail piece
receives its first barcoded sortation on a BCS. USPS-T-22 at 16. Witness Abdirahman
relies upon the Business Reply Mail Practices Study (USPS-LR-L-34) of witness
Loetscher. USPS-T-28 at 1.
3. Proposals for classification change a. The Commission should recommend the shape-related classification changes proposed by the Postal Service. For ratemaking purposes, the First-Class Mail stream has long been divided into
two subclasses: Letters and Sealed Parcels on the one hand, and Cards on the other.
The Postal Service does not propose the establishment of any new First-Class Mail
subclasses in this docket. However, consistent with advances in the direction of more
shape-based mail processing technology and network processes,18 and advancements
18 See generally, Docket No. N2006-1, Direct Testimony of Pranab M. Shah on Behalf of United States Postal Service (USPS-T-1).
188
in shape-based rate design in previous rate dockets, witness Taufique (USPS-T-32)
proposes that rates within the Letters and Sealed Parcels subclass be designed to
move more in the direction of recognizing these shape-based differences. USPS-T-32
at 17-20.
As highlighted by witness Taufique, despite the relatively high cost coverage for
the subclass as a whole, preliminary cost data indicate that many First-Class Mail flats
and parcels do not come close to covering their costs. Tr. 16/4813. Although flats and
parcels comprise a relatively small proportion of the First-Class Mail stream relative to
letters, the combined annual volume of First-Class Mail flats and parcels, nearly five
billion pieces, exceeds that of many non-First-Class Mail subclasses. USPS-T-32 at 17.
Thus, even though limited to the Letters and Sealed Parcels subclass, the intra-
subclass consequences of the cost-to-rate disparity for both flats and parcels is not
insignificant. Accordingly, whether the mail pieces are single-piece or workshared,
witness Taufique proposes different rates for First-Class Mail letters, flats and parcels,
as those shapes are defined by the Postal Service.19 Witness Taufique proposes
initial-ounce rates for First-Class Mail letters, flats and parcels of 42 cents, 62 cents and
$1.00, respectively.
For single-piece mailers, de-averaging on the basis of shape adds an element of
complexity to the rate schedule. However, single-piece mail is overwhelmingly
machinable letter-shaped pieces, so the proportion of mail pieces for which senders will
need to determine whether the flat or parcel rates apply can be expected to remain
19 See Docket No. R2006-1 Request, Attachment B at 1, 3.
189
relatively small. Workshare mailers tend to either maintain sophisticated mail
preparation operations or hire independent contractors who do. Accordingly, they can
be expected to adjust quickly to new shape-based variations in the rate schedule.
Any added complexity is offset by the proposed elimination of the nonmachinable
surcharges currently applicable to some one-ounce single-piece and workshare letters
and flats,20 and the proposed elimination of the heavy-piece discount currently
applicable to workshare mail weighing more than two ounces. And, although de-
averaging that separates the impacts of shape and weight on costs may add complexity
to the rate schedule, this de-averaging allows for the First-Class Mail additional-ounce
rate reductions proposed by witness Taufique. In every instance, the proposed rate
differences are clearly identifiable, within the meaning of § 3622(b)(7).
Some mailers may be able to reconfigure flats to letters or parcels to flats and
avoid having to pay the higher postal rates. USPS-T-32 at 22-23. Those who are able
to reconfigure will pay lower rates. And, those who cannot convert to a less expensive
mail piece shape will benefit from witness Taufique’s proposal that the initial-ounce
rates for flats and parcels reflect relatively low percentages of the estimated shape-
based cost differences.
b. The Automation Carrier Route rate categories should be eliminated. Several factors combine to support witness Taufique’s proposed elimination of
the First-Class Mail Automation Carrier Route (ACR) categories in the Letters and
20 One-ounce letter-shaped pieces that, on the basis of their nonmachinability, do not qualify for the basic letter rate would be charged the proposed rate applicable to flats.
190
Sealed Parcels subclass and the Cards subclass. As witness Taufique explains,
delivery unit sortation is being supplanted more and more by delivery point sequencing
at destinating Processing & Distribution Centers. Automation Carrier Route volumes
have declined precipitously in recent years as Carrier Sequence Bar Code Sorters are
de-commissioned. The current Automation Carrier Route discount is only slightly larger
than the discount for the 5-digit Automation mail stream to which ACR mail has
migrated over the years, and with which its processing will be merged. With the
elimination of ACR rate categories, witness Taufique expects mail currently sorted to
carrier route to convert to 5-digit Automation. This would simplify mail preparation and
witness Taufique’s proposal to pass through more than 100 percent of the 5-digit
Automation cost avoidance will mitigate the impact of the loss of the larger ACR
discount for current ACR mailers. See USPS-T-32 at 20-21.
c. The Forever Stamp should be adopted.
For household mailers and small businesses that rely almost exclusively on
stamps to pay postage, the transition from one initial-ounce First-Class Mail rate to
another (most recently from 37 cents to 39 cents) can involve some inconvenience,
when their stamp inventories have not been fully depleted when rates change. While
this may not be the greatest inconvenience in customers’ lives, determining and
obtaining the necessary number of transitional “make-up” stamps to bridge the
difference between the value of “old” basic stamps and the “new” basic rate adds a level
of inconvenience that many postal customers would rather avoid. USPS-T-48 at 7, 14;
USPS Library Reference L-152, Insight #11. Several foreign postal administrations
191
have made available to their customers a non-denominated, non-expiring basic rate
postage stamp that is intended to eliminate such inconvenience. OCA Library
Reference 1. The Postal Service proposes to join them.
In conjunction with the implementation of Docket No. R2006-1 rates, witness
Taufique (USPS-T-48) proposes that the Postal Service be authorized to sell a non-
denominated, non-expiring stamp -- the “Forever Stamp.” The stamp would provide
unprecedented convenience to basic rate single-piece First-Class Mail users during the
transition from Docket No. R2006-1 rates to the rates that result from the next omnibus
rate proceeding, and beyond. USPS-T-48 at 5-6, 17. The Forever Stamp would serve
as valid postage for a one-ounce First-Class Mail letter-shaped piece at the time of use,
regardless of the First-Class Mail letter rate prevailing at that time. USPS-T-48 at 5,
17.21 The availability of such stamps at the beginning of future rate cycles can be
expected to help smooth the transition to new stamp prices when postal rates change.
Id. at 5-6. The Forever Stamp would be available for purchase at the basic First-Class
Mail one-ounce letter rate established in the instant case, presumably 42 cents, and
21 That is the intended purpose for the stamp and the Postal Service plan to promote that use. Nevertheless, as reflected in proposed DMM 601.1.10 (71 Fed. Reg. 56587 (September 27, 2006), to avoid penalizing customers who affix Forever Stamps to other mail pieces to pay postage, the Postal Service will tolerate such other uses by crediting customers with postage equivalent to the First-Class Mail initial-ounce letter rate prevailing at the time of use. Nevertheless, proposed DMM 604.1.10 -- as explained and elaborated upon in response to DBP/USPS-340-42, 366-68, 457, 510, 606, 616, 619(c), 620, 622, 643-44, 647-48, 657, 674, 677, 684, and 700; as well as DFC/USPS-80-83 -- reflects the Postal Service’s determination that Forever Stamps may be applied to mail matter other than one-ounce First-Class Mail letters.
192
would be available for purchase at that rate until the effective date of a subsequent rate
change. On that date, the Forever Stamp would be sold at the new prevailing rate. Id.
d. The proposed classification changes satisfy the criteria of § 3623(c).
Section 3623(c) of the Postal Reorganization Act requires the Commission to make
its decision on a proposed new mail classification or a classification change in
accordance with the following factors:
(1) the establishment and maintenance of a fair and equitable classification system for all mail;
(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 with extremely high degrees of reliability and speed of delivery;
(4) the importance of providing classifications which do not require an extremely high degree of reliability and speed of delivery;
(5) the desirability of special classifications from the point of view of both the user and of the Postal Service; and
(6) such other factors as the Commission may deem appropriate.
The establishment of separate classifications for letter, flat and parcel-shaped
single-piece First-Class Mail, and the establishment of the Business Parcels rate
categories would satisfy Criterion 1 -- fairness and equity. Due to their shapes, both
flats and parcels are significantly more expensive to process and deliver than letters.
The establishment of classifications within First-Class Mail that more closely recognize
the impact of shape upon cost leads to rates that distribute the burden of supporting the
postal system among First-Class Mail users in a more fair and equitable manner.
193
Mailers who prepare non-letter shaped-pieces (flats, parcels, or some other
shape) in some cases may have the ability and may find it economically feasible to
convert these pieces to shapes that qualify for lower rates. Both the Postal Service and
those First-Class Mail customers would benefit from such conversions. It is expected
that many mailers will continue to send flat or parcel-shaped First-Class Mail pieces.
The establishment of distinct classifications for this mail reflects the value of this mail to
the Postal Service and is consistent with consideration of Criterion 2, the value to the
people of different kinds of mail matter.
The proposed classification changes also would further satisfy Criterion 5 -- the
desirability of special classifications from the user’s and Postal Service’s point of view.
Greater recognition of the cost impact of shape on mailflows and mail processing
provides more accurate signals to mailers and provides an opportunity for them to
evaluate their mail preparation options in light of such information.
Elimination of the heavy piece discount for workshare mail pieces weighing more
than two ounces, and the nonmachinable surcharge for pieces weighing one ounce or
less, both in single-piece and workshare rate categories, are classification changes that
follow from the Postal Service’s proposed shape-based classification changes. Witness
Taufique explains why elimination of these classifications is desirable from the point of
view of the Postal Service, and how the resulting rate simplicity should be seen as
desirable from the point of view of the mailer. USPS-T-32 at 45. The proposed
changes in First-Class Mail rate design give greater recognition to shape, automation
compatibility, and mailer’s work in preparing mail for lower cost processing.
194
Accordingly, the Postal Service believes that the elimination of the heavy piece discount
is both fair and equitable. As a result, both Criteria 2 and 5 are satisfied.
Elimination of the Automation Carrier Route rate categories for letters and cards
also reflects consideration of Criterion 5. Automation of letters and cards has been a
great technological success and has allowed for greater control of postal costs. This is
critical to the continued viability of the Postal Service and many of its customers.
Technology has evolved to permit delivery point sequencing of letters and cards further
upstream at destinating mail processing centers, reducing carrier costs. USPS-T-32 at
20. Currently, the only letter-shaped mail processed at delivery units is the Automation
Carrier Route category. Merging this mail into the 5-Digit mail stream for delivery point
processing further upstream at larger Processing & Distribution Centers would be
desirable both from the perspective of the Postal Service and the mailers, within the
meaning of Criterion 5.
Finally, the establishment of a Forever Stamp classification would promote
several of the policies reflected in § 3623(c). Easing the ability of stamp-using retail
customers to transition from one basic First-Class Mail rate to the next would bring an
additional measure of fairness and equity to their dealings with the Postal Service.
USPS-T-32 at 47. The Forever Stamp would be desirable to retail customers and
would increase customer satisfaction, meeting the terms of Criterion 5. USPS-T-48 at
18-19. Criterion 6 permits the Commission also to take into account the likelihood that
the Forever Stamp can be expected to cause purchasers to view the Postal Service
195
more favorably. USPS-T-48 at 15-16; USPS Library Reference L-152, Insights #5 and
#14.
4. The Commission should embrace the Postal Service’s “de-linking” of Single-Piece and Presort First-Class Mail rate design. The history of First-Class Mail workshare rate design reveals that neither the
Postal Service nor the Commission has ever rigidly determined that any one rate design
approach resolved all material and relevant questions regarding workshare-related cost
differences or was chiseled in stone for all eternity. In Docket No. R97-1, the
Commission affirmed that the bulk metered mail (BMM) component of the single-piece
First-Class Mail stream was an appropriate benchmark from which to base the price
differentials for the First-Class Mail letter automation rate categories. See, PRC Op.
R97-1,at 292-94, ¶ 5089, 5092, 5097. The Commission affirmed that conclusion at
PRC Op. R2000-1 at 241, ¶ 5089.22
As explained by witness Taufique (USPS-T-32 at 12-17), there are compelling
grounds for a fresh review of the benchmark issue. It is noteworthy that there has never
been an actual bulk metered mail cost estimate. Given that Postal Service data
collection systems cannot isolate a cost estimate for BMM letters, a proxy has been
used. The mail processing unit cost estimate for First-Class Mail single-piece metered
letters has been relied upon as the proxy for BMM. See Docket No. R2001-1, USPS
Library Reference J-60, page 8; Docket No. R2005-1, USPS Library Reference K-48,
page 2. Docket No. R2000-1 provided a forum for the expression of divergent and
22 And was offered no compelling basis for re-examining the issue in Docket Nos. R2001-1 and R2005-1.
196
apparently irreconcilable opinions about which components of the widely diverse single-
piece mail stream should serve as a benchmark for estimating the cost differences
associated with worksharing (USPS-T-32 at 13), and which In-Office Cost System cost
pools are properly characterized as workshare-related. USPS-T-32 at 15. The unique
circumstances of Docket Nos. R2001-1 and R2005-1 muted some of the usual
evidentiary tussling among interested parties. And, although bulk metered mail has
been regarded as the type of single-piece First-Class Mail most similar in cost-causing
characteristics, other than the actual presortation, to presort letters and, therefore, most
likely to convert to worksharing, id. at 13, evidence presented in this docket support
reconsideration of whether BMM is still the primary source of conversion to worksharing.
National Association of Presort Mailers rebuttal witness Elizabeth Bell (NAPM-RT-1)
presents evidence that the single-piece First-Class Mail most likely to convert to presort
mail has the physical characteristics of collection mail, not bulk metered mail. This is
based on her daily experiences as the owner and operator of a presort bureau that is in
the business of converting single-piece mail to workshare mail. Tr. 38/12945-52. In a
similar vein, Pitney Bowes witness John Panzar (PB-T-1) makes clear that the BMM
benchmark is likely to understate, on average, the cost avoided by the Postal Service
when mailers presort at the margin. PB-T-1 at 36-37. See also Tr. 26/9307.23 The
Postal Service is not persuaded that all of the mail converting from single-piece to
23 Prof. Panzar also admits that, as a practical matter, no perfect solution to the efficient discount dilemma is likely, and therefore some level of trade-offs must be accepted. PB-T-1 at 37-39. With all of this in mind, however, Prof. Panzar ultimately endorses the Postal Service's de-linking proposal as a step in right direction. Id. at 29, 39.
197
presort fits the description of the mail converted by witness Bell’s presort bureau. But,
given the heterogeneity of both single-piece and presort mail, Postal Service rebuttal
witness Taufique (USPS-RT-18) is very insightful in reminding the Commission that the
development of a benchmark cannot be as precise as some would hope. Tr. 38/13346-
47.
As witness Taufique observes, the Postal Service has historically collected and
reported separate Cost & Revenue Analysis (CRA) data for Single-Piece and Presort
First-Class Mail for rate case base year purposes,24 and has routinely forecast test year
Single Piece and Presort cost estimates through its rollforward model. USPS-T-32 at
13-14. Much of the debate in previous dockets regarding workshare rate design has
focused on the degree to which some or all of the aggregate CRA cost differences
between Single Piece and Presort could be said to be related to worksharing. As
witness Taufique emphasizes, the aggregate differences inherent in Single Piece and
Presort CRA cost estimates reflect the impact of a host of characteristics and variables
beyond simply whether mail is presorted and/or barcoded. Id. at 14.
The option of presortation to obtain lower rates has been available to First-Class
Mail users for a long time and the markets for single-piece relative to presort entry have
been fairly stable. Accordingly, rather than continue to sift through Single Piece CRA
cost data to construct a bulk metered mail benchmark proxy, the Postal Service
proposes an alternative approach, based upon the goal of obtaining similar unit
institutional cost contributions from mail in the CRA Single Piece pool and mail in the
24 And separately for the Letters and Sealed Parcels subclass and the Cards subclass.
198
CRA Presort pool. Id. at 15. The objective of witness Taufique’s rate design approach
is to apply the pricing criteria in a manner designed to gradually achieve a rate design
paradigm in which both workshare and single-piece mail in the aggregate contribute
equally to institutional costs on a per unit basis. Id. at 15-16.
Witness Taufique explains:
The rate design for Single Piece First-Class Mail starts with the Test Year Before Rates (TYBR) rollforward costs for Single-Piece and Presort within the First- Class Mail Letters and Sealed Parcels subclass. A per unit contribution is simultaneously estimated for both Single Piece and Presort mail to meet the Letters [and Sealed Parcels] subclass revenue requirement. The target per- piece revenue estimate is then multiplied by the TYBR volumes to derive the target revenue for both Single Piece and Presort. USPS-T-32 at 21.
Thus, after establishing a revenue requirement for Single-Piece mail which meets
the unit contribution target, witness Taufique references rollforward Single-Piece First-
Class Mail costs and designs rates for the existing and proposed single-piece First-
Class Mail letter, flat and parcel rate categories. He uses the initial-ounce letter rate as
the benchmark for deriving single-piece discounts and surcharges. Id. at 16.
Likewise, after establishing a required revenue for Presort First-Class Mail that
meets the unit contribution target, witness Taufique references the CRA rollforward
costs for Presort and designs rates for the various existing and proposed workshare
rate categories. In contrast to past practice, he proposes that workshare rates not be
designed as discounts off the basic First-Class Mail single-piece rate. Instead, the
starting point, his benchmark for workshare rate design is internal to Presort -- the
Mixed AADC rate.
199
To be clear, only in this limited sense is the rate design for workshare mail “de-
linked” from that for single-piece mail. While it is useful to describe the proposed rate
design process as having “de-linked” Single-Piece and Presort mail on the basis of their
separately reported CRA cost data, single-piece and workshare First-Class Mail remain
inextricably linked components of the Letters and Sealed Parcels subclass and the
Cards subclass for purposes of institutional cost allocation, since one of the goals of
First-Class Mail rate design under this new approach is the balancing of the unit
institutional cost contributions of Single-Piece and Presort to meet the revenue
requirement target for that subclass, as determined by witness O’Hara (USPS-T-31).25
Witness Taufique emphasizes that equalizing unit contribution between single-piece
and workshare mail is a way of maintaining fairness within the First-Class Mail rate
structure and maintaining the link between the two components of the subclass. As a
result, discounted pieces pay unit contribution comparable to that paid by the single-
piece component. Tr. 16/4799-800; see also Tr. 16/4794-95.
Consistent with past practice, witness Taufique’s determination of incremental
rate differences for successive levels of presort and other characteristics of workshare
mail is derived on the basis of Presort First-Class Mail CRA cost data. Id. at 16-17.
Given the heterogeneity of the First-Class Mail Letters and Sealed Parcels
subclass (including single-piece and presort), the increasing maturation of the market
for presort conversion of lower-cost mail pieces most often sent by large mailers, the
25 The Commission should regard any suggestion that the Postal Service is treating single-piece and workshare mail as separate First-Class Mail subclasses or “quasi-
200
increased diversity in the population of mail that is converting or is on the margin of
converting to workshare status, and the long-standing debate surrounding the
identification the appropriate benchmark conversion piece, a review of the workshare
rate design benchmark issue is in order. The Postal Service’s de-linking proposal for
First-Class Mail, relying on data from the CRA, offers a viable and practical alternative
to continued reliance on the bulk metered benchmark. In addition to reflecting the
market trend, the Postal Service's approach has a number of benefits. It is a
methodology that is reproducible from one rate case to the next; it is easily verifiable
and transparent. Also, it has the virtue of relying on a robust and well-established data
source, the Cost and Revenue Analysis system. Tr. 38/13349.
subclasses” for rate design purposes as nothing more than a “red herring.” See Tr.
201
5. The Commission should recommend the First-Class Mail rates proposed by the Postal Service. a. The Postal Service’s initial ounce rates for single-piece letters, flats
and parcels merit approval. The most visible postal rate is the single-piece initial-ounce rate for the First-
Class Mail Letters and Sealed Parcels, currently 39 cents. Postal Service witness
Taufique proposes that it be increased to 42-cents and applied only to the first-ounce of
machinable single-piece letters. This rate, in combination with the various related rate
differentials based upon such factors as shape, weight, prebarcoding, presorting and
machinability, allows the Postal Service to achieve the revenue target proposed by
witness O’Hara (USPS-T-31) in a manner consistent with the policies of the Act. The
proposed three-cent increase in the basic First-Class Mail rate from 39 to 42 cents is a
7.7 percent increase. USPS-T-32 at 21-22. This continues the trend of maintaining
First-Class Mail stamp rate increases below inflation, as measured by Consumer Price
Index (CPI-U). Tr. 32/10707.
As explained by witness Taufique (USPS-T-32 at 21), in light of the revenue
requirement requested in this proceeding, several factors combine to reinforce the
fairness and equity of the proposed increase from 39 cents to 42 cents. First is the
whole-cent constraint, which the Commission and the Postal Service have consistently
agreed, makes it impractical for the basic rate used by the general mailing public to be
anything other than rounded to a whole integer.26 Second is that the alternatives
16/4796, 4804.
26 See PRC Op. R97-1, Vol. 1 at 275, ¶5047; PRC Op. R94-1 at V-2, ¶5005; PRC Op. R87-1 at 438, ¶5083.
202
produce unfair and inequitable allocations of institutional cost. Proposal of a 43-cent
rate essentially would unfairly and inequitably relieve other mail classes and services
from having to bear equitable shares of institutional cost burden. On the other hand, a
41-cent proposal would unfairly require that other more price-sensitive and competitive
mail classes bear unreasonably large percentage rate increases. A 41-cent rate would
also shift more institutional cost burden onto the presorted component of First-Class
Mail, which bears an already very high institutional cost allocation. Tr. 32/10709-10. In
similar circumstances, the Commission has had to balance similar considerations. See
PRC Op. R97-1, at 275, ¶5047; also PRC Op. R94-1 at V-2-3.
Witness Taufique proposes de-averaging of First-Class Mail rates by shape and
asks the Commission to recommend initial-ounce rates for flats and parcels of 62 cents
and $1.00, respectively. These proposed rates only pass through 55 percent of the
letter/flat cost differential and 15 percent of the letter/parcel cost differential for lighter-
weight flats and parcels. USPS-T-32 at 18, 23. Witness Taufique’s proposed rates
recognize some, rather than all of the apparent differences in costs between letters and
flats/parcels. He strikes a proper balance between the twin goals of (a) improving cost
and rate relationships within the diverse Letters and Sealed Parcels subclass, and (b)
mitigating the shock to flat and parcel mailers that would result from a full recognition of
such shape-based cost differences in rate design. His tempering of increases that
would otherwise be suggested by the cost data reflects consideration of the effect of
extraordinarily high rate increases on current First-Class Mail flat and parcel mail users,
and is consistent with § 3622(b)(4). At the same time, witness Taufique prudently
203
proposes workshare rates for flats and parcels that reflect less than the full cost
differences, in light of the novelty of his rate design within the subclass and the
uncertainty about volume impacts. Id.
b. The Postal Service rate proposals for the remaining First-Class Mail single-piece and nonautomation presort letter categories should be recommended.
i. Qualified Business Reply Mail Letter Rate At pages 24-25 of USPS-T-32, witness Taufique testifies that QBRM is clean,
prebarcoded single-piece mail and incurs less cost than non-barcoded mail. Using
witness Abdirahman’s estimated 1.495-cent unit cost difference (USPS-T-22 at 40-41)
between handwritten single-piece First-Class Mail and QBRM as a starting point,
witness Taufique takes into account the current 3.2-cent discount and proposes a 2.5-
cent QBRM discount. This represents a 167 percent passthrough of witness
Abdirahman’s cost avoidance estimate. The resulting QBRM initial-ounce rate of 39.5
cents is 10.3 percent higher than the current rate and above the systemwide average in
terms of percentage rate increase. By recognizing cost savings associated with this
mail, the Postal Service is able to permit a broader base of customers who already
benefit from rate averaging within the single-piece mail stream to more directly share in
the benefits of automation (USPS-T-32 at 25). However, in light of witness
Abdirahman’s QBRM cost difference estimate, witness Taufique is compelled to
propose some reduction in the current 3.2-cent discount. This brings the QBRM rate
more in line with the measured cost avoidance related to the QBRM piece.
204
ii. Nonautomation presort rates for letters and flats
Witness Taufique proposes that the current 1.9-cent rate differential between the
single-piece and non-automation presort letters be increased to 2.0 cents, resulting in
an increase from 37.1 to 40.0 cents for the non-auto presort initial-ounce rate. De-
averaging for shape, he proposes a 51.9-cent initial-ounce rate for flats. USPS-T-32 at
37.27
Taking into account his Mixed AADC benchmark for workshare rate design, the
1.87-cent cost difference between that Mixed AADC letters and Non-Automation Presort
letters,28 and the Postal Service’s policy of encouraging greater worksharing, witness
Taufique proposes that the current 1.9-cent difference between the single-piece rate
and the non-auto presort rate remain approximately the same. USPS-T-32 at 37-38.
Witness Taufique passes through 40 percent of letter/flat cost differential
measured by witnesses Smith (USPS-T-13) and Kelley II (USPS-T-30) to derive an
11.9-cent non-auto presort letter/flat rate differential. USPS-T-32 at 33-34, 37-38.
Adding this amount to his proposed 40-cent non-auto presort rate, he obtains his
proposed non-auto presort flat rate.
The proposed 40-cent nonautomation presort letter rate is two cents below the
proposed single-piece rate of 42 cents and 5.4 cents above the highest Automation
Letter rate of 34.6 cents for Mixed AADC Letters. Witness Abdirahman measures the
additional cost of nonautomation machinable letters at 1.314 cents. USPS-LR L-48,
27 The Postal Service does not propose the establishment of a nonautomation presort parcel rate category. 28 As measured by witnesses Abdirahman (USPS-T-22) and Kelley (USPS-T-30).
205
page 29. Witness Taufique uses a passthrough of 290 percent of this measured
savings over the Mixed AADC rate for Automation Letters to propose the 40-cent rate.
The objective of this approach is to maintain the current rate relationship with the basic
42-cent letter rate. USPS-T-32 at 38.
The Postal Service seeks to encourage pieces that are compatible with its
increasingly automated work environment and prefers to maintain a rate relationship
between nonautomation presort mail similar to the relationship that it has had
historically with the Single-Piece mail.29
For operational reasons, the Postal Service is changing the presort requirements
for machinable letters in this rate category. Currently, at least 3-Digit sortation is
required. The Postal Service now proposes that AADC sortation be required. For non-
machinable letters and flat-shape pieces, 5-Digit would remain the required presortation
level. These proposed rates and mail classification changes promote the automation
goals of the Postal Service and should be recommended by the Commission.
iii. The proposed additional-ounce rate reductions are appropriate. Witness Taufique proposes that the additional-ounce rate for single-piece and
nonautomation presort First-Class Mail be decreased from 24 and 23.7 cents,
respectively, to 20 cents for both categories and for all shapes. As witness Taufique
explains, these rate reductions are one of the benefits associated with shape-based rate
de-averaging. USPS-T-32 at 25.
29 Over the last few dockets, the rate difference between nonautomation presort and single-piece has ranged from 1.8 cents to 2.5 cents.
206
Additional-ounce rate design has long served as a mechanism for managing the
overall First-Class Mail revenue requirement. Revenue form First-Class Mail additional
ounces comprised 7.5 percent of total Base Year revenue for the Letters and Sealed
Parcels subclass, or approximately $3.9 billion. Id. Under witness Taufique’s proposed
rates, Test Year additional-ounce revenue would be $2.9 billion. This amount exceeds
total revenues for many non-First-Class Mail subclasses. First-Class Mail additional
ounces should not be called upon to bear an even greater revenue burden.
iv. Elimination of the nonmachinable surcharge is consistent with shape-based rate differentials. The shape-based rate design proposed by witness Taufique permits the Postal
Service to propose modification of the nonmachinability criteria in Domestic Mail
Classification Schedule § 232 for Letters and Sealed Parcels subclass mail. See
Docket No. R20056-1, USPS Request, Attachment B at 5 (May 4, 2006). This,
however, does not eliminate the justification for assessing additional postage to cover
the significant additional mail processing costs that nonmachinable pieces tend to
generate and the additional value from the ability to send more material within a heavier
weight piece.
To minimize the complexity in the proposal of letter, flat, and parcel shape-based
rate categories within the Letters and Sealed Parcels subclass, the Postal Service
proposes that, in lieu of a surcharge on the initial-ounce rate for nonmachinable one-
ounce letter-shaped pieces, that nonmachinable letters should simply be assessed the
initial-ounce rate proposed for flat-size pieces. Likewise, rather than complicate the rate
schedule with a specific surcharge for nonmachinable one-ounce flats, witness Taufique
207
proposes that that such flats be required to pay the initial-ounce rate proposed for
parcels. Tr. 16/4809, 4812. For reasons explained below in subsection VI.B.5.c.iii of
this Brief relating to the proposed Business Parcel rate category, witness Taufique
proposes retention of a surcharge for nonmachinable parcels.
c. The Postal Service First-Class Mail rate design for bulk automation-based worksharing letter categories affirms the importance of automation.
In the development of First-Class Mail worksharing rate incentives, the
Commission has enunciated certain guiding principles. Among them is the notion that
the relevant mailstream be examined and that pertinent cost data be used in a manner
appropriate to the characteristics of the mail being examined. See, PRC Op. R84-1,
Vol. 1 at 361; PRC Op. R80-1, Vol. 1 at 288.
The statutory pricing criteria call for a balanced consideration of a number of
factors, including fairness and equity, and simplicity in the rate structure and impact of
rate changes on mailers. Witness Taufique is cognizant that, in the absence of other
compelling considerations, the objective should be to pass through approximately 100
percent of the costs avoided relative to the appropriate benchmark. See PRC Op.
MC95-1, at IV-135, ¶4299. And, as noted earlier, witness Taufique advocates that the
Commission use the internally derived rate for Mixed AADC automation letters as a
benchmark for deriving the cost differences associated with finer levels of sortation.
However, given the discounts implied by Abdirahman’s cost analysis, the need to send
an appropriate signal to mailers, and the adverse impact that an immediate and material
reduction in worksharing incentives could have on mailer and postal operations, witness
208
Taufique proposes discounts for Automation 5-Digit letters and cards that exceed the
cost differential measured by witness Abdirahman. As a result, witness Taufique’s
Automation category rate design is not tied strictly to avoided costs, but incorporates
measured cost avoidances within the context of balancing a number of ratemaking
goals.
Automation mail is predominantly made up of Automation Letters, but also
includes Automation Flats, mail that would qualify for the newly proposed category of
First-Class Mail Business Parcels, and Nonautomation Presort. With the creation of
the First-Class Mail Business Parcels rate category, Nonautomation Presort mail is
proposed to include only letter and flat-shaped pieces.
Calculation of revenues as a percent of volume variable costs indicates
that the automation mail stream provides a relatively high contribution to the Postal
Service’s institutional costs. In the FY 2005 Base Year (which does not include the
effect of either the R2005-1 rate increases or the R2006-1 proposed rate increase), that
implicit coverage was 286.7 percent, using the PRC version of the CRA. USPS LR-L-
93, Reports\PRCBYOS, tab Page 8”, cells D15/cell D16. Using Postal Service costs,
that implicit cost is nearly 301 percent. USPS LR L-5, BYOSCRA, tab “Cost 1”, cell
P12.
Cost coverage is traditionally not calculated below the subclass level, but the
implicit cost coverage for Presort (or workshare) Letters has been significantly higher
than the comparable implicit Commission recommended cost coverage of 265.9 percent
209
in Docket No. R2001-1. The comparable implicit cost coverage for Presort (workshare)
letters in Docket No. R2005-1 was 312.1 percent.30
i. Automation Letter Rates
There are five rate categories each for prebarcoded letters: Mixed AADC, AADC,
3-Digit, 5-Digit, and Carrier Route. The Postal Service proposes to eliminate the Carrier
Route category.
To be eligible for the 3-Digit and 5-Digit categories, letters must be properly
barcoded and part of a mailing of at least 500 pieces. To qualify for either the 3-Digit or
the 5-Digit rate, the mailing must have at least 150 pieces destined to the same 3-Digit
or 5-Digit ZIP Code, respectively. USPS-T-33 at 31-32. Pieces that do not meet the
150-piece minimum qualify for the Mixed AADC or AADC rate.31
As witness Taufique explains, the proposed rate for Mixed AADC is an internally
derived number based on leakages and additional costs (for flat and parcel-shaped
pieces, nonautomation presort rate letters, for example) and the estimated intra-class
revenue requirements for the Presort component of the Letters and Sealed Parcels
subclass. USPS-T-32 at 30. He calculates cost savings, as well as discounts, based
on an internal benchmark -- the Mixed AADC Automation Letter rate within Presort
letters. Id. Thus, neither the Bulk Metered Mail benchmark, nor the first-ounce single-
piece rate is used to estimate the proposed rates for Automation Letters.
30 PRC Op. R2005-1: 312.1 percent. (Revenues: PRC Op. R2005-1, Appendix G, p. 2; costs: PRC Op. R2005-1, Appendix F, p. 1.)
31 One could view the Mixed AADC rate as the bulk residual barcoded rate.
210
Witness Taufique’s passthroughs and the discounts underlying his proposed
rates were selected to balance several goals, including: (1) achieving the cost coverage
target provided by witness O’Hara (USPS-T-31); (2) recognizing the value of mailer
worksharing; (3) avoiding changes in discount levels which result in unduly disruptive
rate impacts; (4) acknowledging the importance of mailer barcoding and presortation in
overall postal operations; and (5) recognizing that, overall, automated letters are a low
cost, high contribution mail stream. Id.
Had he adhered to a strict 100 percent passthrough of the 1.3-cent measured
cost savings for 5-Digit Automation letters, the proposed increase in the 5-Digit
Automation rate would have been 8.5 percent, higher than all other Automation letter
rate categories. Since the elimination of the Carrier Route category is expected to
cause that mail to shift to 5-Digit, witness Taufique’s 146 percent passthrough for
Automation 5-Digit eases the rate impact of the transition of Carrier Route mail to 5-
Digit. Id. at 31.
Such an approach is consistent with Commission precedent. Although it has
generally preferred 100 percent passthroughs, the Commission has made clear that:
[C]ircumstances may exist where strict adherence to this policy is not appropriate, and when competing policies may weigh more heavily in the decision making process.
The Commission is required to consider all of the factors of section 3622(b) when reviewing appropriate discount rates for workshared mail. . . . [D]ifferent factors receive different weights depending on the specific circumstances of the rate category under review. For instance, in PRC Op. R2000-1 . . . , where the Commission endorsed passthroughs at 100 percent of avoided costs, the Commission also recommended a discount for carrier route letters that passed through 67 percent of avoided costs to prevent a disruptive effect on the rate schedule. In contrast, the Commission
211
recommended a discount with a greater than 100 percent passthrough for presort letters to moderate the impact of its recommendation to shrink that discount from 2.5 cents to 2.0 cents. In both these instances, other factors outweighed the benefits of strictly adhering to a 100 percent passthrough policy. The Commission concludes that establishing discounts to pass through 100 percent of avoided costs is an appropriate policy, but that other considerations sometimes preclude its application.
PRC Op. R2001-1 at 72-73, ¶¶3063-64.32 Witness Taufique passes through 100
percent of cost savings to propose the discounts and rates for the AADC and 3-Digit
presort levels, based not only on the measured costs of the presort levels, but also
based on consideration of the impact on mailers, and the current operational
environment for processing letters. He passes through 146 percent of cost savings
for 5-Digit Automation Letters in order to mitigate the impact of an 8.5 percent
increase in this rate and an almost 10 percent increase on the Automation Carrier
Route Letters pieces expected to shift to 5-Digit. USPS-T-32 at 32. He is also
swayed by postal mail processing operational policy favoring 5-Digit presort of
Automation rate mail. Id. at 32-33.
32 Even APWU witness Kathryn Kobe recognizes in her rate design that setting rates at greater than 100 percent passthroughs can be consistent with the policies of the Act. See APWU-T-1 at 10.
212
ii. Automation Flats Rates
There are currently four rate categories for prebarcoded flats: Mixed ADC, ADC,
3-Digit and 5-Digit. Based on the data provided by witnesses Smith (USPS-T-13) and
Kelley II (USPS-T-30) for mail processing and delivery unit costs by shape, on average
presort flats cost 30 cents more to process and deliver than letters. Witness Taufique
uses a 40 percent passthrough to propose a differential between Mixed AADC Letters
and Mixed ADC Flats of 11.9 cents, which is added to the Mixed AADC Letter rate of
$0.346. The resulting rate proposed for Mixed ADC Automation Flats is $0.465. As he
explains, this is an 11.5 percent increase from the current first-ounce Mixed ADC rate
for Automation Flats. To develop rates for the various Automation flats presort tiers,
witness Taufique uses witness Miller’s (USPS-T-20) unit cost estimates for the various
presort levels. USPS-T-32 at 34. The resulting rates are fair and equitable.
iii. Business Parcels
Witness Taufique designs the rates for this new category by using the estimated
average mail processing and delivery cost differences between presorted letters and
parcels. First-Class Mail parcels (currently in the presort category, primarily in
Nonautomation Presort), on average, cost $ 3.368 to process and deliver -- compared
to automation letter mail pieces at $ 0.087. See USPS-T-13, Attachment 14; USPS
Library Reference L-53; USPS Library Reference L-99, Tr. 19/6810-17; USPS Library
References L-184 and L-185; response of witness Marc Smith to POIR 16, Question 1;
testimony of witness Kelley II, USPS-T-30. Witness Taufique adds only 15 percent of
the $ 3.28 difference (48.9 cents) to the Mixed AADC Automation Letter cost to
213
establish an AADC Parcel benchmark from which to derive rates for finer presort levels.
USPS-T-32 at 36. Since the Postal Service is not proposing a Mixed ADC rate for the
First-Class levels, this benchmark is used to derive the presort level rates for ADC, 3-
Digit and 5-Digit using witness Miller’s (USPS-T-20) cost estimates.
First-Class Mail Business Parcels that do not meet specified automation
requirements are subject to a proposed nonmachinable surcharge of five cents, with the
exception of parcels that are sorted to the 5-Digit level or paying single-piece rates.
This nonmachinable surcharge is derived by using the Parcel model estimated by
witness Miller (USPS-T-20) and proposing a 15.5 percent passthrough of costs derived
from witness Miller’s (USPS-T-20) parcel cost model. USPS-T-32 at 37. First-Class
Mail Business parcels that are nonbarcorded, weigh less than two ounces or are odd
shaped (such as tubes) would be required to pay a nonmachinable surcharge. These
characteristics would make them non-machinable on the Automated Package
Processing System (APPS). If these pieces are sorted to 5-Digit level, then sorting on
APPS would not be required.
214
iv. Additional-Ounce
Witness Taufique proposes that a uniform additional-ounce rate of 20 cents be
applied to the First-Class Mail Letters and Sealed Parcels subclass, except for the
Automation letter rate categories. For Mixed AADC, AADC, 3-Digit and 5-Digit
Automation letters, where shape and nonmachinability issues do not arise, he proposes
a lower additional-ounce rate of 15.5 cents. USPS-T-32 at 39; Tr. 16/4819-20. These
beneficial improvements to the rate schedule should be recommended by the
Commission.
v. Heavy-Piece Deduction
For the reasons discussed above in section VI.B.3.a relating to shape-based rate
design, witness Taufique proposed that the incremental discount for automation pieces
weighing more than two ounces be eliminated. See also USPS-T-32 at 45-46.
vi. Nonmachinable Surcharge
The shape-based rate design proposed by witness Taufique permits the Postal
Service to propose modification of the nonmachinability criteria in Domestic Mail
Classification Schedule § 232 for Letters and Sealed Parcels subclass mail. See
Docket No. R2006-1, USPS Request, Attachment B at 5 (May 3, 2006). This, however,
does not eliminate the justification for assessing additional postage to cover the
significant additional mail processing costs that nonmachinable pieces tend to generate.
