BEFORE THEPOSTAL REGULATORY COMMISSION

WASHINGTON, D. C. 20268-0001

POSTAL RATE AND FEE CHANGES Docket No. R2006-1

REPLY BRIEF OFTIME WARNER INC.

January 4, 2007

TABLE OF CONTENTS

Page

I. THE POSTAL SERVICE HAS TAKEN A STAND-PAT APPROACH TO PERIODICALS RATES 1

II. ABM SUBSTITUTES BLUSTER AND UNSUPPORTED ASSERTION FOR ARGUMENT 7

III. McGRAW-HILL CHARACTERIZES THE RECORD AND COMMISSIONPRECEDENT INACCURATELY 21

IV. ABM AND McGRAW-HILL PRESENT A MISLEADING CHARACTERIZATION OF THE IMPACT OF TIME WARNER'S PROPOSAL ON SMALL PUBLICATIONS 29

V. TIME WARNER'S PERIODICALS RATE PROPOSAL BESTCOMPORTS WITH THE RELEVANT STATUTORY FACTORS ASINTERPRETED BY THE COMMISSION 36

APPENDIX: METHODOLOGY FOR FURTHER TEMPERING OF TIME WARNER'S PROPOSED RATES 41

BEFORE THEPOSTAL REGULATORY COMMISSION

WASHINGTON, D. C. 20268-0001

REPLY BRIEF OFTIME WARNER INC.

I. THE POSTAL SERVICE HAS TAKEN A STAND-PAT APPROACH TO PERIODICALS RATES

In the 25 pages of its Initial Brief devoted to Periodicals rates (Section VI-G),

the Postal Service uses the word "balance" 15 times. It says that “[t]he 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” (p. 361 [emphasis added]), and that its "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” (p. 347 [emphasis added]).

On the other hand, the word "incentive" is used 25 times. The Postal Service

speaks with apparent approval of rates that "promote[ ] efficiency and lower costs”

(p. 343), and says that its rates would "promote more dropshipping” (p. 344),

"promote co-mailing and co-palletization” (p. 345), and "send a consistent and clear

signal to mailers, encouraging more efficient mail preparation and worksharing” (p.

344).

The Postal Service's putative commitment to these contradictory goals raises

important questions. Has its interest in "balance" constrained it from proposing rates

that would help to achieve goals that it has plainly espoused? How big must a step

be before it qualifies as being meaningful? And how much progress can be

expected from incentives that are poorly related to costs and that do not recognize

major, well-understood cost drivers? Specifically:

1. Is a sack charge of 85¢ reasonable when some sacks cost $4.75 to handle, and others $1.60?

2. Is a pallet charge of 85¢ reasonable when some pallets cost $66.70 to handle, and others $2.90?

3. When bundles cost from 10 to 44¢ to handle, and there are large numbers of bundles, is it reasonable to neglect these costs and somehow average them in with the piece rates?

4. When adjustments in the number of pieces in sacks cause associated adjustments in the costs of bundle handling, should the costs of bundles be ignored?

5. When handling a 5-digit sack costs $5.60 if it is origin-entered and $2.30 if it is destination-entered, should the rates simply disregard these cost differences?

See TW-LR-5 Revised (workpapers of witness Mitchell).

Plainly, the Postal Service's commitment to "balance" is stronger than its (asserted)

commitment to "incentives."

"Balance" is not an especially helpful notion unless one has a principle for

determining what should be balanced against what. According to witness Taufique

(see USPS-RT-12), balance is a tradeoff between maintaining the status quo and

making the kinds of changes that would allow meaningful progress. To him, for a

proposal to be balanced, it must lean toward the status quo, as measured by his

standard deviation; but if a proposal takes bigger steps than the Postal Service

wishes to take, it becomes "unbalanced."

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In other words, the Postal Service is saying that progress is not very

important; that those benefiting from the current rate structure, whether they be non-

machinable or a few pieces per container or something else, should be allowed to

continue benefiting; and that giving them appropriate incentives is not something

that should be done. Much less attention is given to those hurt by the current rate

structure, such as local publications and all those who believe that Periodicals costs

should be lower.

The Postal Service's guiding principle is thus one of standing pat and making

as little change as possible. If the Periodicals class and its rate structure were close

to what they ought to be, that might be comprehensible, even laudable. But it is

neither comprehensible nor laudable for a class that is widely recognized to be in the

grip of a long-term decline in its efficiency and whose rate structure is widely

recognized to be outdated in important respects.

A "balance" that places almost all of the weight on the side of maintaining the

status quo has no apparent foundation either in the policies of the Act or the

precedents of the Commission. Among the statutory factors to be considered in

setting rates is § 3622(b)(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." That provision neither states nor

implies a presumption that mailers should receive equal percentage increases. But

even if such a presumption were implicit in (b)(4) or some other provision of the Act,

the Commission gave fair notice in the most recent omnibus rate case that the

presumption could not be relied on in this docket, stating that “[p]arties should be

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aware that the Commission will seek to obtain economically efficient cost-based

rates [in the next proceeding].” PRC Op. R2005-1, p. 92, ¶ 5032.

A review of the Commission's opinions in Dockets No. C2004-1 and R2005-1

would lead one to think the current proceeding would be the least likely occasion for

the Postal Service to base its rate proposal on a desire "to avoid percentage

increases well above the subclass average for individual rate categories” (USPS Int.

Br. at 361) or " to limit the impact of its rate proposal on various mailers to

as narrow a range as practicable" (USPS-RT-12 at 5 [Tr. 39/13457]). The

Commission's Opinion in Docket No. R2005-1 made clear that it holds an

entirely different view of the changes that need to be made in Periodicals

rates:

The Commission recommends, without change, the set of Periodicals Outside County rates and fees identified in the settlement proposal. The recommended rates represent an across-the-board increase; they do not reflect application of traditional rate design methodology. Pound charges, for example, do not reflect the actual distribution of pound miles in the base year. This result carries forward into the test year; thus, in the future, some rate elements may require larger than expected increases to realign rates with costs. Consequently, mailers must stand forewarned that some may face “rate shock” in subsequent proceedings.

PRC Op. R2005-1 at 146, ¶ 6104.

Even weaker than the Postal Service's response to the Commission's request

for progress towards cost-based rates in Docket No. R2005-1 has been its response

to the Commission's finding in Docket No. C2004-1 that "the Postal Service should

update and examine the Stralberg model to determine its usefulness for future

ratemaking efforts." Order No. 1446 at 30, ¶ 4034. In fact, the Postal Service has

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shown no interest at all in Periodicals modeling beyond responding to witnesses

Stralberg's and Glick's identifications of specific problems with Postal Service

witness Miller's mail flow model.

In response to interrogatories, the Postal Service as an institution did provide

useful new information, obtained from a web based survey, on the flow of sacks and

pallets entered at origin facilities. Stralberg was able to use that information to

upgrade his C2004-1 model, concluding that sacks and pallets entered at origin

facilities pass through more intermediate facilities than previously believed, and

therefore incur even higher costs than his original model had indicated. In other

words, the savings caused by entering Periodicals containers closer to their

destinations are larger, and dropshipping saves more, than previously thought. The

Postal Service's complete silence regarding Stralberg's use of this new data in his

modified model suggests that it concurs with his improvements. Similarly, the Postal

Service's complete silence on the subject suggests that it does not disagree that

bundles, sacks, and pallets, as well as flats machinability, are important drivers of

Periodicals costs.