To minimize the complexity in the rate schedule already resulting from the proposal of
letter, flat and parcel shape-based rate categories within the Letters and Sealed Parcels
subclass, the Postal Service proposes that, in lieu of a specific surcharge on top of the
215
initial-ounce rate for nonmachinable letter-shaped pieces, those nonmachinable letters
should simply be assessed the initial-ounce rate proposed for flats. For the reasons
discussed at pages 45-46 of USPS-T-32, in relation to the nonmachinable surcharge for
single-piece First-Class Mail letters, the Postal Service proposes that the surcharge
which currently applies to nonmachinable automation rate and nonautomation presort
rate category letters be eliminated and that such pieces simply be required to pay the
corresponding initial-ounce rate for flat-shaped pieces.
d. The Cards subclass
Witness Taufique’s proposed rate increases for the Cards subclass are
somewhat higher than the increases he proposes for letters, 12.5 percent compared to
7.7 percent. This results largely from the fact that, compared to letters, the absolute
increases for cards are applied to lower base rates, starting at the single-piece level.
However, as explained at page 41 of USPS-T-32 and as seen below, witness Taufique
is able to mitigate this impact in his workshare card rate design.
i. Single-Piece Card Rate
Witness Taufique proposes to increase the basic card rate from 24 to 27
cents. Single-piece cards account for about 51 percent of card revenues. A three-cent
increase is the amount consistent with the subclass cost coverage target. USPS-T-32
at 40. His rate design, if adopted, would retain the current 15-cent difference between
the basic letter and cards rates and maintain the traditional approximately 2:3
relationship with the basic letter rate. For the sake of simplicity and convenience for the
general mailing public, the proposed increase also reflects an application of the whole-
216
cent constraint. USPS-T-32 at 39-40. The proposed rate of 27 cents represents an
increase of 12.5 percent. The proposed increase imposes upon card mailers no more
than a fair and equitable contribution to the First-Class Mail revenue requirement. Id. at
40.
ii. Qualified Business Reply Mail Card Rate
Using the cost analysis of witness Abdirahman (USPS-T-22) as a starting point,
witness Taufique proposes that the current 21.1-cent QBRM card rate be increased to
24.5 cents. Assuming adoption of the proposed 27-cent basic rate for cards, and the
42-cent basic rate for letters, and the 39.5-cent rate for QBRM letters, a 24.5-cent rate
for QBRM cards would result in identical QBRM discounts for letters and cards. USPS-
T-32 at 40.
As with QBRM letters, to qualify for this QBRM card rate, prebarcoded,
automation-compatible mail piece designs must be pre-approved by the Postal Service.
For this docket, the Postal Service is proposing a rate of 24.5 cents for QBRM cards.
This 24.5 cent QBRM card rate reflects a reduction in the current 2.9-cent QBRM
card discount to 2.5 cents, which matches the proposed 2.5 cent QBRM letter discount.
Witness Abdirahman’s cost study (USPS-T-22 at 21) shows a cost avoidance of 1.495
cents, applicable to both letters and cards. Witness Taufique passes through 167
percent of this measured cost avoidance for both letters and cards. USPS-T-32 at 40.
iii. Nonautomation Presort Card Rate
To mitigate the impact of the 12.5 percent increase in the basic card rate (from
24 to 27 cents) on non-auto presort cards, witness Taufique proposes an increase in the
217
degression between the single-piece card rate and the nonautomation presort rate from
the current 0.7 cent difference to 2.9 cents, resulting in 24.1-cent rate for nonautomation
presort cards. This works out to an 8.1 percent rate increase for this category. USPS-
T-32 at 41. Otherwise, as indicated below, witness Taufique proposes that the current
discount relationships for other Card rate categories be maintained at their current
levels. USPS-T-32 at 41.
iv. Automation Card Rate Categories
As with letters, there are five rate categories for prebarcoded cards: Mixed
AADC, AADC, 3-Digit, 5-Digit, and Carrier Route. Witness Taufique proposes
elimination of the Carrier Route category. As with letters, a card mailing must consist of
500 or more prebarcoded pieces to be eligible for the AADC, 3-Digit and 5-Digit rates.
Further, to be eligible for the AADC, 3-Digit or 5-Digit rate, the mailing must have at
least 150 pieces to the same AADC, 3-Digit or 5-Digit ZIP Code/scheme destination.
Pieces that do not meet the 150-piece volume minimum pay the Mixed AADC rate.
Thus, the Mixed AADC automation rate can be viewed as a rate for bulk residual
prebarcoded pieces. No changes in the qualifying piece minimums are proposed.
The cost analysis performed for this docket indicates the savings for the AADC,
3-Digit and 5-Digit automation tiers are now smaller than the current discounts for these
tiers (USPS-T-22 at 15). For example, the cost data suggest a 1.4 discount from the
nonautomation presort rate of 24.1 cents. Using a passthrough of 134 percent, witness
Taufique maintains this discount at the current level of 1.9 cents. USPS-T-32 at 42-43.
218
Similarly, his discount for AADC cards is based on a 108 percent passthrough. He
proposes retention of the current 0.4 cent rate differential between the AADC
automation rate and the 3-Digit rate, notwithstanding the 0.225-cent measured cost
difference. And, his proposed 5-Digit rate represents the maintenance of the existing
difference of 0.7 cents between 3-Digit and 5-Digit cards, notwithstanding the 0.735
cents measured cost difference between the two automation tiers. USPS-T-32 at 43-
44.
If the proposed workshare discounts for AADC, 3-Digit and 5-Digit automation
cards were tied strictly to avoided costs, the proposed discounts would be reduced.
Instead, as was the case with letters, the passthroughs and the discounts that underlie
the proposed rates were selected to balance several goals, including: (1) achieving the
cost coverage target provided by witness O’Hara, (2) recognizing the value of mailer
worksharing, (3) avoiding changes in discount levels which result in unduly disruptive
rate impacts, and (4) acknowledging the importance of mailer barcoding in overall postal
operations. USPS-T-32 at 41-42. As a result of witness Taufique’s rate design, the
Postal Service’s rate proposal in this docket will maintain the AADC, 3-Digit and 5-Digit
discounts at their present levels for cards.
The overall result is a rate schedule for the Cards subclass that is fair and
equitable and that should be approved by the Commission.
219
2. The Commission should reject the alternative intervenor First-Class Mail rate proposals
a. APWU’s 41-cent basic letter rate proposal does not reflect consideration of relevant factors
In her testimony, APWU witness Kathryn Kobe reviews the Postal Service’s First-
Class Mail Letters and Sealed Parcels subclass rate design and proposes an alternate
rate structure that, in her view, “could result if discounts equal to . . . costs avoided
were used to determine First Class Presort letter rate.” APWU-T-1 at 3. Based on her
review, witness Kobe argues that a 41-cent basic rate could be achieved, in conjunction
with higher presorted First-Class Mail rates. Id. at Table 2. Her proposal is premised
on an assumption that the primary goal of rate design is the development of workshare
discounts that are no greater than costs avoided when a customer prepares mail to
meet specific workshare rate requirements. This theory, often referred to as Efficient
Component Pricing, pushes economic efficiency to the forefront and, when considered
in isolation, does not result in an appropriate consideration of the pricing criteria
enumerated in § 3622(b).33
Witness Kobe, herself, recognizes that economic efficiency “may not be the only
criterion for a decision” (Tr. 20/7131) and takes steps to mitigate the “rate shock”
implied by adherence to her overriding rate design principle. APWU-T-1 at 10.
Unfortunately, her proposal still fails to consider many of the factors that have led the
Postal Service to its First-Class Mail rate design in this case.
33 Postal Service rate design witness Taufique discusses reasons why use of the bulk metered mail benchmark advocated by witness Kobe may no longer be appropriate. USPS-T-32 at 13-14; See also, Tr. 38/13346-48.
220
The Postal Service did not reach its 42-cent basic First-Class Mail rate without
careful consideration. The basic First-Class Mail rate, given its widespread use by
general public, is subject to careful scrutiny. Over time, the Postal Service has made
policy choices that have worked to keep single-piece First-Class Mail as affordable as
possible, given the often competing policy considerations and the need to meet the
financial requirements of the Postal Service. As explained by Postal Service rebuttal
witness Maura Robinson, since the implementation of Docket No. R94-1, through the
anticipated implementation date of this docket, the basic rate will have increased by less
than the rate of inflation consistent with the Postal Service’s policy goals. Tr. 32/10707.
The entire process of rate design involves making difficult choices and cannot be
evaluated without reviewing all of the factors affecting a subclass of mail. PRC Op.
R2000-1 at 235, ¶5064. As Postal Service witness O’Hara explains, the fundamental
goal of pricing is to meet the Postal Service’s revenue requirement through the
application of the statutory pricing criteria. The basic First-Class Mail stamp rate plays a
key role in meeting the revenue requirement, contributing $15.9 billion, or over 22
percent of the Postal Service’s revenue in the base year, more than the combined
revenue from all non-First-Class Mail subclasses, excluding Standard Mail. USPS-LR-
L-77. However, in proposing the basic rate of 42 cents, the Postal Service did not
examine this rate in isolation. The Postal Service considered a panoply of factors,
including the historical relationships between costs and pricing, rates and rate
relationships and the policy choices embedded in its proposals.
221
One of the most striking characteristics of First-Class Mail Letters and Sealed
Parcels subclass is the success that the Postal Service has achieved in controlling unit
costs, particularly for presorted First-Class Mail. From FY 2000 to 2005, single-piece
First-Class Mail unit volume-variable costs have increased ten percent, while the
increase in per-piece revenue has been slightly less, about nine percent. This
demonstrates the Postal Service’s commitment to affordable single-piece First-Class
Mail prices. However, the success in controlling presorted First-Class Mail costs has
been nothing short of striking – over the same time period, unit costs have increased
only three percent while per-piece revenue has increased by 11 percent. Tr. 32/10709.
It is within this context that the Postal Service has developed its rate proposals and asks
the Commission to evaluate alternative First-Class Mail rate designs.
The pursuit of economic efficiency is laudable. And the Postal Service has a
long history of presenting and supporting rate proposals that are consistent with all of
the pricing criteria of the Act and that send economic signals to customers about the
value of worksharing activities. However, in the context of rate design, application of a
sole pricing theory -- even if that theory is economic efficiency -- cannot trump the
application of reasoned evaluation of the pricing criteria. The Commission has
cautioned in the past against the elevation of economic efficiency to a preeminent status
in determining cost coverages. See PRC Op. R97-1 at 236-37, ¶¶4027-29. Such
caution is appropriate in rate design as well. Witness Kobe’s proposed presorted First-
Class Mail rates result in greater-than-average price increases for a customer group
(presorted First-Class mail customers) that has perhaps the most stable costs. The
222
Postal Service submits that it is difficult to conclude that such a result is fair and
equitable. Witness Kobe does not disagree. Tr. 20/7131. It also is difficult to conclude
that single-piece First-Class Mail letters have been unfairly burdened with institutional
cost. As Postal Service First-Class Mail rate design witness Taufique notes, the
proposed rate increase for this rate category is only 7.7 percent, this is substantially less
than the proposed increase for any non-First-Class Mail subclass. Compare Exhibit
USPS-31D to USPS-T-32 at 3.
In developing its prices and presenting them here, the Postal Service has not
shied away from hard choices in its goal of proposing prices that, in its view, most
reasonably balance the relevant statutory pricing criteria. The Commission must also
make the same hard decisions. The visibility of the single-piece basic rate ensures
serious public scrutiny. Given the equity considerations within First-Class Mail, the
financial well-being of the Postal Service requires that this rate be increased to 42
cents.
b. GCA’s alternative rate design proposals should be rejected.
Greeting Card Association witness Clifton (GCA-T-1) appears to offer the
Commission a menu of rate design options. They are designed to either:
(a) increase Standard Mail rates sufficiently to reduce the rate increase on First-Class single piece letters from 42 to 41 cents; or
(b) increase Standard Mail rates sufficiently to reduce the rate increase
on all First-Class mail first-ounce rates by one cent.
GCA-T-1 at 59. These options are driven by Dr. Clifton’s belief that the Postal Service’s
estimated elasticities substantially understate the potential First-Class Mail volume
223
response to a price change. Id. As discussed above in Section III of this Brief, Dr.
Clifton’s recommendation to the Commission relies on a fatally flawed econometric
model. It also is simply bad rate policy.
In reviewing Dr. Clifton’s proposals, it is difficult, at best, to determine what he is
proposing and how it would affect First-Class Mail and Standard Mail revenue and rate
design. In the first place, his proposal presents the Commission two options with
substantially different revenue implications – and substantially different implications for
rate policy. While witness Clifton’s rate proposals are couched as offering the
Commission alternatives, his evaluation of the proposals are not consistent with each
other or even with his stated position. Consider Postal Service rebuttal witness
Robinson’s attempt (USPS-RT-10; Tr. 38/10697 et. seq.) to reconcile Dr. Clifton’s
proposals. For simplicity, she assumes that there was no volume effect associated with
a reduction in prices. If only the single-piece basic rate were reduced by one cent, this
would result in a reduction in First-Class Mail revenue of $337 million, which is
consistent with witness Clifton’s estimate. It appears that Dr. Clifton has assumed no
volume effect in his computation. If all First-Class Mail first-ounce rates are reduced by
one cent, witness Robinson estimates a revenue reduction of $813 million (with no
volume effect). Dr. Clifton, however, estimates that the revenue effect would only be
$519 million. Compare USPS-RT-10 at Appendix to Tr. 29/9796. His computations are
either incorrect or internally inconsistent (with one assuming a volume effect and the
other assuming no volume effect). They offer the Commission little guidance. Setting
224
aside these computational difficulties, Dr. Clifton’s proposals also fail to consider the
appropriate balancing of the pricing criteria.
Effectively, Dr. Clifton suggests that a reduction in First-Class Mail rates should
be funded by an increase in Standard Mail Regular rates. However, he fails to
recognize that Standard Mail Regular is already bearing a greater-than-average
percentage rate increase under the Postal Service’s proposal, and that a further
increase in this burden in not warranted. Testifying on behalf of the Postal Service, Dr.
O’Hara has proposed that Standard Mail Regular rates increase, on average, by 9.6
percent as compared to the system average 8.5 percent rate increase. Exhibit USPS-
31D. As explained by Postal Service rebuttal witness Robinson, Dr. Clifton’s proposal
would result in Standard Mail Regular increases that could range from 11.8 to 14.8
percent, without any consideration of whether this result would be consistent with the
pricing criteria. Tr. 32/10713. Effectively, Dr. Clifton’s argument is that, if the demand
for Standard Mail Regular is more inelastic than that of First-Class Mail, the
Commission should take advantage of this fact and increase Standard Mail rates even
further. In addition, he appears to suggest (contrary to fact and law) that, unlike much
of the content of First-Class Mail, the content of Standard Mail is not subject to the
Private Express Statutes (18 U.S.C. §§1693-1699; 39 U.S.C. §§ 601-606). Based upon
the faulty assumption, he regards Standard Mail Regular as an appropriate target for a
substantial rate increase. See GCA-T-1 at 58. While it is difficult to untangle Dr.
Clifton’s labyrinth of assumptions, the Commission’s position on pricing has been clear.
Pricing involves the balancing of many factors, only one of which is “value of service,”
225
within the meaning of § 3622(b). Dr. Clifton’s sole focus is on only one aspect of value
of service – economic value of service as measured by elasticities. He does not
consider intrinsic value of service. He does not consider the effect on Standard Mail
Regular customers of an inordinately high rate increase.
In contrast, Postal Service rate policy witness O’Hara (USPS-T-31) considers
and balances these variables. Dr. Clifton has not considered how the Postal Service
might reasonably balance the many competing criteria within a comprehensive
Standard Mail rate proposal. On the other hand, Postal Service Standard Mail rate
design witness James Kiefer (USPS-T-36) has. Dr. Clifton does not consider the effect
of a change in Standard Mail Regular prices on Standard Mail Nonprofit rates and cost
coverage under the provisions of § 3626. Both witnesses O’Hara and Kiefer do. Tr.
32/10713-14. The only support for Dr. Clifton’s proposals can be found in his elasticity
estimates, which are discredited by Postal Service rebuttal witness Thomas Thress
(USPS-RT-2). The Commission must reject GCA witness Clifton’s rate proposals.
c. There is insufficient record support for Pitney Bowes’s postage evidencing discount. Pitney Bowes witness Lawrence Buc (PB-T-3, Tr. 30/10086 et seq.) proposes a
0.1-cent discount supposedly intended for the first-ounce of a single-piece First-Class
Mail letter, if the postage is purchased through certain retail sales channels that avoid
postal window transaction costs. PB-T-3 at 2. Witness Buc’s proposal applies to
postage obtained via permits, postage meters, and PC Postage. Id. Though he claims
226
to support expanding his proposed discounts to more retail channels,34 he states that
his proposal in the current docket is limited because of the lack of data on cost
avoidance for those additional retail channels. Id.
Witness Buc’s proposal is based upon his embrace of the notion that all rate
differentials should reflect cost differences. PB-T-3 at 4. He criticizes the Postal
Service for failing to recognize postage evidencing cost avoidance in its direct case. Id.
He claims that his proposed discount would encourage consumers to use less
expensive alternative retail channels, shorten lines at post offices, and save the Postal
Service from incurring unnecessary costs. PB-T-3 at 6.
Witness Buc’s rate design is founded upon his calculation that it costs 1.6 cents
in the Base Year to sell a stamp across the window. PB-T-3 at 7. He surmises that
postage evidencing methods cost somewhat less than this, and in a magnanimous
desire to “not let the perfect be the enemy of the good,” sets his proposed discounts at
an amount less than his cost avoidance estimate. PB-T-3 at 8. According to witness
Buc, his proposed 0.1 cent discount for permit, metered, and PC Postage mail would
result in revenue leakage to the Postal Service of less than $19 million, if one were to
assume that Test Year volumes by indicia are roughly equal to the Base Year volumes.
Id.
However, witness Buc’s proposal lacks sufficient support to justify imposing this
new discount, and the record evidence suggests that the details of this proposal have
not been adequately considered or examined. For instance, he confesses that his
34 Such as the numerous alternative channels through which single-piece First-Class
227
estimate of the revenue leakage under his proposal does not account for the existence
or potential existence of short paid mail. Tr. 30/10124. He further concedes that the
Postal Service would incur additional revenue protection costs associated with
preventing short paid mail. Id.
Witness Buc also admits that the Postal Service would incur additional
implementation costs related to: (1) educating postal workers on the new discounts; (2)
training postal workers on how to identify and treat short paid mail; and (3) educating
the public on the new discounts. Tr. 30/10125-27. There would also be additional costs
associated with formally accepting permit imprint mail, and at many small post offices,
this formal acceptance occurs at the retail window. Tr. 30/10128-29. Witness Buc’s
proposal provides no analysis of whether or not these additional costs would be
outweighed by the avoided cost of selling a stamp at the window. However, apparently
playing with house money, he “would bet” that it could be done. Tr. 30/10129.
The Commission should check the bet until it sees a better proposal.
Witness Buc provides no guidance on how his proposal could actually be
implemented, other than theorizing that his proposal could be implemented along with
the Postal Service’s implementation of the Forever Stamp. Tr. 30/10126. He offers no
analysis of the postage meter, permit imprint, or PC Postage markets. See Tr.
30/10092, 10110, 10116-7. Nor does he estimate the amount of retail postage
purchases that would convert to these alternative retail channels, even though this
would seem to be a fundamental pillar of such a proposal. Tr. 30/10095. In sum,
Mail postage is actually sold.
228
witness Buc’s testimony either ignores or gives short shrift to several important issues
related to implementation, revenue leakage, additional implementation costs, and
additional revenue protection costs to the Postal Service.
Witness Buc attempts to excuse his inability to provide specifics on the
aforementioned issues by stating that he would be able to do so under a “fully
implemented proposal,” which would apply to additional alternative postage retail
channels. See, e.g., Tr. 30/10127. Essentially, he offers his 0.1-cent discount as a
placeholder, to get his foot in the door for purposes of proposing a significantly
expanded discount in the future. Meanwhile, he suggests that his currently modest
proposal would do little harm. Tr. 30/10130-31.
However, a closer examination of the 0.1-cent proposal in the instant docket
reveals that a discount of this magnitude makes little, if any, sense. First, the discount
is so small that it does not provide an incentive for its ostensible beneficiaries -- stamp-
affixing, single-piece First-Class Mail users -- to change their behavior by either
obtaining a postage meter, a permit account, or PC Postage device. Tr. 30/10129-30.
In reality, the discount would primarily reward businesses that already use or have
reason to use postage meters, mailing permits, or PC Postage devices,35 without
requiring them to change their behavior at all. The proposed discount would also apply
to Business Reply Mail (BRM), though witness Buc provides no justification for giving
this additional discount on top of the existing BRM discounts. Tr. 30/10120.
35 Plus, the relatively small number of household mailers that use PC Postage devices or meters.
229
Despite witness Buc’s repeated claims that his proposal is intended to benefit
small mailers,36 even he admits that permit imprint mailings require a minimum of 200
pieces or 50 pounds. Tr. 30/10121-22. He concedes that this is not a “small” amount of
mail. Tr. 30/10128. Moreover, if mailers were to obtain a meter, permit, or PC Postage
device, it would require them to mail approximately 100,000 pieces of mail in order to
recoup their investment, assuming a cost of $100 for such a device. Tr. 30/10131-2. It
is difficult to imagine how the intended beneficiary of the proposed discount, the
proverbial Aunt Minnie, would be able to easily recover her investment under this
proposal, if she invested in a postage meter PC Postage device, or -- for some odd
reason -- a mailing permit.
In conclusion, it is clear that witness Buc’s proposed postage evidencing discount
is impractical in the short term. Additionally, the longer-term implications of the
proposal, in terms of cost increases or revenue leakage, have not been rigorously
examined. There is insufficient record evidence to justify creating this additional
discount at this time. Accordingly, the Commission should reject witness Buc’s
proposal.
d. MMA witness Bentley and TW witness Mitchell rely upon an overstated QBRM cost avoidance.
Major Mailers Association witness Bentley (MMA-T-1, Tr. 21/7842 et seq.)
proposes an alternative to Postal Service witness Taufique’s 2.5 cent discount for
36 Witness Buc states that his proposal is “an opportunity to democratize workshare discounts by making them available to small single-piece mailers.” PB-T-3 at 9. See also Tr. 30/10136. However, instead of a one-letter, one-vote democracy, it appears to operate more like a “democracy” with a high-volume poll tax.
230
Qualified Business Reply Mail letters and cards. Witness Taufique (USPS-T-32) passes
through approximately 165 percent of Postal Service witness Abdirahman’s (USPS-T-
22) estimated 1.495 cent unit QBRM cost avoidance. Witness Bentley estimates that
the QBRM unit cost avoidance is 6.75 cents, and proposes a discount of “at least 4.0
cents.” See MMA-T-1 at 28.
Time Warner witness Mitchell (TW-T-3) similarly takes issue with witness
Abdirahman’s cost avoidance estimate, and relies upon MMA witness Bentley’s 6.75
cent estimate to propose increasing the QBRM discount to 4.0 cents for letters and 3.5
cents for cards.37 However, TW witness Mitchell improperly relies on witness MMA
Bentley’s estimate in proposing his rates because, as discussed below, witness Bentley
overstates the QBRM cost avoidance.
Witness Bentley recommends expanding the scope of the QBRM cost analysis
far beyond what is recommended by Postal Service witness Abdirahman. Specifically,
MMA witness Bentley criticizes witness Abdirahman’s decision to limit the QBRM cost
savings analysis to the costs incurred up to the point where each piece – a QBRM and
handwritten First-Class reply mail piece – receives its first barcoded sortation on a BCS.
Witness Bentley also applies a different CRA Proportional Adjustment factor in his cost
analysis. See MMA-T-1, Appendix II, p. 4-5. Finally, witness Bentley characterizes
witness Abdirahman’s analysis as an “unjustified departure” from the cost savings
methodology employed by the Postal Service and relied upon by the Commission in
prior dockets. See MMA-T-1, Appendix II, p. 1, at lines 23-24.
231
However, as Postal Service witness Abdirahman’s rebuttal testimony
emphasizes, the only identifiable cost differences between a QBRM piece and a
handwritten First-Class reply mail piece are the RBCS-related costs from applying a
POSTNET barcode to the handwritten piece. See USPS-RT-7 at 14-15, Tr. 35/11961-
2; Tr. 35/12019, 12020. This is true for both large volume BRM recipients and small
volume BRM recipients. See USPS-RT-7 at 14-15, Tr. 35/11961-2. In addition, witness
Abdirahman testifies that the proper cost adjustment method is to use the BMM CRA
Proportional Adjustment factor for both QBRM pieces and handwritten reply pieces,
because all three mail types are components of the single-piece First-Class Mail
stream. See Tr. 4/563-4. Witness Abdirahman’s application of the BMM CRA
Proportional Adjustment factor is consistent with the methodology that has been used
since Docket No. R2001-1. Id. MMA Witness Bentley chooses to apply a different CRA
Proportional Adjustment factor, rather than follow the methodology that has been
employed since Docket No. R2001-1.
MMA witness Bentley also mischaracterizes Postal Service witness
Abdirahman’s cost analysis as a departure from past Commission precedent. However,
as witness Abdirahman’s rebuttal testimony states, the Docket No. R2001-1 QBRM cost
analysis was revised to follow the methodology originally presented by the Postal
Service, and approved by the Commission, in Docket No. R97-1. See USPS-RT-7 at
13-14, Tr. 35/11960-1. This methodology was also followed in Docket No. R2005-1,
and is again followed by witness Abdirahman in this docket. Id. Clearly, witness
37 Witness Mitchell also states in his testimony that, “But in any event, the current
232
Abdirahman’s QBRM cost avoidance analysis is consistent with past Commission-
approved methodology. Witness Bentley, on the other hand, proposes expanding the
QBRM cost analysis beyond this accepted precedent. His analysis results in an
overstated QBRM cost avoidance estimate as the basis for his higher proposed QBRM
discount.38 Similarly, TW witness Mitchell erroneously relies on witness Bentley’s
overstated cost avoidance estimate in support of his higher proposed QBRM discount.
Therefore, the Commission should reject witness Bentley’s expanded cost analysis, and
reject the higher proposed QBRM discounts by witness Bentley and TW witness
Mitchell.
e. The OCA additional-ounce rate design should not be recommended. Office of the Consumer Advocate witness Pamela Thompson (OCA-T-4)
proposes a radical collapsing of the First-Class Mail Letters and Sealed Parcels
subclass additional-ounce rate structure that should be rejected by the Commission.
Witness Thompson’s quest for rate schedule simplicity is premised upon a misreading
of the Private Express Statutes and reflects a disregard for the potential consequences
of such a radical rate design.
At page 3 of OCA-T-4, witness Thompson asserts that the Private Express
Statutes (18 U.S.C. §1693-1699 and 39 U.S.C. § 601-606) exist “to hold down rates for
the more costly pieces of mail and provide service to all.” But, she is unable to identify
which, if any of the statutory provisions provides the basis for her assertion. Tr.
discounts should not be reduced.” See TW-T-3 at 13.
233
20/7425. It is undisputed that the principal goal of the Private Express Statutes is to
restrict the private carriage of letters in competition with the Postal Service for the
purpose of ensuring that the Postal Service has sufficient letter volume with which to
generate revenue with which to cover the expense of providing universal mail delivery
service at affordable rates. However, there is no basis for the assertion that the
restrictions are “intended to hold down rates for the more costly pieces of mail” to any
degree more than for less costly mail pieces. The restrictions are directed at driving into
the postal mailstream matter with particular content. The restrictions serve to increase
the volume of “letters” (as defined by 39 C.F.R. §310.1) that are mailed. In accordance
with 39 U.S.C. § 3622(b)(5), as a part of postal ratemaking, the Commission is
responsible for ensuring that prices for mail in all classes (whether or not populated by
such letters) reflect whether non-postal alternatives exist at reasonable cost. However,
there is no basis for witness Thompson’s assertion that the Statutes are intended to
affect postal prices depending on whether a particular class or category of mail
(consisting of letters or otherwise) is, relative to other mail classes or categories, more
or less costly to delivery. In fact, heavy weight Priority Mail merchandise parcels, the
contents of which are not subject to the Private Express Statutes, may be some of the
relatively more expensive pieces to process and deliver.
For purposes of her additional-ounce rate redesign, OCA witness Thompson
incorporates Postal Service witness Taufique’s (USPS-T-32) shape-based classification
changes and rate de-averaging. But, instead of the long-standing practice of assessing
38 Further criticism of witness Bentley’s QBRM fee analysis may be found, infra, at
234
additional postage for each ounce of letter or flat within the Letters and Sealed Parcels
subclass, she proposes, for example, that all single-piece letters, regardless of weight,
be subject to the proposed 42-cent letter rate, and that QBRM letters be subject to the
proposed 39.5-cent rate. At different rates than proposed by the Postal Service, she
proposes that rates increase only at the four ounce and eight ounce increment for each
flats rate category. She deviates further from her approach by concurring with the
Postal Service’s proposal to charge each additional ounce in the 1-13 ounce First-Class
Mail weight range separately for the proposed Business Parcels category. The full
details of her proposal for the subclass are depicted at Exhibit B of OCA-T-4.
Under OCA witness Thompson’s rate design, the bill for her beneficence to
senders of her single-piece 42-cent flat-rate First-Class Mail letters is charged to mailers
of flats and parcels, and to workshare mailers in the form of higher rates, especially in
those rate cells with the highest volumes. The Postal Service readily acknowledges that
its shape-based de-averaging proposal will generate significantly above-average rate
increases for some existing First-Class Mail rate elements, imposing increases as high
as 92 percent for some parcel shippers. Postal Service witness Taufique’s First-Class
Mail rate design reflects the fairness and equity inherent in a moderate approach that
significantly mitigates some of the financial impacts that would otherwise be implied by
a strictly cost-based rate de-averaging. In contrast, to achieve her goal of relieving
letter-shaped mail pieces of the burden of any additional-ounce costs, Thompson takes
an approach that rewards some single-piece letter mailers with 62 percent rate
Section VII.B.
235
reductions, while punishing some parcel mailers with increases of 223 percent. As
witness Taufique explains in his rebuttal testimony, the range of rate reductions and
increases resulting from her rate design is bound to lead to significant changes in the
First-Class Mail mix, the financial and operational consequences which should be
examined before such a radical redesign is seriously considered. USPS-RT-18 at 9-10;
Tr. 38/13350-51.
OCA witness Thompson testifies that the motivation for her proposal is to simplify
the rate schedule for the convenience of all First-Class Mail customers, but neither her
direct testimony nor her responses to questions on oral cross-examination reveal any
examination of mailing practices beyond her own. See Tr. 20/7430-32. When asked
initially about how parcel mailers faced with her proposed 223 percent increase might
mitigate the impact of such an increase, she testifies that they “may seek ways to
consolidate shipments.” Tr. 20/7389. But she later concedes that she really had no
information regarding whether any such opportunities could be expected to exist in the
Test Year. Tr. 20/7433.
The rebuttal testimony of Major Mailers Association witness David Gorham
(MMA-RT-2; Tr. 38/13182 et seq.) sheds some light on the increased ability of
sophisticated high-volume First-Class Mail senders to increase piece weights,
especially if there are no adverse rate consequences. Tr. 38/13188. Witness
Thompson offers no insight on the Test Year volume and revenue impact of such
phenomena of, for instance, mailers of two-ounce pieces took measures to generate
four-ounce pieces instead. Her rudimentary assumptions about the impact of weight on
236
mail processing (Tr. 20/7386) stand in stark contrast to the testimony of Postal Service
witness McCrery (USPS-RT-14 at 6-8/Tr. 34/11464-66) and Laws (USPS-RT-16 at
13/Tr. 39/13440).
f. Mr. Carlson’s Forever Stamp concerns are easily addressed. In his testimony (DFC-T-1), Douglas Carlson expresses concern about the Postal
Service’s Forever Stamp concept and offers his own alternative language, in lieu of that
proposed by the Postal Service for Domestic Mail Classification Schedule §§ 241 and
3030. Mr. Carlson also testifies that, the Postal Service is not legally authorized to offer
a stamp for sale that could ultimately be used as the Forever Stamp at any rate other
than 39 cents, before the implementation date for the Docket No. R2006-1 Forever
Stamp rate and classification.
Below, the Postal Service makes clear that Mr. Carlson’s primary concerns
regarding permitted uses of the proposed Forever Stamp have been resolved. Second,
the Postal Service also explains why it would not be prudent at this time for the
Commission to recommend an alteration of the intended purpose of the Forever Stamp.
Finally, as indicated below, there is no authority for, or merit to, Mr. Carlson’s argument
regarding when the Postal Service can begin selling stamps that could ultimately be
used as Docket No. R2006-1 Forever Stamps.
As reflected in the direct testimony of witness Taufique (USPS-T-48 at 3)
and in proposed DMCS § 241, the Postal Service has conceived the Forever Stamp
classification for the purpose of benefiting customers whose postal transactions involve
237
the use of basic rate First-Class Mail stamps on one-ounce letters. Nevertheless, as
reflected in proposed DMM 601.1.10 (71 Fed. Reg. 56587 (September 27, 2006)), to
avoid penalizing customers who might affix Forever Stamps to other mail pieces to pay
postage, the Postal Service makes clear that it will tolerate such other uses by crediting
customers with postage equivalent to the First-Class Mail initial-ounce letter rate
prevailing at the time of use. This policy is reiterated in numerous interrogatory
responses that have been designated into the evidentiary record. See responses to
DBP/USPS-340-42, 366-68, 457, 510, 606, 616, 619(c), 620, 622, 643-44, 647-48, 657,
674, 677, 684, and 700; as well as DFC/USPS-80-83. The approach reflected in those
responses prudently recognizes the unlikelihood that all postal customers will always
appreciate the intended purpose of the Forever Stamp. It can be expected that some
mailers will irreversibly affix it to other mail pieces to pay other postage rates. On
balance, the Postal Service considers that there is great customer relations benefit and
administrative ease in according equal value to all Forever Stamps at the time that they
are used.
The Postal Service concedes that the path to the development of the policy
underlying its proposed DMCS language and DMM regulations for the implementation
of the Forever Stamp classification was an iterative one and – like the concept itself --
developed as this docket proceeded. However, given the merits of this proposal,
particularly the great increase in ease of use at the time of rate changes for small
customers, the Postal Service believes it was preferable to refine its proposal as it was
developed, rather than forgo proposing such a customer-friendly idea. As a
238
consequence, Mr. Carlson cannot be faulted for expressing some uncertainty at the
time that he filed his testimony (DFC-T-1 at 21-28) about what Forever Stamp uses the
Postal Service might permit under proposed Domestic Mail Classification Schedule
§ 241, and at what value. However, the record developed in this docket provides the
Commission the necessary basis for concluding that the Postal Service’s intent is now
completely unambiguous.39
As reflected at page 28 of DFC-T-1, Mr. Carlson proposes that the Commission
recommend DMCS language expanding the purpose of the Forever Stamp to serve as
“postage equal to the prevailing rate, at the time of use, for Single Piece Letters, First
Ounce . . . .” Thus, it appears that he prefers that the Postal Service implement
“Forever Postage” intended for use on every stamped mail class or rate category. But,
if that were the Postal Service’s objective, there would be no reason not to also apply
“forever” value to each and every postage stamp designed primarily for a specific
classification or rate category denomination, from the First-Class Mail postcard stamp to
the Express Mail flat rate envelope stamp.
As the proponent of the Forever Stamp proposal in this docket, as the principal
source of the concept design, as a public service agency eager to enjoy the customer
39 And while some uncertainty may have arisen during the course of this docket, the resulting proposal and the now very clear implementation plan should not generate confusion for the vast numbers of individual customers who will have no exposure to the Docket No. R2006-1 record and whose understanding of the concept will be based upon implementing regulations and other rate implementation publicity materials developed by the Postal Service.
239
goodwill likely to flow from the implementation of its proposal,40 the Postal Service
regards itself as second to none in its enthusiasm for the concept.41 However, the
Postal Service also is the agency charged with the burden of executing the
implementation and administration of the Forever Stamp; and bears all of the financial
risk associated with how the Forever Stamp will end up being used. Thus, while the
merits of a Forever Stamp have generated excitement, as illustrated by various press
reports, enthusiasm tempered by prudence should be the order of the day. And, it is
more prudent to use experience with the proposed Forever Stamp, as the Postal
Service intends to implement it, as a basis for future consideration of any proposal to
formally expand the scope of its intended purpose. Given the uncertainties surrounding
the post-Test Year financial impact of Forever Stamp usage identified at pages 21-23 of
USPS-T-48 by witness Taufique, the Postal Service plans to carefully monitor such use
in the interim.
At pages 28-29 of DFC-T-1, Mr. Carlson appears, at first, to grasp the Postal
Service’s concerns, but he then he blithely dismisses them as not being grounded “[i]n
reality . . . .” He also argues that:
the proposal needs to be implemented once, with one consistent message to the public. The public’s use of the stamp will depend on the rules announced for it, so it makes no sense to observe the public’s use of the stamp and then write rules. Id. at 29. Taken to its logical conclusion, his first contention is a call for the complete
avoidance of any amendment of the terms of any particular mail classification ever,
40 See, USPS-T-48 at 16; USPS LR-L-152, Insights #5 and #14.
240
once it is initially established. Such rigidity in an evolving, non-static postal world is
contrary not only to the expectations of the framers of the Postal Reorganization Act, it
is also contrary to effective and responsive postal management. His second contention
can be excused for having been made before the above-referenced proposed Domestic
Mail Manual regulations and related interrogatory responses became a part of the
record in this docket.
It bears repeating that the shared enthusiasm for the Forever Stamp concept
must be tempered by some regard for understanding the extent of any measurable
downside. At page 29 of DFC-T-1, Mr. Carlson responds by advising that:
[i]f the Postal Service has serious concerns about the financial effects of the proposal, . . . [it] should conduct more research and return to the Commission when it has a clear and practical proposal. Designing and promoting the Forever Stamp concept to benefit customers who use
basic rate stamps for First-Class Mail letters is both clear and practical. The same is
true for the proposed policy of tolerating the use of the stamp by mailers to pay other
postal rates and crediting them with postage value equivalent to the prevailing basic
First-Class Mail letter rate at the time of use. The absence of absolute certainty about
the future should not discourage the adoption of the Postal Service’s prudently designed
Forever Stamp mail classification. If absolute certainty were a prerequisite to
innovation, the Postal Service would never have initiated such customer-friendly
initiatives as the Priority Mail flat-rate envelope or flat-rate box.
41 The Office of the Consumer Advocate is to be commended for proposing in Docket No. R2005-1 that the Postal Service accelerate its examination of the concept.
241
At page 6 of a November 22, 2006, motion seeking to compel a further
responses to DFC/USPS-80(c) and DFC/USPS-81, Mr. Carlson imagines a scenario
under which the “Postal Service may very well be trying to enact DMCS language that
will allow it to change course later without further Commission review[,]” contrary to the
explicit statements of postal policy that have emerged on the evidentiary record, as
proposed in the Federal Register, and that will serve as a basis for the Commission’s
recommended decision and any subsequent judicial review. Mr. Carlson’s outlook lacks
any rational basis. It reflects a jaundiced view of a Postal Service unilaterally adopting
an interpretation of DMCS § 241 that is contrary to its explicitly stated intentions after
the Commission’s recommended decision, in an act of supreme self-sabotage. To the
contrary, assuming the concept is adopted as proposed, the Postal Service intends to
preserve its reservoir of Forever Stamp goodwill and avoid provoking his imagined
customer relations nightmare, political headache, and litigation before the Commission
or the Federal courts. The Postal Service acknowledges without hesitation that, should
future circumstances arise which justify consideration of whether to explicitly broaden or
limit the intended purpose of the Forever Stamp, such a classification change -- like any
other -- will be subject to applicable Commission procedures.
Finally, Mr. Carlson comments on the Postal Service’s plans, before Docket No.
R2006-1 rates are implemented, to sell postage stamps that will function as Forever
Stamps at the value of the First-Class Mail basic letter rate, once Docket No. R2006-1
rates take effect. He testifies that such action would be illegal, based on his reading of
DMCS § 241, as proposed by the Postal Service. In pertinent part, it states that “[t]he
242
Forever Stamp is sold at the prevailing rate for Single Piece letters . . . .“ Presumably,
Mr. Carlson’s legal argument is based upon his reading of 18 U.S.C. § 1721. That
provision reads:
Whoever, being a Postal Service officer or employee, knowingly and willfully: sells . . . postage stamps . . . otherwise than as provided by law or the regulations of the Postal Service; shall be fined under this title or imprisoned not more than one year, or both. Since the “prevailing rate” before any Docket No. R2006-1 rates take effect is the
current 39-cent rate, Mr. Carlson appears to assert that the only rate at which a Forever
Stamp could legally be sold before R2006-1 rates take effect is at 39 cents. However,
he quickly acknowledges the likely infeasibility of such an alternative. DFC-T-1 at 30.
As Mr. Carlson is, no doubt aware, the Postal Service sells many stamps at values
other than at the prevailing First-Class Mail first-ounce letter rate. See, Domestic Mail
Manual 604.1.1 By designating the Forever Stamp design as being sold at 42 cents
prior to the implementation of Docket No. R2006-1 rates and classifications, the Postal
Service would be well within its operational prerogatives, consistent with the provisions
of the Domestic Mail Classification Schedule prior to the Postal Service’s Board of
Governors’ implementation of rates and classifications recommended by the
Commission in this docket.
Ultimately, Mr. Carlson comes close to an obvious alternative solution. He
acknowledges that the Postal Service, at any time, can sell postage stamps at any
denomination of its choosing. He then proposes that the Postal Service, before any
Docket No. R2006-1 rates take effect, could sell a particular stamp at the known
Forever Stamp denomination or designated value, and then later declare that stamp to
243
be the Forever Stamp “[a] few months after the rate change . . . .” Id. However, the
reason for his proposed delay in the “conversion” announcement is not obvious.
Clearly, once the Governors have approved the Forever Stamp classification and rate,
and a particular stamp at that rate is on sale before Docket No. R2006-1 rates and
classifications take effect, there is no barrier prohibiting the Postal Service from
informing customers in advance of the effective date of the Forever Stamp
classification, that the stamp will convert to Forever Stamp status on that effective date.
Mr. Carlson expresses concern about the public’s inability to grasp that “new” rate
stamps should be used after the effective date of “new” rates and the Postal Service’s
inability to educate mailers about this concept. DFC-T-1 at 29-30. However, this
concept is neither novel nor confusing. This is the same task that faces the Postal
Service and postal customers with every change in rate regime. The Forever Stamp
may introduce a new wrinkle, but -- more importantly -- it will provide an obvious benefit
to customers.
g. The GCA square envelope test and essay on aesthetics provide no basis for rate design
Although the Postal Service and the Greeting Card Association agree that
nonmachinable letters should pay more postage than machinable letters, they dispute
the manner in which and the degree to which such additional postage should be
imposed. The Postal Service proposes that it be imposed in the form of a requirement
that nonmachinable one-ounce letters pay the proposed initial-ounce rate for flats.
Under the Postal Service’s proposed rate schedule, such letters would pay 62 cents
postage. Postal Service witness Taufique’s elimination of specific surcharges for
244
nonmachinable letters and flats in the newly proposed shape-based rate schedule
(USPS-T-32) has the advantage of minimizing additional complexity.
As an alternative, GCA witness Morrissey’s proposal would continue the practice
of maintaining special nonmachinability rate elements for each shape. He not only
questions the Postal Service’s proposed application of the initial-ounce rate for flats to
nonmachinable letters, but he also asks the Commission to rely on the conclusions of
an experiment he conducted as the basis for determining “that the 13 cent surcharge
currently in place is too high or perhaps even unnecessary altogether.” Testimony of
Mr. Raymond Morrissey on Behalf of the Greeting Card Association, Docket No. R2006-
1, GCA-T-3 at 7.
At page 9 of GCA-T-3, witness Morrissey asserts that the Commission should
rely on the results of his experiment and the testimony of GCA witness Andrea Sue Liss
(GCA-T-4) about the aesthetics of squares vs. rectangles to support rejection of the
Postal Service’s rate design. As is demonstrated below, neither the GCA square
envelope experiment nor its musings on the aesthetics of squares provide any basis for
the Commission to recommend any rate design contrary to that proposed by the Postal
Service.
i. The GCA square envelope test is fatally deficient.
Through the testimony of witness Raymond Morrissey, the Greeting Card
Association (GCA) urges the Commission to modify the Postal Service’s proposed rate
structure for single-piece First-Class Mail by maintaining the nonmachinable surcharge
for square-shaped, low aspect ratio letters and cards. GCA-T-3 at 9. Mr. Morrissey
245
claims that square cards display a much higher degree of machinability than flats, entail
“some” greater need for manual cancellation, and an “immaterial” amount of additional
sorting. Id. at 9. Elsewhere in his testimony, he asserts that low-aspect-ratio single-
piece (i.e. square) letters “are both cancelled and processed as letters – apparently with
a favorable if not ideal level of success so far as machine cancellation is concerned,
and with an extremely high level of success as regards machine sorting.” Id. at 8.
Witness Morrissey supports these statements about square letter machinability
through the results of an “experiment” he conducted – an experiment that is flawed,
unreliable, and does not accurately demonstrate the nonmachinability of square letters.
The GCA experiment involved eight participants, located in different geographic regions,
each mailing 63 square and 63 rectangular cards (in envelopes) to witness Morrissey.
After receiving the envelopes, witness Morrissey “examined them for visible signs of
manual or machine processing.” Id. at 4. To determine the method of cancellation,
witness Morrissey looked for either the machine-printed cancellation mark or the round
cancellation stamp indicating manual cancellation. Id. Under the rules of his
experiment, witness Morrissey concluded that the presence of a postal-applied barcode
or orange fluorescent I.D. tag was proof of automated sortation. He considered the
absence of any such barcode or I.D. tag to indicate manual sortation. Id. at 4-5.
Based solely on these observations, GCA witness Morrissey jumps to the
conclusion that the success rate for automated cancellation for square cards could have
246
been as high as 80.45 percent, and for rectangular cards, as high as 91.84 percent.42
Id. at 5. He also concludes that the success rate for automated sorting for square
cards was 95.24 percent, and for rectangular cards, 100 percent. Id. at 6.
The obvious fatal flaw in this experiment is that witness Morrissey attempts to
determine how a process works, and whether or not there are additional costs, by only
observing the input and the output of the process. Witness Morrissey himself admits
that his experiment does not reveal:
• the percentage of test pieces that were rejected on the first pass on an
Automated Facer Canceller System (AFCS),
• the number of pieces that required manual facing and/or one or more additional
passes on an AFCS or other piece of cancellation equipment,
• the number of pieces I.D. tagged on an AFCS or DBCS, but rejected within
subsequent automated mail processing steps due to low aspect ratio and the
propensity of pieces to tumble,
• the number of pieces barcoded on a DBCS, but rejected within subsequent
automated mail processing steps due to low aspect ratio and the propensity of
pieces to tumble, or
• the number of pieces that were successfully processed throughout the entire
automated mailstream without the manual handling of rejects.
Tr. 21/7780-7781.
42 These numbers also could have been as low as 70.44 percent for square cards, and 80.36 percent for rectangular cards. See GCA-T-3 at 5-6.
247
ii. The USPS Engineering test is the low-aspect-ratio gold standard.
As the rebuttal testimony of Postal Service witness George Laws succinctly
summarizes:
To claim that . . . [the GCA experiment] can determine the degree to which square single-piece First-Class letters are successfully processed by Postal Service automated equipment is similar to claiming that one can determine the route someone took to travel from point A to point B and how much it cost to make that trip by only looking at the outside of the vehicle to see if there is mud on it.
Rebuttal Testimony of George R. Laws on Behalf of the United States, USPS-RT-16 at
9-10.
The square letter machinability test conducted by USPS Engineering at GCA’s
request better illustrates the true machinability of square letters. Witness Laws
discusses the results of the USPS Engineering Test, which were provided to GCA two
months before witness Morrissey conducted his own square letter experiment.43 The
USPS Engineering Test shows that, on average, half of the low aspect ratio (square)
pieces mailed can be expected to require extra processing and manual handling by the
Postal Service. USPS-RT-16 at 12.
Having designed and conducted this extensive test at the request of GCA and
presented the results to GCA in May 2006, the Postal Service is disappointed that
GCA’s testimony would neither bring the test results to the Commission’s attention nor
43 All of the cards in witness Morrissey’s experiment were mailed on July 20, 2006. GCA-T-3 at 4. The Postal Service provided a final version of its test results to GCA on May 18, 2006. See Tr. 21/7673. The test report itself can be found at Tr. 21/7681–- 7712.
248
even acknowledge their existence. Be that as it may, the USPS Engineering results
prove what GCA has known since May 2006 that, in comparison to letters and cards
that currently are not subject to the nonmachinability surcharge, low-aspect-ratio pieces
suffer a substantial degradation in processing when subjected to automation, in
comparison to letters and cards that currently are not subject to the nonmachinability
surcharge. The USPS Engineering test makes a mockery of witness Morrissey’s claim,
at page 8 of GCA-T-3, that nonmachinable letters “are both cancelled and processed as
letters [footnote omitted] -- apparently with a favorable if not ideal level of success a
regards machine sorting.”
iii. Witness Liss’ musings on the aesthetics of squares vs. rectangles are not compelling.
Greeting Card Association witness Liss (GCA-T-4, Tr. 28/9489 et seq.) supports
the GCA proposal by offering her opinion on the use of the square shape in the design
of greeting cards. See GCA-T-4 at 4. Witness Liss discusses the importance of the
square shape in graphic design, the history and symbolism of the square, and the
inherent appeal of the square shape in the minds of consumers. See GCA-T-4 at 6-13.
Witness Liss’ observations lead her to assert that the Postal Service’s proposed rate
increase for square cards will cause consumers to reduce the number of pieces they
mail, or to select a more standard mailing size and shape, which may not be their
preferred choice. See GCA-T-4 at 13.44 Ultimately, witness Liss warns that nothing
44 Many other mailpiece configurations that could also be “appealing” to customers are limited by specific Domestic Mail Manual regulations requiring minimum print contrast, minimum or maximum thickness or weight. These limitations are often driven by operational concerns that the Postal Service must consider.
249
less than the entire future of the United States Postal Service and its relevance in
today’s economy rests upon the Commission’s decision with regard to square cards.
See GCA-T-4 at 17. (“Let us not travel down that road; rather let us remain relevant
and connected to the consumer and citizen mailer.”) Id.
Despite witness Liss’ claim that the Postal Service’s proposed rate increase for
square cards will negatively affect mail volume, there is no quantitative record evidence
in this docket that supports her statements. In fact, witness Liss explicitly states that
she has not performed any empirical studies pertaining to consumer demand for square
cards. See Tr. 28/9494, 9495, 9496. She also concedes that she has not analyzed the
cross price elasticity between square and rectangular greeting cards, even though she
states in her testimony that consumers will be “forced” to choose rectangular cards
instead of their allegedly-preferred square cards because of the proposed rate increase.
See Tr. 28/9497. Finally, witness Liss is unable to explain how the history and the
symbolism of the square might quantitatively affect consumer demand for square
greeting cards. See Tr. 28/9498-99.45
Witness Liss has no quantitative or econometric support for her theory that a
lower rate for square cards would translate into higher mail volume. In short, her
testimony adds no support to GCA’s single-piece, nonmachinable letter rate design
proposal and does not justify any change in the Domestic Mail Classification
nonmachinability criteria beyond that proposed by the Postal Service.
45 Witness Liss’ remark that “the square has a basic appeal to people beyond what they might put into words,” GCA-T-4 at page 8, lines 4-5, might also apply to her testimony’s
250
h. Intervenors’ alternate approaches to First-Class Mail presort cost methodologies and cost estimates should be rejected.
i. Intervenors’ mail processing cost estimates
Pitney Bowes, through the testimony of witness Buc (PB-T-2), and Major Mailers
Association, through the testimony of witness Bentley (MMA-T-1), support the delinking
approach for the derivation of First-Class Mail presort discounts.46 But despite their
declarations of fidelity and allegiance to the Postal Service’s de-linking approach to rate
design, neither witness can resist the urge to propose that workshare discounts be
further increased. Accordingly, they both modify the Postal Service’s cost methodology
to support proposals for increased workshare discounts. In particular, each takes an
expansive and unsupported approach to cost pool classifications.
As discussed above, the Postal Service classifies cost pools as either
proportional or fixed, with the distinction being that that proportional costs are the ones
that are modeled, and fixed costs are the ones beyond the scope of witness
Abdirahman’s USPS-T-22 model. The Postal Service classifies cost pools as
proportional because the activities, and the costs thereof, captured within those cost
pools are understood to vary in known ways with the presort level, i.e. the more finely
presorted a piece is, the less the cost of processing in a given cost pool. USPS-RT-7 at
10-11.
failure to translate the “basic appeal” of square cards into even the roughest estimate of any quantitative effect it may have on mail volume. 46 MMA-T-1 at 6 and PB-T-2 at 10.
251
PB witness Buc uses two cost pool classifications: (1) proportional and (2) fixed.
Witness Buc proposes cost pool classifications in PB-LR-L-1 that differ from those relied
upon by the Postal Service and the Commission in past dockets. Witness Buc classifies
more than 70 percent of the nonmodeled cost pools as proportional. See PB-T-T2 and
Pitney Bowes Library Reference L-1. His arbitrary classifications of the majority of the
cost pools as modeled/proportional lack any supporting basis. When the Postal Service
inquired whether witness Buc had, in fact, attempted to model the costs for the cost
pools that he proposes to shift to the “proportional” classifications, he replied, “I have
not modeled them but I have provided multiple reasons why they are proportional.” Tr.
20/7314. Witness Buc acknowledges that he mainly relies on his so-called “Thought
Experiment” and other flawed cost pool analysis in PB-LR-L-1. Witness Buc has
chosen to use the costs that are modeled as distribution keys for the costs that he has
not modeled; an activity that he, himself, conceded was inappropriate. Tr. 20/7349.
Witness Buc’s cost pool reclassification proposal misses the point of why the cost
pool classifications in the letter models were necessary in the first place. He classifies
the cost pools as proportional without regard to whether the activities, and the costs
therein, captured within those cost pools are understood to vary in known ways with the
presort level. Only the modeled cost pools are the ones where the more finely
presorted a piece is, the less the cost of processing in a given cost pool. Witness Buc’s
“Thought Experiment” and his other cost pool analyses are not based on a mail flow
model depicting these extraordinary changes.
252
Witness Bentley also takes an aggressive stance on cost pool classification. He
uses three cost pool classifications: (1) modeled and proportional, (2) nonmodeled but
proportional and (3) nonmodeled fixed. MMA-T-1, Appendix 1 at 10. He follows
witness Buc’s lead and considers almost all cost pools as proportional. As with witness
Buc’s approach, most cost pools that were previously treated as fixed are now classified
by witness Bentley as proportional cost pools, such that the cost relationships between
rate categories are distorted. In fact, the classifications used by witness Bentley do not
even correspond to those he has relied upon as a MMA witness in past dockets. He
now states “[T]here are no nonworkshared related cost pools,” but provides no evidence
to substantiate that claim. MMA-T-1, Appendix 1 at 10. Like witness Buc, witness
Bentley presents no factual basis for shifting large sums of costs from the nonmodeled
fixed classification to the nonmodeled proportional classification. Witness Bentley also
admits that his analysis was somewhat arbitrary, because the mail flow model
presented in witness Abdirahman’s testimony in this docket did not allow him to perform
the cost pool shifts. MMA-T-1, Appendix 1 at 9 and 10.
The Commission’s analysis in Docket No. R2000-1, where cost pool
classifications were debated at length, supports the Postal Service’s approach, rather
than the flawed approaches advocated by witnesses Buc and Bentley.47 If a given cost
pool contains tasks that are included in the mail flow models, that cost pool is classified
47 In Docket No. R2000-1, the Commission analysis relied upon a methodology that classified cost pools in three categories. Even though the Postal Service’s methodology in this docket relies on two classifications, the Commission’s analysis of which cost pools should be classified as proportional or fixed is applicable in this case.
253
as proportional. If not, that cost pool is classified as fixed. That same principle holds
true in this case.
A number of intervenors have presented testimony on the use of a Bulk Metered
Mail (BMM) benchmark as a method to derive mail processing cost estimates. APWU
witness Kobe (APWU-T-1) makes the BMM benchmark the centerpiece of her cost
methodology. MMA, while supporting de-linking in rate design, hedges its bets and
suggests that if the Commission should it reject de-linking, it should employ a
methodology not based on the BMM benchmark but on the Metered Mail Letters
benchmark. Not surprisingly, this would, conveniently expand the workshare discounts.
See witness Abdirahman’s rebuttal testimony, USPS-RT-7. While the new de-linking
approach does not require the use of a BMM letters benchmark, it is worth noting that
the Commission-approved benchmark for First-Class Mail letters has been BMM letters
since Docket No. MC95-1. In Docket No. R2000-1, the Commission stated that it:
continues to accept bulk metered mail as the appropriate benchmark for determining the worksharing cost savings for First Class Mail. The Postal Service provides evidence that at least some BMM does exist in the mailstream. The Commission also views a benchmark as a “two-way street”. It represents not only that mail most likely to convert to worksharing, but also, to what category current worksharing mail would be most likely to revert if the discounts no longer outweigh the cost of performing the worksharing activities.
PRC Op. R2000-1 at 241, ¶ 5089.
Even if the Commission does not adopt de-linking, these unsubstantiated views would
not warrant departure from Commission findings in past cases supporting the BMM
benchmark in favor of benchmarks apparently chosen solely because they would result
in larger estimated cost differences.
254
ii. Delivery cost issues
Despite repeated warnings from postal witnesses that the DPS percentages by
presort level are specious results, three intervenors reject the Postal Service’s delivery
cost estimates. Instead, they revert to the methodology employed in past dockets in
their efforts to expand the workshare discounts. MMA, Pitney Bowes, and APWU
incorporate the use of separate DPS percentages by presort level to de-average
delivery costs to rate levels in order to derive workshare related cost avoidances. As
discussed, infra, in Section VI.B.2.b, the use of the DPS percentages to derive delivery
cost differences by rate category is highly suspect.
While the letter cost models are adequate for estimating mail processing unit
costs by rate category, they are not likely to be an effective tool for estimating DPS
percentages by rate category. The DPS percentages that were calculated in the past
were based on a premise that mail processed through a larger number of steps had
lower DPS percentages than mail processed through fewer steps because of the
cumulative probabilities of being rejected by each successive letter operation. DPS
percentages from the mail processing models were determined by BCS acceptance
rates which are not presort-specific (i.e., they are based on average data for all mail
pieces processed through a given operation). In the mail processing model, the
application of the acceptance rates makes it appear that the more steps that a mail
piece is processed through (i.e., the less finely presorted it is), the higher the probability
that the presort mail will be rejected.
255
Exaggerating this effect, as the model moves from upstream to downstream
operations, the aggregate acceptance rates tend to increase. Part of the reason this
occurs is that the upstream operations contain more single-piece mail. If there are
problematic single-piece mail pieces upstream, once they are rejected they would be
processed manually, with the result that downstream acceptance rates are higher.
Given that the cost models rely on aggregate acceptance rates (single-piece and
bulk combined), less finely presorted bulk mail pieces appear to have lower DPS
percentages, even though the Postal Service has no data to indicate that this is actually
true. In other words, the DPS percentages are a byproduct of data limitations. In reality,
it is not known if prebarcoded presort mail pieces that are successfully processed in a
given operation would also be successfully processed in downstream operations.
Furthermore, no studies have been conducted in which the same mail pieces are
processed through machines multiple times in order to determine if the total number of
pieces that are ultimately rejected increases as the number of automation handlings
increases. Tr. 11/2850-2851. Moreover, a field study in delivery units would not be able
to estimate the DPS percentages by rate category because the covers of mail pieces do
not contain markings that would indicate the rate level at which a given piece was
presented to the Postal Service. Hence, the disaggregated DPS percentages by
presort category are not meaningful and should not be used to determine cost
differences by presort level for letters.
Because it is not known whether presort level directly impacts the delivery costs,
the Postal Service applied an approach based on known facts. As discussed above,
256
machinability has a demonstrable impact on delivery costs. Thus the Postal Service’s
rate design appropriately relied upon delivery costs deaveraged only between
machinability and nonmachinability. Hence, the cost results presented in the
testimonies of witnesses for MMA, APWU and Pitney Bowes are relying on specious
cost differences and should be rejected.
MMA’s assessment of workshared delivery cost savings (MMA-T-1 at 14-16)
which applies DPS percentages to deaveraged delivery costs suffers from an additional
and fundamental flaw. Witness Bentley’s results are all useless because the
cornerstone of his analysis is a demonstrably false statement, indicative of a defective
methodology:
There can be no argument that Postal Service data indicate that Presorted letters cost, on average, 3.38 cents less to deliver than single piece letters.
Id. at 16. The flaws in Mr. Bentley’s analysis are revealed in the questions posed in
USPS/MMA-T1-17 and 27, and his responses thereto. Tr. 21/7885-92, 7910-14. For
starters, if “Presorted letters cost, on average, 3.38 cents less to deliver than single
piece letters” as he claims, then there must be some Presorted letters unit delivery cost
X, such that X times the Presorted letters volume equals the actual total delivery costs
for Presorted letters ($1.977 billion), and (X + 3.38 cents) times the Single Piece volume
equals the actual total delivery costs for Single Piece letters ($1.782 billion). When
asked to identify a value of X meeting these prerequisites, however, Mr. Bentley could
not. The only way he could get a single piece unit delivery cost that is 3.38 cents more
than his Presorted unit delivery cost was to assume, “contrary to fact” that 46 percent
257
more Single Piece is delivered (by carriers) than is actually the case. Tr. 21/7912
(emphasis in original). This causes him to presume $827 million of total Single Piece
carrier delivery costs that do not exist. Id. It should come as no surprise to Mr. Bentley,
whether or not he is willing to admit it, that someone might appropriately “argue” with a
claim regarding average cost differences which requires him to assume in excess of
$800 million of nonexistent delivery costs for one of the two types of mail for which he is
purporting to compare delivery costs.
In reality, there are two conceptually rational measures of unit delivery costs.
Both start with the same actual total delivery cost in the numerator, but differ in the mail
volume used in the denominator. Using originating volume in the denominator
generates the unit delivery costs per originating piece. Unit delivery costs per
originating piece are useful because they can be compared to and combined with unit
costs for other functions (e.g., processing, transportation), when those unit costs are
also expressed per originating piece. Given the propensity of the mail category in
question to be delivered by carriers (as opposed, for example, to destinate at a post
office box), each additional originating piece will, on average, cause an increase in total
delivery costs equal to the unit delivery cost per originating piece.
Another potential measure of unit delivery costs, however, is to use delivered
volume in the denominator, which then generates unit delivery cost per delivered piece.
Unit costs per delivered piece are less useful than unit costs per originating piece,
because they cannot be compared to or combined with unit costs from other functions
that are expressed per originating piece. On the other hand, using costs per delivered
258
piece allows for control of the differing propensities of different mail categories to be
delivered by carriers, to whatever extent that might be useful. Therefore, as long as
estimates of total delivery costs, originating volumes, and delivered volumes are
available for two categories, it is possible to calculate and compare unit delivery cost
per originating piece for both categories, and unit delivery cost per delivered piece for
both categories. (As shown at Tr. 21/7885, with respect to the Single Piece and
Presorted categories of interest, the Single Piece unit delivery cost per originating piece
is 5.15 cents, the Presorted unit delivery cost per originating piece is 4.16 cents, and the
difference between the two unit costs per originating piece is 5.15 cents minus 4.16
cents, or 0.99 cents. Similarly, for unit costs per delivered piece, the values are 8.42
cents, 4.65 cents, and a unit cost difference per delivered piece of 3.77 cents.) But the
two unit cost measures are distinct, and, in particular, one would not want to compare a
unit cost per delivered piece for one category with a unit cost per originating piece for
another category, as this would be mixing the proverbial “apples” and “oranges.”
Mr. Bentley does not make the mistake of comparing a unit delivery cost per
originating piece for one category with a unit delivery cost per delivered piece for
another category. But he does make the mistake of insisting that comparisons of unit
delivery costs per originating piece across categories with different delivery percentages
are not meaningful. Tr. 21/7886-87, 7890. In fact, as explained by witness Kelley, they
are quite meaningful. Tr. 12/3392. More disturbingly, Mr. Bentley makes the mistake of
concocting a specious measure of unit delivery costs which, he erroneously claims,
allows him to calculate a difference between unit delivery costs per originating piece
259
that is different from the actual unit cost difference per originating piece (correctly
obtained by dividing actual total delivery cost for each category by the actual originating
volume for each category, and calculating the difference between the two actual unit
cost numbers). Rather than mixing “apples” with “oranges” (a practice of which he
accuses the Postal Service at Tr. 21/7911), Mr. Bentley is injecting something into the
fruit bowl which is perhaps more akin to a hockey puck than to any of the spherical
fruits.
Mr. Bentley erroneously contends that comparisons of unit delivery costs per
originating piece are only meaningful if both categories being compared have the same
percentage of mail delivered by carriers. Tr. 21/7886-87, 7912. Mr. Bentley’s proposed
solution, to circumvent the (for him) awkward fact that Single Piece and Presorted do
not have the same percentage delivered, is to counter-factually equalize those
percentages for purposes of his calculations. Tr. 21/7887-88, 7911-13. One obvious
and fatal flaw in this approach is that the result one obtains is a direct function of the
counter-factual scenario one assumes. For example, Mr. Bentley acknowledges that if
one equalizes the delivery percentage for both categories at 61 percent (which is the
actual delivery percentage for Single Piece), one obtains a unit cost difference of 2.31
cents (3.77 cents times 0.61), as opposed to the 3.38 cents (3.77 cents times 0.90) that
Mr. Bentley has obtained by choosing to equalize at 90 percent (the actual delivery
percentage of Presort). Tr. 21/7888-89. Mr. Bentley is perfectly willing to confirm the
conclusion that naturally follows, which is: according to his proposed methodology,
while Presorted letters on average cost 3.38 cents less to deliver than Single Piece
260
letters, Single Piece letters on average cost 2.31 cents more to deliver than Presorted
letters. Id. This is sheer nonsense, and no amount of prestidigitation by Mr. Bentley
can obscure that fact.
In reality, once one starts to imagine counter-factual scenarios, any scenario is
as good as the next. Mr. Bentley concedes as much in his response to USPS/MMA-T1-
17.d, noting that there is “nothing magical” about either the 3.38-cent figure or the 2.31-
cent figure. Tr. 21/7889. Would he feel the same about a scenario that assumes that
26 percent of both categories are delivered, which by his methodology would yield a
0.99 unit cost difference (3.77 cents times 0.26), a figure that coincidentally also
happens to be the actual unit cost difference per originating piece? In the world of
counter-factual assumptions, there is nothing less “magical” about 26 percent than there
is about 61 percent or 90 percent.
The problem, of course, is that while Mr. Bentley is willing to acknowledge that
there is “nothing magical” about his 3.38-cent figure, the counter-factual assumptions
behind that figure are required for his methodology to generate all of the “Delivery Unit
Cost Savings” and “Incremental Unit Cost Savings” he presents on page 16 of MMA-T-
1. Different counter-factual assumptions would produce different results.
Consequently, all of the unit cost saving numbers on MMA-T-1, page 16 are equally as
flawed, and equally as useless, as the 3.38-cent figure.
In the last case, witness Bentley did not testify (presumably because of the
settlement), but the MMA Brief stated:
The problem arose because the Postal Service erred in computing the unit delivery cost by dividing total delivery costs by total originating volumes.
261
However, many originating pieces bypass the delivery network and, therefore, do not incur any delivery costs because they are addressed to post office boxes. Accordingly, the result of this computation does not represent the unit cost to deliver a piece of mail; instead it simply represents total delivery costs divided by all mail pieces whether or not they were actually delivered. . . . To correct this error unit delivery costs should be computed by dividing total delivery costs by the total volumes delivered[.]
Docket No. R2005-1, MMA Initial Brief at 26-27. Thus, the MMA Brief in the last case
clearly laid out the two alternative measures of unit delivery costs, and clearly
expressed MMA’s preference for unit delivery cost per delivered piece. In the instant
case, though, Mr. Bentley is, for some reason, apparently of the opinion that unit
delivery cost per delivered piece is no longer adequate, and he therefore endorses
deviation from the method of computation advocated by MMA in the last case. Instead
of simply reverting to a comparison of the actual unit delivery costs per originating
piece, he fabricates a bogus computation that produces a number he erroneously
claims represents the unit delivery cost savings per originating piece. His claim is
wrong. Between Single Piece and Presorted letters, per originating piece, the unit
delivery cost difference is 0.99 cents, and per delivered piece, the unit delivery cost
difference is 3.77 cents. Mr. Bentley’s attempts to torture a different result out of these
numbers are simply an exercise in smoke and mirrors.
C. The Commission Should Recommend the Postal Service's Proposed Priority Mail Classification and Rate Changes The Postal Service proposes an overall increase in Priority Mail rates of 13.6
percent, which corresponds to an overall test-year-after-rates cost coverage of 163
percent. USPS-T-31 at Exhibit USPS-31D (revised August 25, 2006). Major
classification proposals include dimensional-weight ('dim-weight') pricing for parcels
larger than one cubic foot in Zones 5 through 8, elimination of the balloon-rate category
in Zones 5 through 8, and a permanent classification for the Priority Mail flat-rate box.
Specific rate proposals include a minimum Priority Mail rate of $4.65 for pieces weighing
one pound or less and for flat-rate envelopes, and a rate of $8.80 for pieces mailed in a
flat-rate box. USPS-T-33 at 33, 57. Proposed changes to the Priority Mail rate
structure include a separate rate for Zone 3, and a 5-pound increase in the weight for
the balloon rate, to become applicable in Local and Zones 1-4. In addition, the Postal
Service is distributing certain transportation costs to rate cells on the basis of cubic
volume (instead of weight) resulting in some rate relief at 11 pounds and up, properly
distributing distance-related surface transportation costs incurred in connection with air
travel, and utilizing a novel “economic cost adjustment factor” for the distribution of air
transportation costs in Zones 5-8.
No witness has challenged either the classification changes proposed by USPS
witness Scherer (USPS-T-33), or his rate design. Only one witness, R. Richard Geddes
(UPS-T-3), has proposed any alternatives regarding Priority Mail. He proposes a cost
coverage that would result in an average rate increase of 23.6 percent. UPS-T-3 at 12.
For reasons explained in Part V of this brief, his self-serving testimony is unbalanced
262
and unpersuasive. The Commission should recommend the Postal Service's proposed
Priority Mail rate and classification changes.
1. Proposed major classification changes include dim-weight pricing and a permanent classification for the Priority Mail flat-rate box.
The Postal Service proposes three major classification changes. The first is
“dimensional-weight ('dim-weight') pricing" for parcels larger than one cubic foot in
Zones 5 through 8. USPS-T-33 at 13-32. The second, which is related to the dim-
weighting proposal, is elimination of the balloon-rate category in Zones 5 through 8. Id.
at 21. The third is a permanent classification for the Priority Mail flat-rate box. Id. at 52-
60.
First, witness Scherer (USPS-T-33) proposes dim-weight pricing in the zones
that receive primarily air transportation — that is, Zones 5 through 8. USPS-T-33 at 13.
This will enable the Postal Service to cover its implicit costs on — and send proper price
signals regarding — bulky but lightweight parcels that historically have been money-
losing. Dim-weighting is a pricing method, applicable to packages, that considers the
density (weight in relation to cubic volume) of the package. Id. Relatively high-density
packages are priced based on weight while relatively low-density packages are priced
based on cubic volume (“cube”). Id. This treatment acknowledges the importance of
cube as a shipping cost determinant. Id. Historically, Priority Mail rates have been
based primarily on weight and distance shipped (zone). Id. Dim-weighting will
introduce cube as a third major Priority Mail rate element, although it is expected to
apply only to an estimated 2.3 percent of all Priority Mail volume. Id.
As explained by witness Scherer, dim-weighting is a worldwide standard for the
pricing of air freight, including parcels. USPS-T-33 at 13. It is utilized by all major
263
carriers in the United States, including FedEx, UPS, and DHL. Id. at 14, 15 n. 11).
Packages are rated at the actual weight or the “dim weight,” whichever is greater. Id. at
14. The dim weight is determined as cubic volume measured in cubic inches (length x
width x height, all in inches), divided by an industry standard “dim factor” of 194 cubic
inches per pound. Id. The dim factor is simply a reciprocal of the density. Id. In this
case, it corresponds to a density constant of approximately 8.9 pounds per cubic foot.
Id. Until 2004, FedEx and UPS applied dim-weighting only to parcels exceeding one
cubic foot, and the Postal Service's proposal is so limited. Id. at 15.
For irregularly shaped parcels, i.e., parcels that are not rectangular in shape, the
Postal Service proposes a novel exception. USPS-T-33 at 21-26. Whereas FedEx and
UPS use the common method of measuring such parcels at their maximum length,
width and height cross-sections, and calculating cubic volume as the product of those
three factors, the Postal Service proposes to moderate this calculation with an
adjustment factor of 0.785, as explained by witness Scherer in his testimony. Ibid.
Second, the Postal Service proposes eliminating the 15-pound balloon rate in
Zones 5 - 8. USPS-T-33 at 21. Dim-weighting’s scope — above one cubic foot — will
cover the great majority of parcels in Zones 5 - 8 currently paying the balloon rate, most
of which are in excess of three cubic feet (see USPS-LR-L-120, Tables Z5-5, Z6-5, Z7-5
and Z8-5). Id. The balloon rate will be retained in Local and Zones 1 - 4. Id. This is
once again consistent with the market: UPS Ground, FedEx Ground and DHL Ground
264
all charge a 30-pound “oversize” rate for parcels measuring more than 84 inches in
combined length and girth. Id.1 The same is not done for their air services. Id.
Third, the Postal Service proposes a permanent classification for the Priority Mail
flat-rate box, which has been offered since November 20, 2004, under experimental
conditions pursuant to Docket No. MC2004-2. USPS-T-33 at 52. The Priority Mail flat-
rate box consists of two boxes, actually, of the same size (external cubic volume) but
different shape. Id. The two boxes carry a single rate not varying by distance shipped
(zone) or weight. Id. The rate started at $7.70 on November 20, 2004, increasing to
$8.10 on January 8, 2006, following Docket No. R2005-1. Id. The boxes are available
for no fee at post offices and can be ordered from www.usps.com. USPS-T-33 at 53.
The Postal Service has also provided several mailers with customized flat-rate boxes.
Id. In these cases, the box dimensions have been altered, but the size has been
maintained at 0.34 cubic feet. Id.
Witness Scherer assessed usage of the flat-rate-box (see USPS-LR-L-119),
concluding that revenue leakage from preexisting Priority Mail pieces trading down to
the flat-rate box has proven to be tolerable owing to more-than-offsetting contribution
from some pieces trading up and from volume newly attracted to Priority Mail by the flat-
rate box (“new business”). USPS-T-33 at 54. USPS-LR-L-132 describes the market
1 UPS recently announced that, starting January 1, 2007, dim-weighting will apply to Ground parcels exceeding 3 cubic feet in lieu of the "oversize rate." See http://www.ups.com/content/us/en/resources/prepare/dimweight2007.html. FedEx and DHL have announced that they will do the same, effective February 5, 2007, and January 1, 2007, respectively. See http://images.fedex.com/us/ rates2007/DimWeight.pdf?link=4 (FedEx); http://www.dhl-usa.com/home/ home.asp (DHL).
265
research conducted on the flat-rate box, showing that customers have found the flat-
rate box to be convenient and easy to use.
Witness Scherer proposes a rate increase for the flat-rate box of 8.6 percent,
from $8.10 to $8.80. USPS-T-33 at 57. The $8.80 is derived by equating the flat-rate
box’s implicit cost coverage with implicit cost coverage for the Priority Mail flat-rate
envelope. Id. at 57-58. This is based on the notion that the two products offer similar
convenience and ease of use: rate simplicity, rate immunization against variations in
weight and zone, etc. Id. at 58. Witness Scherer examined and applied the 39 U.S.C. §
3623(c) criteria, finding they were met. USPS-T-33 at 58-60.
2. Other changes improve the Priority Mail rate structure.
In addition to the three proposed classification changes described above, the
Postal Service is proposing two changes to the Priority Mail rate structure. The first is a
separate rate for Zone 3, which will bring Priority Mail in line with the rest of the package
delivery market, including the Postal Service's own parcel post. USPS-T-33 at 6-7. The
second is an increase in the balloon rate (which will only apply to Local and Zones 1-4)
from 15 pounds, where it has been since Docket No. R76-1, to 20 pounds. This move
is made to increase implicit cost coverage on balloon-rated parcels to a more
appropriate level. USPS-T-33 at 32.
3. The Postal Service properly distributes certain Priority Mail transportation costs on the basis of cube, not weight.
In this docket, the Postal Service is departing from past practice by distributing
certain transportation costs to rate cells on the basis of cubic volume, whereas in
previous Priority Mail rate filings, these costs were distributed on the basis of weight.
USPS-T-33 at 6. For this purpose, the Postal Service offers the first-ever cube-weight
266
distribution key for Priority Mail. USPS-T-33 at 36. The key, which shows average cubic
volume by rate cell (i.e., for each combination of weight increment and zone), is based
on two studies in which over 8,000 Priority Mail parcels and flats were sampled. Id. at
36-37. The results of those studies as well as determination of the cube-weight
distribution key are detailed by witness Schroeder in USPS-T-29. Id. at 37. One effect
of this switch to a cube-weight distribution key is some rate relief at 11 pounds and up.
See USPS-T-33 at 33, 51.