In addition, the Postal Service has expressed no disagreement, either in its

testimony or its initial brief, with Stralberg's and Mitchell's conclusions that the likely

future standard for Periodicals machinability is the same as the standard now being

applied to First and Standard class flats, namely AFSM-100 machinability (as

modified in the Postal Service's September 7, 2006 proposed rule, New Standards

for Domestic Mailing Services).1

1 71 Fed. Reg. 56588. The modifications mainly address issues of flexibility, in connection with items such as compact disks, and have little relevance to Periodicals

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Stralberg's conclusion, based on an analysis of MODS and IOCS data, that

the UFSM-1000 machines are being used in a manner fundamentally different from

that assumed in Miller's model, was strengthened when Miller was forced to concede

on cross-examination that he had not understood what data Stralberg had based his

analysis on. Tr. 33/11103. If the Postal Service had any valid reason to disagree

with Stralberg's conclusions about how the UFSM-1000s are used, it could have so

stated in its initial brief. Instead, this is one more issue on which its brief is silent.

Nor has the Postal Service expressed any disagreement that the cost

differentials associated with mailer-supplied barcodes on flats, when separated from

the question of machinability, are as Stralberg's model shows them. Nor has the

Postal Service explained (other than formulaic appeals to "balance") how passing

through over 800% of such cost differentials represents "progress towards cost-

based rates." The silence of the Postal Service even extends to issues on which it

should have had no difficulty at all in accepting Stralberg's conclusions, such as the

demonstrated need for a more rational treatment of firm bundles.

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II. ABM SUBSTITUTES BLUSTER AND UNSUPPORTED ASSERTION FOR ARGUMENT

According to ABM, "in a variety of relevant areas, what makes sense in theory

makes none in practice." Br. at 2. ABM goes on:

[T]he four witnesses for Time Warner and MPA/ANM . . . are, by education, a mathematician, a physicist, and two economists who, to be sure, have a world of insight into the unique economics of postal costs, but their view is gained from the lofty plane of theory rather than the more useful planes of the publishing office and the printing plant. ABM does not for a minute question their skill or their numerical, economic or theoretical premises or conclusions, lacking the resources even to make the attempt. But American Business Media does question in meaningful ways the application of their elegant yet sterile theories and conclusions to the real world of periodicals publishing and distribution.

Br. at 2-3.

Professor Samuelson's standard textbook on economics states that "when a

student says, 'That's all right in theory but not in practice,' he really means 'That's not

all right in theory,' or else he is talking nonsense."2 In this instance, ABM is talking

nonsense.

A postal rate case is primarily about postal costs: how those costs are

incurred, measured, attributed, and ultimately recovered through rates. Expertise in

economics and statistics is essential in studying these matters. Having printer's ink

on one's fingers does not help. ABM's position seems to be that costs are not really

important.

2 Economics, An Introductory Analysis (4th Edn.), p. 10.

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The defining characteristic of Stralberg's and Mitchell's rate proposal is that it

reflects a far more realistic view of postal processing than either the current or the

Postal Service's proposed rate design. If one looks through Stralberg's testimony,

for example, one is hard put to find anything that could be described as derived

"from the lofty planes of theory" rather than from a painstaking assessment of how

mail processing is actually performed. The Commission found that this was so in

Docket No. C2004-1:

There are several options open to the Postal Service by which it could immediately begin to better align the Periodicals rate structure with the costs imposed on the Postal Service by various existing mailing practices. The Complainants have made a major contribution by identifying and quantifying cost drivers associated with bundles, sacks and pallets.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

There was little direct or implied criticism of Stralberg’s model. He appears to have accurately captured the cost causing characteristics of containers and provided the Postal Service with a sound framework for further study.

Order No. 1446, pp. 4, 22, ¶¶ 1013, ¶ 4013.

And the Postal Service has virtually conceded that it is so in this docket.3

Moreover, ABM tacitly concedes it is so when it accurately states that it "does

not for a minute question [Time Warner's witnesses'] skill or their numerical,

economic or theoretical premises or conclusions." Br. at 2. One searches in vain for

any statement from ABM about what is wrong with Mitchell's and Stralberg's

analysis. Are the costs not what they say they are? Is there an important cost driver

3 On cross-examination, witness Taufique stated: "The Time Warner proposal from what I've seen, my understanding is it reflects all types of cost causation behavior in terms of containers, the level of containers, the end point of containers, bundles, so the Time Warner proposal is much more elaborate in that regard." Tr. 39/13533.

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that mailers can respond to which Mitchell and Stralberg have overlooked? Do

mailers not have options as to how they make up their bundles or how many pieces

are in their sacks? Is comailing not really occurring? Is there something about co-

palletization that goes unrecognized? Are mailers not dropshipping? Do mailers not

use computers and software to presort? Do some mailers not dropship by air at

great cost? Are mailers not interested in service? Are there not local mailers? Are

there relevant cost factors that have been neglected? Are Periodicals costs under

control?

In the absence of insight on any of these questions, ABM proffers its "mud of

the marketplace" theory. It argues that the people who really know what incentives

should be built into Periodicals rates are not "ivory tower" mathematicians,

economists, and other theorists with their "numerical, economic, or theoretical

premises," but rather ABM's own ink-stained witnesses who have spent their lives

"on the front line of the constant battle to weigh postage costs." Br. at "prologue," 1,

3.4

ABM's mud-of-the-marketplace theory is open to many objections. Perhaps

the denizens of the ivory tower should have pride of place in responding to what is,

as it pertains to them, no better than an ad hominem attack. We have seen what

4 ABM's complaint that Time Warner's and MPA's witnesses are "a mathematician, a physicist, and two economists" makes an interesting contrast to the following statement, over the signature of the same counsel, from page 1 of the Initial Brief of AAPS:

AAPS, with one part-time employee, and its members are simply not in a position to retain the highly specialized economists, mathematicians and postal costing experts who would be necessary to take on those toiling on behalf of the Postal Service and by [sic] those retained in bunches by those seeking lower Standard mail rates.

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Professor Samuelson has to say. Here are the comments of two of his colleagues.

First, the late Milton Friedman:

The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in the light of what can be done, politics aside, and not to predict what is "politically feasible" and then to recommend it.

Comments on Monetary Policy. In Essays on Positive Economics (Univ. of Chicago Press) [1951] 1953: 264.

Second, Michael Polanyi:

Almost every major systematic error which has deluded men for thousands of years relied on practical experience. . . . The scientific method was devised precisely for the purpose of elucidating the nature of things under more carefully controlled conditions and by more rigorous criteria than are present in the situations created by practical problems.

Personal Knowledge: Towards a Post-Critical Philosophy [1958] 1964: 163.