Some other changes are proposed to more accurately reflect the Priority Mail
transportation network. For example, the traditional Priority Mail rate design has
distributed distance-related surface transportation costs only to the zones in which
trucks are typically used for transportation between the origin and destination
processing facilities: Zones 1 - 4. USPS-T-33 at 40. Further consideration of the
matter, however, reveals that some of those costs are actually incurred in connection
with air travel (surface transportation either to or from air facilities). Id. The Postal
Service has accounted for this disparity by distributing those costs to the higher zones
where they belong. USPS-T-33 at 41-49. A detailed analysis of this matter was
provided by witness Nash (USPS-T-16).
Witness Scherer also proposes to impart an upward slope to the Priority Mail
rates in Zones 5 - 8 (where air transportation is generally used) by applying a novel
“economic cost adjustment factor.” USPS-T-33 at 41-44. This adjustment factor
recognizes that while there may be no explicit distance-related element in the “day turn”
air transportation contract with FedEx, there is an implicit distance-related element.
FedEx’s own costs do go up with distance traveled. By applying the adjustment factor,
267
the rates in Zones 5 - 8 can reflect “economic cost” rather than “accounting cost,” and
better price signals can be sent (e.g., a continuous cycle of increasing costs can be
avoided). Ibid.
4. A new fee for on-call and scheduled pickup On-Demand® is warranted.
Finally, the Postal Service proposes an increase in the fee for on-call and
scheduled Priority Mail, Express Mail, and Parcel Post Pickup On-Demand® service
form $13.25 to $14.25, as explained by witness Scherer at USPS-T-33 at 60.
5. The Commission should not adopt the self-serving cost coverage urged by UPS witness Geddes (UPS-T-3). None of the classification changes proposed by USPS witness Scherer (USPS-T-
33) has been challenged by any witnesses of record in this proceeding. Moreover, his
rate design -- specifically his allocation of costs to rate cells -- has not been contested
by any witness of record in this case.
Only one witness, R. Richard Geddes (UPS-T-3), representing United Parcel
Service, a competitor to the Postal Service in the market for parcel delivery, has
proposed any alternatives specifically aimed at Priority Mail. He proposes a cost
coverage that would result in an average rate increase of 23.6 percent for Priority Mail.
UPS-T-3 at 12. This may reflect UPS's pecuniary interests, but, as explained in Part V
of this brief, lacks the comprehensive evaluation of the rate making criteria performed
by Postal Service witness O'Hara (USPS-T-33 at 20-23). It also conveniently ignores
the fact that while Priority Mail volumes remain far below their FY 2000 level, from 2000
through 2004 UPS combined deferred and ground volume grew by 2.1 percent. See
Response to USPS/UPS-T3-7, redirected to UPS; UPS-T-3 at 17.
268
6. Conclusion
In summary, the Postal Service’s approach to Priority Mail rate design in the
instant case was relatively empirical, relying upon special studies that characterized
Priority Mail by piece size (in relation to weight and zone) and transportation logistics.
These studies enabled a better reflection of costs, both across the zones and across the
weight increments. The distribution of transportation costs to weight increments is
specifically improved by recognizing the importance of cubic volume (size) as a cost
determinant. The new distributions promote fairness by spreading the burden of cost
recovery more evenly across the universe of Priority Mail pieces. Fairness is also
promoted by the proposal for dim-weight pricing in Zones 5 - 8. Previously, many of the
pieces that would be subject to dim-weighting were not covering their costs. This
imposed an unfair burden on other pieces. The Postal Service has also attempted to be
fair in its dim-weighting proposal by offering a novel adjustment factor that reduces the
rate assessment for irregularly shaped parcels. Another aim of the Postal Service’s
proposed Priority Mail rate design has been to send proper price signals to users,
particularly with respect to bulky, lightweight parcels (through the dim-weighting
proposal). Finally, the Postal Service continues to strive to enhance the value of Priority
Mail to customers. In particular, the proposal for a permanent flat-rate-box classification
is intended to bring convenience and ease of use.
Accordingly, the Commission should recommend the Priority Mail rates and
classification changes proposed by witness Scherer.
269
D. The Commission Should Recommend the Express Mail Rates Proposed by the Postal Service
The Postal Service’s proposed Express Mail rates are designed to achieve a cost
coverage appropriate for this service and institute a logical revision to the rate structure,
while responding to Commission views expressed in Docket No. R2005-1. As
explained by witness Berkeley, the Postal Service proposes an overall rate increase of
12.5 percent for Express Mail in order to achieve a cost coverage of 191 percent
established by witness O’Hara. USPS-T-34 at 13. The Postal Service also proposes
separating the current uniform two-pound rate into discrete one- and two-pound rates
for the three Express Mail rate categories. Id. at 21-22. No party has opposed the
Postal Service’s proposed Express Mail rate design.
1. Witness Berkeley’s rate design is reasonable, supported by substantial record evidence, and responsive to prior Commission concerns from R2005-1.
With two exceptions, witness Berkeley’s rate design generally adheres to the rate
design she presented (as witness Mayo) in Docket No. R2001-1. She initially designed
the Post Office to Addressee rates, which account for the vast majority of Express Mail
volume, and then applied rate differentials across-the-board to arrive at her proposed
Custom Designed and Post Office to Post Office rates. Id. at 21-24. The Custom
Designed differential is 30 cents greater than the Post Office to Post Office differential.
This differential is identical to the one used in Docket No. R2001-1 and reasonably
represents the additional cost of Custom Designed service over Post Office to Post
Office service. Id. at 23.
Because of its importance, the first rate that should be designed in Express Mail
is the Post Office to Addressee half-pound letter rate, which represents 83.7 percent of
270
Express Mail volume. Witness Berkeley proposes to increase this rate by 12.8 percent
– the result of applying the target percentage increase of 12.5 percent with a quarter
rounding constraint, rather than the nickel rounding constraint used in Docket No.
R2001-1. As she explains, this revised rounding constraint produces a more easily
remembered rate ($16.25). Id. at 21.
Witness Berkeley also deviated from her Docket No. R2001-1 rate design in the
manner by which she designed the Post Office to Addressee rates above two pounds,
in order to respond to Commission statements concerning Express Mail rate design in
the last omnibus rate case (Docket No. R2005-1). Specifically, the Commission
expressed concern that the use of minimum and maximum constraints was creating an
uneven application of the markup. See PRC Op., R2005-1, at ¶ 6009. Witness
Berkeley proposes a uniform rate increment of $3.10 for the three- to nine-pound Post
Office to Addressee rates, and a uniform increment of $2.15 for the ten-pound and
above rate cells, a design which serves to reduce the range of cost coverages for the
individual rate cells while meeting the target percentage increase. USPS-T-34 at 22.
The range of proposed cost coverages for the Express Mail rate cells is therefore
significantly smaller in this docket than in Docket No. R2001-1. Id. at 23-24.2 Witness
Berkeley has therefore taken a strong step in the direction that the Commission has
indicated is desirable, while at the same time remaining cognizant of the need to avoid
increases that are inordinately above the subclass average. The Postal Service urges
2 In Docket No. R2001-1 the range of percentage increases for the rate cells was tightly constrained, with every rate cell for Post Office to Addressee increasing between 9.6 and 9.8 percent. See Docket No. R2001-1, USPS-T-35 at 22-23. In this docket, however, the Post Office to Addressee rates increase between 3.7 percent (for the new separate one-pound rate) and 26.0 percent.
271
the Commission to avoid any further movement towards more equal application of the
markup. Id. at 23-24.
2. The Commission should maintain Same Day Airport service in the Classification Schedule.
The Postal Service has not proposed any classification changes for Express
Mail. While Same Day Airport Service is currently suspended for security reasons, and
no rates are therefore proposed, witness Berkeley proposes to maintain that service in
the classification schedule in case circumstances allow for its resumption. Id. at 6-7.
This proposal is unopposed, and is consistent with Commission precedent. See, e.g.,
PRC Op., R2000-1, at App. Two, page 2.3
3. The Commission should recommend the ungrouping of the combined one-and-two pound rate.
The only structural change to the Express Mail rate schedule that witness
Berkeley proposes is the separation of the uniform two-pound rate into individual one-
pound and two-pound rates in the rate categories. As she explains, there are three
reasons why such a change is desirable. First, the difference in the per-piece costs
from one to two pounds is comparable to other differences between pound increments
where separate rates are charged, and is significant enough to warrant separate rates.
Id. at 22. Second, the use of separate rates for one- and two-pound pieces is consistent
with the practice of the Postal Service’s competitors in the expedited delivery market.
UPS, FedEx, and DHL all use separate one-pound and two-pound rates for their
domestic retail overnight and second-day products. Finally, this proposal would make
the Express Mail rate schedule consistent with the one-pound increment rate schedules 3 In that docket, the Commission maintained Same Day Airport Service in the DMCS despite its suspension for security reasons. It has followed this approach in subsequent cases.
272
for Priority Mail and Parcel Post, neither of which has a combined one-and-two-pound
rate. Id. at 22. Express Mail would no longer be the only Postal Service retail product
with such a rate.
Separating the uniform two-pound rate into one-pound rate increments would
also be consistent with Commission precedent. In successive rate cases (Docket Nos.
R80-1 and R84-1), the Postal Service proposed uniform two-pound and five-pound
rates, partly based on the practices of the expedited delivery industry. See Docket No.
R84-1, USPS-T-22 at 64; Docket No. R80-1, USPS-T-10 at 168. In Docket No. R90-1,
the Postal Service proposed to ungroup the uniform five-pound rate into separate three-
pound, four-pound, and five-pound rates for competitive reasons. See Docket No. R90-
1, USPS-T-19 at 25-26. The Commission agreed, finding that the change “appears
appropriate and consistent with other Postal Service offerings as well as the expedited
delivery market.” PRC Op., R90-1, at ¶ 6538. The Commission also noted that there
was no opposition to the Postal Service’s proposal. Id.
An identical situation is presented here. The Postal Service’s competitors in the
expedited delivery market do not have a uniform rate for pieces weighing one and two
pounds, and neither do other Postal Service offerings. Additionally, no party has
opposed this proposal. The Commission should therefore recommend ungrouping this
rate.
E. Standard Mail Rate and Classification Changes
The Postal Service’s Standard Mail rate and classification proposals are shown
in the Docket No. R2006-1 Request of the United States Postal Service For A
273
Recommended Decision On Changes In Rates Of Postage And Fees For Postal
Services, at Attachments A (pages 11-32) and B (pages 7-22) (May 4, 2006). The
justification for these proposals is explained in the direct testimony of Postal Service
witness James M. Kiefer, USPS-T-36.4 The Postal Service is proposing important
classification changes and will discuss them first before discussing the rate design for
Standard Mail.
1. Standard Mail Classification Proposals
Standard Mail is generally divided into four subclasses, Standard Mail Regular,
Standard Mail Nonprofit Regular, Standard Mail Enhanced Carrier Route (ECR), and
Standard Mail Nonprofit Enhanced Carrier Route (NECR).5 For the Standard Mail
Regular subclass, witness Kiefer proposes an average increase in the revenue per
piece of 9.6 percent. USPS-T-36 at 3. For the Standard Nonprofit Regular subclass, he
proposes an average increase in the revenue per piece of 9.8 percent. The overall
increase for the Regular subclasses is 9.8 percent. The cost coverage for the Regular
subclasses is 176.5 percent. Id. at 35.
For the ECR subclass, witness Kiefer proposes an average increase in the
revenue per piece of 8.1 percent. For the NECR subclass, he proposes an average
increase in revenue per piece of 8.2 percent. Combined, the two subclasses have an
average rate increase of 7.9 percent. The proposed cost coverage for the ECR and
NECR subclasses is 214.2 percent. Id. at 35-36.
4 Docket No. R2006-1, Direct Testimony of James M. Kiefer On Behalf Of United States Postal Service, USPS-T-36. 5 As discussed below, the Postal Service is recommending nominal changes to the nomenclature of the Nonprofit subclasses. Id. at 4.
274
A significant feature of the Postal Service’s rate and classification design, which
is presented in the testimony of witness Kiefer, is the proposed change to the
classification structure in Standard Mail. Witness Kiefer proposes the establishment of
new rate categories within the Standard Regular and Standard Nonprofit Regular
subclasses on the basis of shape. The design retains the Letter category but
deaverages the previous Nonletter category into three -- flats, parcels, and NFMs (Not
Flat-Machinable). USPS-T-36 at 4-7.6 Witness Kiefer also proposes that the
Automation Carrier Route rate categories within the ECR and NECR subclasses be
eliminated. All of witness Kiefer’s specific rate design proposals, including these
proposed classification changes, are summarized and discussed below.
a. Changes to subclass and rate category names. As noted above Standard Mail currently has four subclasses: Regular,
Enhanced Carrier Route, Nonprofit, and Nonprofit Enhanced Carrier Route. Domestic
Mail Classification Schedule (DMCS) §§ 321-324, respectively. Witness Kiefer
proposes that the Standard Mail Nonprofit subclass be renamed Standard Mail
Nonprofit Regular. This simple change creates a parallel naming convention to the one
that already exists between Enhanced Carrier Route (ECR) and Nonprofit Enhanced
Carrier Route (NECR). Id. at 4.
6 In conjunction with this shape-based redesign, witness Kiefer advocates a related classification change. No longer will parcels be priced simply as surcharged nonletters and therefore the residual shape surcharge (RSS) is eliminated. Instead, parcels have their own rate structure. Attachment A to Request, p. 13, 15 n. 2; USPS-T-36 at 5.
275
Witness Kiefer also proposes that the rate categories now known as “Presorted”
be renamed “Nonautomation.” Since all Standard Mail is presorted, the change will
make the name more descriptive of the non-barcoded mail in these categories. Id. at 4.
b. Standard Mail Regular/Nonprofit Regular. i. Letters. The rate structure for automation letters will not change in this proposal. Rates
will still be provided for four presort and three entry levels. For non-automation-rated
letters, the Postal Service is proposing distinct rate designs for machinable and
nonmachinable letters. The Postal Service is proposing expanded rate categories for
nonmachinable letters, mirroring those for automation; and a realignment of the two
presort categories for machinable letters. The proposed changes align these types of
mail with operations. Id. at 13.
The Postal Service barcodes machinable letters at the AADC, therefore finer
levels of presorting have little or no value. As such, witness Kiefer proposes that
nonautomation machinable letters have two presort rate options, MAADC and AADC.
Id.
The cost of sorting manual letters varies significantly depending on how finely
presorted the letters are when presented to the Postal Service.7 In the current rate
structure, nonmachinable letters pay a fixed surcharge over the rate paid by machinable
nonautomation letters. The Postal Service is proposing a rate structure that has
significant increase in rates for the least finely presorted manual letters and more
7 See USPS-LR-L-48, STANDARD.xls, worksheet NONAUTO NMACH SUM.
276
moderate increases for highly presorted pieces. This will encourage mailers to make
their letters machinable, and if not, then to more finely presort them. Id. at 13-14.
No participant has opposed these classification changes.
ii. Flats.
The current broad nonletters shape category in Standard Mail will be replaced by
three new categories that better reflect how each type of mail is processed. Most
nonletters will continue to be processed in the flats mail stream and will be recognized
for rate treatment purposes in a separate flats shape category. Id. at 15. The two other
rate categories, parcels and NFMs, are discussed below.
Eligibility for flats rate treatment will be tightened under the Postal Service’s
proposal to better align with the flats processing. For example, pieces whose thickness
exceeds 0.75 inch will no longer qualify for automation flat rates. Id. at 15-16. Pieces
that do not meet the rigidity requirements will not be eligible for flats rates. Separating
nonletters into flats and other shape-based categories will allow the rate designs for
pieces in different mail streams to evolve toward more rational rate structures and
relationships. Id. at 15-16
The Postal Service is also proposing to de-average the presort rate categories
for automation and nonautomation flats. The finer presort discount categories will allow
deeper discounts for the most highly workshared mail and, conversely, higher rates for
the most costly, least workshared flats.
No participants have opposed these classification changes.
277
iii. Standard Regular Parcels.
The Postal Service proposes the following classification changes for Standard
Mail Regular and Nonprofit Regular parcels:
• A de-averaged rate design that is independent of the flats rate design. The residual shape surcharge will be abolished. USPS-T-36 at 5, 10-12, 17-21, and 26.
• Separate rate categories for machinable and nonmachinable parcels. Id. at
18-21 and 26. • A requirement to barcode parcels; non-barcoded parcels will be subject to a
surcharge. Id. at 21 and 26. • Eligibility for DDU discounted rates for parcels. Id. at 19, 21, and 26.
The proposal for separate, shape-based classifications for parcels is of primary
importance to the Postal Service and is the Postal Service’s principal pricing and
classification goal for nonletters in this docket. Id. at 10; USPS-RT-11 at 6, 7. An
important aspect of this reclassification is that the new rate categories have meaningful
price differentials that lead to the efficiencies that the proposed changes intend to
induce. USPS-RT-11 at 6.
The Postal Service’s proposals will have significant efficiency and other benefits.
They will better align parcel mail with the way it is processed and costs are caused, will
allow rates to better reflect costs, and will encourage mailers to adopt more efficient
practices to lower Postal Service costs. USPS-T-36 at 12. They will also encourage
parcel worksharing and machinability, allow expanded worksharing opportunities for
mailers, and increase the visibility of these parcels in the Postal Service’s cost and
278
volume reporting systems leading to more specific data in the future. Id. at 17. See Tr.
5/956.
The proposed changes are reasonable, lead to a more rational rate structure,
encourage efficiencies, and give expanded opportunities to mailers. No party opposes
the classification changes. The Commission should recommend the Postal Service’s
proposed parcel classification changes.
iv. Standard Regular Non Flat-Machinable Pieces (NFMs or “Hybrid pieces”)
The Postal Service proposes to create a new classification category, since the
current structure does not differentiate pieces well by mail processing path. At present,
the flats rate category contains significant numbers of parcel-shaped pieces that,
because of the UFSM 1000 standards and the lack of an appropriate recognition of
rigidity in the standards, qualify for automation flats rates. Id. at 10. Of significant
concern are pieces that are somewhat flat-shaped but rigid, or that are between 0.75
and 1.25 inches in thickness (USPS-T-36 at 21). These pieces are not commonly
processed on flat sorting machines. See Tr. 5/929. They are commonly processed in
the parcel stream, and as a consequence, these pieces are counted as parcels for cost
allocation purposes but are counted as flats for volume purposes. USPS-T-36 at 21-22;
Tr. 5/934, 956. The new category for these types of pieces is called Not Flat-
Machinable8 and have the following classification elements:
• A de-averaged rate design that is independent of the flats rate design. USPS-T-36 at 6, 10-12, 21-24 and 26.
8 In his testimony, Witness Kiefer sometimes refers to NFMs as “hybrids”. See, e.g., USPS-T-36 at 21-23.
279
• A requirement to barcode NFMs; non-barcoded NFMs will be subject to a surcharge. Id. at 24, 26.
• Eligibility for DDU discounted rates for NFMs. Id. at 23, 26. The proposal for separate, shape-based classifications for NFMs, as with
parcels, is of primary importance to the Postal Service and is the Postal Service’s
principal pricing and classification goal for nonletters in this docket. Id. at 10; USPS-RT-
11 at 6, 7. An important aspect of this reclassification is that the new rate categories
have meaningful price differentials that lead to the efficiencies that the proposed
changes intend to induce. USPS-RT-11. at 6.
The Postal Service’s proposals will have significant efficiency and other benefits.
They will better align NFM mail with the way it is processed and costs are caused, will
allow rates to better reflect costs, and will encourage mailers to adopt more efficient
practices to lower Postal Service costs. USPS-T-36 at 12. They will also encourage
NFM worksharing and machinability, allow expanded worksharing opportunities for
mailers, and increase the visibility of these pieces in the Postal Service’s cost and
volume reporting systems leading to more specific NFM data in the future. Id. at 17.
See Tr. 5/956.
The proposed changes are reasonable, lead to a more rational rate structure,
encourage efficiencies, and give expanded opportunities to mailers. No party opposes
the classification changes. The Commission should recommend the Postal Service’s
proposed NFM classification changes.
280
v. Customized MarketMail (CMM).
The Postal Service proposes to change the reference point for Standard Mail
Regular and Nonprofit Regular CMM mail pieces. Currently it is priced as a piece-rated
origin-entered Nonautomation Basic Nonletter, plus the residual shape surcharge. With
the proposed elimination of the residual shape surcharge, a new reference point is
needed. The Postal Service proposes using the rate for an origin-entered 5-digit
presorted NFM as the reference rate. Id at 25-27. This change in the reference rate
appropriately reflects CMM’s presort level, nonstandard shape, and rate relationships
with nonautomation flats. Id. at 26. No party opposes this change. It should be
recommended by the Commission.
c. ECR/Nonprofit ECR.
The Postal Service proposes the following classification changes for the
Standard Mail ECR and NECR subclasses:
• The Automation Basic rate category for letters will be eliminated. Witness Kiefer assumes that these pieces will migrate to the Regular subclasses and pay the Automation 5-digit letter rates. USPS-T-36 at 6, 30-31.
• The DDU destination entry discount will be eliminated for all letters. Id. at 6,
30. • The nonletter category will be deaveraged into flats and parcels. Eligibility
requirements for flats rates will follow the same revised definitions used for the Standard Mail Regular subclasses. Pieces not meeting these revised eligibility requirements will pay parcel rates. Since there are separate parcel rates, the residual shape surcharge is eliminated. Id. at 32-34.
• Detached address labels (DALs) will still be permitted for certain flats, but
mail addressed with DALs will have to pay a per-piece surcharge. Id. at 7, 32.
281
i. ECR/NECR Letters.
The Postal Service is proposing to eliminate two rate categories for Enhanced
Carrier Route letters. Both proposed changes will better align the rates for these letters
with operations.
Automation Basic rate category is currently available only for letters sent to sites
that do not receive letters from the plant in delivery point sequence. The Postal Service
intends to further centralize the sequencing operations in plants to the greatest extent
possible, reducing the dependence on automated or manual sorting in delivery units.
USPS-T-36 at 30-31; USPS-T-42, Section II, Part A, discussion of CSBCS equipment).
The elimination of the Automation Basic rate aligns this mail with its expected
operational handling at the mail processing plant. The rate effect of this change is
discussed below.
The Postal Service is proposing to eliminate the discount for DDU letters in order
to promote its automation program. It intends to delivery point sequence (DPS) as
many letters as possible by machine, and since DPS equipment is mostly located at
plants, entering letters at delivery units no longer makes operational sense. USPS-T-36
at 30; USPS-T-42, Section II, Part A. Eliminating the DDU discount will remove the
economic incentive to deposit letters at delivery units when the letters are subsequently
transported back to plants at added costs. Mailers will continue to be able to drop
letters at the delivery unit, which may be of particular importance to local mailers.
However, by eliminating the discount, the volume of letters dropshipped to the plant,
where the sorting actually takes place, should increase. Id.
282
ii. ECR/NECR Flats.
Under the Postal Service’ proposal for Enhanced Carrier Route, the current
classification for nonletters will be deaveraged into flats and parcels. See proposed
DMCS, Schedule 322. The eligibility qualifications for flats rates will be similar in the
ECR and NECR subclasses as in the Regular and Nonprofit Regular subclasses.
Pieces that do not meet the flats rate eligibility will become parcels and pay parcels
rates. Because there is no UFSM 1000 exception in ECR/NECR today that allows for
pieces up to 1.25” thick, for example, the number of pieces that will lose eligibility for
flats rate treatment is expected to be relatively small. Id. at 32.
The Postal Service is proposing one important change to the rate design for ECR
and NECR flats. The Postal Service has determined that it wants to encourage on-
piece addressing for all mail in furtherance of its goals of improving efficiency (see the
discussion of DALs by witness Coombs (USPS-T-44), Section 3.1). To further that
policy decision, the Postal Service is proposing that all mail that uses detached address
labels pay a surcharge. No one opposes the addition of the surcharge to the schedule,
including those likely to be most affected such as the Saturation Mailers Coalition.
SMC-RT-1 at 3. Several parties support the surcharge such as ADVO (Id.), Valpak9
(VP-T-1 at 176), and NAA (NAA-T-2 at 11).
The Postal Service’s proposed changes to the Enhanced Carrier Route
subclasses classifications for letters and flats are reasonable, encourage efficiencies,
and align the rate structure with operations. No party opposes the classification
changes for letters, the elimination of the DDU discount for letters, or the introduction of
the DAL surcharge. As discussed below, only Valpak opposes the elimination of the
9 Valpak Direct Marketing Systems Inc. and Valpak Dealers’ Association, Inc.
283
Automation Basic rate. The Commission should recommend the Postal Service’s
proposed ECR classification changes.
2. Intervenors’ classification proposals.
a. PostCom’s proposals to raise the weight limit for Standard Mail automation letters from 3.5 to 4.0 ounces should be rejected.
PostCom witnesses Posch (PostCom-T-3) and Otuteye (PostCom-T-8) both
propose increasing the current maximum weight limit for automation letters from 3.5
ounces to 4.0 ounces. Witness Posch believes that “there is, plainly, no operational
rationale for the current maximum weight limits for automation letters.” PostCom-T-3 at
3. Witness Otuteye bases his proposal on the claim that pieces mailed by Money
Mailer, LLC, weighing between 3.5 and 4.0 ounces are being processed on Postal
Service automated equipment. PostCom-T-8.
The Postal Service is always looking for new ways to grow the mail, and
adjustments to the automation mail weight limit have been considered in the past. The
majority of the Postal Service’s DBCS equipment (over 5,000 machines) was designed
to optimally handle a mix of mailpieces which collectively weighs less than 3.5 ounces.10
10 A very small portion of the DBCS fleet (less than 12 percent of the entire equipment fleet) is equipped with expanded capabilities, which allow for the processing of letters with physical characteristics outside the limits of base DBCS equipment, including the processing of pieces up to 6.0 ounces. The primary function of these machines is to process thicker and heavier outgoing single-piece letters that are culled from the collection mail stream. These machines provide the opportunity to sort these originating letters to the destination in an automated operation, though with a significantly lower throughput, thereby minimizing the dependency on manual operations. Tr. 34/11464-11465.
284
See Tr. 34/11527-11528. However, recognizing that expanding the number of pieces
that could be handled on automation equipment would benefit both customers and the
Postal Service, a “Heavy Letter” test was conducted to determine the maximum letter
weight that could be handled by the majority of our machines, without causing
detrimental consequences in mail processing.11 Tr. 11/3214; Tr. 34/11529-11530. The
test recommended that any proposals to raise the weight limit above 3.5 ounces should
be rejected as impractical given the current configurations of USPS mail processing
equipment. Tr. 11/2846. As witness McCrery explained, raising the weight limit above
3.5 ounces causes detrimental consequences to the mail base as whole, by both
damaging mail processing equipment, creating down time, and causing jams that
damage mail pieces. Tr. 34/11530.
Setting the weight limit at 3.5 ounces does not mean that every piece below 3.5
ounces runs without any problems, and that every piece over 3.5 causes problems. In
fact, there are pieces that weigh less than 3.5 ounces that process at unacceptable
throughput and jam rates, as well as pieces that weigh over 3.5 ounces that process
without great difficulty. See 39/13440. It is not possible to establish a weight limit on
automated equipment such that there is a certainty that all pieces below the limit will
process well and all pieces above the limit will process poorly, regardless of mail piece
construction. Id. As witness Laws states, the weight limit is “established in
consideration of the letter mail base in general, with a goal of establishing an overall
11 The test was conducted between April 20, 1999 and May 13, 1999. The results of the test were published April 6, 2001. Since the test was conducted, there have been no changes to the base DBCS equipment fleet to invalidate these conclusions. Tr. 11/2844-2845; Tr. 34/11464.
285
automated letter mail stream that has a high probability of processing at an acceptable
throughput and jam rate.” Id.
b. Witness Horowitz’ proposal to expand the definition of Standard Mail to include advertising inserts beyond the 16 ounce limit fails to consider important issues with potentially harmful consequences and should be rejected.
Witness Horowitz (POSTCOM-T-6 at 10-12) proposes to allow Standard Mail
parcels to contain an additional two ounces of advertising inserts beyond Standard
Mail’s 16 ounce weight limit. This is a significant redefinition of Standard Mail. Witness
Horowitz cites as a benefit of his proposal that the additional advertising would generate
new business which would generate additional volume in several mail classes (the
multiplier effect). POSTCOM-T-6 at 10-11. His proposal would benefit mail order firms
like his that ship parcels that weigh close to the 16 ounce weight ceiling and so cannot
now include many advertising inserts. POSTCOM-T-6 at 11.
The Postal Service does not dispute that including additional advertising inserts
in parcels containing mail order fulfillment might generate additional mail pieces, but
there is no record evidence, either from witness Horowitz, or from any other party, that
the alleged benefits will be material enough to justify redefining Standard Mail. USPS-
RT-11 at 3.
Moreover, neither witness Horowitz nor any other witness has addressed several
obvious concerns on the record. These include: how the Postal Service is to determine
that the additional weight is advertising and not merchandise; the fairness of allowing
Standard Mail to breach its weight limit but not extending this same treatment to other
286
subclasses of mail like Media Mail, Library Mail, Parcel Post and Priority Mail; the
rationale for limiting the inclusion of additional advertising materials to parcel shaped
mail pieces only, rather than allowing, for example, catalogs to breach the 16 ounce
weight limit also; and what extra costs this extra material would impose on the Postal
Service. USPS-RT-11 at 3-5.
Mr. Horowitz cites BPM as an example of a subclass of mail where non-print
material that does not fall within the definitions of bound printed matter can still be
included in BPM parcels. POSTCOM-T-6 at 10-11. Yet Mr. Horowitz acknowledges
that, even in BPM, extra non-BPM material cannot be included if it would cause the
BPM parcel to exceed the 15-pound subclass weight limit. USPS/POSTCOM-T6-15.
His illustration, therefore, fails to support his proposal.
Mr. Horowitz fails to provide or point to any record evidence that his proposal
would produce material benefits, or any record evidence that addresses important
issues that the Commission should consider before deciding to redefine a major class of
mail. His proposal should be rejected.
287
c. Witness Mitchell’s (VP-T-1) proposal to retain the automation
basic rate category in ECR should be rejected.12
Witness Mitchell suggests that that the rate category for basic automation letters
in ECR should be retained. VP-T-1 at 123-127. However, as witness McCrery explains
in his rebuttal testimony, automation carrier route letter mail preparation should be
eliminated based on the future of mail processing and the desire to streamline the
Postal Service’s offerings and operations. Tr. 34/11472; see Tr. 34/11461-11464.
As the Postal Service takes additional steps to automate a greater percentage of
the letter mail base, along with a further centralization of delivery point sequencing on
DBCSs in postal plants, the limited additional value of automation carrier route sortation
is further eroding. Tr. 34/11462. In addition, the Postal Service is in the early stages of
an additional phase of DBCS purchases that will completely phase out the CSBCS fleet.
See response to POIR No. 8, Question 15(a)-(c)/Tr. 11/3021. Even prior to the
retirement of CSBCS equipment, there are many instances where the value of the
carrier-route sortation is not fully realized. Tr. 34/11463. If the trays are not labeled
properly or identified such that they can be directed in an appropriate manner, or it is
determined that it would be more efficient to consolidate these letters to the appropriate
12In his testimony, Valpak witness Mitchell states that the Commission should consider creating an unrestricted category of basic automation letters. See Testimony of Witness Mitchell, VP-T-1, at page 126, lines 12-13. He then retracts this recommendation and states he is not proposing an unrestricted Automation Basic rate category. Tr. 25/8998, See Tr. 25/8888 (Response to Witness Mitchell to USPS/VP-T1-3(d)). The negative operational impact of the creation of an unrestricted Automation Basic rate category is discussed within the rebuttal testimony of Postal Service witness McCrery. Tr. 34/11461-11464.
288
CSBCS schemes on DBCS equipment, the carrier-route sort provides no value. Id.
Since CSBCS equipment can process up to six routes on a single sort plan, processing
the automation carrier route volume labeled to these multi-carrier schemes first on a
DBCS is more likely to occur, since pure carrier-route sorting is suboptimal. Id. Smaller
volumes of letters from multiple mailings will then be combined in significantly fewer
trays for more efficient dispatch, transport, and CSBCS induction. Id.
Once automation carrier route preparation is eliminated and automation letters
shift from carrier route to 5-digit automation trays, the fewer resulting trays will be
directed to the proper destination plant where the trays will then be processed on the
appropriate incoming secondary sort plans. Letter volume that is further sequenced on
CSBCS equipment will be grouped on the DBCSs to the CSBCS sort plans and then
directed to this equipment. Id.
Continuing the preparation of automation letters in pure carrier-route trays no
longer comports with current operational realities, and the additional trays that are
created under this preparation are costly. Id. An expansion of this category makes
even less sense. Furthermore, Witness Mitchell’s rate design proposal would result in
automation letters migrating to the nonautomation Enhanced Carrier Route Basic
category. See Tr. 25/8998-8999. This would be an undesirable result, since letters in
this category are neither required to be automation compatible nor barcoded.
Furthermore, ten or more letters must be prepared to the appropriate carrier route under
this category, a sort that provides no value for a vast majority of delivery zones that are
sequenced on DBCS equipment. Tr. 34/11464.
289
3. The Postal Service’s proposed Standard Mail classification
changes meet the requirements of the Act and the Commission should recommend them.
The current classification schedule for Standard Mail, as recommended by the
Commission and approved by the Governors, complies with the requirements of 39
U.S.C. § 3623. The Postal Service’s proposed changes are also consistent with
Section 3623. Consistent with the advances in the direction of more shape-based mail
processing technology, the proposed classification changes move the schedule more in
the direction of recognizing these shape-based differences. Furthermore, the changes
offer a greater opportunity for worksharing and aligning the mail better with operations.
The changes are fair and equitable, and provide classifications that are desirable.
The shape-based classification changes, although significant, were not opposed
by any intervenor and were specifically adopted by Valpak and Advo in their rate
designs. As discussed below, intervenors oppose elements of the rate design
associated with the new shaped-based design. The other classification changes were
similarly not opposed, except for the limited objection of Valpak to the elimination of the
Automation Basic rate category for ECR/NECR letters. See discussion supra.
The Postal Service’s proposed classification schedule, including the proposed
changes should be recommended by the Commission.
4. The Postal Service’s rate proposals meet its revenue needs under the Act and appropriately reflect the policies and practical objectives embodied in its classification initiatives.
The rate changes proposed for Standard Mail satisfy the needs to make
appropriate contributions to the Postal Service’s revenues, as well as to combine and
achieve various goals underlying the important classification initiatives described
290
generally above. These goals include the promotion of increased operational efficiency
and effectiveness through the establishment of a shape-based framework that sends
clear pricing signals to mailers. The resulting rate structures will facilitate sound
business decisions beneficial to the individual postal customer and the Postal Service,
as well as to all mailers. At the same time, the rates will fairly recognize cost
differences among types of mail and mailing practices, and pay appropriate attention to
the effect of rate increases on the mailers using categories resulting from the proposed
classification changes. In these respects, the Postal Service’s rate proposals succeed
on several levels.
First, they meet the Postal Service’s revenue requirement by covering the costs
attributable to the pertinent categories within the class and making reasonable
contributions to institutional costs. Second, the process of rate design fairly balances a
complex array of considerations related to operations and mailer behavior, rather than
focusing on a single principle or a narrow range of considerations. Third, the rates
recognize and maintain important rate relationships. Fourth, the rate design recognizes
and incorporates cost and operational differences among the various mail categories.
Fifth, the rates strike a fair balance between cost recognition and mitigation of the
adverse effects of rate increases. Sixth, the rates fairly recognize the worksharing
efforts of mailers and send appropriate pricing signals. Seventh, the rates reinforce the
logic and policies underlying the move toward shape-based rate structures. Finally, the
proposed rate structures establish a practical foundation for the advance of greater
automation and more efficient operations in the future.
291
Furthermore, the Postal Service believes that the rate design process that
produces the various rate levels recognizing worksharing within Standard Mail need not
conform to an artificially constrained presort tree analysis, as is discussed in a later
section.
a. The Postal Service’s proposals meet its revenue needs by
reasonably increasing rates in accordance with the Postal Reorganization Act (Act).
The direct testimony of Postal Service witness James M. Kiefer (USPS-T-36)
summarizes the financial effects of the proposed rates for Standard Mail. USPS-T-36 at
35-36. The Act requires that each class (subclass) of mail or type of service cover its
attributable costs and make a reasonable contribution to all other costs. 39 U.S.C. §
3622(b)(3). As presented in detail in witness Kiefer’s workpapers, in accordance with
the test year cost allocations described in the testimony, exhibits, and workpapers of
Postal Service witness Waterbury (USPS-T-10), the rates proposed cover attributable
costs. They also contribute to all other costs, in accordance with the rate policy
determinations for allocation of institutional costs outlined and justified in the testimony
of Postal Service witness O’Hara (USPS-T-31).
Witness Kiefer summarizes (USPS-T-36 at 35) the following average increases
(calculated at constant volumes) for the subclasses within Standard Mail:
Standard Mail Regular 10.8% Standard Mail Nonprofit Regular 10.0% Standard Mail Enhanced Carrier Route 8.4% Standard Mail Nonprofit Enhanced Carrier Route 8.1%
292
b. The proposed rates fairly and effectively balance multiple
considerations.
The Postal Service’s proposed rates meet the challenge of reconciling and
balancing a number of sometimes conflicting objectives presented under the ratemaking
criteria in the Act, as well as numerous practical considerations. In the current
proceeding, several participants have advocated designing rates for the various
worksharing categories by focusing on a relatively narrow principle of economic
efficiency, namely, efficient component pricing, as that concept has been employed and
accepted in prior proceedings. As discussed by Postal Service witnesses, and
elsewhere in this brief, however, this narrow focus risks lack of appropriate attention to
other important considerations. In Standard Mail, the testimony of Postal Service
witness Kiefer explains how all significant considerations are balanced appropriately
under the policies of the Act in designing rates. In particular, he discusses: (1) how the
rates recognize and maintain important historical and future relationships among rates
for various categories and types of mail, both inside and outside the Standard Mail
class; (2) appropriate reflection of cost differences; (3) the importance of assessing and
mitigating the adverse effects of rate increases; (4) the need to recognize mailer
worksharing efforts and send appropriate price signals consistent with economic goals,
including ECP; and (5) the role of Standard Mail rate design in building a sound
operational foundation for the Postal Service’s automation programs.
293
c. The Standard Mail rates recognize important rate
relationships.
As noted repeatedly by the Commission in the past, existing rates embody
relationships recognized through application of the statutory criteria to practical
circumstances in prior cases. While relationships among costs, volumes, mailer
practices, and postal operations evolve over time, existing rate relationships are the
starting point for evaluating pricing decisions and classification proposals. Among
numerous factors, they reflect the relative status and uses of the different classes of
mail, such as between First-Class Mail and Standard Mail, relationships dictated by
statute, such as between the Standard Mail Regular and Standard Mail Nonprofit
Regular subclasses (39 U.S.C. § 3626), and the operational distinctions and economic
objectives represented by the rates and classifications for different worksharing
categories. In these respects, witness Kiefer’s testimony presents numerous examples
in which his rate design judgmentally balanced the ratemaking criteria and other
considerations, in light of important rate relationships. For instance, in designing rates
for nonmachinable (manual) and machinable and automation letters to meet the
revenue and policy determinations established by the Postal Service’s cost coverage
targets, he kept in mind the need to maintain the appropriate relationships between
presort and drop-shipping levels, in light of the minimum per-piece/piece-pound
structure for the proposed rates.13 He passed through a significant portion of the cost
avoidance estimates for the different categories in order to maintain the appropriate
signals to encourage mailer behavior with the potential to reduce Postal Service costs.
13 USPS-T-36, at 14, n. 5. See witness Kiefer’s response to VP/USPS-T36-1(i), (k) (Tr. 5/962-63).
294
Id., and n. 6. His approach to maintaining appropriate relationships was similar in
establishing levels for rate elements reflecting different shapes.14 He also reconciled
the statutory average revenue relationships dictated for Standard Regular and Nonprofit
subclass rates with the operational objectives embodied in the worksharing categories,
and the effects of higher rates, by adjusting the piece and pound rate elements for
Nonprofit to maintain acceptable relationships. Id. at 27. He made similar adjustments
in designing letter and flat rates for the ECR and NECR subclasses.15
Witness Kiefer’s workpapers reflect numerous other instances in which his
judgmental rate design choices represent the need to maintain appropriate rate
relationships, in light of various policy and practical objectives (e.g., revenue targets,
pricing signals, operational distinctions). While alternative proposals have been
presented in this proceeding, no participant has successfully demonstrated that witness
Kiefer’s rate design establishes or maintains inappropriate rate relationships.16 Rather,
as we argue below, the alternatives presented are inferior to the integrated rate and
classification proposals presented by witness Kiefer.
14 See witness Kiefer’s response to VP/USPS-T36-1(e) (Tr. 5/961-62), and VP/USPS-T36-7(d) (Tr. 5/978-79). 15 To maintain the correct statutory relationship between ECR Regular and Nonprofit letters and flats, he adjusted both commercial and nonprofit rate elements to produce the appropriate average revenue ratios (Id. at 31, 33), and to maintain the desired worksharing signals. Id. at 32. See also, witness Kiefer’s response to NAA/USPS-T36-4 (Tr. 5/909). 16 One exception consists of an observation made by United Parcel Service (UPS) in an interrogatory directed to witness Kiefer, UPS/USPS-T36-1(b). Tr. 18D/6668. UPS noted that the rates for a nonmachinable parcel that has been presorted to 3-digits is lower than a comparable machinable parcel sorted to BMCs. The Postal Service acknowledges that the most effective way to achieve the goal of encouraging machinability would be to establish rate relationships in which the rates for nonmachinable parcels presorted to 3 digits were equal to or greater than the proposed rates for BMC presorted parcels.
295
d. Postal Service rate design recognizes appropriate cost
distinctions.
Recognition of actual cost distinctions among the various categories of mail is a
key feature of the Postal Service’s rate design. Id. at 10-12. In this regard, witness
Kiefer’s testimony cites numerous instances in which the Postal Service’s classification
and rate proposals are consistent with the transportation, handling, and delivery costs
for Standard Mail representing different shapes, weight, and entry profiles. For
example, in designing rates for Standard Mail Regular and Nonprofit flats, witness
Kiefer de-averaged the presort rate categories for automation and nonautomation flats,
reflecting the cost savings differentials at different presort levels and sending price
signals to influence more efficient mailer behavior. Id. at 16. Rather than relying on
rigid models that evaluated costs solely on a linear depiction of processing steps,
however, his approach to design reflected operational realities resulting in actual cost
differences. For instance, his design for nonautomation machinable letters proposed
discounts for letters presorted only to the MAADC and the AADC levels. This decision
conformed to the actual operational practice whereby the Postal Service barcodes
machinable letters at the AADC, eliminating the value of a finer level of presort. Id. at
13.
Furthermore, witness Kiefer applied available cost information to reflect both
expected cost savings results, as well as operational objectives. For example, in
designing parcel rates, he increased discounts for drop-shipping parcels above the
discounts for letters and flats. According to witness Kiefer, this
[R]ecognize[s] the fact that parcels are generally more costly to transport and move about due to their larger size, so
296
avoiding these operations would be expected to result in larger postal savings. I am also proposing that parcels entered at the Destination Delivery Unit (DDU) be eligible for an additional discount that is not available to flats.
Id. at 18-19. He also passed through only a small fraction of the cost differential
between machinable and nonmachinable parcels since the least-workshared
machinable parcels were already receiving a large increase. Limiting the add-on for
nonmachinability tempers the proposed price increase, while still creating an incentive
for mailers to convert to machinable parcels. Id. at 20.
Use of cost information did not in all respects result in rates that conformed
rigidly to cost differences. In most instances, however, the proposed rates moved in the
direction of greater recognition of measured costs. Departures from this principle were
adequately explained and justified in witness Kiefer’s testimony.
e. The rate design process fairly balances cost recognition and
other considerations in light of the adverse effects of rate increases.
In designing Standard Mail rates, witness Kiefer was sensitive to the impact on
mailers of rate increases resulting from the Postal Service’s classification change
proposals and accompanying rate structures. This awareness particularly influenced
his judgment in designing rates for the new parcel categories. His rate design tended to
respect the effects of increases in two ways. First, concern about adverse impacts
influenced the applicability of the classifications themselves. Second, consideration of
impact moderated the degree to which cost distinctions were reflected in the rate
design.
297
For example, witness Kiefer proposed to extend temporarily the eligibility for the
NFM category to mail that will no longer qualify as flats and would ordinarily by
considered a “parcel”. In this regard, pieces that formerly qualified as flats because
they met the published standards for the UFSM 1000 machines would, during a
transition period, qualify for rates as NFMs even though they are typically handled as
parcels. Id. at 11, 22.
Full cost recognition between categories was also moderated in light of the
adverse impacts of rate increase proposals. For example, the extra costs caused by
nonmachinable parcels were only partly reflected in proposed rates. Id. at 20. Witness
Kiefer also designed rates for NFMs to mitigate the impact of increases represented by
that category. Id. at 23. The piece and pound rates for NFMs, and the discount
proposals, avoid the effects of recognizing the full costs of manual processing that
would be expected for NFMs. Id. A similar approach was taken in designing rates for
nonmachinable letters, which would experience more substantial increases if the prices
reflected the full additional costs of manual processing. Id. at 15. Also, witness
Kiefer’s flats rate design “selected passthroughs for the various presort levels to
mitigate somewhat the effects of de-averaging on rates.” Id. at 16.
While the inevitable consequence of moving to purely shape-based rates would
be to impose large increases on mail arguably previously underpriced, the Postal
Service’s rate design attempted to fairly balance those results with the overall beneficial
objectives of the classification change proposals for mailers as a whole.
298
f. The balancing of considerations present in the Postal Service’s rate design reasonably reflected worksharing efforts by mailers and send appropriate pricing signals.
The corollary to full recognition of cost differences in worksharing is that, not only
does efficient worksharing tend to minimize total costs and benefit all mailers in the long
run, but it fairly recognizes the efforts and expenses of mailers who participate in
worksharing activities. It also promotes the principles of economic efficiency embodied
in ECP. In this regard, as discussed further below, the Postal Service’s rate design
incorporates the beneficial objectives sought by advocates of strict adherence to ECP,
while balancing it with other important considerations. Balancing also helps influence
future mailer behavior leading to greater efficiency and lower costs. Id.
This approach is reasonably employed in the Postal Service’s rate design for
Standard Mail. Witness Kiefer’s testimony contains substantial examples of rate design
choices intended to recognize existing mailing practices and influence future mailer
behavior. The objectives sought by this rate design include additional presort (Id. at 13-
14, 16, 19), drop-shipping and entry patterns (Id. at 17, 18-19, 30), automation
compatibility, including barcoding (Id. at 20, 21), and mailpiece design (Id. at 23-24, 32,
33 at n. 16).
Of particular note, several of witness Kiefer’s rate design initiatives result in
mailers having more choices for worksharing leading to lower rates. For example, he
proposes to extend the deaveraging of automation letter rates (Mixed AADC, AADC, 3-
digit, and 5-digit) to nonmachinable letters, and also create more presort tiers within the
rates for flats. Id. at 12. He also proposes to extend de-averaging for automation mail
from letters to flats. Id. at 16.
299
In some instances, new options mitigate some of the adverse effects of shape-
based deaveraging of the rate design. Witness Kiefer’s proposals create new
worksharing options for parcel mailers. He has extended new drop-ship options to
parcel mailers and has increased the discounts for drop shipping parcels above
discounts for letters and flats. Id. at 17-18, 19, 21. NFM category pieces will also be
allowed an additional discount for dropping mail at a DDU. Id. at 23.
g. The proposed rates effectively implement the Postal
Service’s shape-based classification proposals.
The proposed shape-based classification and rate structure reforms are the
central feature of the Postal Service’s Standard Mail initiatives. These proposals are
fundamentally designed to facilitate creation of more efficient transportation and
processing networks that benefit from more coherent mail streams and maximum use of
automation technology. While the shape-based classifications create the framework for
movement in this direction, several features of witness Kiefer’s rate design are intended
to facilitate the transition to a more modern system by creating appropriate incentives
for mailer behavior and mitigating the adverse rate effects of de-averaging by shape.
In the first instance, it is important to note that the rates were designed based on
reliable cost information or reasonable proxies, and revenues were projected using the
results of an extensive field study. As discussed above, the Postal Service’s proposed
classification design deaverages nonletters into three categories—flats, parcels, and
NFMs. To project the volumes of these three categories in the test year, witness Kiefer
relied on the Non-ECR Standard Non-Letter Redefinition Study (USPS-LR-L-33),
presented by Witness Loetscher (USPS-T-28) and which utilized a national sample of
300
non-letter mail to measure detailed physical characteristics of non-letters. A sample of
50 routes/box sections was drawn and all non-letters were sampled for one day.
Physical characteristics (length, height, thickness, weight, deflection, and rigidity) of
each sample piece were recorded. The sample data were then used to analyze the
composition of non-letters based on piece compatibility with existing processing
machinery and carrier casing practices. Witness Miller (USPS-T-20) provides the
estimated test year mail processing costs for Standard Mail NFMs and parcels in USPS-
LR-L-45. Witness Abdirahman provided the Standard Mail letter mail processing costs
in USPS-LR-L-48.
Furthermore, as noted above, witness Kiefer has attempted through his rate
design to mitigate the adverse rate effects of separately pricing parcels and flats. He
creates new presort and drop-shipping opportunities for parcels and sets discounts
“significantly higher than the discounts for presorting machinable letters and flats – in
recognition of the higher costs of sorting parcels.” Id. at 19. He states:
The effect of these adjustments is a strong incentive for mailers to give the Postal Service lower-cost workshared parcels. The workshare discounts also offer mailers a way to significantly offset a large portion of the rate increases: machinable parcels sorted to 5-digit ZIP Codes and presented at the DSCF (or DDU) will see only moderate rate increases, despite what may appear to be large increases for non-workshared, non drop-shipped parcels.
Id.
Witness Kiefer also designed the category of NFMs (referred to as “hybrid” flats
in portions of his testimony) to facilitate transition to the new system and mitigate the
effects of reclassification. He states:
I based my “hybrid” flats rate design on a piece rate that was below the rate for machinable parcels and used the same pound rate I used for
301
parcels. These rate elements represent heavy mitigation of the costs of processing in the manual mail stream which, I understand, would be the typical path for these pieces. I also propose generally higher discounts for “hybrid” flats than for parcels so as to lower the piece rates further. The destination entry discounts for hybrid pieces are the same as I am proposing for letters and flats. To provide a way for mailers to reduce their postage costs further, I also have proposed a DDU discount for “hybrid” pieces.
Id. at 23. For certain pieces that were formerly classified as machinable flats, but would
not qualify as flats or hybrid flats under the new rate structure (“hybrid” parcels), he
proposes to apply hybrid flat rates (the NFM prices) for a temporary transitional period
until the next rate changes take effect. Id. at 22.
In the ECR subclass, witness Kiefer also attempts to mitigate the effects of a
shape-based rate structure through his rate design. He
selected piece and pound rates for ECR and NECR parcels that represent a fixed increment over the prices these pieces would have paid, had they remained in the flats rate categories. This approach will help to mitigate the impact of moving from flats-rate treatment to parcels-rate treatment. The rate differential, $0.200 per piece, is slightly less than the current ECR and Nonprofit ECR residual shape surcharge.
Id. at 33-34 (footnote omitted)..
h. The Postal Service’s rate design promotes its automation
programs and machinability of mail in general.
The maintenance and growth of an operating system benefiting from the use and
expansion of automation technology represents a key consideration in the Postal
Service’s rate design. While it could be argued that this objective is subsumed under
the consideration of cost distinctions and fair recognition of mailer worksharing efforts,
the conscious goal of promoting automation as the best hope for future efficiency in
operations pervades both the shape-based classification proposals and several specific
302
elements of rate design in this proceeding. Witness Kiefer’s testimony provides
numerous examples of how this goal influenced features of his rate design for letters17,
flats18, and parcels19. No participant has contended that the goal should not be a pre-
eminent influence on postal rates in the future.
Postal Service witness McCrery provides comprehensive descriptions of existing
and, to some extent, future networks for the transportation and processing of various
types of mail. USPS-T-42. He organizes his overview according to the mailflows and
processes that have evolved for handling various shapes: letters and cards (Id. at 2-
13); flats (Id. at 13-22); and parcels and containers. Id. at 22-32. In describing this
operating environment, he emphasizes the roles of the various automation technologies
and equipment, and he highlights the more costly processes created by the need to
handle different shapes manually.20
Witness McCrery’s testimony amplifies the importance of increased use of
automation and mechanization in the evolution of an efficient operating system. In this
regard, his testimony and discovery responses highlight the special problems that have
led to the proposals to reclassify Standard Mail by shape. He emphasizes in particular
the issues surrounding rigid mail pieces that impede more efficient operations.21
In numerous important ways, the Postal Service’s rate proposals support the
efforts to control costs through the automation programs described in witness McCrery’s
17 Id. at 13-14 and responses to NAA/USPS-T-36-1 (Tr. 5/906), NAA/USPS-T36-13 (Tr. 5/920) VP/USPS-T-36-9(b), (c), (g)(Tr. 5/984-85). 18 Id. at 24 and responses to NAA/USPS-T36-1, 13, VP/USPS-T36-9, supra. 19 Id. at 17, 18, 20, 21, 24. 20 See Id. at 11-12 (letters and cards); 19-21 (flats); 24-25 (parcels). 21 See witness McCrery’s responses to POSTCOM/USPS-T42-6, Tr. 11/2986; POSTCOM/USPS-T42-9, Tr. 11/2990-91. See also, witness McCrery’s rebuttal testimony, USPS-RT-14, at 8-13.
303
testimony, by creating incentives to make mail machinable, and by aligning the rate
design with the ways the Postal Service transports and processes mail. These
initiatives, furthermore, affect all types and shapes of mail. In particular, witness
Kiefer’s proposed rate structure creates significant increases for “the least finely
presorted manual letters and more moderate increases for highly presorted pieces.” He
states:
This rate design will encourage mailers to make their letters machinable. If possible, it will encourage mailers to present nonmachinable letters as finely presorted as possible.
Id. at 13-14. Other classification changes are also designed to induce mailing patterns
for letters that are more consistent with modern processing operations. For example,
witness Kiefer proposes eliminating the DDU discount for ECR letters to “remove the
economic incentive to deposit letters at delivery units when the letters are subsequently
transported back to plants at added costs.” Id at 30. He also proposes eliminating the
Automation Basic rate category for ECR letters. He explains that the Postal Service
intends to continue the centralization of sequencing operations in plants to the greatest
extent possible, and to reduce the dependence of manual or automated sorting in
delivery units. Since the Automation Basic rate is currently only given to mail sent to
sites that do not receive letters pre-sequenced to delivery points from the plant, there is
no need for a two-tracked pricing scheme. Id. at 30-31.
Witness Kiefer also developed separate rate structures for machinable and
nonmachinable parcels. See Id. at 18-19. While certain features of his rate design
were intended to mitigate the effects of reclassification, and do not pass through the full
cost differential between machinable and nonmachinable parcels, he does create
304
incentives for mailers to convert to machinable parcels where possible, and he expects
that the differentials will increase significantly in the future. Id. at 20. He also expects
that his rates for ECR and NECR parcels will create an incentive for ECR mailers to
reconfigure their pieces not eligible for the flats category to avoid being reclassified as
parcels. Id. at 33, n. 16.
i. The presort tree is not a necessary component of Standard
Mail rate design or rate development methodology.
In its NOI No. 2, the Commission requested the views of participants on the
question of whether the presort tree was “needed to provide a systematic way of
analyzing each rate differential within a subclass in terms of the rate-setting criteria of
the Act?”22 The Postal Service and several parties addressed this question.23 While
several parties emphasized the presort tree can be a useful tool24, no party claimed that
the presort tree was necessary. The Commission asked further whether the presort
tree was needed to avoid rate anomalies. Only the Postal Service responded to this
22 Notice of Inquiry No. 2, Docket No. R2006-1, at 7 (July 21, 2006) (“NOI No. 2”) 23 See Response of United States Postal Service to Notice of Inquiry No. 2 (August 21, 2006); Parcel Shippers Association (PSA) Response to PRC’s Notice of Inquiry No. 2 (July 26, 2006); Response of United Parcel Service to Notices of Inquiry Nos. 2 and 3 (August 17, 2006); Comments of Time Warner in Response to NOI No. 2 and NOI No. 3 (August 17, 2006); Comments of Valpak Direct Marketing Systems, Inc., and Valpak Dealer’s Association, Inc., In Response to Notice of Inquiry Nos. 2 and 3 (August 17, 2006). 24 UPS Response at 4; Valpak Response at 10; USPS Response at 8. See also, witness Kiefer’s response to POIR No. 5, question 3(a), Response of United States Postal Service to Presiding Officer’s Information Request No. 5, Questions 2-19 (June 29, 2006), Tr. 5/941-43.
305
question. The Postal Service’s view is that the presort tree can never provide assurance
that all rate anomalies were uncovered.25 USPS Response to NOI No. 2, at 10.
With the introduction of shape-based rates and with the expansion of presort rate
categories, the presort tree’s usefulness as a guide becomes limited primarily to the rate
relationships that go down the branches of the tree (representing worksharing levels),
rather than between branches (representing shapes/mail processing categories).26
Witness Mitchell’s presort tree evidently also recognizes that the key relationships are
those that go down the branches, since his passthroughs are only calculated at the top
of each branch and not between rate cells further down adjacent branches, much less
between rate cells in non-adjacent branches.27
In any event, with the multiplication of rate categories, the presort tree becomes
less useful. The expansion of Standard Mail rate categories, primarily with the
introduction of shape based rates, has expanded the number of branches in the presort
tree. It is no longer obvious which branches appropriately relate to each other.28
Moreover, the multiplication of rate categories in Standard Mail has led to a
multiplication of branches in the presort tree, so that the tree is no longer a simplifying
25 NOI No. 2 provides an illustration where the original 2 x 2 presort tree could be used to uncover a potential rate anomaly. Notice of Inquiry No. 2, at 3, n. 2. With the expansion of the presort tree to more than two branches (See USPS Response to POIR 5, question 3b, Tr. 5/943-45; or, see witness Mitchell’s workpaper, VP-LR-1, VP-RWM-Workpaper-8.xls, “Inputs” tab), not all presort levels are adjacent, so the capability of spotting rate anomalies between all rate categories is lost. 26 USPS Response to POIR 5, question 3a, Tr. 5/941-43. 27 See VP-LR-1, VP-RWM-Workpaper-8.xls, “Inputs” tab. See also, PSA’s comment that the traditional presort tree can be misleading when used to calculate cost recognition ratios (passthroughs) between some shapes. PSA Response to NOI No. 2 at 3. 28 USPS Response to NOI No. 2, at 9, n. 9,12-13. See also, USPS Response to POIR 5, question 3b, Tr. 5/943-45.
306
visual tool. Indeed, witness Mitchell’s Regular subclass presort tree spans three pages
of his testimony (VP-T-1, at 131, 147, 158), with the whole tree spreading over 15
columns of his Inputs worksheet. While the presort tree may once have been a simple
tool, witness Mitchell’s complex web of cells and arrows show that the presort tree has
morphed into a sprawling mass.29
The Postal Service does not deny that the presort tree may have some use.30
But, if a presort tree is developed, it should have multiple benchmarks.31 Furthermore,
while the Postal Service proposes that any presort tree that is used for Standard Mail be
set up with multiple benchmarks, that does not mean that the benchmark rates should
be set in isolation, or without regard to relative costs or other interrelationships.32
In fact, witness Mitchell’s own rate design, in effect, consists of a multiple
benchmarks approach. While his Regular subclass rates do tie back mathematically to
his minimum-per-piece rate for an origin-entered nonautomation flat (see VP-LR-1, VP-
RWM-Workpaper-8.xls, “Inputs” tab), this tie apparently exists only as a formality. For
29 See VP-LR-1, VP-RWM-Workpaper-8.xls, “Inputs” tab. 30 USPS Response to NOI No. 2, at 8. 31 UPS Response to NOI Nos. 2 and 3, at 4; USPS Response to NOI No. 2, sections 4 and 5; USPS Response to POIR 5, question 3a, Tr. 5/941-43. Consider also the implication of PSA’s comment, “[t]he ‘presort tree’ approach remains appropriate for evaluating worksharing discounts within a mail shape.” PSA Response to NOI No. 2, at 2. Also, while not explicitly endorsing multiple benchmarks, Valpak comes relatively close to the Postal Service’s position when it comments on the use of multiple, less complex, trees organized along the same shape or product definition. Valpak Response to NOI Nos. 2 and 3, at 10-11. 32 See USPS Response to NOI No. 2, at 13-16. See, in particular, page 16 of the response:
As these several examples show, the multiple benchmark approach does not set benchmark prices in arbitrary or unconstrained fashion. Cost and non-cost relationships between the separate trunks were given appropriate consideration as they always have, despite the evolution of the model from the traditional single-trunk to a multiple-trunk framework.
Id.
307
example, witness Mitchell argues that the estimated cost differential between letters and
flats should properly be marked up by the subclass cost coverage when passed through
into rates. See VP-T-1 at 118. This would mean a passthrough of the letter-flat
differential of 180 percent under witness Mitchell’s proposed cost coverage. VP-T-1 at
97. Yet, despite his theoretical arguments, he actually proposes only a 95 percent
passthrough. VP-T-1 at 119.
The wide disparity between witness Mitchell’s “theoretical” passthrough and his
actual proposal is de facto evidence that even witness Mitchell recognizes that the rates
for letters and flats must be developed based upon consideration of a host of factors
other than simple cost differences. In reality (as opposed to theory), letters and flats are
priced separately, yet with appropriate consideration given to cost and rate relationships
between the two categories. Both witness Mitchell and witness Kiefer derive separate,
judgmental flats and letters “benchmarks.” The essential difference between the Postal
Service’s approach and witness Mitchell’s is that witness Mitchell presents his flats and
letters benchmarks via a cost and passthrough framework, whereas the Postal Service
does not.
j. The Postal Service’s proposal for an alternative approach for
charging for Standard Mail Forwarding is unopposed, and should be recommended.
The Postal Service proposes a new approach for calculating postage due for
forwarded Standard Mail letters and flats, when electronic or automated address
correction service is requested. Using information provided by mailers in the keyline or
barcode, the Postal Service would be able to charge them for each mailpiece that is
forwarded. This new approach would provide an alternative to the application of a
308
multiplicative factor to the postage due on the pieces returned to the mailer, as
described in DMCS 353. USPS-T-40 at 47.
Witness Mitchum proposes rates of 35 cents and $1.05 cents, respectively, for
forwarded Standard Mail letters and flats. He applies a cost coverage of 230 percent,
similar to that for First-Class Mail, to the costs for forwarding Standard Mail letters and
flats derived from the Undeliverable as Addressed costs sponsored by witness Cutting
(USPS-T-26, Appendix A). Witness Mitchum also proposes notes to Rate Schedules
321, 322, 323, and 324, along with the appropriate classification changes to amend
DMCS 353, and add DMCS 321.9, 322.9, 323.9, and 324.9. USPS-T-40 at 47-51. All
of these proposals are unopposed, and should be recommended.
5. Intervenors’ Pricing Proposals
a. The proposed parcel and NFM price increases are not unreasonably high, and the Commission should reject the opposition to, and alternatives for, the Postal Service’s Standard Mail shape-based rate proposals.
i. Witness Glick’s criticisms on behalf of PSA/PostCom
do not withstand scrutiny.
Witness Glick criticizes the Postal Service’s parcel pricing because he claims it
passes through more than 100 percent of the estimated cost difference between parcels
and flats. PSA/POSTCOM-T-1 at 3-4. Witness Glick’s position is equivalent to asserting
that unit contributions should be the same for both flats and parcels, or that the efficient
component-pricing (ECP) rule should apply to shape-based cost differences. USPS-RT-
11 at 8-9.
309
Witness Glick’s position misapplies the ECP rule. The ECP rule does not apply
to shape-based cost differences as it can to worksharing cost differences. USPS-RT-11
at 9; NAA-T-1 at 11. USPS Response to NOI No. 2 at 4. Passthroughs of shape-based
costs that exceed 100 percent do not necessarily indicate economically inefficient
pricing or price discrimination. USPS-RT-11 at 9. USPS Response to NOI No. 2 at 3-8.
The ECP rule is only applicable for pricing worksharing activities where a mailer
performs some activity that the Postal Service would otherwise have performed and the
Postal Service avoids doing that work. In the case of shape-based cost differences
there is no outsourced work component that can be priced, so the ECP rule cannot be
applied. NAA-T-1 at 11-12; USPS Response to NOI No. 2 at 3-4.
Despite witness Glick’s criticism, the Postal Service’s proposals reasonably
recover the volume variable costs of parcels plus make a reasonable contribution
toward the Postal Service’s institutional costs. Witness Kiefer, on cross examination,
pointed out that the cost coverage for Standard Mail parcels under his proposals would
only be 116 percent. Tr. 5/1121.
Glick cannot appeal to ECP or any sound theory to support his preference for
limiting the recognition of flat-parcel cost differences to 100 percent. Moreover, the
Postal Service’s methodology produces reasonable contributions for parcels. Witness
Glick’s criticism should be rejected. USPS-RT-11 at 10.
Witness Glick testifies that the Postal Service’s proposed rate increases for
parcels are too large and may be larger than the Postal Service estimates.
PSA/POSTCOM-T-1 at 4-5. Witness Glick’s testimony ignores several important
considerations that serve to justify the rate increases and mitigate the impact of rate
310
increases on customers. First, parcels are not now covering their costs. Tr. 5/1124-5. It
is reasonable and fair to ask these mail pieces to cover their costs and make a
reasonable, yet modest, contribution to institutional costs. Tr. 5/1121-2. Second, when
mail pieces that are not covering their costs are reclassified, higher than usual rate
changes should be expected. USPS-RT-11 at 7. Third, the Postal Service has already
significantly mitigated the potential impact on mailers and the rate increases proposed
could have been much higher. USPS-RT-11 at 6-7. Fourth, the Postal Service’s parcel
proposals contain deeper drop-ship options and higher drop-ship discounts than are
available to flats, both of which can reduce the impact of the price changes on mailers.
USPS-T-36 at 18-19; USPS-T-36 at 20-21. See, also USPS-LR-L-36, WP-STDREG-27.
Nevertheless, the Postal Service believes that the Commission will exercise its
judgment on the appropriate level of rate mitigation to apply. USPS-RT-11 at 7. The
Postal Service’s principal goal in proposing parcels rates in this docket is to establish
separate classifications with meaningful price differentials that lead to the efficiencies
that were the intention of the proposed changes. USPS-RT-11 at 6.
Witness Glick criticizes the Postal Service’s parcels cost data as having
“substantial uncertainty” and testifies that the proposed rate increases for parcels are
too high in light of that uncertainty. PSA/POSTCOM-T-1 at 5-8. Witness Horowitz joins
in the criticism, but merely cites witness Glick and provides no independent analysis of
his own. POSTCOM-T-6 at 9.
Witness Kiefer has acknowledged that the Postal Service’s data are imperfect,
but points out that this fact, while true for all data estimates, does not make them
unreliable. Tr. 5/1126, Tr. 33/1102-3, 1093-4, 1092. Moreover, in fact, postal witness
311
Smith made adjustments to improve the parcel cost estimates. USPS-T-13, pages 34-
35.33 While witness Glick suggests that the parcels cost data have “substantial
uncertainty,” neither he nor any other witness has provided record evidence to show
that the Postal Service’s cost estimates are high—they could just as well be too low. Tr.
5/1125 . While witness Glick tries to insinuate that the data used are too high by citing
some anomalous data for Standard Mail ECR parcels (PSA/POSTCOM-T-1 at 6), he
concedes that this anomalous data was not used by the Postal Service to price
Standard Mail parcels. USPS/PSA-POSTCOM-T1-2.
The rates proposed for Standard Mail parcels reflect significant mitigation of cost
data. USPS-RT-11 at 6. Witness Glick suggests that the rate increase should be
mitigated further, but provides no evidence to prove that any potential errors in the data
are not already adequately addressed by the Postal Service’s prior mitigation efforts.
Witness Glick argues that data imprecision should lead to a limit of 30 percent on
rate increases. PSA/POSTCOM-T-1 at 8-9. But he supplies no rationale to tie these
two notions together. Merely suggesting data imprecision without giving any evidence
that the imprecision is material is insufficient grounds for limiting necessary rate
increases. Witness Glick suggests that greater cost-precision should be required for
33 Witness Glick argues that the adjustment done by Postal Service witness Smith (shifting the 23 percent of the parcel costs to flats) is too small. PSA/PostCom-T-1 at 7-8. Witness Glick proposes an alternative, larger, adjustment, based on POSTNET barcodes. Id. His suggested alternative is inappropriate, however, because there is no demonstrated link between the presence of POSTNET barcodes and flats rated pieces. See Tr. 14/4268-69, 4275, 4283-84, 4290-92 (Note: The second page of witness Smith’s revised response to PSA/USPS-T13-6, revised 8/22/06, which should appear behind page 4275 in the transcript, is missing. The page which appears as 4276 is actually the second page of the previous response, PSA/USPS-T13-5, also revised 8/22/06.) Witness Smith’s adjustment is reasonable and consistent with available evidence (Tr. 14/4280, 4290-4292), and Mr. Glick’s alternative proposal should be rejected.
312
large rate increases. PSA/POSTCOM-T-1 at 5. But that argument is a two-edged
sword: suggestion is not enough—witness Glick offers no evidence to indicate that the
costs are substantially overstated, or even that they are not understated. If his proposal
to limit the rate adjustments to 30 percent on the basis that data are imprecise is to be
taken seriously, he needs to clarify his own cost-precision threshold by showing just
how imprecise they are and that his 30 percent cap is appropriate, rather than a 40, 50,
or 60 percent cap. Witness Glick does not provide any evidence that the remedy is at
all appropriate to the alleged data imprecision. Ironically, his own claims and assertions
are, at best, imprecise and should be rejected.
Witness Glick proposes that Standard Mail parcel rate increases should be
limited to a maximum of 30 percent because the Postal Service used a 30 percent
increase cap when designing Parcel Post rates. PSA/POSTCOMT-T-1 at 8-11.
Witness Glick’s proposal is flawed for two reasons. First, there is no evidence that
Parcel Post rate categories are not covering their costs, whereas this is not the case for
Standard Mail. Tr. 5/1124-25. When a mail category that is not covering its costs is
reclassified, larger rate increases should be expected. USPS-RT-11 at 7. Furthermore,
the application of the 30 percent rate increase cap is not rigid, even in Parcel Post.
There are certain rate cells for Parcel Post where the rate increases exceed 50 percent.
USPS-RT-11 at 7, footnote 2.
Second, while witness Glick’s testimony focuses on the percentage change, it
ignores the base entirely. Tr. 5/1117, 1118. A 50 percent increase on an 80-cent
parcel is a postage increase of only 40 cents. In contrast, the current rate for a one-
pound DBMC Zone 3 machinable parcel is $2.38. ATTACHMENT A to Request, page
313
43. A 30 percent increase for this piece is 71 cents, much higher than the postage
increase on an 80-cent Standard Mail parcel receiving a 50 percent increase.
Witness Glick’s proposal to “borrow” the rate design elements from one class of
mail to use in another is ill-advised. Different circumstances apply to different classes of
mail and Glick offers no rationale why design elements from Parcel Post are appropriate
to use in Standard Mail. USPS-RT-11 at 7. His proposal is flawed and should be
rejected.
Witness Glick asserts that NFM data are less reliable than Standard Mail parcel
data. He then claims that this provides an even stronger reason to limit the NFM rate
increases than the arguments in favor of limiting the parcels rate increases.
PSA/POSTCOM-T-1 at 11-13. Witness Glick’s testimony regarding the reliability and
uncertainty of Postal Service NFM data suffers from the same flaws as his testimony on
the uncertainty of parcel data. Virtually all Postal Service data of any complexity have
some uncertainty and contain a margin of error. While imprecise at some level, the data
used were not unreliable. Tr. 5/1126, 1102-3, 1093-4, 1092. Moreover, witness Glick
has not provided record evidence to show that the Postal Service’s NFM cost estimates
are too high—they could just as well be too low. Tr. 5/ 1125.
As with parcels, the rates proposed for Standard Mail NFMs reflect significant
mitigation of cost data. USPS-RT-11 at 6. Witness Glick suggests that the rate
increase should be mitigated further, but provides no evidence to prove that any
potential errors in the data are not already adequately addressed by the Postal
Service’s prior mitigation efforts.
314
Witness Glick’s testimony ignores the fact that the reasons for increasing NFM
rates are even stronger than for parcels. These pieces do not even pay the residual
shape surcharge today (like current “parcels” do), but they are typically processed in the
parcels mail stream. USPS-T-3 at 21-2. Moreover, the UFSM1000 machines are being
redeployed, so that the original justification for granting these pieces automation flat
rates has vanished. USPS-T-36 at 22, footnote 11.
Witness Glick further asserts that the Postal Service doesn’t know very much
about NFM volumes and presort breakdowns. PSA/POSTCOM-T-1 at 11-13. The fact
that the Postal Service estimates of volumes by presort level are imprecise is a red
herring. Witness Kiefer uses estimates of volumes to estimate revenues, not in
designing rates. See USPS-LR-L-36, WP-STDREG-30, 31, 32. Witness Glick fails to
provide any convincing evidence that imprecise volume estimates should be a reason to
mitigate rate increases. In fact, if the goal is not to leave the Postal Service short of
funds, the presence of imprecise volume estimates would rather support higher
increases, just in case revenues projected from imprecise volumes have been
overstated. Witness Glick’s criticisms of the reliability of NFM data fails for the same
reasons as his criticisms of parcels data and should be rejected.
ii. Witness Knight’s and witness Horowitz’ claims that
the proposed parcel and NFM rates will have adverse impacts on their businesses are not necessarily disputed, but are an insufficient reason to reject needed price adjustments.
Witness Knight and witness Horowitz assert that the Postal Service’s proposed
increases for Standard Mail parcels and NFMs will make it uneconomical to deliver mail
order purchases using the Postal Service. Current mailers, they say, will either go out
315
of business, reduce the number of parcels shipped, or use other shippers. Doing this
would, in turn, lead to lower usage of the mails for advertising and customer acquisition.
POSTCOM-T-7 at 2; POSTCOM-T-6 at 2, 6, 7-8.
The Commission should note that these mailers’ testimonies do not oppose the
proposed classification changes that de-average Standard Mail nonletters into separate
flats, parcels and NFM categories with their own rate designs, only the size of the
proposed increases. See, for example, POSTCOM-T-6 at 9. The Postal Service is
aware that its proposed increases may have a major impact on some mailers. USPS-
RT-11 at 7. Nevertheless, these parcels and NFMs have not been adequately covering
their costs. Both the need to have these pieces appropriately priced and the need for
appropriate mitigation were taken into account when the rates were developed. USPS-
RT-11 at 6. The result of these considerations is that the Postal Service’s proposals
contain significant rate change mitigation. USPS-RT-11at 6-7.
Witnesses Knight and Horowitz argue that the higher parcels and NFM rates
might result in reduced volumes of parcels or NFMs. Yet they fail to explain any
economic rationale for the Postal Service to continue to maintain or expand volumes in
rate categories that lose money. They do not explain why the Postal Service would not
be better off to handle a smaller volume of parcels that cover their costs rather than
larger volumes of money-losing pieces.
Both witnesses also suggest that higher parcel and NFM prices might lead their
businesses to seek alternate means to deliver their products and to reduce the amount
of other mail categories used for marketing. See, for example, POSTCOM-T-7 at 9-10;
POSTCOM-T-6 at 8. While these arguments appear alarming, they lack merit: they fail
316
to demonstrate why it makes economic sense for mailers to curtail economically
productive promotional activities just because they are using alternative delivery
channels. It is rational for mailers to use the most cost-effective promotional means.
Witnesses Knight and Horowitz fail to explain why the choice of an alternate delivery
system should rationally lead their businesses to avoid advertising mail if the most cost-
effective promotional mix includes advertising mail.34 Conversely, if mailers find
alternative promotional channels to be more cost-effective, the Postal Service doesn’t
expect that a freeze in parcels rates would dissuade them from replacing mail with
electronic substitutes for promotional purposes. See USPS/POSTCOM-T6-13.
All price increases are expected to have some impacts on mailers. Witnesses
Knight and Horowitz have failed to demonstrate why the adverse impacts they foresee
should forestall needed price adjustments for Standard Mail parcels and NFMs. The
Postal Service understands that the degree of rate increase recommended by the
Commission is a matter of judgment. USPS-RT-11 at 7. Yet it reminds the Commission
that the rates it has proposed are already significantly mitigated to soften the impact on
mailers. USPS-RT-11 at 6.
Witness Horowitz claims that the Postal Service’s enhanced discounts for drop-
shipping and finer presorting will not work for some mailers, if their volumes are
insufficient to take advantage of these discounts. POSTCOM-T-6 at 2, 6, 7. Witness
Horowitz’ testimony fails to justify rolling back the Postal Service’s proposed parcel
pricing on two grounds. First, he claims that “few, if any, mailers can benefit from the
34 In spite of the Postal Service’s proposed rate increases, the proposed rates are still below the rates charged by alternate delivery services. USPS/POSTCOM-T6-10b; USPS/POSTCOM-T6-14. Witness Horowitz has also testified that the proposed rates are significantly below Cosmetique’s shipping charges. USPS/POSTCOM-T6-18.
317
DSCF and DDU discounts” proposed by the Postal Service. POSTCOM-T-6 at 2.
Witness Horowitz provides no evidence whatsoever that this assertion is true. He has
presented no surveys of the mailing community, or other data, to support his claim.
Simply put, the record lacks any evidence that this assertion is anything other that
witness Horowitz’ opinion, extrapolated from his own company’s experience. Second,
witness Horowitz’ claim that his company cannot take advantage of the enhanced drop
ship discounts represents no new information. It has always been the case that some
mailers do not have the volumes needed to take advantage of the Postal Service’s drop
shipment discounts directly. It is well known that intermediaries exist to offer mail
consolidation services for such mailers. Cosmetique’s inability to achieve finer presort
and drop ship levels on its own is insufficient grounds to reject needed parcel price
adjustments. Witness Horowitz’ arguments lack merit and should be rejected.
Witness Horowitz claims that the Postal Service does not provide evidence that
costs increase linearly by shape and weight, so not to consider the revenue differences
between flats and parcels is both economically irrational and unfair. POSTCOM-T-6 at
9-10.