Evidently, the United States Congress agrees, for section 502 of the Postal

Accountability and Enhancement Act provides that members of the Postal

Regulatory Commission "shall be chosen solely on the basis of their technical

qualifications, professional standing, and demonstrated expertise in economics,

accounting, law, or public administration."

ABM's assertion that only printers and publishers can say what incentives are

needed in Periodicals rates also runs up against the problem that printers and

publishers occupy every side in this argument. They agree about only one thing

respecting Periodicals postal rates: namely, that the appropriate rates are those that

will make their own postage bills as low as possible. The Postal Reorganization Act

requires the Commission to recommend rate changes only after a full hearing, and

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only on the basis of record evidence, in part because anecdotal, impressionistic, and

unverifiable statements by self-interested participants are simply not trustworthy.

Perhaps as a fallback from its indefensible entrenchment in the mud of the

marketplace, ABM's last recourse is to beg for the Commission's protection, on the

ground that it is too small and weak and poor to defend itself. It says that it does not

question the skill or the theoretical premises or conclusions of Time Warner's

witnesses because it "lack[s] the resources even to make the attempt." This is one

of many statements in ABM's brief that finds no support anywhere on the record.

Perhaps ABM is as poor as this statement implies. Perhaps "[i]ts 290 member

companies [who] reach an audience of more than 100 million professionals and

represent nearly 5000 print and online titles" cannot muster the resources to hire a

consultant with the ability to question Mitchell's and Stralberg's "numerical,

economic, and theoretical premises or conclusions."5 If that is the case, however,

one must still wonder what accounts for the same inability on the part of the Postal

Service. Do they too lack the resources to hire experts capable of evaluating the

same evidence?

At great length, ABM does take issue with one argument. However, it is an

argument that Time Warner has never made: namely, that all or nearly all small

5 As of December 27, 2006, the ABM website (www.americanbusinessmedia.com) stated: "American Business Media is the industry association for b-to-b information providers. Its 290 member companies reach an audience of more than 100 million professionals and represent nearly 5000 print and online titles and 1000 Trade Shows." ABM witness Bradfield presented "the results of an American Business Media survey for the 360 of its member publications that responded to a request for data this summer." Those publications represent 251,000,000 annual copies. Bradfield noted that three publications which did not respond (but did respond to an earlier survey) represent an additional 41,000,000 copies. Thus, 363 ABM publications represent 292,000,000 copies. ANM Br. at 12-13. Those 363 represent only about 25% of ABM members' printed periodical publications (see Docket No, C2004-1, Tr. 1804-20).

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publications can avoid the impact of the proposed rate increases by either co-

palletizing or co-mailing. Rather, as the Initial Brief of McGraw-Hill correctly points

out:

Time Warner itself acknowledged in Docket No. C2004-1 that "there obviously are many small-and medium-sized publications that for some time will remain without access to comailing, co-palletization, and dropshipping."

P. 20, n. 20.

Time Warner's Initial Brief in the instant docket is no less candid in stating that

co-mailing, copalletizing, and dropshipping are not a universally available remedy for

higher-than-average rate increases under Time Warner's proposal:

Time Warner does not argue that all publications can be comailed or copalletized. Clearly, many are too small for these to be viable options. But as Stralberg’s analysis shows, most very small publications would do quite well under the Time Warner proposal, and many of those that would not do well with their current mailing characteristics would have opportunities to do much better, as discussed above. Nor does Time Warner dispute the fact that comailing or copalletization is not a viable option for some small and medium-sized publications that are so time-sensitive that their publishers find it worthwhile to airlift them to destinating facilities. But publications entered in sacks near their destination, assuming the sacks are reasonably full and not “skin sacks,” will also do quite well under the Time Warner proposal.

And for other medium-sized publications, comailing and co-palletization are viable options that increasingly are being adopted and will become more available with the stronger rate incentives that Time Warner’s rate proposal offers.

P. 55.

ABM criticizes Time Warner's witnesses for not having worked for a printer or

publisher, or sought the opinions of printers or publishers about the costs and

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availability of co-mailing and co-palletization. Br. at 23. After citing witness

Bradfield's testimony that the added front-end costs paid to a printer for co-mailing

services are substantial, ABM goes on:

Yet both Time Warner and MPA/ANM ignore these heavy, additional front-end costs in their impact discussion, so that the naked assertion that mailers can avoid the very large cost increases that their proposals would cause is unsupported and not testable, even if and to the extent that co-mailing and co-palletizing might soon become available to some of them.

This deficiency is crucial. . . . [I]t is essential to know the costs to the mailer of participating in these programs.

ABM Int. Br. at 22-23.

This argument suffers from serious deficiencies. First, the record

demonstrates that its factual assertions and assumptions are false. Second, its view

of what information is and is not essential to proper ratemaking is contrary to all

known authorities on the subject, including the Commission.

As just discussed, Time Warner has never made any "naked assertion" that

mailers can avoid large cost increases under its proposal through co-mailing and

copalletizing. Time Warner has discussed a variety of ways in which some

publications could mitigate or avoid large increases by changes in their mail

preparation, including changing the number of sacks they use, adopting a

machinable format, and increasing their amount of dropshipping through methods

other than co-mailing or copalletizing. Time Warner is the only party that has fought

to have data made available that would allow testing of all of these measures, as

well as a thorough assessment of the impact of all proposed rate schedules on all

types of publications, and Time Warner is the only party that has used the data

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which have become available to analyze the impact of the various elements of its

rate proposal on various kind of publications and to analyze the methods available to

various kinds of publications for reducing or avoiding large rate increases through

changes in their mailing practices.

As discussed later in this brief, some of the new information developed in this

docket runs counter to the conventional wisdom espoused by ABM and McGraw-Hill.

For example, the assumption that most of the many thousands of very small

publications in Periodicals class are similar to medium-size business-to-business

publications of the type published by most ABM members–just smaller and even

more likely to be made worse off by rate de-averaging–turns out to be completely

untrue. In fact, those very small publications, most of which appear to be directed

primarily to a local readership, have characteristics fundamentally different from the

mostly nationally distributed, medium-size, requester publications that ABM

represents.

It is notable also that ABM and its witnesses have resolutely refused to

provide any solid facts about these "crucial" issues, but instead rely on the highly

general, impressionistic, and undocumented opinions of their witnesses. Unlike the

Postal Service, ABM cannot be criticized for lacking boldness. For example, its

assertion that methods of avoiding large cost increases through changes in mail

preparation are "not testable" is arrestingly bold, considering that ABM and its

witnesses have gone out of their way not to test them and have done everything in

their power to make certain that they would not be in a position to test them. In that

respect, ABM has endeavored in this docket to replay its litigation strategy in Docket

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No. C2004-1. In that docket, ABM witness Bradfield stated: "[M]y testimony is based

upon my experience in the industry, not 'analysis'"; and "This testimony is based on

my experience, not any analysis." Tr. 6/1675, 1679. ABM witness Cavnar testified:

"My statement is not based upon analysis of any particular titles but upon my own

experience in the industry." Tr. 6/1714. And ABM witness McGarvy provided the

following responses to interrogatories:

Q Please confirm that your testimony does not report the results of any study, by yourself or others, of the ability of any publication or group pf publications to adapt their mailing practices in response to the proposed rate changes.