Witness Horowitz’ claim recalls witness Glick’s recitation of the Commission’s
statement in NOI No. 2 that “it is often difficult to separate the cost effects of shape from
weight.” PSA/POSTCOM-T-1 at 3. Yet witness Horowitz goes on to extend this
statement in a way that is completely unsupported. Mr. Horowitz offers no explanation
why the linearity of the relationship has anything to do with charging more for heavier
weight pieces, or whether it would matter if the Postal Service had demonstrated that
the costs for parcels were to increase, for example exponentially, rather than linearly,
318
with weight. Furthermore, witness Horowitz provides no justification for his assertion
that increasing rates for heavier weight pieces is unfair. Following witness Horowitz’
reasoning, the pound rate should be totally abolished for both flats and letters and the
difference between flats and parcels should be a fixed charge. Given the Commission’s
reluctance to lower the pound rate even moderately absent substantial evidence that it
should be lowered (e.g., Op.&Rec.Dec., R2000-1, at pg. 362-393), Horowitz’s statement
seems to turn the Commissions past reasoning on its head. In any event, there is
nothing on the record to support anything other than a linear pound rate.
iii. Witness Wilbur’s proposal that the rate changes for
parcels should be implemented gradually fails to address the many issues that need to be considered before phased rates can be recommended and so should be rejected.
Witness Wilbur’s testimony states that the Postal Service’s proposed rate
increases are too sudden and proposes that they should be implemented gradually.
MBI-T-1. The implementation of non-phased rates is a decision reserved by law to the
Board of Governors and is not a subject for decision in this rate case.
Witness Wilbur is essentially requesting the Commission to recommend phased
rates. The Postal Service has not requested the establishment of phased rates in this
case and there is no evidence on the record for the Commission to consider and decide
the many issues that establishment of phased rates would open up. There is simply no
319
basis for the Commission to make a decision on phased rates in this docket. Witness
Wilbur’s proposal should be rejected.
iv. Witness Angelides’ testimony that the price elasticity of Standard Mail parcels may be different from the subclass average is insufficient to support an alternate rate proposal.
Witness Angelides testifies that there is reason to believe that, in terms of
response to price changes, Standard Mail Regular parcels may behave differently from
letters or flats. POSTCOM-T-4 at 3 – 10. As discussed previously in this brief in the
section on volume forecasting, as a general theoretical proposition, witness Angelides’
claim of differing elasticities may well be true, since subclasses include broad ranges of
mail pieces. But witness Angelides has not demonstrated that his claim for Standard
Mail Regular parcels could not also be claimed for almost any identifiable subgroup of
mail.35 Furthermore, his testimony begs, and fails to answer, the critical questions:
what are the consequences for pricing, and what can and should be done about it? For
example, discovering that parcels have a higher elasticity than anticipated might prompt
movement to raise parcels’ prices even higher, in order to achieve the same given
35 Witness Angelides suggests that the higher Parcel Select price elasticity is a
reasonable proxy for the Standard Mail parcels elasticity. POSTCOM-T-4 at 6 – 7. The earlier section of this brief regarding forecasting explained why this suggestion is not persuasive. One of the reasons cited by Dr. Angelidies to support his claim is witness Kiefer’s testimony that one goal of the Postal Service is to facilitate merger of Standard Mail parcels into a general parcel class. Id. at 6. But there is no reason to equate witness Kiefer’s mention of the Postal Service’s desire to simplify its parcel offerings with the idea that the Postal Service considers the market price responses of all groups of parcel products that might be consolidated to be the same. Dr. Angelides’ testimony fails to provide adequate evidence to conclude that Parcel Select and Standard Mail parcel categories are sufficiently alike, though in separate subclasses, that the Parcel Select price elasticity should be used for Standard Mail parcels. His suggestion in that respect should be rejected.
320
target contribution. See, for example, the discussion of pricing a price elastic product,
VP-T-1 at 47, especially the conclusion at line 18.
Witness Angelides is correct that the Postal Service does not have enough data
at present to develop parcels forecasts comparable to forecasts developed for certain
other rate categories. USPS-T-36 at 21-22; POSTCOM-T-4 at 3, 8-9. With the Postal
Service’s new, separate rate design for parcels, these kinds of data should become
available, and specific forecasts may be available at some time in the future. USPS-T-
36 at 17. Witness Angelides’ criticism that the Postal Service’s Regular subclass
elasticity may not apply perfectly to parcels within the subclass does not, in itself,
support changing the Postal Service’s proposed rates.
b. ECR proposals.
i. NAA witness Ingraham’s criticism of the ECR rate design is without merit
NAA, through the testimony of witness Ingraham, NAA-T-2, criticizes three
aspects of the Postal Service’s rate design for ECR flat mail. First, witness Ingraham
argues that the Postal Service’s proposed rate differential between ECR Saturation
Flats and High Density Flats is unreasonable and conflicts with ECP. He maintains that
the price difference between the two rates is 2.2 cents, while the cost differential is only
0.1 cent. Id. at 7, 8-10. Second, he states that the Postal Service’s rate design is
flawed because witness Kiefer makes an unrealistic assumption regarding future DAL
usage and therefore the proposed DAL surcharge cannot be considered a reasonable
“offset” for the proposed High Density / Saturation flats rate differential. Finally, he
321
argues that the ECR pound rate should be kept at its current level. He then proposes
an alternate set of rates. These arguments have no merit and his rate design is flawed.
Witness Ingraham’s estimate of the cost differential between High-Density and
Saturation flats is too low. It is based on de-averaging the Basic-High Density delivery
costs but using the same combined mail processing cost for High Density and
Saturation flats. Id. At 18, fn. 21; Tr. 24/8725; Tr. 24/8718. ECR flats are already
sorted to carrier routes, so the predominant mail processing costs would be material
handling and movement. And, since High Density flats have (by definition) fewer pieces
to a carrier route (cf. DMM 245.6.9.2 to DMM 245.6.9.4), it is likely to have relatively
higher mail processing costs than Saturation flats. Witness Ingraham ignores this.
Therefore, his pricing approach is flawed using his own criteria: he is failing to reflect
the true cost differences.
Dr. Ingraham’s use of deaveraged delivery costs, yet combined mail processing
costs, weakens or invalidates NAA’s alternate proposed rates that he presents for High-
Density and Saturation flats, including his 1.4 cent alternate DAL surcharge proposal.
Despite his claims (NAA-T-2 at 7) that he is passing through 100 percent of cost
differences (and that witness Kiefer passes through more than 100 percent ), he fails to
do so, since he makes no acknowledgment that using average mail processing costs
understates true cost differences (See USPS-LR-L-36, WP-STDECR-1, INPUTS [8] and
[9]). Under these circumstances, a passthrough other than 100 percent may be
appropriate.
Witness Ingraham (NAA-T-2) supports the proposal for a separate charge for
DALs . Id. at 11. Dr. Ingraham, however, criticizes Postal Service witness Kiefer’s
322
(USPS-T-36) assumption that no current DAL users will change their behavior and all
will pay the proposed DAL surcharge. For this reason, witness Ingraham maintains that
the proposed DAL surcharge cannot be considered a reasonable “offset” for the
proposed High Density / Saturation flats rate differential. He maintains that Witness
Kiefer’s rate design is therefore flawed. NAA-T-2 at 11-16.
Witness Ingraham misinterprets witness Kiefer’s plainly stated rationale for his
no-change assumption. The assumption was made solely for the purposes of estimating
net revenue—so that the cost and revenue assumptions for DALs would be consistent
with each other. Tr. 5/1007. The rate design does not depend on the level of DAL
usage, as can be seen by witness Kiefer not changing the rate design when he changed
his usage assumption. (See original LR-L-36, WP-STDECR.XLS versus revised WP-
STDECR-R0621.XLS). Witness Ingraham was asked to explain the rationale for
changing the rate design because of a change in his assumption about DAL usage. He
merely asserted that this was a relevant factor without providing any evidence or
argument that it was, in fact, relevant. Tr. 24/8733. Witness Kiefer also states that it is
likely that there will be mailers switching from DALs, but that the switch would, in
parallel, reduce costs. Tr. 5/1008. Finally, Dr. Kiefer explained that the modest rate
increase proposal for Saturation flats took into consideration the impacts of the on-piece
addressing requirement (to avoid the surcharge) on mailers—as a cost mitigation effort.
See Tr. 5/1079-80; also see SMC-T-1 at 10-12. Moreover, witness Ingraham agrees
that it is legitimate to take non-cost factors into consideration (e.g. impact of a price on
mailers) in developing rates. Tr. 24/8731.
323
Finally, witness Ingraham argues that since there is no record evidence
explaining why the pound rate was changed, it should be kept the same. NAA-T-2 at 18,
ln. 8-11. Witness Ingraham’s argument is facile and self-serving. Witness Kiefer
discussed the minor adjustment to the pound rate. Tr. 5/901, 909. The rationale was in
keeping with past Postal Service efforts to adjust the ECR pound rate lower—which
were recommended by the Commission. Op.&Rec.Dec, R2000-1, at pg. 359. As SMC
witness Crowder (SMC-RT-1) points out, witness Ingraham has not attempted to show
quantitative support for his proposed pound rate, nor has he assessed its impact on the
market. SMC-RT-1 at 14. Indeed, she testifies that his high pound rate would unfairly
favor letters over flats. Id. at 15.
NAA’s witness Ingraham proposes two alternate rate designs, based solely on
the response to the DAL surcharge. Tr. 24/8733. His proposals would lead to an odd
rate relationship in which the rates for saturation flats using DALS will be higher than the
rates for High Density Flats. It would be preferable to avoid such a relationship.
ii. Valpak’s argument that the ECR basic letter rate should be decoupled from the Standard Mail Regular rates is without merit.
Valpak witness Mitchell (VP-T-1) challenges witness Kiefer’s rate design for ECR
basic letters by arguing that it should be decoupled from the Standard Mail Regular
rates. Id. at 121-122. He states that the USPS pricing proposal ignores the cost
differences between ECR Basic letters and flats, and sets the letter rate equal to the
flats rate without justification. Id. In the view of witness Mitchell, witness Kiefer’s
comments that this rate design would support the Postal Service’s goal of promoting
324
automation and sequencing of letters at plants is an inadequate explanation. Id. at 121.
Witness Mitchell argues that, in its Opinion in Docket No. R2005-1, the Commission
“found persuasive” witness Mitchell’s arguments for decoupling the ECR Basic letter
rate from the Regular 5-digit Automation rate and expanding recognition of the cost
differences between letters and flats at the ECR Basic level. Id. at 39, fn. 16 and at
116-117.
The Postal Service understands the Commission’s concerns and general
preference for recognizing cost differences in rates where there are not overriding
reasons not to. The Postal Service believes that in this case there are strong reasons to
keep ECR Basic letter rates below Regular Automation 5-digit rates. These reasons
have been discussed thoroughly in the past. Op.&Rec.Dec., Docket No. R2000-1, at
pg. 359-62. The Postal Service’s position has not changed in this docket. Witness
Kiefer has reiterated the Postal Service’s concerns that setting the ECR Basic letter rate
below the Automation 5-digit rate would provide mailers with an incentive to prepare
smaller containers of carrier route letters. Tr. 5/920. Since the Postal Service has a
major goal of sequencing as many letters as possible in its plants (USPS-RT-14 at 3-6),
giving mailers a price incentive to prepare relatively higher cost carrier route letter
bundles or containers rather than lower cost full 5-digit trays of letters would only serve
to frustrate that goal. The pricing mechanism advocated by the Postal Service to
achieve its goal is appropriate. Witness Mitchell concedes that because the Automation
5-digit rate is cheaper than the ECR Basic rate, automation compatible letters have
largely migrated to the Automation 5-digit rate, leaving largely non-automation
compatible letters in the ECR Basic category. Tr. 25/8999. To the extent these pieces
325
are not compatible with the Postal Service’s automation equipment, they have to be
cased manually. For this reason, it is reasonable to price them similarly. Finally,
witness Mitchell uses the Commission’s Opinion that his “arguments” in Docket No.
R2005-1 on this topic were “persuasive.” But, apparently, witness Mitchell has
abandoned at least one of his key arguments from the last rate case in this docket. In its
Docket No. R2005-1 Opinion, the Commission summarizes his argument:
Mitchell believes that the Service is implying that if the ECR rate were lower, automation mail would migrate from Regular 5-Digit Automation to ECR Basic and no longer bear a barcode. Witness Mitchell asserts that this possibility is unlikely because mailers would need much higher density to use ECR basic rather than Standard Regular 5-digit, and the two groups of mailers are “different in kind” from one another. Op. Para. 6068.
In the current docket, Mr. Mitchell seems to be backing away from this
“persuasive” argument. In his testimony he asserts that ECR Basic letters should pay
rates at a level that recognizes “their characteristics and their costs, in line with
accepted ratesetting principles. Once this is done, mailers should be allowed to decide
what mail to send and what rate categories to use, and the Postal Service should be
happy to process the resulting mail.” VP-T-1 at 121. This newer argument implicitly
acknowledges that setting ECR Basic letter rates as Mr. Mitchell recommends would
likely induce mailers to “decide…what categories to use.” Presumably they would
decide to migrate from Regular 5-digit Automation to ECR Basic, at a higher cost and
lower revenue to the Postal Service. And, despite witness Mitchell’s picture of the
Postal Service happily accepting whatever mail is tendered regardless of the impact on
automation goals, the Postal Service does, not surprisingly, prefer to handle mail in the
326
most efficient manner possible. It therefore does not want to offer incentives that would
result in less efficient processing.
Witness Mitchell also argues that one of the consequences of setting the ECR
Basic letter rate above the 5-digit automation letter rate is that it has the effect of
pushing up the rates for High Density and Saturation letters also. Id. at 122. Witness
Mitchell qualifies this argument by saying this would be the outcome unless an
“extraordinary” adjustment is made. He then goes on to admit that witness Kiefer did
adjust the passthrough between ECR Basic and High Density letters costs to offset the
exogenous setting of the ECR Basic letter rate equal to the ECR Basic flat rate. Id.
Notwithstanding Witness Mitchell’s description, there is nothing extraordinary
about this adjustment. It is simply common sense to adjust the passthrough to limit the
impact of the policy decision to support the letter automation program to Basic letters
only.36
36 Saturation Mailers Coalition and ADVO, Inc. witness Crowder (SMC-RT-1)
supports the ECR rates proposed by the Postal Service. SMC-RT-1 at 2. However, noting that Valpak witness Mitchell (VP-T-1) and Newspaper Association of America witness Ingraham (NAA-T-2) propose ECR rate designs that, in her words, "have a severe bias against Saturation flat mailers," SMC-RT-1 at 1, 10, she presents an alternative set of ECR rates with, among other features, a lower on-piece addressed Saturation flat-rate. SMC-RT-1 at 2, 17-19. She argues that "[i]f the Commission decides it must make changes to the USPS-proposed ECR rates, then it should make them in this direction." SMC-RT at 6. Insofar as witness Crowder supports the Postal Service's ECR rates, the Postal Service does not deem it necessary, at this time, to critique her proposed alternative in detail. However, it bears noting that the Postal Service does not agree with the application of ECP principles to hold that each shape-density rate category should generate the same average piece contribution to institutional cost. SMC-RT-1 at 15. While ECP principles may warrant consideration on matters, such as presorting, where the mailer and the Postal Service can perform the same function, shape is different. A mailer can decide to alter the shape of a mailpiece. The Postal Service cannot do so.
327
c. Drop-ship alternate rate design.
i. Intervenor proposals to increase Standard Mail letter and flat dropship passthroughs to 100 percent fail to address adjustments already made in the rate design for lightweight pieces.
Postcom witnesses Glick (Postcom-T-1) and Pursley (Postcom-T-2) propose a
simplistic application of efficient component pricing to the dropship cost differences for
Standard Mail letters and flats, with resultant passthroughs of 100 percent. Witnesses
Glick and Pursley support these proposals by claiming they will encourage palletization
and reduce container handling costs. Postcom-T-1 at 3; Postcom-T-2 at 6. Witness
Glick adds that greater palletization constitutes “a major USPS goal.” Postcom-T-1 at 3.
Both witnesses also point to the Postal Service’s Evolutionary Network Design (END)
initiative, claiming that mailer costs will increase because of the need to drop mail at
additional DBMCs. Postcom-T-1 at 2-3, Postcom-T-2 at 6.
Neither witness addresses why the Postal Service proposes passthroughs for
DBMC, DSCF and DDU pieces as 87, 85 and 85 percent, respectively. Witness Kiefer
states that the passthroughs “were adjusted as needed to maintain reasonable rate
relationships between the different rate categories.” USPS-T-36 at 14. He goes on to
state:
The less than 100% passthrough for the destination entry savings reflects, in part, the fact that piece-rated pieces (of all shapes) are given discounts for drop shipping as if they weighed 3.3 ounces, regardless of their actual weight. Despite this reduced passthrough, I have increased all destination entry discounts from current levels in my rate proposals. The drop-ship passthroughs selected are shown in my Proposed Rates worksheet in workbook WP-STREG.XLS (USPS-T-LR-36).
328
Id. n. 6. Adjusting the passthroughs as Postcom proposes would amount to giving
double credit for the avoided costs. Tr. 5/912.
Postcom’s justifications are themselves weak, as well. First, what Postcom
proposes is essentially blanket application of efficient component pricing (ECP) to
dropship cost differences, while divorcing the pricing decision from the criteria of the
Act. Increasing those passthroughs to 100 percent, when the piece rates have already
been suppressed by using 3.3 ounces to calculate the discount, would not be fair and
equitable since the net effect would be a greater than 100 percent passthrough.
The Postal Service agrees that, on the whole, mailpieces entered on full pallets
closer to destination are less costly to deliver. But these facts do not themselves justify
mechanically decreasing rates for dropshipped pallets at the expense of origin entered
mail. So, while it costs the Postal Service less to process and deliver a mailpiece
entered nearer to its destination, witness Glick himself cites to the fact that 87 percent of
destination entered Standard Mail pounds are already entered on pallets. Postcom-T-1
at 3, n. 6, citing to library reference USPS-LR-L-88, Appendix C, Table 6. That
percentage is a consequence of existing rates and their passthroughs, and witness
Kiefer proposes to increase the passthroughs. So, 1) the desired mailer behavior
already occurs, 2) under discounts today that are smaller than those proposed by
witness Kiefer, and 3) somehow Postcom thinks that behavior can be increased with
even larger discounts. Postcom does not provide evidence – because it can not – that
its proposed increases in dropship discounts are necessary to avoid a decrease in
329
destination entered mail. Increasing the dropship passthroughs will simply provide a
windfall to existing dropship mailers at the expense of origin mailers – who may not
have the necessary density to dropship anyway.
Postcom’s reliance upon the impact of END is similarly misplaced. Witness Glick
cites to an institutional interrogatory response regarding the impact of END in the test
year ((PSA/USPS-T42-1), see Postcom-T-1 at 2). PSA witness Finley similarly relies
on this interrogatory response, and in fact constructs an entire hypothetical study based
on the Postal Service’s statement that the parcel sorting activities currently conducted at
the Postal Service’s 21 BMCs and 7 ASFs will, under END, likely be carried out at from
28-100 RDCs. The fact is, the impact of END upon the test year simply is not known
with any specificity. See Tr. 18D/6616-23. There may be more DBMCs (id. at 3, no 6),
just as there may be fewer DSCFs. The test year savings the Postal Service will
achieve through END are also unknown. What is known is that the evidentiary record in
this docket does not provide any answers, nor does the record in Docket No. N2006-1.
In any event, dropship discounts are not based on mailers’ costs, so increasing the
dropship discounts because of mailers’ supposed increased costs, as both Postcom
witnesses argue, is not appropriate.
330
ii. De-averaging of Standard Mail presort flats entails rate shock considerations that preclude recommendation of Postcom’s proposal to set the passthrough for the new 5-digit automation flats discount, a new rate category, to 100 percent.
Postcom witness Pursley proposes another simplistic application of efficient
component pricing (ECP) in setting the passthrough for the 5-digit automation flats
discount to 100 percent. Postcom-T-2 at 7-8. Witness Pursley relies on two arguments
to support the proposal. First, she resorts to the general tautology that bigger discounts
for finer presortation and deeper dropshipment increase the potential incentive for
mailers to perform those activities. Second, she claims that the Postal Service’s
installation of Flat Sequencing System will make the Postal Service more efficient in
handling flats.
Witness Pursley completely fails to address the reasoning applied by witness
Kiefer in proposing lower discounts for 5-digit automation flats. Witness Kiefer states:
In my flats rate design, I have selected the passthroughs for the various presort levels to mitigate somewhat the effects of de-averaging on rates. Without these adjustments the Mixed ADC and 3-digit presort rates would have been at even higher levels than I am proposing. As a consequence, the ADC and 5-digit presort levels will receive higher increases than if I had not mitigated the effects of de-averaging. Nevertheless, the rates for the ADC and 5-digit presort categories do increase significantly less than comparable Mixed ADC or 3-digit pieces. My rate design also gives flats the same per-pound drop ship discounts as letters. Details of these calculations and adjustments, including passthrough adjustments, are in the Proposed Rates worksheet of my workbook WP-STDREG.XLS (USPS-LR-L-36).
USPS-T-36 at 16-17.
331
The 5-digit discount constitutes a new rate category created by de-averaging the
3-digit/5-digit rate. Whenever a rate is de-averaged, one rate is pushed up and the
other is pushed down. In this case, 3-digit auto flats are proposed to increase by 18.5 to
19.3 percent for minimum-per-piece pieces. At the same time, 5-digit pieces are
proposed to increase only 7.3 to 9.1 percent. To give 5-digit pieces 100 percent
passthroughs without increasing 3-digit rates more would mean reducing 5-digit rates.
The Postal Service’s view is that 3-digit rates are increasing as fast as is reasonable
and that 5-digit rates should not decrease when the overall average increase is above
10 percent. See library reference USPS-LR-L-36, workpapers WP-STDREG-26 and
WP-STDREG-27. Accordingly, witness Pursley’s proposal is at least premature, and
should definitely not be recommended.
332
F. THE POSTAL SERVICE’S PACKAGE SERVICES RATE PROPOSALS SHOULD BE RECOMMENDED
1. Parcel Post a. The rates designed by witness Kiefer are reasonable and
supported by substantial record evidence.
The Parcel Post rates proposed by Witness Kiefer represent an average increase
of 13.8 percent, with a corresponding cost coverage of 115 percent. USPS-T-37 at 3.
On average, Inter-BMC Parcel Post rates would increase 13.1 percent, Intra-BMC rates
would increase 17.7 percent, and Parcel Select rates would increase 12.0 percent.
Within Parcel Select, average DBMC rates would change by 15.9 percent, DSCF rates
16.3 percent, and DDU rates 11.1 percent. Parcel Return Service RBMC and RDU
rates would increase 12.0 and 9.1 percent, respectively. Id. In developing the Parcel
Post rates, Witness Kiefer relied on cost estimates developed by witnesses Miller
(USPS-T-21) and Mayes (USPS-T-25). Id. at 8-16.
Witness Kiefer proposes to maintain the existing rate design with one minor
modification, in that all DBMC machinable parcels will be required to be barcoded, with
the cost savings from barcoding reflected in the rates instead of being separately stated.
Witness Kiefer also proposes raising the weight for balloon parcels from 15 to 20
pounds, in line with the changes proposed for Priority Mail by witness Scherer (USPS-T-
33). Id. at 7.
Witness Kiefer’s testimony provides an explanation of his rate design
methodology, as detailed in his workpapers. Id. at 8-16. He also explains the rate
change constraints and rate adjustment factors that he applied in order to mitigate
excessive changes between particular existing and proposed rates and to preserve
reasonable rate relationships between Priority Mail and Parcel Post on the one hand,
333
and among the Parcel Post rate categories on the other. Witness Kiefer’s proposed
Parcel Post rates are supported by record evidence and merit recommendation by the
Commission.
b. UPS witness Luciani’s criticism of witness Kiefer’s rate design methodology is unfounded.
UPS witness Luciani (UPS-T-2) criticizes the Postal Service’s Parcel Post rate
design methodology for applying a markup factor to transportation costs by rate
category. The Postal Service’s methodology, according to witness Luciani, “marks up
transportation worksharing cost differences,” and he claims that this approach “is
directly contrary to sound Commission policy.” UPS-T-2 at 5-6. Witness Luciani’s
criticisms are, however, based on a flawed understanding of the Postal Service’s Parcel
Post transportation cost data.
Witness Kiefer’s rebuttal testimony (USPS-RT-11) explains that these categories
are not themselves pure worksharing categories for transportation purposes and that
they do not control for the differences in mail that use these five rate categories.
Accordingly, the differences in transportation costs between the different categories are
influenced by a variety of factors and cannot simply be identified as worksharing cost
avoidances, as witness Luciani does. See USPS-RT-11 at 11-12. Moreover, witness
Kiefer demonstrates why zone designations cannot be directly compared across these
Parcel Post rate categories. Id. at 12-13. Witness Luciani misidentifies the cost
differences between the average transportation costs for “workshared” and the average
transportation costs for “non-workshared” parcels as solely (or even primarily) due to
worksharing, and therefore as “avoided costs.” Id. at 14. As witness Kiefer explains,
“The Postal Service’s methodology is a reasonable way to approach the problem posed
334
by the complex nature of Parcel Post rate categories.” Id. Moreover, despite witness
Luciani’s claim, the Postal Service’s approach is consistent with the Commission’s
precedent in Docket No. R2000-1. Id. Accordingly, witness Luciani’s critique should be
disregarded.
c. Witness Miller’s Parcel Post cost model is reliable and should not be used to justify a lower passthrough for Parcel Select.
As noted above, witness Kiefer relies on the test year mail processing cost
estimates, cost avoidances, and cost savings estimates for Parcel Post developed by
witness Miller (USPS-T-21). Witness Miller’s model updates and refines the study first
presented by witness Eggleston in Docket No. R2001-1. See USPS-LR-J-64.
Consistent with past practice, it employs a hybrid cost methodology to estimate the test
year mail processing unit costs for the Parcel Post rate categories, and more narrowly
tailored cost avoidance methodologies to estimate test year Parcel Select window
service cost savings, BMC presort mail processing cost savings, Origin BMC (OBMC)
cost savings, and pre-barcode cost savings. USPS-T-21 at 6-10. Also, for the first
time, the model includes mail processing cost estimates, and cost savings estimates, for
the Parcel Return Service rate categories. Id. at 3-4. The results of witness Miller’s
model, presented on page 11 of USPS-T-21, are used to support the retail Parcel Post,
Parcel Select, and Parcel Return Service rates, as well as the OBMC, BMC-presort, and
pre-barcode discounts.
UPS witness Luciani criticizes various inputs used in witness Miller’s model as
being outdated or as being based on “significant assumptions that have not been
subject to any study.” UPS-T-2 at 7. He also criticizes the size of the CRA adjustment
factor used in the model and the fact that it was revised several times in this proceeding
335
as a result of errata. Id. at 9-12. He believes that for these reasons the model
produces unreliable cost avoidance estimates, and therefore that the passthroughs for
Parcel Select should be set at 90 percent, rather than the 100 percent used by witness
Kiefer. Id. at 18-19. He also proposes a revision to the model relating to the modeled
costs of parcel sortation at the delivery unit. Id. at 13-15. As discussed below,
however, witness Miller’s model reliably estimates the costs underlying the Parcel Post
and Parcel Return Service rate design of witness Kiefer, and witness Luciani’s criticisms
should be disregarded.
i. Witness Luciani’s view that various cost inputs are materially “outdated” is unsubstantiated on the record and is proven incorrect by Witness Miller.
Though witness Luciani criticizes various model inputs as being “outdated,” he
does not specify how the operations measured by the inputs have changed or whether
any such change would have a material effect on the cost model results. Instead, he
simply recites when the data was collected as it that fact alone means it is no longer
reliable. Id. at 7-9. He later admitted, however, that the age of data by itself does not
compel a conclusion that it is no longer reliable, particularly when the relevant
operations have not materially changed. Tr. 27/9429, 9439. Thus, as rebuttal witness
Miller (USPS-RT-8) notes, it is wholly insufficient for witness Luciani to criticize the cost
model solely on the fact that some of its inputs are supposedly “outdated,” without
attempting to demonstrate that those inputs have actually changed, and, if they have
likely changed somewhat, whether any such changes would have a material effect on
the model results. Tr. 33/11012.
Rebuttal witness Miller examines the model inputs that witness Luciani has
criticized, and shows that any changes to parcel processing operations that may have
336
occurred since the inputs were derived do not indicate that reducing the Parcel Select
passthroughs is the appropriate response. Tr. 33/11011. For some cost model inputs
that witness Luciani criticizes, witness Miller shows that the operation involved has not
changed appreciably since the input was developed. Tr. 33/11013, 11014. For those
operations that witness Miller indicates may have changed somewhat, he shows that
any changes that may have occurred would not have a material effect on the cost model
results, or would not indicate that reducing the passthroughs is the appropriate
response. Tr. 33/11012, 11013-14, 11014-15, 11015, 11016-17.1 Finally, for the parcel
keying productivity figure that witness Luciani criticizes, witness Miller uses a Methods
Time Measurement (MTM-4M) analysis to show that the model estimate is reasonable.
Tr. 33/11017-18. For these reasons, witness Miller concludes that witness Luciani’s
criticisms of the supposedly “outdated” model inputs should not be used as a basis for
reducing the Parcel Select passthroughs.
ii. The size of the CRA adjustment factor is not a meaningful indicator of the model’s reliability.
While witness Luciani suggests that the size of the CRA adjustment factor helps
to demonstrate the unreliability of the Parcel Post cost model, in rebuttal witness Miller
shows how the size of the factor is not a meaningful indicator of the model’s reliability.
Tr. 33/11018-20. As witness Luciani agrees, the Parcel Post cost model represents a
simplified version of reality, and thus does not include tasks that occur in the real world
of parcels processing. Tr. 27/9436, 9443. Therefore, some of the tasks that are
1 For example, one input that witness Luciani criticizes is the model’s estimate that 12.3 percent of parcels are dispatched directly to the delivery unit from the BMC. UPS-T-2 at 8; Tr. 27/9438. Witness Miller notes that if this input was updated today, the percentage would likely decrease. Tr. 33/11015. The end result would be, however, that the DDU cost avoidance would increase. Id.
337
included in the proportional cost pools may not be modeled, even though as a general
matter proportional pools contain operations that are modeled. Tr. 27/9436.2 For these
reasons, as witness Miller notes, it is unproblematic for a CRA adjustment factor to
deviate from 1.000. Tr. 33/11019. Nor is the use of a 1.194 factor problematic from the
standpoint of those factors utilized in past parcels models. When asked what an
acceptable CRA adjustment range would be, witness Luciani declined to do so. Tr.
27/9437.3
iii. Witness Luciani’s selective delivery unit parcel sortation cost pool revision should be disregarded.
The only revision that witness Luciani proposes for the Parcel Post cost model is
to replace the modeled cost for parcel sortation at the delivery unit with a figure he
derives from a tally analysis of the non-MODS MANP cost pool, the cost pool to which
the delivery unit parcel sortation task is mapped. UPS-T-2 at 13-14. As witness Miller
notes in rebuttal, however, performing such a selective analysis on a single cost pool
without concomitantly examining other cost pools could lead to a model that is biased.
Tr. 33/11020-21. He specifically points to the fact that Parcel Select DDU parcels likely
avoid certain MODS costs that are currently classified as fixed by the model, and which
are therefore included in the adjusted costs for every rate category. Tr. 33/11020.
Witness Luciani also admits that DDU parcels likely avoid such costs. Tr. 27/9444,
9466, 9468. Since no comprehensive examination of the cost pools has occurred on
this record by UPS or any other party, however, witness Luciani’s proposed revision
2 Witness Miller identifies one such task that would be included in the proportional cost pool estimates but not in the model cost estimates. Tr. 33/11019. 3 Witness Luciani seems to agree with the point that a CRA adjustment factor of 1.194, as is used in USPS-LR-L-46, is not per se unreasonable. Tr. 27/9437, 9443. Instead, he appears to base his criticism of the CRA adjustment factor simply on his more
338
should be disregarded by the Commission. Tr. 33/11021.
d. Witness Luciani’s proposed revision to the Parcel Select window service cost savings model is inappropriate.
Witness Miller’s model for estimating the window service cost savings for Parcel
Select includes PRS pieces in the volume for Parcel Select. See USPS-LR-L-46, page
34. Witness Luciani argues that these pieces should be counted as “Non Parcel Select”
in that cost study since PRS pieces are not entered via dropshipment. UPS-T-2 at 16-
17. This would, however, lead to inconsistent treatment of PRS costs and volumes in
the window service cost savings model, since PRS costs were systematically assigned
to Parcel Select in the base year by IOCS. Tr. 3/333, Response of Postal Service to
PSA/USPS-2. Treating those costs and volumes inconsistently would inappropriately
skew the model.4
2. Bound Printed Matter
Witness Yeh proposed an average increase of 11.7 percent for Bound Printed
Matter with no fundamental changes to the rate design. The proposed increase would
yield a cost coverage of 124.9 percent. Witness Mayes (USPS-T-25) provided witness
Yeh with estimated transportation costs per pound by zone and Witness Miller (USPS-
T-20) provided witness Yeh with the estimated cost differences underlying the flats
differential and worksharing discounts that are reflected in her proposed rates. USPS-
T-38, at 8-10. Witness Yeh mitigated unacceptable rate increases for non-dropshipped
mail and maintained reasonable rate relationships by lowering slightly the passthrough
general dissatisfaction with the model inputs. 4 Witnesses Luciani and Glick (PSA-RT-1) both suggest the need to separately identify PRS costs in the future. USPS-T-2 at 16-17; Tr. 27/9477-78; Tr. 33/11272. The Postal Service agrees, and would like to note that IOCS is now separately identifying PRS pieces; this practice began with the start of FY 2007, the first full fiscal year after PRS
339
of cost savings for DSCF and DDU mail. USPS-T-38, at 11.
Witness Yeh’s testimony demonstrates that her proposed rates are in
accordance with the policies of the Act. The Commission should recommend these
rates, which are supported by substantial evidence on the record.
a. Amazon.com witness Haldi’s proposal to allow CDs and DVDs to be mailed as Bound Printed Matter is fatally flawed.
Amazon.com witness Haldi (AMZ-T-1) proposes that CDs and DVDs be allowed
to be mailed as Bound Printed Matter. He also proposes that the name of the subclass
be changed to “BPM,” no doubt to disguise the fact that CDs and DVDs are not “bound
printed matter.” Witness Haldi’s proposal is intended to allow pieces containing DVDs
and CDs to migrate from Media Mail to Bound Printed Matter. He believes that this
migration will be “profitable” for the Postal Service, because the unit contribution of
Bound Printed Matter is $0.03 more than that of Media Mail. AMZ-T-1, at 16-17.
However, he also proposed lowering the cost coverage for Bound Printed Matter. Id. at
28. Witness Haldi confirmed that his proposed BPM cost coverage will result in a lower
unit contribution from pieces that migrate from Media Mail to Bound Printed Matter.
Witness Kiefer’s rebuttal testimony demonstrated how the convergence of these
proposals is fatally flawed. As Witness Kiefer stated, “The Postal Service processes
and delivers similarly presorted and entered bulk Media Mail and BPM in the same way,
so the cost would be the same, regardless of the subclass.” Therefore, “[i]f migration
does not change the costs, and postage goes down, it follows unambiguously that,
ceteris paribus, allowing currently non-qualifying pieces to migrate from Media Mail to
BPM will reduce Postal Service contribution.” USPS-RT-11, at 28-29.
became a permanent part of the classification schedule.
340
Witness Kiefer also explained that Bound Printed Matter’s attractive cost
characteristics rely crucially on its inherent physical characteristics as “bound, printed
matter.” Witness Kiefer testified:
Bound printed matter is by its very nature dense. High-density parcels and flats have favorable cost characteristics that have led to the low rates that make BPM so attractive. To allow low-density non-printed matter parcels into BPM would erode and perhaps, eventually destroy BPM’s low cost profile.
USPS-RT-11, at 32. Witness Kiefer pointed out that, “Nowhere in witness Haldi’s
testimony, or elsewhere in the record is there any estimate of the cost impacts of
bringing in low-density CDs and DVDs into a subclass that consists largely of relatively
high-density books and catalogs.” His conclusion was: “This is a serious shortcoming
in Haldi’s testimony and renders it inadequate to use as the basis for restructuring
BPM.” USPS-RT-11, at 31. For these reasons, witness Haldi’s radical proposal should
not be recommended.
3. Media Mail and Library Mail Library Mail’s rates are required to be set, as nearly as practicable, five percent
lower than the corresponding Media Mail rates. 39 U.S.C. § 3626(a)(6)(A); see USPS-
T-38, at 13-14. The rates developed by witness Yeh for Media Mail represent an
average increase of 17.9 percent, and for Library Mail a 18.2 percent increase. Since
Media Mail and Library Mail costs are available only on a consolidated basis, the
combined cost coverage is 109.0 percent. Witness Miller provided witness Yeh with
the estimated cost differences underlying the worksharing discounts that are reflected in
her proposed rates. USPS-T-38, at 17-18.
Witness Yeh proposed no fundamental changes to the Media Mail rate design.
341
The proposed rates were derived from a per-piece and per-pound rate construction
manifested in a three-part structure that resulted in one rate for the first pound, a
separate lower rate for additional weight up to 7 pounds and the same lower rate for
additional weight over 7 pounds. USPS-T-38, at 13; Tr. 8/1908-9. The Commission
should recommend these rates, which are supported by substantial evidence on the
record.
a. PostCom witness Angelides provides no basis for disturbing witness Yeh’s Media Mail rate structure.
On behalf of PostCom, Witness Angelides proposed to change the longstanding
Media Mail rate design to include half-pound rate increments instead of whole pound
rate increments for pieces weighing more than one pound and less than five pounds.
POSTCOM-T-5, at 6. Witness Angelides argued that full pound rate increments at low
weights “can result in dissimilar packages paying the same rate.” POSTCOM-T-5 at 5.
In his rebuttal testimony, Witness Kiefer pointed out that “[d]issimilar mail pieces pay the
pay the same rates in all mail classes offered by the Postal Service.” USPS-RT-11, at
33. As Witness Kiefer stated:
Apparently, witness Angelides finds weight variations this big to be unacceptable, since he proposes to reduce them by setting up half-pound weight steps between 3.0 and 5.0 pounds. But if 23 percent variation is not acceptable in a full pound weight step, why is 27 percent variation acceptable in his half-pound step between 1.0 and 1.5 pounds? At what point exactly does a weight variation within a rate step become unacceptable?”
USPS-RT-11, at 34. Witness Angelides proposal appears to be both internally inconsistent and lacking in
consideration for the implications of applying his principle throughout the postal rate
structure.
342
G. The Periodicals Rates Proposed by the Postal Service Are More Balanced than any Alternatives, and Should Be Recommended
Witness Tang (USPS-T-35) presents the Postal Service’s rate and classification
proposals for the Periodicals Outside County and Within County subclasses. These
rate proposals would result in an overall increase for Periodicals of approximately 11.9
percent. Outside County rates would increase by 11.7 percent, and Within County rates
would increase by 24.2 percent. USPS-T-35 at 2.