A Confirmed.

Tr. 6/1759.

A I can confirm that my testimony does not identify a single mailer who would not be able to avoid large, crippling rate increases under the rates proposed.

Tr. 6/1766.

In this docket, ABM has presented the same witnesses, who have provided

the same amount of useful or verifiable data (none), conducted the same amount of

testing, study and verifiable analysis (none), and repeated the same conclusions.

When asked early in this docket by Time Warner whether it had collected any recent

mail.dat-type data from its membership that would make it possible to evaluate the

impact of the contending rate proposals in this case, ABM responded that it had not.6

When asked on cross-examination of his direct testimony whether ABM had made

6 Response to TW/ABM-4 (designated into evidence by Presiding Officer’s Ruling on Commission Designation of Responses to Interrogatories for Inclusion in the Evidentiary Record [POR No. R2006-1/100], issued November 2, 2006, but apparently not transcrivbed).

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any further progress in evaluating the impact of the three contending proposals,

witness Cavnar replied that they had not. Tr. 30/10234. Only in the rebuttal stage

did witness Bradfield present some alleged analysis (but not the underlying data that

would permit its verification).

ABM and its witnesses provided nothing like hard data on printers' or

publishers' costs, which they assert is "crucial" and "essential" information for

evaluating the rate proposals. The extreme degree to which they are unwilling to

part with such information was perhaps best exemplified during witness McGarvy's

hearing, when she and ABM's counsel refused to say whether it costs more to air-

freight publications to their destination than the pallet discount which is forgone

because pallets cannot fit onto the planes, claiming that such information is

proprietary. Tr. 35/12195-97.

The information on the non-postal costs to mailers of participating in

worksharing opportunities that ABM describes as "essential" and "crucial" is not

without value in the ratemaking process. It is helpful in determining the probable

impact of particular elements of a rate design on particular customer segments in a

regulated market. If a refined calibration of the welfare effects of rate changes on

individual customers were the goal of regulation, such information might assume

considerable importance. But the goal of regulation is to set rates that approximate

what rates would be in a competitive market and that maximize total consumer

welfare. To achieve that goal, the only necessary cost information concerns the

costs of the regulated enterprise.

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ABM is therefore unable to cite anyone more authoritative than Mr. Bradfield

for the proposition that it is essential to know about the mailer's non-postal costs in

order to correctly price a worksharing discount, because in fact no such authority

exists. All leading authorities on the economics of rate regulation (e.g., Vickery,

Baumol, Kahn, Panzar, Schmalensee, Sherman, Kleindorfer, Ordover, and Sidak)

agree that the opposite is the case. The Postal Service also agrees.7 Also, the

Commission itself has weighed in. Its Opinion in Docket No. R2000-1 states:

The Commission bases worksharing discounts on avoided costs. . . . This approach to worksharing discounts is called “efficient component pricing” (ECP) in the economic literature. The theory requires the discount to be 100 percent of the cost savings. . . . An important virtue of ECP is that the mailer will perform the workshared activity (e.g. presort) when he can do so at a lower cost than the Postal Service. This leads to productive efficiency (i.e. the most efficient provider does the work resulting in the lowest cost to society). Because ECP also lowers the real cost of mailing, volume should increase in response to lower effective prices.

PRC Op. R2000-1, p. 390, ¶¶ 5034-35.8

Although ABM casts scorn on any possible role for theory in guiding

ratesetting, it also acknowledges that “rate design changes to promote the

presentation of less costly mail are appropriate,” and it reiterates witness Cavnar's

statement that “American Business Media recognizes that some changes in the

7 See, for example, Tr. 7/1828 and generally 1818-33.8 See also PRC Op. MC95-1 at III-29-30, ¶¶ 3074-75:

From the inception of worksharing discounts, the Commission has been concerned with both equity and economic efficiency. It set the first such discount at clearly capturable avoided costs. This provided a rate incentive to mailers which would allow cost-based decisions on whether to engage in the worksharing activity. In effect, the Commission was setting discounts in conformity with what later became known as efficient component pricing. The discount approach led to the lowest cost producer providing the service. This, in turn, minimized the cost of the workshare activity to society as a whole.

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existing rate design to provide both incentives and rewards for worksharing by

Periodicals mailers are inevitable and, in fact, in many respects desirable.” ABM Int.

Br. at 1, 6. However, the bulk of its brief is given over to a meandering discussion of

various aspects of co-mailing, co-palletizing, dropshipping, and shifting mail from

sacks to pallets, with the focus on whether existing incentives are "adequate."

Time Warner contends that the most that can be done and the best that can

be done is to identify important cost drivers to which mailers can respond, and to

reflect these drivers in rates. It has proposed to do just this, with tempering. Its goal

is not to bring about co-mailing, co-palletization, and dropshipping for their own

sake, and no level of these or other worksharing activities is deemed a priori to be

appropriate or adequate. The goal is to align rates with Postal Service costs, so

that when mailers decide to workshare or otherwise change their mail preparation, or

not to do so, the result will be as efficient as the circumstances permit.

Similarly, Time Warner's focus is not on getting mailers to shift from sacks to

pallets. Under appropriate rates, that will occur, but it is not in itself the goal.

Incentives to use sacks efficiently and to use pallets efficiently are just as important

as incentives to change from one to the other. And appropriate dropship discounts

for sacks and pallets cannot be given without separate rates for each that depend on

their makeup and their entry point.

All of these things–presorting, dropshipping, co-mailing, co-palletization,

adjustments in the use of containers, adjustments in bundle makeup, and changing

from one container to another–will occur in varying degrees under decisions by

mailers given appropriate rates, and the changes will bring about increases in

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efficiency, but the goal is to set appropriate rates, not to provide incentives for

specific changes.

There have been a great many suggestions in this case, chiefly from ABM

and McGraw-Hill, that the proposed changes would be unfair, punitive, and broadly

destructive to some Periodicals publications because they cannot adopt more

efficient mailing practices. The same parties argue that the proposed changes are

unnecessary because so many publications are already adopting more efficient

mailing practices without superfluous rate incentives for doing so.

ABM and McGraw-Hill portray a world in which periodicals are divided into

two groups: those that are incapable of adopting more efficient practices no matter

what the incentive; and those that have already adopted or are fast adopting more

efficient practices and need no further incentive.9 The group that is unrepresented in

that portrayal—and exceedingly difficult to identify with particularity—is the large

population of Periodicals publications that would adopt more efficient practices,

lowering their own postage rates and the exorbitant costs of Periodicals mail, in

response to the incentives that Time Warner has proposed. Experience teaches

that this population will be large, even if it cannot readily be identified before the

fact.10

9 See Tr. 35/12062, 12099-100 (Bradfield), 12180, 12190 (McGarvy).10 See Tr. 37/12712, where witness Mitchell discusses the dramatic increase in the efficiency of Standard mail after rates that had been uniform nationally were changed in Docket No. R90-1, consistent with principles of efficient component pricing, to allow lower rates for mail entered at destination BMCs, SCFs, and delivery units.