1. The Postal Service’s proposals for the Outside County subclass should be adopted.
The Postal Service’s proposal for the Outside County subclass reflects a
balanced movement towards greater incentives for improved mail preparation, while
remaining cognizant of the interests of publications that currently are less able to
change their preparation practices. The Postal Service’s proposal is preferable to the
alternatives proposed by the intervenors, and should be recommended.
a. The proposed container rate promotes efficiency and lower costs.
The Postal Service is proposing a new container rate, along with the appropriate
classification change, in proposed DMCS 421.35. The container rate would apply to all
Outside County mail, based on its preparation. Tr. 7/1616-18. Because pallets
generally carry much more mail than a sack, charging for each container effectively
provides a pallet discount. The container rate thus would replace the experimental co-
palletization discounts, as well as the other pallet discounts. USPS-T-35 at 6.
Therefore, witness Tang proposes to delete DMCS 421.48 (Pallet Discount) and 421.49
(Dropship Pallet Discount). Moreover, DMCS 421.50 (Co-palletization Dropship
Discounts) will expire upon the implementation of the proposals in this rate case. The
Postal Service urges the Commission to recommend the requested DMCS changes.
343
In rebuttal, witness Taufique provides additional support for the Postal Service’s
proposed container rate. The container rate would send a consistent and clear signal
to mailers, encouraging more efficient mail preparation and worksharing. Tr. 39/13456.
All mailers would understand that one goal they should strive for is to prepare their mail
in as few containers as practical. In some cases that would mean switching from sacks
to pallets (since a pallet holds more mail than a sack). But in other cases it would
create an incentive for a sack mailer to prepare the mail in fewer sacks, and for a pallet
mailer to prepare the mail in fewer pallets. All of these actions generally would reduce
Periodicals costs. USPS-T-35 at 6.
b. The piece-pound split should be adjusted as proposed.
Witness Tang proposes a 37.5/62.5 percent split between revenue to be raised
from pounds and pieces. This split better reflects actual cost incurrence than the
traditional 40/60 percent split. USPS-T-35 at 6-7.
c. The Postal Service’s proposals will promote more dropshipping.
Witness Tang proposes separate editorial pound dropship rates for the
destinating ADC, SCF, and DDU. The flat editorial pound rate would be retained,
however, since Zones 1&2 through 8 would continue to have one editorial pound rate.
USPS-T-35 at 7. But the proposed destinating ADC, SCF, and DDU rates for editorial
pounds will encourage more efficient practices for publications, especially those with
high editorial content. Id. at 8.
Consistent with the introduction of destination entry rates for editorial pounds, the
Postal Service proposes editorial pound rates for Science of Agriculture, at 75 percent
of the comparable Outside County rates. Id. at 10.
344
A major goal of the Postal Service’s proposal is to maintain or increase the
incentives to dropship, in particular for the farthest zones. Witness Tang therefore
allocates 50 percent of the transportation costs to advertising pounds, instead of a lower
amount. She also proposes to raise the passthrough for advertising pound dropship
cost differences from 50 percent to 80 percent. Id. at 9. For the piece rates, she
proposes to increase the destination ADC discount by 37.5 percent, and the destination
SCF discount by 50 percent. Id. at 11. Thus, additional dropshipping will be
encouraged.
d. The Postal Service’s proposals promote co-mailing and co-palletization.
The current pallet discounts, including the experimental co-palletization
discounts, share the same purpose: to encourage more efficient mail preparation and
more dropshipping. But the co-palletization discounts are experimental, and the design
of the other pallet discounts was criticized by the Commission in Docket No. R2001-1,
when they were introduced. PRC Op., R2001-1, at 109. Witness Tang therefore
proposes to replace these discounts with a combination of editorial pound dropship
rates, increased per-piece dropship discounts, and a container rate. USPS-T-35 at 11.
Witness Tang assessed the impact of these rate design changes, and concludes that
mailers would have comparable if not better incentives. This proposal would also
eliminate the restrictions on publications eligible for discounts related to co-palletization,
as well as the documentation requirements. This alone should lead to more co-
palletization. Id.
e. The proposed presort discounts should be recommended.
The Postal Service believes that presortation to the 5-digit automation flat and
carrier route basic levels will continue to have value in future mail processing and
delivery environments. Witness Tang therefore proposes to maintain these discounts at
345
their current levels, by increasing the passthroughs to well above 100 percent.
Maintaining the level of these discounts is important while the operational environment
for flats continues to evolve. USPS-T-35 at 12. In addition, the proposed 3-digit and 5-
digit presort rates reflect witness Miller’s mail processing and witness Kelly’s and
witness Talmo’s delivery cost studies, using 100 percent passthroughs. Id. The Postal
Service urges the Commission to adopt these discounts.
2. The Postal Service opposes the alternative Periodicals Outside County proposals by Time Warner, Inc., the Magazine Publishers of America and Alliance of Nonprofit Mailers, and the National Newspaper Association.
The Magazine Publishers of America and the Alliance of Nonprofit Mailers
(MPA/ANM) and Time Warner, Inc. (TW) present two alternative rate proposals for the
Periodicals Outside County subclass, as well as alternative versions for the Periodicals
Outside County flats cost model. The National Newspaper Association presents an
alternative for applying the Postal Service’s proposed container rate. The Postal
Service opposes each of these proposals, as discussed below.
a. The MPA/ANM and TW rate proposals fall short of the balance found in the Postal Service proposal.
The MPA/ANM proposal follows the general rate design of the Postal Service
proposal, with the following changes.
• Replaces the proposed container rate with a deeper pallet discount; • Reduces automation discounts; • Increases the dropship incentive by basing it on a different estimate of the costs
avoided by dropshipping; • Introduces a discount for pieces that are entered on 5-Digit pallets; and • Reduces the proposed Ride-Along rate so that the percentage increase in this
rate matches the subclass average.
MPA/ANM-T-2 at 5-6.
TW proposes a variation on the major restructuring of Periodicals rates proposed
in Docket No. C2004-1. While TW backs away from zoning of the editorial pound rate,
346
they still propose a complete overhaul of the Periodicals rate design, including
container, bundle, and piece charges based on presort level and machinability. TW-T-1
at 22-26; Exhibit TW-1-A.
In rebuttal testimony, witness Taufique explains why the Postal Service believes
its proposals will best meet the interests of the entire Periodicals class. He shows that
the Postal Service’s recent rate design philosophy for the Periodicals Outside County
subclass has been to move gradually in the direction of lower-cost preparation, by
providing incentives for reducing the number of containers, and for destination entry.
This gradual approach reflects the Postal Service’s desire to limit the rate impact of the
changes on publications that currently are less able to change their preparation and
destination entry practices. Tr. 39/13453. So far, the Postal Service’s approach, to the
extent adopted by the Commission, has substantially increased dropshipping, and
increased the efficient use of containers. Tr. 39/13454. As witness Taufique concludes,
“gradual change has been proven to be very successful, so we’ll want to continue with
that approach.” Tr. 39/13512. The Postal Service’s current proposal thus is a logical
continuation of this use of modest incentives for improved mail preparation, while
avoiding large rate impacts for non-participants. Tr. 39/13455.
Witness Taufique compares the three Outside County rate proposals in this
docket, and finds that the Postal Service’s proposal is the most balanced one. He
chooses standard deviation as the key statistic in comparing the proposals. Id. at 5.
The Postal Service proposal has the lowest standard deviation overall, and for large and
medium mailers. Moreover, after excluding one outlier, it would have the lowest
standard deviation for small mailers. Id.
347
At his hearing, witness Taufique discussed the fact that the percentage rate
increase from the Postal Service proposal for four of the 259 publications is greater than
the largest rate increase from the MPA proposal. He indicated that these four
publications are Within-County publications, and that the large percentage increases
pertain only to the limited Outside County portion of these Within County mailings.
Therefore, the dollar increase in actual postage for the Outside County portion would
not be large. Moreover, given postal reform legislation’s making Within County rates
available to some Outside County portions of Within County publications (the Postal
Accountability and Enhancement Act, § 1003(2)), and possible flexibility in
implementation rules, it is likely that the significant percentage rate increases may not
materialize or be sustained.
ABM witnesses Bradfield and McGarvy also criticize the MPA/ANM and TW
proposals. Witness Bradfield recognizes that “[e]ach of the three rate proposals here
moves in the direction requested by the Commission by increasing those incentives [for
moving from sacks to pallets].” Tr. 35/12059. But, focusing on the need to “assure
adequate protection from destructive rate increases for the many publications that
cannot . . . co-mail or co-palletize,” he finds that the Time Warner and, to a lesser
extent, the MPA/ANM proposals fall short. Tr. 35/12060. He also finds that “[t]he Time
Warner proposal is far worse for all but the largest publications.” Tr. 35/12067. Finally,
witness Bradfield agrees with Postal Service witness Taufique that “[g]reat progress in
co-mailing and co-palletizing has been accomplished and will be accomplished with a
level of incentives at or near the level in today’s rates.” Tr. 35/12067-68.
Witness McGarvy also concludes that “the Time Warner proposal, and, to a
348
significantly lesser extent, the MPA proposal still provide inadequate protection to
mailers of Periodicals that cannot escape sacks, at least in the next couple of years.”
Tr. 35/12175. She explains why comailing and co-palletizing are not currently available
to a large number of Periodicals publications. Tr. 35/12176-80. But she is “hopeful that
once the Postal Service has completed its ongoing automation efforts with the FSS
program, and as more and more titles that can be co-mailed or co-palletized are in fact
prepared that way, opportunities for our publications to get out of sacks and into either
alternative containers or co-mailing or co-palletizing programs will materialize.” She
also notes that many ABM members may be switching to pallets in the near future. She
therefore concludes that the current incentives to palletize “are doing their job. It is
unnecessary to expose those that cannot move from sacks to punishing rate levels in
order to increase the incentives and rewards for palletizing too much and too soon.” Tr.
35/12180.
b. MPA/ANM’s proposal for a 5-digit pallet discount should be rejected.
Witness Taufique specifically criticizes the alternative 5-digit pallet discount that
is part of MPA/ANM’s proposal. He calls this proposal “premature.” Tr. 39/13455-56.
Because the Periodicals cost coverage is so close to 100 percent, only the most
effective discounts can be added. A 5-digit pallet discount, however, would reward
existing mail preparation on 5-digit pallets, rather than being focused on cost-reducing
behavior. 5-digit pallets are limited to high-density publications, or those publications
which can co-mail or co-palletize as part of a high-density pool. Witness Taufique
concludes that “it is important to construct the incentives such that they are obtainable
for a wide range of mailers, especially those that are producing high-cost mailings.” Tr.
349
39/13456.
In addition, witness McCrery identifies operational problems with MPA’s 5-digit
pallet discount proposal. His rebuttal testimony (USPS-RT-14) focuses on the fact that
the proposal would apply to all 5-digit pallets, regardless of their entry location or
weight. He asserts that, for 5-digit pallets entered upstream from the destination SCF or
delivery unit, transportation to the destination “can negate much of the benefit of the
pallet.” Tr. 34/11460. MPA’s proposal also would give customers “an incentive to
prepare small 5-digit/scheme pallets to the greatest extent possible while depositing
those pallets at an origin facility.” Tr. 34/11461. Finally, witness McCrery is concerned
about pallets containing less than 250 pounds, even when deposited at destination
SCFs. Id.
For all of these reasons, the Postal Service does not support MPA’s proposal for
a 5-digit pallet discount.
c. The Postal Service’s proposed Ride-Along rate follows established ratemaking practice, and is superior to MPA/ANM’s alternative proposal.
Witness Taufique defends the Postal Service’s proposed Ride-Along rate as
consistent with the traditional pricing approach for this rate. Tr. 39/13462 (USPS-RT-12
at 10). MPA/ANM proposes a lower Ride-Along rate simply to keep its increase similar
to the overall increase for the Periodicals Outside County subclass. MPA/ANM-T-2 at
35. The Ride-Along rate, which applies to matter that otherwise would be sent using
Standard Mail rates, was originally developed to respond to customer demand for an
effective and affordable advertising medium for Periodicals mailers. Its revenue is
included in the total Periodicals revenue and improves the overall class contribution. Tr.
350
39/13462. Thus, it should be developed based on accepted principles, rather than to
just match the overall increase for the Outside County subclass.
d. The container rate should apply to all Periodicals mailings, including those entered in flats tubs and in unsacked bundles.
As explained by witness Tang, the container rate is an integral part of the Postal
Service’s proposed Outside County rate structure, whose existence allows for other rate
elements (specifically, the piece rates) to be lower. Tr. 7/1648, 1656, 1740, 1839.
Therefore, it should apply to all Outside County mailings, not just those involving a sack
or a pallet. The Postal Service has explained how the container rate would be applied
in those situations not involving a sack or a pallet, such as when a mailing is entered in
a flats tub or in unsacked bundles. Tr. 7/1617-18.
NNA witness Heath argues that the container rate should not apply to Outside
County mailings that utilize a flats tub or that are entered as unsacked bundles at the
delivery unit. NNA-T-1 at 17-18. Mailers utilizing flats tubs and unsacked bundles do, of
course, pay the same piece rates as all other Outside County mailers, as witness Heath
admits. Tr. 29/9604. They therefore benefit (in terms of lower piece rates) from the
existence of the container rate. In addition, the container rate can have efficiency
benefits not confined to the usual sack/pallet paradigm. Thus, it is improper not to apply
the container rate to these mailings. In addition, witness Heath has not presented
compelling record evidence that would justify treating these mailings differently from all
other Outside County mailings.
351
i. The record does not support witness Heath’s assertion that
the container rate would be a material disincentive for mailers to switch from sacks to flats tubs.
Witness Heath admits that a flats tub is a container, and that applying the
container rate to flats tubs should encourage the more efficient use of those containers
by mailers already using them. Tr. 29/9601. His argument therefore boils down to the
notion that the container rate should not apply to mailings entered in a flats tub because
he believes that it would provide a disincentive for mailers to make the beneficial switch
from sacks to tubs. NNA-T-1 at 17.5 The record, however, demonstrates that the
container rate would not create a material disincentive to such a switch.
First of all, witness Heath admits that service is the paramount determinant of
container usage for newspaper mailers. As he notes, newspapers like to use the
container that provides them with the best service. Tr. 29/9601, 9637. Newspapers
therefore have a non-financial incentive to use tubs over sacks, since as witness Heath
notes they are easier for mailers to use and handle, and provide service improvements
over sacks. NNA-T-1 at 16-17; Tr. 29/9638-39. Witness Heath even went so far as to
say that a tub is “mandatory if you want good service.” Tr. 29/9655. Because service is
vitally important for newspaper mailers, and tubs provide service improvements over
sacks, it stands to reason that the only way the container rate would slow the movement
from sacks to tubs is if it provides a material financial disincentive to switching; that is, if
moving from tubs to sacks would appreciably increase the number of containers that
5 Specifically, he states: “I believe the Commission should reject the proposed charge on [tubs] altogether and allow the Postal Service to capture greater savings through sack abandonment before slowing a positive trend with a surcharge on tubs.” NNA-T-1 at 17.
352
newspaper mailers would be required to use for a given mailing (therefore increasing
the total postage resulting from the container rate).
The record does not show, however, that switching from sacks to tubs would in
fact require materially increased container usage by mailers. First, moving from sacks
to tubs is unlikely to have a material effect on presort level, given the typical mailing
profile of a community newspaper and the Postal Service’s 24-piece rule for sacks. The
typical mailing profile for a community newspaper is a concentration of addressees in
the local ZIP Codes of its trade area, with the rest of the addressees dispersed
throughout the country. Tr. 29/9639.6 Sacks are used primarily for papers destined to
the latter group of addressees, who reside outside the trade area of the newspaper. Tr.
29/9599, 9639. While newspapers commonly prepared a number of small 3-digit and
some 5-digit sacks, in addition to ADC sacks, prior to the advent of the 24-piece rule,
that rule has led to fewer 3-digit and 5-digit sacks and more ADC, mixed ADC, and
origin mixed ADC mail. Tr. 29/9641-42. These are the same presort levels that postal
standards currently allow for flats tubs. Tr. 11/3275-76; DMM 705.9.2.6.
Second, the record indicates that the number of newspapers that can be placed
in a flats tub may not differ materially from the number typically placed by community
newspapers in sacks. Witness Heath states that 35 pieces are typically placed in sacks
by his newspaper company. Tr. 29/9599. Tubs, meanwhile, can hold anywhere from
20 to 200 pieces, with the typical paper putting around 40 to 50 pieces in a tub. Tr.
29/9599, 9642-43.
6 Witness Heath did note that there is sometimes a concentration of addressees outside a newspaper’s trade area in particular locales where people from a community tend to move. Tr. 29/9639-40.
353
Thus, the record indicates that community newspapers switching from sacks to
tubs will in many circumstances not experience an attendant material increase in the
number of containers required for their mailings, since the presort levels of the sacks
that are increasingly typical in the post-24-piece-sack-rule environment do not differ
from the allowable presort levels for tubs, and because tubs can often hold a
commensurate number of papers as the typically prepared sack. Because the container
rate is the same for an individual sack and an individual tub, Tr. 7/1617, 1858, it cannot
be said on this record that the container rate would provide an appreciable financial
disincentive to switch from sacks to tubs.
The Postal Service agrees with witness Heath that flats tubs often provide
benefits to both mailers and to the Postal Service over sacks. Tr. 11/3276-77.
However, witness Heath’s protest that applying the container rate to flats tubs would
materially slow the movement away from sacks and towards tubs is not supportable on
this record. Instead, the record indicates that the container rate would likely be not be a
material disincentive, nor a material incentive, to the making of this switch.
ii. The record indicates that the container rate will likely play little to no role in the usage of unsacked bundles.
Witness Heath also argues that the container rate should not apply to unsacked
bundles (or loose copies) entered at the delivery unit because there are no container
handling costs associated with that mail, and because it could create a disincentive for
mailers to utilize this practice. NNA-T-1 at 18. These justifications for not applying the
container rate to such mailings are, however, unconvincing based on the record.
First, the fact that this mail is “uncontainerized” does not mean, ipso facto, that
the container rate should not apply to it. As noted above, the container rate is an
354
integral part of the rate structure, which allows for other rate elements to be lower. Tr.
7/1648, 1656, 1740, 1839. It is also a price signal, designed to encourage the efficient
preparation of Outside County mailings, rather than necessarily a means of recouping
the costs of handling containers. Tr. 7/1859. Second, the record indicates that the
container rate would likely not constitute a financial disincentive for mailers to use
unsacked bundles. According to witness Heath, newspapers generally use one
container per 5-digit ZIP Code, meaning the number of containers would equal the
number of 5-digit ZIP Codes to which the mail is destined. Tr. 29/9603, 9643-44. Since
the container rate will be applied based on the number of 5-digit ZIP Codes to which the
mail is destined, Tr. 7/1617,7 this means that, according to the record, the container rate
would likely be a financial wash in the case of unsacked bundles, neither encouraging
nor discouraging the practice. 8 For example, if unsacked bundles were prepared for a
delivery unit serving a single 5-digit ZIP Code, one container rate would be assessed,
similar to the same bundles prepared on a pallet or in a sack, regardless of the number
of bundles.
From a financial standpoint, therefore, the record does not support witness
Heath’s argument that applying the container rate to unsacked bundles would give him
“no leverage to push this practice further.” NNA-T-1 at 18. Instead, the record indicates
7 If, for example, the mail in the unsacked bundles dropped at a delivery unit are destined to two 5-digit ZIP Codes, then two container rates would be applied. Tr. 7/1837. If the mail is destined to one 5-digit ZIP Code, then a single container rate would apply. Tr. 7/1857. 8 In addition, if the number of containers exceeds the number of ZIP Codes to which the mail is destined, the container rate would provide an incentive to utilize unsacked bundles. Tr. 29/9603. As witness Heath notes, unsacked bundles can hold more papers than sacked bundles. Tr. 29/9644.
355
that a mailer’s decision to use unsacked bundles rather than some other container, or
vice versa, will likely be made independently of the existence of the container rate.
e. The Commission should adopt Postal Service Witness Miller’s flats mail processing cost model over those proposed by MPA/ANM and TW.
Witness Tang uses Outside County mail processing costs that are presented by
witness Miller (USPS-T-20). Witness Miller provides comprehensive test year mail
processing unit cost estimates for the First-Class Mail presort flats, Periodicals Outside
County flats, and non-ECR Standard Mail presort flats rate categories. The model
updates and refines the flats cost model that was first presented by witness Miller in
Docket No. R2001-1. See USPS-LR-L-61. Consistent with past practice, the test year
unit cost estimates are developed using a hybrid cost methodology. Id. at 6. Three
modifications were made to the model, concerning the incorporation of base year mail
characteristics studies, the inclusion of mail processing cost estimates for First-Class
Mail presort parcels in the First-Class Mail model, and the de-averaging of the Standard
Mail rate categories in the Standard Mail model. Id. at 4-5.
Witness Miller's cost models provide the most comprehensive and accurate mail
processing unit cost estimates for the First-Class Mail presort flats, Periodicals Outside
County presort flats, and the Standard Mail non-ECR presort flats rate categories on
this record. Witnesses Glick (MPA/ANM-T-2) and Stralberg (TW-T-2) both criticize
witness Miller's Periodicals Outside County flats model, and present their own versions
of the model. See MPA/ANM-LR-2; TW-LR-2. While many of their criticisms of the
model are identical, the approaches that they used to address those criticisms in their
revised models often diverge. Their models both have the same result, however: in
nearly every case, their modifications move the costs in a direction that greatly expands
356
the cost differential between a nonautomation 5-digit flat and a nonautomation carrier
route flat. Tr. 33/10993-94.9 As discussed below, the Commission should utilize
witness Miller’s model rather than those of witness Glick or Stralberg.
i. Arbitrary incoming secondary factors should not be included in the model.
Witnesses Glick and Stralberg both criticize witness Miller’s decision to remove
the incoming secondary flats coverage factors from the cost model prior to Docket No.
R2005-1, and attempt to incorporate such factors back into the model. See MPA/ANM-
T-2 at 17-19; TW-T-2 at 11-14. Both justify the inclusion of these factors on the fact that
Postal Service witness McCrery, responding to an interrogatory, provided MODS and
FLASH data estimating that 44.7 percent of incoming secondary flats were finalized
manually. Tr. 11/2853.
In his rebuttal testimony (USPS-RT-8), witness Miller describes what this figure is
used for and why it is unsuitable for cost modeling purposes. He explains that the figure
witness McCrery provided is not used for cost modeling, but is instead used by
operations management to estimate the percentage of all flats finalized in incoming
secondary operations in order to gauge year-to-year performance. Tr. 33/10994. While
the data are appropriate for the use for which they are derived, witness Miller explains
that they are not appropriate for cost estimating. Id.
Witness Miller demonstrates the unsuitability of using witness McCrery’s figure
for cost modeling purposes in his comparison of the volumes that underlie that figure
with RPW volumes. This comparison shows that the manual percentage is suspect
9 Witness Glick expands this differential by 2.452 cents (6.778 compared to 4.326 cents), while witness Stralberg expands this differential by 5.424 cents (9.750 cents compared to 4.326).
357
because the estimated volume of incoming secondary flats exceeds the total RPW
volume for candidate incoming secondary flats. Tr. 33/11023. While witness Miller
may have errantly excluded some other candidate incoming secondary volume from his
analysis, Tr. 33/11046-50, the incorporation of these volumes still result in an
unexplained gap between the RPW and FLASH manual volume figures underlying
witness McCrery’s figure.
As witness Miller notes, there is simply no data that indicate the true percentage
of total flats that are finalized in incoming secondary operations. Tr. 33/10995. He
concludes that manipulating the cost model through the inclusion of arbitrary incoming
secondary factors, based on a misused estimate, is inappropriate and should be
rejected by the Commission. Tr. 33/10999, 11026-27.
ii. The flats model should use CRA flats costs rather than combined flats and parcels costs.
Witnesses Glick and Stralberg both propose that the Periodicals Outside County
flats model abandon the use of CRA flats cost by shape estimates in favor of a mixed-
shape (flats and parcels) cost estimate. See MPA/ANM-T-2 at 20-21; TW-T-2 at 24-25.
As witness Miller notes in rebuttal, however, this modification is especially problematic
because it represents a methodological change that could impact the models for all
classes and shapes of mail. Tr. 33/11000-01. Furthermore, the CRA cost-by-shape
estimates for flats have already been modified to account for differences in how mail
pieces are categorized in Postal Service data collection systems. Id.
iii. Proportional cost pool classifications should be based on whether the tasks are modeled.
Witnesses Glick and Stralberg both propose that some cost pools should be
classified as proportional even though they do not represent any piece or bundle
358
distribution operations that are depicted in the mail flow models. See MPA/ANM-T-2 at
20-21; TW-T-2 at 25. The Postal Service and the Commission have, however,
historically relied upon a classification approach in which cost pools have only been
classified as proportional if they contain costs for operations depicted in the mail flow
models. USPS-T-20 at 6.10 As witness Miller notes, deviating from a conservative
approach in classifying cost pools is inadvisable, and represents a methodological
change that implicates the cost studies for all other classes and shapes of mail. Tr.
33/11001-02.
iv. The proposed selective cost pool adjustments should be rejected.
Witnesses Glick and Stralberg both attempt to manipulate CRA data at the cost
pool level. Both suggest that a portion of the 1FLATPRP cost pool should be classified
as proportional, though they differ in the manner by which to accomplish this task. See
MPA/ANM-T-2 at 22-23; TW-T-2 at 9-14. As witness Miller explains, however, flat
preparation costs do not generally vary for the non-carrier route rate categories, while
the AFSM100 Automatic Induction (AI) modification will ultimately reduce the difference
in preparation hours between carrier route and non-carrier route mail. Tr. 33/11003-05.
Consequently, he believes that the 1FLATPRP cost pool should be classified as fixed.
Both witnesses also propose that a portion of the non-MODS ALLIED cost pool
be classified as proportional, based on tally analysis which estimated that 37 percent of
the tallies associated with that cost pool are related to bundle sorting operations. See
MPA/ANM-T-2 at 22; TW-T-2 at 24. As witness Miller explains, however, selective
10 While proportional pools can contain costs that are not modeled, every proportional pool contains at least some costs related to tasks actually represented by the cost models. Tr. 33/11006.
359
attempts to disaggregate costs below the cost pool should be discouraged. Tr.
33/11006-07. He shows that a similar tally analysis conducted on two proportional cost
pools demonstrates that a portion of those pools could be, if the Glick and Stralberg
approach is used, classified as fixed, indicating that performing such a detailed analysis
on all the cost pools would lead to modifications that would probably balance out. Tr.
33/11007.
Finally, witness Glick (but not witness Stralberg) proposes that the 1SUPP_F1
cost pool should be classified as proportional. See MPA/ANM-T-2 at 22. Witness Miller
notes, however, that this contradicts how the Commission classified this cost pool in
Docket No. R2000-1, wherein the proper classification for this cost pool was extensively
debated. Tr. 33/11007-08.
v. Witness Stralberg’s bundle breakage revision should not be accepted.
Witness Stralberg proposes that the bundle breakage assumption for manual
operations be modified. See TW-T-2 at 19-22. In rebuttal, however, witness Miller
suggests that witness Stralberg's revised manual bundle breakage assumption is based
on incorrect information concerning manual bundle sorting operations and should
therefore be rejected. Tr. 33/11008-09.
3. The Postal Service’s proposed rate design for Within County Periodicals is reasonable and should be recommended.
a. Witness Tang’s rate design is reasonable and balanced.
Like its Outside County counterpart, the Postal Service’s rate proposal for the
Within County subclass represents a reasoned and balanced approach to rate design.
Witness Tang designs rates that lead to a 24.2 percent increase for Within County mail
360
and a cost coverage of 103.6 percent. USPS-T-35 at 14. As she notes, the size of the
rate increase for Within County is driven by the increased costs for the subclass, while
the cost coverage is determined by applying the “half markup rule.” Id. at 2, 14.11
Witness Tang also notes that her rate design is generally consistent with prior practice.
Id. at 14.
One anomaly produced by the Postal Service’s rate design is that the 5-digit
automation letter rate, as proposed, is slightly higher than the proposed 3-digit
automation letter rate. Id. at 15. The Postal Service believes that the 5-digit rate should
be lower than the 3-digit rate, and would support Commission adjustments to witness
Tang’s proposal to correct this anomaly. Besides this one change, however, the
Commission should accept witness Tang’s rate design.
The major concern that animates witness Tang’s rate design is a desire to
achieve a balanced proposal; that is, to avoid percentage increases well above the
subclass average for individual rate categories. Tr. 7/1869. She designed the presort
discounts with this goal in mind, using Outside County costs as a proxy since no Within
County cost study is available, and applying different passthroughs than are used in
Outside County rate design in order to reflect the inherent differences between the two
subclasses. Id. at 14; Tr. 7/1726. In particular, the passthroughs she uses to create the
discounts for carrier route presorted mail reflect a measured increase in the
passthroughs, and resultant discounts, over what the Commission has recommended in
the past for such mail, while also protecting lower-presort publications from inordinate
11 These issues are discussed in the Costing and Rate Level sections of this brief, respectively.
361
rate increases. Tr. 7/1727, 1731.12
A desire to achieve a balanced rate proposal also led to witness Tang’s reduction
in the percentage of revenue derived from the piece side from that used in prior
proceedings. She proposes to derive 53.5 percent of revenue from the piece side, Tr.
7/1729, whereas in recent cases the ratio has generally been 60 percent from the piece
side, and 40 percent from the pound side. See PRC Op., R2005-1, at 149, n.68. The
billing determinants show, however, that the weight per piece for Within County has
increased, which has caused the percentage of revenue derived from the piece side to
decline markedly to 54.2 percent. See USPS-LR-L-126.13 Because this has occurred,
returning to a 60/40 ratio would lead to very high piece rate increases combined with
low pound rate increases. Therefore, in order to achieve a balanced increase between
the piece and pound rates, and therefore between heavy and light weight publications,
witness Tang uses a ratio of 53.5/46.5.
b. NNA’s proposed revisions result in an imbalanced rate design and should be rejected.
NNA witness Siwek proposes to revise witness Tang’s rate design by increasing
the passthroughs for Carrier Route Basic and Carrier Route High Density over that
proposed by the Postal Service, and by increasing the amount of revenue to be derived
from the piece rates to match the piece/pound ratio proposed for the Outside County
12 Compare the discounts and passthroughs for the carrier route categories in USPS-LR-L-126 with the same discounts and passthroughs recommended in Docket No. R2000-1, PRC-LR-14 and Docket No. R97-1, PRC-LR-11. 13 In FY 2000, the weight per piece was 4.6 oz, and 58.8 percent of revenue was derived from the piece side. See USPS-LR-J-107. In FY 2005, the weight per piece was 5.3 oz, and only 54.2 percent of revenue was derived from the piece side. See USPS-LR-L-126. This is consistent with the fact that as weight per piece increases, the proportion of revenue from the pound rates increases as well. See PRC Op., R2000-1, at ¶ 5675.
362
subclass. NNA-T-3 at 24-28. These revisions, however, lead to a completely
unbalanced rate proposal, with inordinate increases for non-carrier piece rates, and
minimal increases for the pound rates relative to the piece rates.
i. NNA’s proposed passthrough for Carrier Route Basic is inconsistent with prior Commission rate design and leads to inordinate increases for non-carrier route mailers.
NNA witness Siwek proposes to increase the passthroughs for Carrier Route
Basic and Carrier Route High Density to 100 percent and 70 percent, compared to the
Postal Service’s proposed passthroughs of 58 percent and 65 percent, respectively. Id.
at 27.14 This proposal to nearly double the passthrough and resulting rate discount for
Carrier Route Basic over that proposed by the Postal Service is wholly inconsistent with
past Commission practice. It would also lead to rate increases for Within County
mailers who do not presort to carrier route that are way above the subclass average.
First, NNA’s proposal leads to a large increase for the Carrier Route Basic
passthrough and rate discount over that recommended by the Commission in Docket
Nos. R2000-1 and R97-1. In those cases, the Commission recommended that this
passthrough be set at 50 percent, resulting in rate discounts of 3.6 and 3.7 cents
relative to 5-digit Nonautomation. See PRC Op., R2000-1, at ¶ 5721; PRC Op., R97-1,
at ¶ 5856. There is no indication that witness Siwek considered this prior accepted rate
14 NNA’s proposed passthrough for High Density deviates only slightly from the Postal Service’s proposal, and would lead to a discount of 1.7 cents off the Carrier Route Basic rate compared to the Postal Service’s proposed 1.6 cents discount. Instead, NNA seeks to benefit High Density mailers by substantially increasing the passthrough and discount for Carrier Route Basic. Therefore, this section concentrates on witness Siwek’s proposed passthrough for Carrier Route Basic. The Postal Service notes, however, that its High Density discount is consistent with the discount of the prior two omnibus cases, and is higher than the discount recommended by the Commission in the last two non-settled rate cases.
363
design before proposing his dramatic increase in the size of the passthrough and
discount for carrier route mail. Tr. 29/9717.
When shown the Commission’s prior recommended passthroughs, witness
Siwek attempted to dismiss them as immaterial, since in those cases Nonprofit costs
were used as a proxy for Within County costs, whereas in the current proceeding
Outside County costs are used as the proxy. Tr. 29/9719-20. This is a complete red
herring, however, since NNA’s proposed rate design would not only double the size of
the passthrough for Carrier Route Basic, it would also nearly double the size of the rate
discount for Carrier Route Basic over that recommended in Docket Nos. R2000 and
R97. The following table, which shows the rate discount for Carrier Route Basic
(relative to 5-digit Nonautomation) that was recommended by the Commission in the
past several cases, along with the rate differences proposed by the Postal Service and
NNA in this case, illustrates this point:
Docket
Rate Discount for CR (relative to 5-D)
R97 $0.037 R2000 0.036 R2001 0.037 R2005 0.036 R2006 (USPS) 0.038 R2006 (NNA) 0.066 Sources: USPS-LR-L-72; USPS-LR-L-126; NNA-T-3
Clearly, the fact that Within County presort discounts now use Outside County costs
rather than Nonprofit costs as a proxy does not explain away nearly doubling the
364
passthrough over what has been previously recommended by the Commission, as it
would lead to a dramatically higher rate discount.
Second, and more importantly, witness Siwek’s proposed passthrough and
discount for Carrier Route Basic would also cause increases well above the subclass
average for mailers who do not presort to carrier route. NNA mailers almost exclusively
presort to carrier route, Tr. 29/9611, so it is understandable why NNA seeks to increase
this discount. However, non-carrier route mail accounts for roughly 22 percent of the
subclass. See USPS-LR-L-126. Mailers who tend to have higher percentages of non-
carrier route mail include, according to NNA witness Heath, city, business, and regional
magazines. Tr. 29/9634. Small newspapers may also be presorting to something other
than carrier route. Tr. 29/9633. As witness Tang noted, the passthrough chosen for
Carrier Route Basic helps to mitigate the rate increases for these mailers. Tr. 7/1731.
NNA’s proposal would, on the other hand, benefit its membership while leading to
dramatic rate increases for non-carrier route mailers. Moreover, non-carrier-route
mailers generally lack the density to convert to carrier-route presort, so this is not an
effective incentive for more efficient mailings.
Looking at the rates that would result from NNA’s passthrough revision in
isolation from its piece/pound ratio revision, the revised carrier route passthroughs
would lead to a median increase of 61.22 percent for the non-carrier route piece rates,
including an increase of 76.92 percent for the 5-digit automation flats piece rate. Tr.
29/9707. This is well above the median increase of 10.20 percent for the carrier route
categories (which would increase by 10.20 percent and 12.12 percent for Basic and
High Density, and decrease by 3.70 percent for Saturation Mail). Id. If this revision is
365
combined with the piece/pound ratio revision that NNA also proposes, such an extreme
imbalance remains: the non-carrier-route piece rates would increase by a median
percentage of 83.10 percent, including a whopping 93.85 percent for 5-digit automation
flats, while the carrier route piece rates would increase by a median percentage of
37.04 percent (32.65 percent, 45.45 percent, and 37.04 percent, respectively). Tr.
29/9702 (NNA-T-3, Appendix D, page 10). This belies witness Siwek’s assertion that
there is “ample room” to increase the passthroughs for Within County. NNA-T-3 at 24.
Witness Siwek seeks to justify his proposal by pointing to the fact that the Within
County passthroughs are much lower than the passthroughs for Outside County, even
though Outside County costs are used as a proxy for Within County costs. Id. at 24, 26-
27. This ignores the fact that Within County rate design has long been characterized by
lower passthroughs than the subclass that serves as its source for cost avoidances.15
This is due to the fact that the nature of the Within County mail subclass simply does
not allow for as much de-averaging as is possible in the Outside County subclass. Tr.
7/1731, 1868-69.
ii. The Postal Service’s proposed piece/pound ratio for Within County leads to a balanced increase between the piece and pound sides, whereas NNA’s does not.
NNA witness Siwek criticizes the Postal Service’s proposed Within County
piece/pound ratio due to the fact that it deviates from the ratio for Outside County, and
proposes that the Outside County ratio be used instead. NNA-T-3 at 25. This would
15 In Docket No. R97-1, for example, the Commission recommended passthroughs for the Within County piece rates that were for the most part much lower than the passthroughs used for the Nonprofit piece rates. See PRC Op., R97-1, at 542, 547-548. In particular, the Carrier Route Basic passthrough was 95 percent for Nonprofit and 50 percent for Within County. Id. Subsequent cases have exhibited this same pattern.
366
lead, however, to a wholly imbalanced rate proposal. Implementing this revision would
cause the delivery unit pound rate to not increase at all, and the General pound rate to
increase by only 2.82 percent. Tr. 29/9708. This would benefit heavier weight
publications at the expense of lighter publications.
Witness Tang’s rate design, on the other hand, strikes a more appropriate
balance between the piece and pound rate increases. As noted above, the billing
determinants demonstrate that the weight per-piece for Within County mail has
increased over time, leading to an increase in the importance of the pound rates, and
making it impossible to return to a ratio around 60/40 without creating highly unbalanced
increases between the piece and pound rates. Deviating from a traditional ratio in this
manner in order to achieve rate balance also finds support in past Commission practice.
See PRC Op., R97-1, at ¶ 5799.
Overall, the Commission must ensure that the rate design it recommends is
balanced and considers the concerns of all Within County mailers, including those small
mailers who are not represented in this proceeding and who do not presort to carrier
route. The Postal Service’s rate design achieves such a balance between carrier route
and non-carrier-route mailers through its choice of passthroughs and resulting rate
discounts, which provide appropriate discounts for carrier-route presorted mail without
unduly impacting non-carrier route mail. In addition, the Postal Service’s rate design
provides an appropriate balance between the rate increases on the piece and pound
sides, and thus balances the impact of the rate increase between lighter and heavier
weight publications. The Commission should accept the Postal Service’s balanced
approach and reject NNA’s proposals.
367
VII. THE PROPOSED FEES AND CLASSIFICATIONS FOR SPECIAL SERVICES ARE FAIR AND EQUITABLE, COST-BASED, AND CONSISTENT WITH THE OTHER STATUTORY RATE AND CLASSIFICATION CRITERIA
The Postal Service’s special services provide an array of options for customers
of all of the classes of mail. Several Postal Service witnesses developed special
service cost analyses, and pricing witnesses Susan W. Berkeley (USPS-T-39), Drew
Mitchum (USPS-T-40), and Kirk T. Kaneer (USPS-T-41) designed the fees, and
proposed many classification changes. As demonstrated by these witnesses, the
Postal Service’s special service classification and fee proposals satisfy the statutory
classification and pricing criteria, and meet the needs of customers. Therefore, all of
the Postal Service’s classification and fee proposals should be recommended by the
Commission.