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III. McGRAW-HILL CHARACTERIZES THE RECORD AND COMMISSION PRECEDENT INACCURATELY

McGraw-Hill's brief seeks to establish that the Postal Service proposal does,

and the Time Warner and MPA/ANM proposals do not, "reflect[ ] the guidance and

expectations expressed by the Commission in Docket No. C2004-1" (a position that,

significantly, neither ABM nor the Postal Service has seen fit to assert). McGraw-Hill

Initial Br. at 11, 17. But the cause is hopeless. In attempting to establish that a

proposal which defines itself as a continuation of the status quo follows the guidance

of a Commission order which in fact concludes that "progress towards a more cost-

based structure is both possible and necessary," which "urges the Postal Service to

proceed forthwith to develop a rate design for Periodicals that better serves the

needs of all interested stakeholders," and which the Commission states "should not

be read as a ringing endorsement of the status quo,"11 McGraw-Hill is trying to

square the circle. McGraw-Hill is able to reach its conclusion only by resorting to

misleading characterizations of what the Commission said in Order No. 1446.

McGraw-Hill's central thesis is that, of the "three general alternatives to full

implementation of the Time Warner et al. proposal" described by the Commission in

Order No. 1446, the Commission recommended "(2) a 'piecemeal' approach of

gradually making changes over time," and that the Postal Service proposal is an

example of that approach. McGraw-Hill is incorrect on both counts. McGraw-Hill

states that:

the Commission appeared strongly to encourage the Postal Service to adopt the piecemeal approach, declaring that the Postal Service "should . . . evaluate the impact of potential

11 Order No. 1446, at 5, ¶ 1013; App. B at 7, ¶ 13; and App. B at 14, ¶ 28.

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rate changes on various categories of Periodicals mail[] and suggest incremental changes that will foster efficient mailer practices without undue disruption."

Br. at 9-10 (emphasis added by McGraw-Hill).

McGraw-Hill suggests that by using the word "incremental" here, the

Commission was indicating its preference for the "piecemeal" approach and that

what the Commission had in mind by the "piecemeal" approach was something like

what the Postal Service has proposed. It should be noted, first, that in its discussion

of the three approaches, the Commission made a positive recommendation as to

only one of them: "The Commission recommends that the Postal Service consider

the opt-in approach for Outside County Periodicals" (Order No. 1446, at 49, ¶ 5012).

Second, all three of the approaches contemplate incremental changes: that is the

sense in which they constitute "alternatives to full implementation of the Time

Warner et al. proposal" (Order No. 1446 at 47, ¶ 5005). And third, an examination of

the full passage from which McGraw-Hill takes its quotation shows that what the

Commission meant there by "incremental changes" bears no resemblance to the

glacial pace of change proposed by the Postal Service:

[1015] The Commission sees many possibilities for positive action that should not cause undue disruption. For example, the proposed machinability distinctions in piece charges would recognize the additional costs of processing nonmachinable mail. These distinctions exist in other classes and as flats automation progresses they will become more important. They should be seriously considered within the context of changing operations. The proposed presort levels refine existing presort elements by creating additional divisions. The additional dropship incentive would give mailers the option of entering publications at BMCs. Each of these elements have considerable potential.

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[1016] The cost analyses that have been the focus in this case reflect processing practices that are now somewhat out of date. The Postal Service should update these analyses, evaluate the impact of potential rate changes on various categories of Periodicals mail, and suggest incremental changes that will foster efficient mailer practices without undue disruption.

Order No. 1446 at 5.

It is only by staying at a high level of generality that McGraw-Hill is able to

sustain the impression that Order No. 1446 and the Postal Service's proposal are

mutually compatible. A fair evaluation of whether the Postal Service's proposal

"reflects the guidance and expectations expressed by the Commission in Docket No.

C2004-1" (MH Br. at 11, 17) would pay some attention to the Commission's specific

recommendations and would ask what the Postal Service had done to implement

them. Among the recommendations in Order No. 1446 that McGraw-Hill fails to

mention (and that the Postal Service failed to pursue) are the following:

The Postal Service should review each of the rate design features in the context of the current and planned processing and transportation network for Periodicals mail. The focus should be on quickly incorporating the most promising and least disruptive components. [P. 6, ¶ 1019.]

[T]he Postal Service should provide Periodicals mailers with notice that pieces that are nonmachinable will become subject to rates that reflect higher processing costs. [P. 7, ¶ 1019.]

The Commission encourages the Postal Service to investigate the feasibility of incentives for entering Periodicals mail at destination BMC facilities in terms of both internal operations and service considerations, but also to identify any potential physical impediments to widespread BMC entry point use in this manner. [P. 7, ¶ 1019.]

The Commission recommends that the Postal Service consider, and confer with a broad cross-section of Periodicals mailers, concerning the potential benefits of

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implementing a bifurcated opt-in rate schedule for Outside County Periodicals. [P. 7, ¶ 1019.]

The Commission . . . urges the Postal Service, with the cooperation of mailers, to develop a profile of all Periodicals mail with information along the lines requested by Time Warner et al. in interrogatories directed to witness Tang. See, e.g., id. at 2199. This profile, along with the information used to develop Periodicals mail preparation characteristics (Docket No. R2005-1, USPS-LR-K-92) would be very useful in Periodicals rate design. [P. 12, ¶ 2010.]

[S]ince the Byrne study is over 20 years old, the Postal Service should consider measuring current productivities for this operation [pallet cross-docking productivities]. [P. 21, ¶ 4010.]

[T]he Postal Service should update and examine the Stralberg model to determine its usefulness for future ratemaking efforts. [P. 30, ¶ 4034].

The Postal Service should review each of the rate design features in the context of the current and planned processing and transportation network for Periodicals mail. The focus should be on quickly incorporating the most promising and least disruptive components. [P. 30, ¶ 4035.]

Mailers should expect the Postal Service to develop additional machinability standards as technology evolves and additional automated equipment is deployed. The Postal Service therefore should look toward a rate structure that recognizes the machinability of Periodicals mail, along the lines suggested by Complainants. . . . As more Periodicals mail becomes automated, savings should accrue and a rate structure for recognizing cost distinctions should be available to provide appropriate incentives for mailers. . . . [T]he Postal Service should provide Periodicals mailers with notice that pieces that are nonmachinable will become subject to rates that reflect higher processing costs. [Pp. 34-35, ¶ 4045-46.]

The Commission recommends that the Postal Service consider the opt-in approach for Outside County Periodicals. [P. 49, ¶ 5012.]

There is ample evidence that supplemental mailings are more costly to process than main file mailings. It is also the case that supplemental mailings exhibit characteristics

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similar to those of low-circulation publications. The Postal Service should examine these mailings to determine the extent to which witness Mitchell’s allegation that they are below cost is true. The Postal Service may find it feasible to develop classification language or a partial restructuring of Periodicals rate design to treat these mailings in a different manner than main file mailings. [Pp. 52-53, ¶ 5017.]

The Postal Service could begin to create an environment for Periodicals that would encourage more efficient mailing practices by conducting the study required to implement the opt-in system. [App. C, p. 11, ¶ 20.]

McGraw-Hill's account of the Commission's conclusions and

recommendations in Order No. 1446 thus ends up being fundamentally misleading.

Its assertion that "the rate structure proposed by the Postal Service in this docket

largely reflects the guidance and expectations expressed by the Commission in

Docket No. C2004-1" (Br. at 11) is simply not correct.

McGraw-Hill's brief also presents a less than forthcoming characterization of

the record on another important matter, the standards for machinability in

Periodicals. McGraw-Hill states:

MPA/ANM witness Cohen . . . testified that she did not propose in this case any rate differential for non-machinable Periodicals mail because

looking at the difference between the AFSM 100 and the FSM 1000, knowing that the FSS system is going to be coming into play if machinability criteria are almost identical to the 1000, so since we are in a period of changing definitions and this would be an entirely new rate element, I didn't think that this was a good time to put that in. . . .

Tr. 30/10175-76.

McGraw-Hill concurs with this reasoning.

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Br. at 21.

McGraw-Hill does not mention that the same subject was discussed during witness

Stralberg's hearing on the next day:

Q Do you have an estimate or a feeling for what percentage of publications that are machinable only on the FSM 1000 that are likely to be machinable on the FSS machines?

A First of all, I should mention the Federal Register notice that came out on September 27 where the Postal Service essentially summarizes the standards for implementing what they're proposing in this rate case. They essentially are addressing first class flats and standard flats and not periodical flats at this time, but basically they're saying both for first class flats and for standard flats that their criteria for machinability from now on will be AFSM 100 machinability.

Let's see if I can see what they're saying for the standard. It purportedly includes a new, not flat machinable NFM classification for rigid flatsized pieces and for pieces that are currently automation compatible only by meeting UFSM 1000 standards. In other words, they are proposing to characterize those flats as nonmachinable. Now, they're not doing this for periodicals yet.

Q You said from now on. Forever or until the FSS becomes operational?

A Well, I don't know about that. I assume the Postal Service wouldn't restrict their standard for machinability if they thought pretty soon everyone will be machinable. The standard for UFSM 1000 machinability now is basically that it must be a flat. There really isn't much that's not UFSM 1000 machinable, and that is because that machine can work in two ways, either with an automated feeder, which basically takes the same type of mail that the AFSM 100 takes, or flats can be keyed manually.

Tr. 31/10627-28.

Witness Cohen cited no source for her impression that machinability on the

FSS might be defined similarly to machinability on the FSM 1000, and Time Warner

has been unable to discover any indication by the Postal Service, either on or off the

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record, that this is the case. In what may be an oblique allusion to Stralberg's

comments, McGraw-Hill declares that "[m]achinability standards and rate elements

for other mail classes are not necessarily germane to Periodicals," citing witness

McCrery's rebuttal testimony (USPS-RT-14) at 8-13 as its authority. But those

pages discuss flexibility standards and the exclusion of items such as CD's from the

machinable category. They do not say anything that makes it less improbable that in

two years time the Postal Service will either (1) fundamentally change the

machinability standards it is only now implementing in First and Standard classes or

(2) employ a fundamentally different standard for Periodicals flats, which will be

sorted on the same machines as First and Standard class flats.

As the Commission stated in Order No. 1446 (at 33, ¶ 4040):

The rate structures for First-Class Mail, Standard Mail, and Package Services mail already contain rate elements for mail that is more costly to process because of physical or other characteristics that prevent machine processing. Periodicals mail is the only traditional class in which machinability is not explicitly recognized in the current rate schedule.

The Commission concluded that the Postal Service "should look toward a rate

structure that recognizes the machinability of Periodicals mail, along the lines

suggested by Complainants." Id. at 34, ¶ 4045. Needless to say, Time Warner

agrees. Non-machinability imposes a heavy cost burden on the Periodicals class. It

is unfair to the vast majority of periodicals which are machinable (including 94% of

the very small publications, according to Loetscher's data12 [cite]) that they should

12 See Response of Time Warner Inc. Witness Stralberg to Questions Posed at Hearing By McGraw-Hill (filed November 20, 2006, designated for inclusion in the evidentiary record by Magazine Publishers of America, Inc., and Alliance Of Nonprofit Mailers Designation of Response Filed After the Appearance of the Witness [filed December 13, 2006]), at 9.

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continue to bear these costs, most of which might disappear after machinability is

recognized in the rate structure.

Time Warner is also aware, of course, that recognition of the costs of non-

machinability accounts for many of the larger percentage increases that would occur

under its proposed rates. Time Warner does not support recognizing less than the

full costs of non-machinability. However, as stated in our initial brief, Time Warner

believes the most important issue is whether a more appropriate Periodicals rate

structure is put in place. The Appendix describes methods by which the

Commission could adjust Time Warner's proposed rates to mitigate the charge for

non-machinability, or other components of the proposed rates, if it believes that this

is necessary to make such a rate structure possible at this time.

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IV. ABM AND McGRAW-HILL MISLEADINGLY CHARACTERIZE THE IMPACT OF TIME WARNER'S PROPOSAL ON SMALL PUBLICATIONS

According to ABM, "[o]f the three proposals, the Time Warner proposal

creates the greatest benefits for the largest mailers . . . and the greatest penalties for

the smallest." Int. Br. at 6. According to McGraw-Hill:

Assuming that the sample [data on 259 publications provided by the Postal Service in response to POIR No. 19] is valid, some 3000 small publications (of the roughly 30,000 members of the subclass) would incur rate increases of 20% or more under the MPA/ANM proposal. [¶] The results are even grimmer under the Time Warner proposal. Some 17% (5000) of the small and medium-circulation publications would incur rate increases ranging from 25% to 59% . . . .

Int. Br. at 20-21.

McGraw-Hill's statement is either disingenuous or extraordinarily careless,

because the record makes it entirely clear in a number of places not only that the

sample referred to is not valid but that there was no effort by the Postal Service to

make it statistically valid. When witness Tang provided the original version of the

data in Docket No. C2004-1, she testified that "[t]he 251 observations . . . were

randomly drawn to evenly populate the six size/density groups." Docket No. C2004-

1, Tr. 6/2221.13 In its response to POIR No. 19 in the current docket, the Postal

Service, for various reasons, had to replace 87 of the publications used in Docket

No. C2004-1.14 In his response to POIR No. 19, Stralberg stated that "[b]ased on

13 Tang’s size/density scheme includes a breakdown of each size category into “high density” and “low density.” But nowhere on the record in either docket has she specified the number of publications, or the number of pieces, that are respectively classified “high density” or “low density” within each size category. Such information would be essential in order to properly weight the different publications in the POIR 19 data set. Tang’s definition of high and low density is not the same as that used in witness Loetscher's LR-L-91.14 Revised Response of the United States Postal Service to Presiding Officer’s Information Request No. 19 [Errata] ( filed October 17, 2006). A count of the entries marked as “RPL” in the final version of the Postal Service’s POIR 19 data indicates that 87 publications were introduced that were not part of the C2004-1 sample.