Extensive cost studies provided a solid foundation for the Postal Service’s
proposals. Witness Waterbury (USPS-T-10) summarized volume variable costs for
those special services included in the Postal Service’s CRA reports.1 Witness Pifer
summarized volume variable costs, and developed incremental costs for those special
service costs included in the Postal Service=s CRA reports.2 These costs are used for
overall cost coverage analyses for each of those special services. In addition, these
costs, along with corresponding volumes, are used for fee design for Certified Mail,
collect-on-delivery, money orders, Registered Mail, and special handling.
When CRA data are not available, special service cost studies are used by the
pricing witnesses for both cost coverage and fee design purposes. Several Postal
Service witnesses prepared these special service cost studies. Witness Mayes
presents the cost study for bulk parcel return service. USPS-T-25 at 15-16. Witness
Cutting presents the cost studies for address correction service. USPS-T-26 at 9-13.
1 These special services include certified mail, collect-on-delivery, insurance, money orders, post office box and caller service, registered mail, special handling, stamped cards, and stamped envelopes. USPS-T-10, WP-E, Page D-1. 2 USPS-T-18, Table 1A.
368
Witness Abdirahman presents the cost studies for business reply mail, permits, and the
account maintenance. USPS-T-22 at 17-21. Witness Page provides cost studies for
caller service, certificates of mailing, Confirm, correction of mailing lists, Delivery
Confirmation, insurance, money order inquiries, Periodicals applications, post office box
key replacement and lock changes, restricted delivery, return receipts, Signature
Confirmation, stamped cards, stamped envelopes, and ZIP Coding of mailing lists.
USPS-T-23; LR-J-59, Attachments 1, 2, 3, 4, 6, 7, 8, 9, 10, 11, 12, 13, 15, and 17.
Using the results from witness Page, witnesses Smith and Kaneer further develop the
costs for caller service. USPS-T-13 at 30-31; USPS-T-41 at 25-26.
Postal Service witnesses Berkeley, Mitchum, and Kaneer used sound
professional judgment to develop fees and fee designs for the special services. Witness
Berkeley presents pricing proposals for the annual account maintenance fee, bulk
parcel return service, business reply mail, certified mail, collect-on-delivery, Delivery
Confirmation, merchandise return service, money orders, Periodicals application fees,
permits, restricted delivery, return receipts, Signature Confirmation, stamped cards, and
stamped envelopes. USPS-T-39. Witness Berkeley also proposed and testified in support of several classification
changes for these special services, including the account maintenance fee,
merchandise return service, and meter service. She proposes to rename the
accounting fee as “account maintenance” fee. This change would more accurately
describe the service, which involves account maintenance activities, rather than
accounting activities related to daily withdrawals from an account. USPS-T-39 at 5.
The classification changes for merchandise return service and meter service are
discussed in their respective sections, below.
Witness Mitchum proposes classification changes consistent with his proposed
fee structure changes for address correction service, Confirm service, and insurance, as
369
discussed below. His testimony also proposes classification changes for address
correction service, Confirm service, and insurance, corresponding to the proposed
changes described below.
Witness Kaneer proposes a clarification on Group E fee availability in footnote 1
of the post office box service fee schedule. USPS-T-41 at 29-30. This clarification is
not intended to change any aspect of Group E fee availability. Tr. 15/4350, 4354.
Presiding Officer’s Information Request No. 12, Question 8 raised the issue of
reorganizing the Domestic Mail Classification Schedule (DMCS) for special services,
primarily to include a complete listing of the special service combinations for each
special service. The Postal Service repeated its concerns about including these
combinations in the DMCS. In particular, the Postal Service wishes to retain flexibility to
change special service combinations to meet customer needs, without the delay from
first preparing and litigating a case for Commission review. The Postal Service also
suggests some alternative, more customer-friendly approaches for the Commission to
exercise control over the combinations of special services, should the Commission wish
to pursue them after the rate case. Tr. 19/7027-32. The Postal Service notes that no
participants have indicated an interest in changing the DMCS language as proposed by
the Commission in Docket No. R2001-1.
The Postal Service filed errata to its Request, much of which corrected special
service provisions.3 The Postal Service urges the Commission to recommend the
changes in the errata notice.
3 Notice of United States Postal Service of Filing Second Errata to the Proposed Changes in the Proposed Rate and Fee Schedules and the Domestic Mail Classification Schedule (September 20, 2006).
370
Witness Mitchum proposes and testifies in support of fee changes for the
following special services: address correction service, certificates of mailing, Confirm,
insurance, mailing list services, parcel airlift, registered mail, and Special Handling.
USPS-T-40. He also presents the Postal Service’s proposal for a new Standard Mail
forwarding charge, which is discussed in the Standard Mail part of Section VI of the
brief.
Witness Kaneer presented and supported the Postal Service’s proposals for
Post Office Box and Caller Service. For post office box and caller service, witness
Kaneer forecasts volumes, by fee group and box size. USPS-T-41 at 3-7. He also
allocates CRA post office box costs by box size and ZIP Code. Id. at 7-14. He
proposes making the caller service fees reflect location, consistent with the current
approach for post office box service. Id. at 24-26.
Witnesses Berkeley, Mitchum, and Kaneer demonstrate that the Postal Service=s
proposed cost coverages satisfy the criteria of the Act. USPS-T-39, USPS-T-40, and
USPS-T-41. Only one cost coverage, and one implicit cost coverage, have been
challenged in this proceeding. Intervenor challenges to the proposed cost coverages
for collect-on-delivery (COD) and electronic return receipts are addressed below.
Intervenors have challenged the Postal Service proposals for the following
special services: business reply mail (BRM), COD, Confirm, and return receipts. The
issues for these special services are presented below, along with a brief discussion of
five other special services in which significant changes are proposed, specifically
address correction service, insurance, merchandise return service, meter service, and
Registered Mail. The Postal Service urges the recommendation of all of its special
371
service proposals, including those that are not addressed below. The Postal Service
also recommends the approval of the DMCS changes proposed in the direct testimonies
of witnesses Berkeley (USPS-T-39), Mitchum (USPS-T-40), and Kaneer (USPS-T-41).
A. The Proposed Fee Redesign for Address Correction Service Should Be Recommended
Address correction service helps mailers correct their bad mailing addresses, by
providing a forwarding address, corrected address, or a reason why mail is
undeliverable. Witness Mitchum proposes both pricing and classification changes to
improve the service. These include the addition of an automated option, with lower
fees, along with fee differentiation by class of mail for both the electronic and proposed
automated options. The automated option would rely on address corrections being
processed automatically by the Postal Automation Redirection System (PARS). USPS-
T-40 at 8.
As a result of these changes and a new cost study, witness Mitchum proposes a
33 percent fee reduction for manual correction notices, a 71 percent fee reduction for
electronic correction for First-Class Mail, and a 19 percent fee increase for electronic
corrections for other classes of mail. USPS-T-40 at 6. The fee increase for electronic
corrections for classes other than First-Class Mail is offset because this fee would apply
even when electronic option customers receive manual notices. Id. at 8. The proposed
fees for the automated option are lower for First-Class Mail than for Standard Mail, as
well as for the first two notices, compared to additional notices, for a particular address.
Witness Mitchum also proposes the DMCS changes needed to implement the proposed
changes. Id. at 10-11.
372
These proposals, with their generally lower prices, are intended to encourage
mailers to improve the quality of their mailing lists by using address correction service.
USPS-T-40 at 9. All of these address correction service proposals are unopposed, and
should be recommended.
B. The Proposed Business Reply Mail Fees Should Be Recommended. Witness Berkeley proposes fee decreases for three of the Business Reply Mail
(BRM) fee categories (the per-piece fees for Qualified BRM (QBRM) without a quarterly
fee and Regular BRM with an accounting fee, and the quarterly fee for QBRM with a
quarterly fee), and fee increases for four fee categories (the per-piece fee for QBRM
with the quarterly fee, the per-piece fee for Regular BRM without an accounting fee, and
the monthly and per-piece fees for weight averaged nonletter-size BRM). Increases are
also proposed for the account maintenance (accounting) fee and the annual permit fee.
The proposed percentage increase, overall, is only 0.14 percent, resulting in a proposed
cost coverage for BRM of 185.5 percent. USPS-T-39 at 14-15. Witness Berkeley’s fee
proposals are based on the BRM cost estimates of witness Abdirahman. USPS-T-22 at
17-21.
Only one fee proposal is challenged. The Major Mailers Association opposes the
proposed increase, from 0.8 cents to 0.9 cents, of the per piece fee for Qualified BRM
with a quarterly fee (also known as High Volume QBRM). MMA witness Bentley (MMA-
T-1) proposes to eliminate the High Volume QBRM per piece fee entirely, or reduce it to
no more than 0.5 cents. MMA-T-1 at 27. Witness Bentley bases his fee proposal on his
own calculation of the High Volume QBRM per piece cost, which results in a drastically
lower cost estimate than what is provided by witness Abdirahman. Witness Bentley
373
estimates that the High Volume QBRM per piece cost “ranges from 0.012 cents to 0.070
cents.” MMA-T-1, Appendix II, at 7, line 23. He testifies that he finds the lower end of
the range, 0.012 cents, “more reliable.” Id. at line 24. Witness Abdirahman, on the
other hand, calculates a unit cost of 0.458 by following the same cost methodology as
the one employed in Docket No. R2005-1. USPS-T-22 at 21.
Witness Bentley arrives at his lower unit cost estimate by combining various
methodologies and assumptions. MMA-T-1, Appendix II, at 7, lines 10-20. In witness
Bentley’s view, his alternative calculation is necessary because he “suspects” that the
Postal Service’s estimate of the percentage of High Volume QBRM that is manually
counted is “simply wrong.” MMA-T-1 at 28, lines 24-25. Witness Bentley uses some of
the results of Postal Service witness Loetscher’s BRM Practices Study (USPS-T-28;
USPS-LR-L-34). However, instead of using the manual counting productivity, he
applies the productivity for counting machines or weight averaging techniques. MMA-T-
1, Appendix II, at 7, lines 11-14. He also assumes the counting methods by percentage
from Postal Service witness Miller’s High Volume QBRM survey from Docket No.
R2001-1, rather than accepting the manual counting results from witness Loetscher’s
study in this docket. Id. at lines 14-17.
However, as witness Loetscher’s rebuttal testimony (USPS-RT-9, Tr. 38/13263 et
seq.) points out, witness Bentley is incorrect in asserting that the manual counting
estimates presented in USPS-LR-L-34 are flawed. Witness Oronzio (USPS-RT-15, Tr.
36/12226 et seq.) also supports witness Loetscher’s manual counting estimate from an
operational perspective. Thus, there is no need for witness Bentley’s alternative unit
374
cost estimate, with his “pick-and-choose” method of using different assumptions and
methodologies from prior dockets.
In his rebuttal testimony, witness Loetscher discusses how witness Bentley
ignores basic characteristics of the High Volume QBRM category. Tr. 38/13269-71.
For example, witness Loetscher explains how the volume of High Volume QBRM
depends on how much each customer expects to receive each quarter, rather than the
amount they actually receive. Tr. 38/13269. There is also no minimum volume
requirement for High Volume QBRM eligibility. Tr. 38/13270. Therefore, High Volume
QBRM can be received in small volumes on any given day, based on a variety of factors
that contribute to fluctuations in mail volume. Id. Witness Bentley demonstrates his
misunderstanding of these facts by stating, “I do not understand how an office can
process and deliver High Volume QBRM but does not receive a ‘significant volume of
QBRM.’” Tr. 21/7880-2.
As witness Loetscher’s rebuttal testimony makes clear, if it is not already clear
from his direct testimony (USPS-T-28) and library reference (USPS-LR-L-34) alone,
witness Loetscher’s BRM Practices Study in this docket is the most statistically sound
study of the BRM universe available today. Tr. 38/13276-9. Witness Loetscher’s
estimate of the percentage of QBRM letters is consistent with operational practice, as
witness Oronzio testifies. Tr. 36/12272 at lines 17-18. However, the study by witness
Campbell in Docket No. R2000-1 and the survey by witness Miller in Docket No. R2001-
1 both suffer from selection bias and measurement bias. Tr. 38/13271-6. The selection
bias in those studies exists because both excluded lower volume recipients from their
analysis of High Volume QBRM. Tr. 38/13271-4. Similarly, both studies exhibit
375
measurement bias because they assumed away manually counted volumes. Tr.
38/13274-6.
On the other hand, witness Loetscher’s BRM Practices Study in this docket
(USPS-LR-L-34) provides unbiased estimates based on sound statistical methods. Tr.
38/13276-79. Witness Oronzio supports the manual counting estimates in his rebuttal
testimony by explaining that in certain situations, it is more efficient to manually count
High Volume QBRM that is received in smaller volumes. Tr. 36/12272-3. Nevertheless,
witness Bentley chooses to assume the counting methods by percentage from Postal
Service witness Miller’s survey in Docket No. R2001-1, and refuses to accept the
manual counting estimates of witness Loetscher, in favor of flawed estimates from prior
dockets. MMA-T-1, Appendix II, at 7, lines 10-20. Because witness Bentley’s
calculation of the High Volume QBRM per piece costs is based on assumptions from
flawed statistical studies in prior cases, rather than following witness Loetscher’s
statistically-sound BRM Practices Study, the Commission should reject witness
Bentley’s unit cost estimate. Therefore, the Commission should also reject witness
Bentley’s High Volume QBRM fee proposal, which is based on his flawed unit cost
analysis.
C. The Proposed Fee Changes for Collect-On-Delivery (C.O.D.) Should Be Recommended
Witness Berkeley proposes fee increases ranging from 2.2 to 21.1 percent for
Collect-On-Delivery (COD) mail valued up to $400, no fee change for COD mail valued
from $400 to $500, and fee decreases of 1.8 to 6.6 percent for COD mail valued above
$500. Overall, a 10.6 percent fee increase is proposed. See USPS-T-39 at 26-27. The
largest fee increase, for COD mail valued up to $50, reflects the relatively high
376
percentage of claims filed in this fee category. This fee increase also provides a base
from which other fee categories can face smaller increases, or even decreases. Id. at
29.
Witness Berkeley proposes a low cost coverage of just 113 percent, down from
the 129 percent cost coverage that resulted from Docket No. R2005-1. USPS-T-39 at
26; PRC Op., R2005-1, Appendix G, page 1. In proposing a relatively low cost
coverage, witness Berkeley balances the value of service for customers with the fact
that declining volume and revenue suggest reduced relevance in the marketplace.
USPS-T-39 at 30.
Growing Family presents the testimony of its Vice President, Operations, Robert
Paul (GF-T-1). In essence, Mr. Paul raises complaints about how the Postal Service is
paying claims by Growing Family when it sends a package by COD, but receives
neither the money the addressee would pay if purchasing the package, nor a return of
the package if the addressee refuses it. Mr. Paul testifies that until May 2005, the
Postal Service would reimburse Growing Family in an amount equal to what was to be
collected from the addressee, but that since May 2005 the amount has only equaled the
reproduction cost of Growing Family's items (along with postage and COD fees). GF-T-
1 at 2-3.
Witness Paul recognizes that some of the claims issues he raises are not
suitable for Commission action in this rate case. GF-T-1 at 8, 15. He formulates only a
few links to the rate case, none of which should have an effect on the pricing of COD
service.
377
First, he argues that the COD revenue requirement and fees in the Test Year
should be reduced to reflect the impact of the Postal Service's alleged new claims
payment practice in relation to Growing Family, which began in May 2005, during the
Base Year.4 This argument suffers from a failure of proof. Growing Family did not
submit any evidence that could be used to quantify the impact of this new practice on
the Postal Service's projected total COD claims payments in TY 2008; much less did it
propose any alternative projected costs for the Test Year. While witness Paul states
that Growing Family represents "about 10% of the total COD volume," GF-T-1 at 2, he
does not show what percentage of the Postal Service's total COD claims payments go
to Growing Family, by what proportion Growing Family’s claims payments would
decrease since the base year, or even that Growing Family’s claims dispute would have
a significant impact on total COD costs. In the absence of such evidence, there is no
basis to alter the Postal Service's projected Test Year COD claims payments.
Second, witness Paul believes the already low cost coverage for COD should be
reduced even further to reflect a low value of service, as portrayed in his testimony.
GF-T-1 at 16. He does not, however, counter witness Berkeley's testimony that COD
service is a high value service because all sellers, even ones that do not accept credit
cards, can utilize it, and all recipients, regardless of their economic classification, are
able to have merchandise mailed to them without prepaying. USPS-T-39 at 30.
Moreover, Mr. Paul testifies that Growing Family's historical claim rate has declined.
GF-T-1 at 2. Indeed, the only argument he makes about a lower value of service is
1 GF-T-1 at 8-9, 15-16. Witness Berkeley explains that any change in May 2005 was "due to a clarification of the Postal Service's policy," as explained in the March 10, 2006, letter from Postal Service Consumer Advocate Delores Killette to David Straus, attorney
378
limited to the new payment practice as it relates to his own company. Tr. 23/8251.
Growing Family, once again failing to support its argument with record evidence, fails to
show why the decrease in COD's cost coverage from 129 percent to 113 percent should
go even further.
Third, Mr. Paul argues that the fee should be calculated based on the
reproduction cost of the item mailed. GF-T-1 at 6, 16. To begin with, this standard
would unduly complicate the application of the fee schedule, as each mailer would have
to calculate, in advance, how much it would cost to replace each item mailed by COD.
More importantly, COD indemnities to mailers are not always limited to reproduction
costs. In two of the four scenarios described in the March 10, 2006, letter from Postal
Service Consumer Advocate Delores Killette to David Straus, attorney for Growing
Family, the Postal Service will reimburse the mailer for the full amount that was to have
been collected from the recipient. Tr. 15/4484-85. Accordingly, it is appropriate to base
the fee calculation on that amount.
The Postal Service therefore submits that the Commission should recommended
the rates proposed by witness Berkeley, and that Growing Family’s claims dispute
should have no effect on the pricing of COD service.
D. The Postal Service Proposal for Confirm Service is the Only One Likely to Cover Attributable Costs
Pricing for Confirm service has received considerable attention in this
proceeding. Contrary to initial expectations, the Postal Service is faced with a pricing
structure that never produced sufficient revenue to cover costs since its introduction via
Docket No. MC2002-1. Subscription and other fees have been insufficient to cover
for Growing Family. Tr. 15/4482-85.
379
costs because fewer subscribers than anticipated signed up.5 In particular, many
potential subscribers instead chose to obtain Confirm service through resellers. Very
little incremental revenue is generated when customers use resellers, because the
structure includes an unlimited scan tier. When a reseller adds a customer, neither the
reseller nor the customer pays the Postal Service any additional fees, with the limited
exception of fees for additional IDs.6
The Postal Service supports resellers, having anticipated their existence, and
welcomes their provision of value added services to consumers.7 However, the number
of subscriptions and the proportion of direct subscribers to resellers have consistently
left the Postal Service with revenue insufficient to cover attributable costs.
As a consequence, the Postal Service proposes a single subscription tier with
declining block fees for “units” which are exchanged for scan information.8 While this
would eliminate the option to pay a fixed fee for unlimited scans, the declining block
fees make the incremental fees low. A million units costs as little as $17.50, which,
although not free, results in a very low effective price per scan.9 Nonetheless, this
pricing structure provides some Postal Service revenue if, as expected, resellers
continue to play a significant role in providing Confirm service. By generating at least
5 USPS-T-40 at 19. 6 USPS-RT-13 at 16. 7 USPS-RT-13 at 10 and 15. 8 Witness Mitchum also proposed classification changes consistent with his pricing proposal. USPS-T-40 at 18-19, 21. One of these changes, concerning the electronic notice requirement in DMCS 991.31, has been controversial. The Postal Service is willing to retain the status quo with the notification requirement in DMCS 991.31, consistent with the interest of Office of the Consumer Advocate and some customers. 9 USPS-T-40 at 18.
380
some incremental revenue for the provision of the data, this structure helps protect
Confirm service from failing to cover costs.10
The Postal Service and the Commission cannot simply expect higher prices to
overcome the failure of the existing structure to recover costs since fees were
implemented in September of 2003. Instead, the Postal Service urges the Commission
to follow the prudent course of altering the pricing structure in a manner that helps
assure compliance with the statutory cost coverage requirement in 39 U.S.C. §
3622(b)3).
1. The Postal Service’s proposal improves fairness and equity.
A wide variety of customers (in terms of scan usage) currently use the unlimited
tier. Within that group, the proposal would shift the fee burden toward the largest
users.11 This shift complies with the fairness and equity ratemaking criterion: 12 those
that make greater use of the service would pay more. As an illustration, currently, a
customer receiving data on 164 million scans pays 61 times more per scan than a
customer obtaining data on one billion scans. Under the Postal Service proposal,
instead of the smaller customer paying 61 times as much per-scan as the larger user,
she would pay less than twice as much per scan.13
The Postal Service also proposes to improve fairness and equity by making
Standard Mail (and other class) customers pay a greater share of the Confirm costs,
relative to First-Class Mail customers. Witness Mitchum proposes to charge five units
10 USPS-RT-13 at 17. 11 USPS-T-40 at 20; Tr. 14/3918-19. 12 39 U.S.C. § 3622(b)(1). 13 As shown in USPS-RT-13 at 18, the cost per million scans for 164 million scans is $91.95, while the cost per million scans for 1 billion scans is $56.03. Thus, the smaller
381
for each Standard Mail scan, compared to one unit for each First-Class Mail scan.14
Today, the relative values of First-Class Mail and Standard Mail are distinguished by the
availability of more special services, features built into its price, and speed of service for
First-Class Mail; the Postal Service proposal for Confirm service builds additional value
for First-Class Mail by – as proposed for Address Corrections (see proposed Fee
Schedule 911) – providing a lower effective price for First-Class Mail.15 MMA witness
Bentley evidently agrees, as his Confirm proposal would charge First-Class Mail
customers less than Standard Mail customers. Witness Bentley states:
[I]t makes sense to add such value only to First-Class Mail workshared mailers that make a unit contribution to institutional costs that is more than twice the unit contribution to institutional costs that Standard mailers make.16
2. Unit-based pricing facilitates adding other information-based
services under the Confirm umbrella. Witness Mitchum proposes to charge for units rather than scans, in part to
provide flexibility for future Confirm enhancements, such as the provision of data
generated by manual scans of containers of mail.17 Establishing this system of unit-
based prices now will ease any modification that expands Confirm service beyond
today’s piece-scan information. It will allow the Postal Service to update its Confirm
software just once, likely saving development costs that would otherwise have to occur
if a separate option were developed to provide other forms of data. Tr. 33/11369-71.
mailer would pay only 64 percent more per million scans. 14 USPS-RT-13 at 17. 15 Tr.14/3934, 3959-62, 4125, and 4131. 16 Tr. 21/7900. While the Postal Service does not believe an unlimited tier is consistent with covering costs, if an unlimited option is nonetheless retained, it would be advisable to limit it to First-Class Mail usage, as supported by witness Bentley. See Tr. 33/11310-11.
382
The unit structure proposed by witness Mitchum is sufficiently flexible that it can
accommodate other possible Confirm fee proposals that may be made. For example,
MMA witness Bentley agreed that his proposal to charge just an annual fee for First-
Class Mail scans could be implemented using the unit fee structure proposed by
witness Mitchum. Tr. 21/7953-54.
3. The existing fee structure has so many shortcomings that it would still fail to cover Confirm costs, even if fees are increased.
The Office of the Consumer Advocate (OCA) proposes to retain the existing fee
structure. GrayHair Software supports that proposal.18 But the OCA’s proposed fees
are unlikely to generate adequate revenues to cover costs. Witness Callow proposes to
generate almost all the needed additional revenue to cover costs by increasing the fee
for the unlimited (Platinum) tier by 95 percent. Since he assumes that all current
subscribers would accept this increase, he shows an increase in revenue of 95 percent
from the unlimited tier. While this assumption conveniently helps meet the cost
coverage threshold on paper, it runs an unacceptable risk of being wrong, jeopardizing
the alleged cost coverage.
Since the current fees are modest, and have not changed since the
implementation of Confirm, customers have had little reason to re-evaluate their
selection of a service tier. However, an increase of 95 percent, to $19,500 for the
Platinum tier, would likely cause customers to review their options. Certainly, the
inordinate amount of attention that the price increase has garnered leads one to think
that customers would indeed seek ways to at least lower their out-of-pocket expense for
17 USPS-T-40 at 16-17; Tr. 33/11307-08. 18 GHS-T-1 at 2-7.
383
using Confirm. If that is the case, faced with a 95 percent increase in the unlimited tier,
many subscribers might drop out, switch to resellers, or buy down to the Gold tier.
Because of the price advantage that would be offered by choosing the Gold tier
under the OCA’s prices, only 15 Platinum subscribers would be expected to remain
Platinum subscribers at the $19,500 fee,19 producing $406,500 less revenue than
witness Callow projects.20 Costs therefore would not be covered.
MMA witness Bentley agrees that Confirm users who require 61 million or fewer
scans “would more than likely have chosen to become a gold subscriber.”21 Witness
Bentley also disagrees with witness Callow’s assumption that a 95 percent increase in
the Platinum tier fee would not reduce the number of Platinum subscribers.22
Retaining the existing structure with even higher fees than the OCA proposes
also would not assure costs are covered, and would impose too large a burden on
moderate users of the unlimited tier. Witness Mitchum’s rebuttal testimony explains that
the Platinum fee would need to increase to $42,500 (and even higher to reflect
additional consequent switches to the Gold tier) to cover costs. But to cover costs, 8
Platinum users would need to continue to subscribe when faced with this 325 percent
increase in fees. The Postal Service fears that these fee increases needed to cover
costs under the existing fee structure would drive even more customers to resellers.
19 USPS-RT-13 at 22. 20 The revenue decrease assumes: no loss in the number of subscribers overall; 30 Platinum subscribers would switch to Gold in order to save money; and, on average, these Gold subscribers would need to purchase one additional block of 6 million scans each. Under these assumptions, the Platinum subscription revenue decreases from $877,500 to $292,500, for a revenue decrease of $585,000. Gold subscription revenue increases by $156,000 to $774,800, and Additional Scan revenue increases from $750 to $23,250. The net effect of these changes is $406,500 less revenue. 21 Tr. 21/7894.
384
Costs would not be covered if almost all Platinum users stop subscribing at that level,
no matter how high the fee.
Any attempt to preserve the existing fee structure must also consider the risk that
arbitrage will limit the revenue that fee increases produce. As witness Mitchum explains
in rebuttal, arbitrage is the process by which someone purchases a commodity and then
resells the commodity so as to profit from a pricing discrepancy. In the case of Confirm
service, a reseller takes advantage of the availability of unlimited scans for a fixed price
by acting as a middle man for several subscribers, offering each of them a savings over
what they would pay the Postal Service to subscribe directly to the service.23
While arbitrage has not been a substantial problem for Confirm to date,24 its risks
would increase as fees for the unlimited tier increase. Increasing the Platinum fee to
$42,500 would appear on the surface to recover the revenue lost from customers
buying down to the Gold tier, but it ignores the likelihood that resellers would attract
business from Gold tier customers paying up to $42,500, and Platinum tier customers
paying $42,500. The fee would accordingly need to increase even more, causing more
customers to switch to the Gold tier or a reseller.25
Hence, there is no assurance that the current structure would actually produce
revenues that cover costs, regardless of the level of the Platinum fee.
22 Tr. 21/7896. 23 Tr. 33/11298-99 (USPS-RT-13 at 14-15). 24 Tr. 33/11299 (USPS-RT-13 at 15); GHS-ST-1 at 4. 25 Tr. 33/11300-01.
385
4. The Postal Service proposal would not diminish the utility of Confirm service for service performance assessment.
The Postal Service goal is for Confirm service to cover costs while balancing the
other ratemaking criteria. The record shows that Confirm service does not work well
for the Postal Service as a performance assessment tool, which explains why the Postal
Service developed its own process of adding Planet Codes to pieces in the mail stream
to assess service and make adjustments to improve it.26 While this use does not
generate revenue for Confirm service, nor are its costs attributed to Confirm. By
agreeing informally with the OCA not to push elimination of the electronic notice
requirement in DMCS 991.31, the Postal Service is signaling its intention not to reduce
the utility of Confirm service for assessing service performance. In any event, the
Postal Service is open to using any number of tools to improve measures of service
performance. The proposed price structure for Confirm service does nothing to change
the potential role that the Confirm infrastructure may or may not play in such
improvements.
5. Witness Bentley’s proposal for a specific subscription just for workshared First-Class Mail may be worth examining, but it does not appear to be supported on the record.
MMA witness Bentley proposes that, for workshared First-Class Mail, Confirm
service should provide unlimited scans for a fixed annual fee, such as $2,000.27 The
basis for witness Bentley’s proposal is that Confirm service need not directly cover its
costs, given the value that it adds to First-Class Mail.28
26 Tr. 14/3942-43. 27 MMA-T-1 at 33. 28 Tr. 21/7921-22.
386
But Docket No. MC2002-1 established Confirm service as a special service, with
OCA and mailer support. No participant is proposing in this docket a classification
change that would bundle Confirm service with one or more classes of mail. As a
special service, Confirm service is required by statute to cover its costs.29 So while
Bentley’s proposal may be interesting in concept, record evidence does not appear to
permit its specific adoption in this docket. For example, it is not clear whether a mailer
of multiple classes of mail would subscribe to Confirm by purchasing the $2000
subscription for workshared First-Class Mail, and another subscription for the other
classes of mail. No fees for Standard Mail customers are proposed in conjunction with
the $2000 fee for First-Class Mail presort mailers, nor is any attempt made to show that
such a fee would recover all Confirm attributable costs. Accordingly, it does not appear
to constitute a viable alternative in this proceeding.
E. The Enhancements to Insurance Service Allow Fee Reductions and Should Be Recommended
Witness Mitchum proposes significant changes for insurance service. The
proposal would add a barcode and delivery scan for the current unnumbered ($0-50)
category in order to facilitate the claims process. The proposal also would eliminate the
signature requirement for insurance for items valued between $50 and $200, but retain
the delivery scan. The result is to reduce costs enough to justify fee decreases for all
but two fee categories. USPS-T-40 at 24, 28-29.
Consistent with the addition of a barcode and delivery scan for insurance for
items valued up to $50, witness Mitchum proposes to increase its fee from $1.35 to
$1.65. However, the proposed fee for insuring items valued between $50 and $100
29 39 U.S.C. § 3622(b)(3).
387
would decrease from $2.30 to $2.05, and the proposed fee for insuring items valued
between $100 and $200 would decrease from $3.45 to $2.45. The fee for items insured
for $200.01 to $300 would increase from $4.40 to $4.60. Consistent with the
restructuring of the prices for insurance service, witness Mitchum proposes a 14 percent
reduction in the incremental fee for each additional $100 of insurance above $300, from
$1.05 to $0.90. This would produce a price reduction for all items insured for more than
$400. Id. at 22, 25-26.
Witness Mitchum also proposes a redesign of the insurance fees for Express
Mail. The fees for Express Mail insurance (above the $100 of insurance included in
postage) are proposed to change from the current $1.05 per $100 of coverage, to $0.75
for the first additional $100 increment, $2.10 for items insured from $200.01 to $500,
and then $1.35 for each $500 increment above $500. The result is a significant fee
decrease for most increments, with no increase for any level of coverage. Id. at 26.
Consistent with his proposed changes, witness Mitchum proposes just one bulk
insurance discount, of 80 cents, reflecting the cost savings realized by the Postal
Service. Id; See USPS-LR-L-59, Attachment 6, page 1.
In addition to the fee increases, witness Mitchum proposes classification changes
specifying that a signature is obtained only for items valued above $200. For items
valued at $200 or less, a delivery scan, rather than a signature, is sufficient to protect
the customer’s and Postal Service’s interests in insuring a mail item. Moreover, postal
customers may prefer that delivery be made without requiring the recipient to come to
the door or the Post Office to sign for the item. USPS-T-40 at 26-27. He also proposes
388
to extend the limitation on coverage of negotiable items, currency, or bullion from
Express Mail insurance to all insurance. Id. at 26-27.
These changes improve the product, have not been opposed, and should be
recommended.
F. The Proposed Classification Changes for Merchandise Return Should Be Recommended
Witness Berkeley proposes clarifications to the DMCS language for merchandise
return service (MRS). She proposed changes for the merchandise return service
classification, to clarify that the service is not limited to the return of parcels, but is also
available for sending parcels. Id. at 40-41. These proposed changes have not been
opposed, and should be recommended. G. The Proposal to Eliminate Meter Service Should Be Recommended
Since on-site meter service was discontinued on February 28, 2006, witness
Berkeley proposes to remove Fee Schedule 933 and DMCS 933 pertaining to the fees
and classifications regarding meter service. USPS-T-39 at 42. The proposed changes
have not been opposed and should be recommended.
H. Registered Mail Fees Should be Based on Costs Estimated in Accordance with the Postal Service’s Methodology
The Postal Service proposes a 50 percent increase in Registered Mail fees in
order simply to raise the revenue from this service above its cost. Under the Postal
Service version of the Cost and Revenue Analysis (CRA), this service has been priced
below costs for the past few years. The proposed fee increases therefore do not result
from recent increases in Registered Mail costs. Rather, they reflect the need to recover
an existing shortfall between revenues and Postal Service CRA costs.
389
In past rate cases the Commission has moderated Registered Mail fee
increases, compared to Postal Service proposals, based on a different allocation of
costs between customer and Postal Service usage of Registered Mail. In prior cases,
this different allocation produced lower Registered Mail costs under the previous PRC
methodology, compared with the Postal Service methodology. However, for the base
year in this proceeding, the base year Registered Mail costs using the previous
Commission methodology are actually higher than the costs using the Postal Service
methodology. This reversal reflects a change in the data collection in the redesigned In-
Office Cost System (IOCS). This change in data collection more effectively isolates
customer Registered Mail costs from Postal Service Registered Mail costs. Tr.
18D/6487-88. Registered Mail costs under the previous Commission methodology are
higher than under the Postal Service methodology, probably because all overhead costs
for Registered Mail are distributed to subclasses and services, including Registered
Mail, rather than to fixed costs. Tr. 18D/6489.
It is perfectly reasonable for the Commission to re-evaluate its methodology in
light of the change in information generated by the redesigned IOCS. The Postal
Service believes that the Commission should adopt the Postal Service’s approach to
estimated Registered Mail costs, and that Registered Mail fees thus should be based on
costs using the Postal Service methodology, holding the fee increase below that which
would be required under the previous Commission methodology.
390
I. The Commission Should Recommend the Substantial Reduction in the Electronic Return Receipt Fee Proposed by the Postal Service, But a Greater Reduction Is Not Justified
The Postal Service has proposed increases of 10 to 16 percent for three of the
four return receipt categories. At the same time, the Postal Service is proposing a fee
decrease of 37 percent for the electronic return receipt category. USPS-T-39 at 61.
The proposed fee decrease primarily reflects the cost estimate for the products, which,
was adjusted downward from the Docket No. R2005-1 estimate by 45 cents. Unlike the
Docket No. R2005-1 cost analysis, witness Page assumed that the email transaction
contributes no costs to electronic return receipts. USPS-T-23 at 15. The result was a
45 cent reduction in costs. Compare USPS-T-39 at 63 ($0.44) with Docket No. R2005-
1, Exhibit USPS-27F, page 6, col (2), ($0.89). In response, witness Berkeley proposed
to lower the electronic return receipt fee by 50 cents, from $1.35 to $0.85. While this
increases the implicit cost coverage to 194 percent, the unit contribution decreases from
$0.46 to $0.41. This would leave the per unit contribution at only about three-fifths of
the 68-cent per-unit contribution from basic return receipt service. Tr. 38/13400.
Douglas Carlson criticizes the costing for electronic return receipts. DFC-T-1 at
4-8. He focuses on the window acceptance time of about 25 seconds. He speculates
that the purchase would involve one or two questions by the window clerk, and one or
two brief replies by the customer, taking about 10 to 15 seconds. Id. at 6-7. But that
ignores the wide variety of questions that a customer might ask. Tr. 23/8202. Witness
Berkeley reports on discussions with several people who have observed electronic
return receipt transactions at a retail counter. The typical transaction takes much
391
longer, especially for new customers.30 Thus, it is more likely that the typical electronic
return receipt transaction is longer than 25 seconds, rather than shorter. So a new cost
study for electronic return receipts would tend to increase the cost estimate provided in
this docket.
Carlson ultimately uses the Postal Service cost estimate, but proposes a lower
cost coverage because of the cost uncertainty, and because there is no evidence that
the value of service for electronic return receipt is higher than that of green card return
receipt service. DFC-T-1 at 14. But value of service is not the only criteria to consider
in determining an implicit cost coverage for electronic return receipts. Fairness and
equity (criterion 1), effect of rate increases on customers (criterion 4), and degree of
preparation of mail (criterion 6) also should be weighed. Tr. 38/13401.
The over 50 percent fee reduction (from $1.35 to $0.65) proposed by Carlson
would skew the contributions so much as to be uneconomic. Under Carlson’s proposal,
the contribution from electronic return receipt is cut nearly in half (from 41 cents to 22
cents). The resulting contribution would be less than one-third the contribution from
basic return receipt service. This would create a perverse financial disincentive for the
Postal Service from encouraging more usage of electronic return receipts. Id. And, as
witness Berkeley concludes, under Carlson’s proposal, “there would be considerable
risk that the fee would not cover costs for any transactions in which the customer has
significant questions for the clerk.” Tr. 38/13401.
30 Tr. 38/13396-97. Since the volume of electronic return receipts is still low, and the Postal Service is promoting greater awareness of the electronic return receipt option, it is likely that many transactions involve new customers. Tr. 39/13396, 13399-400.
392
For all these reasons, the Postal Service’s proposed fee for electronic return
receipt is far superior to Douglas Carlson’s.
393
CONCLUSION For the reasons stated above, the rates for postal services, fees for special
services, and the modifications of the domestic mail classification schedule proposed or
endorsed by the United States Postal Service are supported by the evidentiary record
and are in accord with the applicable provisions of the Postal Reorganization Act.
WHEREFORE, the Postal Service requests that the Postal Rate Commission
recommend under 39 U.S.C. § 3624(d) the rates and fees and changes in the Domestic
Mail Classification Schedule requested by the Postal Service in this Docket.
Respectfully submitted,
UNITED STATES POSTAL SERVICE
By its attorneys:
Daniel J. Foucheaux, Jr. Chief Counsel, Ratemaking
____________________ ____________________ ____________________ Frank R. Heselton Kenneth N. Hollies Eric P. Koetting ____________________ ____________________ ____________________ Nan K. McKenzie Sheela A. Portonovo Elizabeth A. Reed ____________________ ____________________ ____________________ Brian M. Reimer Scott L. Reiter David H. Rubin ____________________ ____________________ Michael T. Tidwell Keith E. Weidner 475 L'Enfant Plaza West, S.W Washington, D.C. 20260-1137 December 21, 2006
CERTIFICATE OF SERVICE
I hereby certify that I have this day served the foregoing document upon all participants of record in this proceeding in accordance with section 12 of the Rules of Practice.
___________________________________ Daniel J. Foucheaux, Jr.
475 L'Enfant Plaza West, S.W. Washington, D.C. 20260B1137 December 21, 2006