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data from the more comprehensive survey described in LR-L-91, particularly the

data provided by witness Loetscher in response to Time Warner interrogatories," the

percentage of very small publications "identified as non-machinable" in the updated

Tang data "is not likely to reflect accurately the characteristics of very small

publications." Tr. 31/10604.

Counsel for McGraw-Hill attempted on cross-examination to challenge

Stralberg’s conclusion that the LR-L-91 data are from a more comprehensive and

rigorous study than the POIR 19 data and that the former should be given greater

weight in determining the percent of non-machinability among publications of

different sizes. During the exchange that followed, Stralberg pointed out not only

that the selection of publications for the POIR 19 sample was less rigorous than for

the LR-L-91 study and was not designed to be statistically representative of the

Periodicals population, but also that the process of determining whether a

publication was machinable was much less rigorous, particularly for small

publications:

Q I mean, if you don't know how many publications he [Loetscher] surveyed how can you be certain it's a more comprehensive survey?

A Well, let's look at it this way, okay? The Library Reference No. 91 was the main data set that the Postal Service collected to support their periodicals proposal in this case. They had considerable time to do it. It was supposedly a scientifically well-designed sample that he used and his testimony documents how he did it, okay?

They had a whole year to do it. As I understand it the mail.dat information they collected wasn't just for a single publication, but over an extended period. Some of what I

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say in here is in fact confirmed by the Postal Service's answer to this recent Interrogatory No. 7, parts (c) and (d).

We asked them if they applied the same criteria of machinability here as they used in the LR- 91. Their answer is yes, but - - okay. Let me read this. This is on page 2 of the Postal Service's answer. In LR-L-91 for publications with annual circulation less than 15,000 pieces BMEU clerks were asked to determine if the piece met AFSM 100 machinability standards and provide actual measurements of length, height and thickness of the publication.

Then they go on to describe all the other checks they made to make sure that this really was correct. In order to come up with this data that they provided now [the updated Tang data] they couldn't do that. They had to get some data in a hurry and they just called people and asked them what they remembered about such and such publication.

So in other words the rigor with which they collected the LR-91 data seems to have been quite a bit larger.

Q In the portion of the interrogatory response that you just read it refers to publications with annual circulation less than 15,000 pieces.

A Right. Uh-huh.

Q That would be a small publication under Witness Loetscher's definition, correct?

A Well, he used several size criteria. I think 15,000 was one of the borders. He also had an under 5,000 category and a 5,000 to 15,000 category. Then we asked for data specifically for the publications under 1,000 circulation.

Q But that's not data that he had surveyed specifically. You simply asked him to break that out of --

A His original size category was zero to 5,000. Because in the complaint case Witness Tang had provided data specifically for publications under 1,000, so we asked him to break that out which he did and that is that Table 15, I believe it should be 15, that you asked about.

Q But again, he didn't set out as you understand it to survey very small publications defined as having mailed circulation of less than 1,000?

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A He set out to survey publications of all sizes from very small to very large. Then he divided them into strata for the purpose of aggregating. Now, we asked him to break up his smallest strata which was zero to 5,000 and to break it up into publications under 1,000 and those from 1,000 to 5,000.

Tr. 31/10644-45.

In the Response of Time Warner Inc. Witness Stralberg to Questions Posed

at Hearing By McGraw-Hill (at 9), Stralberg addressed this subject again. He

provided a table, based on Loetscher's data, showing "Machinability Of Outside

County Flats Per Circulation Size," and then commented:

The above numbers are, as discussed above, based on a rigorous examination of machinability and a scientific stratified sampling approach as described by witness Loetscher (USPS-T-28). I was therefore particularly surprised to find that among the 42 very small publications on which the Postal Service provided data in response to POIR 19, twelve, or 28.6%, rather than the 6.6% indicated for this stratum in Table 4, are identified as non-machinable.

The Initial Brief of the Postal Service did not comment on Stralberg's conclusions

regarding the representativeness of Loetscher's data and the unrepresentativeness

of Tang's.

The difference between the 28.6% and the 6.6% referred to by Stralberg is

highly significant, because, as he demonstrated in his POIR 19 response, almost all

machinable publications with circulation below 1,000 would pay less postage under

the Time Warner proposal than under the Postal Service’s proposal, in many cases

much less. If indeed only 6.6% of such publications are non-machinable, as the LR-

L-91 data indicate, it follows that the vast majority of the more than 15,000

publications with circulation below 1,000 would be better off with Time Warner’s rate

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proposal. This is a very different conclusion from those presented in the briefs of

ABM, McGraw-Hill, and the Postal Service.

Of the 30 “very small” publications identified by the Postal Service as

machinable in its POIR-19 response, only four were found to have higher increases

under the Time Warner proposal. In each of those four cases, Stralberg identified

the unique circumstances that would cause the high increase, circumstances that in

all likelihood would change if the more cost-based Time Warner rates were to be

implemented.15

McGraw-Hill’s false assertion of statistical significance is not the end of its

and ABM’s mischaracterizations of the likely impact of Time Warner’s proposal.

ABM’s claim that Time Warner's proposal would be the best for the large

publications and worst for the small ones (Br. at 6) is also not true. Assuming no

change in mail preparation or entry practices, the medium-sized business-to-

business publications represented by ABM would be more likely to experience a

higher increase under Time Warner’s proposal than would either very large or very

small publications. One reason for this appears to be that the percentage of non-

15 The four publications were numbered 194, 197, 201 and 258 in Stralberg’s response. The first three are “high density” very small publications that, for unknown reasons, are entered far from their destination. The most extreme example is No. 194, which enters all of its copies in Zone 6, i.e., between 1,000 and 1,400 miles from their destination. Response to Questions Posed at Hearing, at 17-18. Producing a publication so far from all its readers and expecting the Postal Service to absorb all the extra transportation and handling costs will lead to higher postage under cost-based rates. Stralberg identified another publication, very similar to No. 194 except that its copies are entered locally. It would experience a decrease in postage under Time Warner’s proposal. Similarly, No. 197 is also small and high density but enters all of its volume in Zone 4 and would therefore pay more under cost-based rates.

The last of the four, publication No. 158, uses three sacks for 20 pieces. Its postage would increase 44% under the USPS proposal and 46% under the Time Warner proposal. As witness Taufique pointed out during his cross-examination, the 20 pieces are the Outside County residue from an In-County publication, which would pay much lower rates for its In-County copies.

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machinability is highest for medium-sized publications. See Response to Questions

Posed at Hearing, Table 4.

But Stralberg's response to the questions posed by McGraw-Hill at his

hearing also described in detail a number of other factors affecting impact. The fact

that Stralberg provided a realistic discussion of the many ways in which publications

might change and likely would change in response to a different set of price signals

is ignored completely by ABM and treated as a defect by McGraw-Hill, which states:

The greater adverse rate impact under the Time Warner proposal has no clear antidote for many mailers, not even co-mailing.12

12The rate impact of the Time Warner proposal appears to be driven by diverse factors, including machinability, presort level, pre-barcoding, number of bundles, and use of firm bundles, in addition to palletization, dropshipping and number of mail pieces per container.

Br. at 14 & n. 12.

But all these factors have a role in determining the impact of Time Warner’s

rates because Stralberg and Mitchell recognized that all these factors affect the

Postal Service’s costs and set out to design rates that would help reduce those

costs, to the benefit of all members of the Periodicals class. It is true that there is no

single “antidote,” certainly not co-mailing, that will fix all problems. However, as

Stralberg points out, in the case of ABM's mostly medium-sized member

publications, especially the large majority that are not time-sensitive, co-mailing may

really be promising. For those that are non-machinable for any reason other than

excessive weight, adopting a machinable format that is consistent with the Postal

Service’s future automation plans may be the most promising way of reducing their

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costs to the Postal Service and, under a properly cost-based rate structure, reducing

their postage costs as well.

Time Warner fully supports the tempered Periodicals rates proposed by

witness Mitchell in TW-T-1 and does not advocate any further tempering of the

recognition of costs. For reasons explained above, we believe the vast majority of

small publications will adapt to and benefit from these more cost-based rates. The

rates we propose will also lead to a healthier Outside County subclass, benefiting

the Postal Service and all mailers.

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V. TIME WARNER'S PERIODICALS RATE PROPOSAL BEST COMPORTS WITH THE RELEVANT STATUTORY FACTORS AS INTERPRETED BY THE COMMISSION

ABM, McGraw-Hill, and the Postal Service all assert that the Postal Service's

rate proposal is "the most compliant with [the] statutory factors" (ABM Int. Br. at 5),

but none of them discusses those factors in any but the most cursory way. ABM's

position ultimately comes down to the following:

The rate preference long provided to periodicals is to promote a broad and diverse periodicals class, so care must be taken to assure that, to the best of the rate setter's ability, rate changes do not produce disproportionate increases for small publications, or widely dispersed publications, or, for that matter, for very large publications.

Br. at 7.

This is essentially the position taken by the Postal Service and McGraw-Hill as

well.16 But it lacks any support either in the Act or in logic. If rates are not currently

well aligned with costs, the only way to get the two into alignment is through

"disproportionate" increases. The Act may rightly be read to discourage unfair

increases, but there is nothing inherently unfair about "disproportionate" increases,

and there is nothing in the Act that discourages "disproportionate" increases.

Indeed, the statutory factors that involve consideration of something other than

"proportionality" (which is to say, all of them) have the natural tendency to produce

disproportionate increases.

A similar flaw in reasoning underlies the Postal Service's assertion (Br. at

359) that "[b]ecause the Periodicals cost coverage is so close to 100 percent, only

the most effective discounts can be added." The truth here would instead seem to

16See Tr. 39/13525 (Taufique); McGraw-Hill Int. Br. at 23.

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be something like: since coverage is so close to 100%, every failure to recognize

cost avoidance in the rates means that some mail will be carried below cost at the

expense of other mail in the class, so that all potential discounts that are justified by

demonstrated cost avoidance should be put in.

A similar inattention to the actual factors enumerated in the Act, and the

Commission's precedents interpreting those factors, lies at the heart of witness

Taufique's argument that because the cost coverage of Periodicals is so low, "The

rate design for [P]eriodicals should not have the variety of impacts, of significant

impacts, that we're looking at in standard mail." Tr. 39/13525. Rather, as the

subclass markup approaches zero, the probability will approach 100% that any

individual component of the rate design that fails to reflect costs will result in some

mail in the subclass having a negative implicit markup and being subsidized by other

mail.

It is implicit in the positions of ABM, McGraw-Hill, and the Postal Service that

"disproportionate" percentage increases are presumptively unfair, while intra-class

cross-subsidization as a result of some mail being carried below cost poses no

problems of fairness. That is entirely contradictory to the Commission's settled view

of the matter. In the most recent fully litigated rate case, the Commission repeatedly

made clear that its approach to the question of fairness in pricing is very nearly the

opposite of what the Postal Service now suggests. The Commission said:

Rate design for a subclass can be thought of as setting the implicit percentage markups for each rate category . . . . The Commission begins the rate design process assuming equal implicit markups. This is a neutral starting position which seems to be implied by § 3622(b)(1), a fair and equitable

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schedule. It is consistent with the Commission's general policies that the rates for each rate category be above cost; that rates reflect the costs developed in the record; and that rate design results in identifiable relationships between rate categories.

PRC Op. R2000-1, ¶ 5533 (emphasis added).

After considering the coverage on Standard mail above and below the break point,

the Opinion in Docket No. R2000-1 concluded:

The Commission hopes that reliable information on implicit markups may make it possible to calculate the total amount of revenue that should be obtained from pieces above and from pieces below the break point. This would be an important contribution to ensuring that intra subclass rate relationships for Standard Mail are fair and equitable. The separate issue of the best way to design rates for the pieces above and below the break point might also be addressed by studying implicit markups.

PRC Op. R2000-1, p. 392, ¶ 5540 (emphasis added).

And in regard to the Residual Shape Surcharge in Standard, the Commission said:

Several objections raised on this record were also presented and resolved in Docket No. R97-1. In essence, these include arguments that there is no cost coverage requirement below the subclass level; that costs should not be “blended”; and that other mailers have not objected to “averaged” costs. The Commission has once again considered the validity of these arguments, but finds no sound reasons to depart from its previous conclusions. In general, the Commission continues to believe that overall considerations of fairness and equity and an interest in cost-based rates overcome opponents’ objections.

PRC Op. R2000-1, p.357, ¶ 5436 (emphasis added).

The missing link in the arguments of ABM, McGraw-Hill, and the Postal

Service is any evidence that the rates proposed by Time Warner would be

detrimental to "a broad and diverse periodicals class," ABM Br. at 7. No evidence

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for believing that this is so has been brought to the Commission's attention. As in

Docket No. C2004-1, ABM's witnesses show something like disdain for the

presentation of concrete facts or methodical analysis, relying wholly on broad-

gauged statements of opinion. McGraw-Hill focuses much more of its discussion on

facts and evidence, but it does not provide a fair representation of either. And the

Postal Service offers pleasant-sounding generalities that fail to convey the nature of

the link between the facts it adduces and the proposal it endorses.

In this proceeding, Time Warner has heeded the Commission’s

recommendations in Docket No. C2004-1, provided solid evidence from witnesses

whose caliber is well known to the Commission, and proposed a cost-based rate

structure that will serve the entire Periodicals class well. We strongly recommend

that the Commission approve Time Warner’s proposed rate structure, with such

modifications as the Commission deems necessary in order to effectuate the policies

of the Act..

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Respectfully submitted,

s/ John M. BurzioTimothy L. Keegan

Burzio & McLaughlinCanal Square, Suite 5401054 31st Street, N. W.Washington, D. C. 20007-4403Telephone: (202) 965-4555E-mail: burziomclaughlin@covad.net

COUNSEL FORTIME WARNER INC.

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APPENDIX

METHODOLOGY FOR FURTHER TEMPERING OFTIME WARNER'S PROPOSED RATES

Time Warner fully supports the tempered Periodicals rates proposed by

witness Mitchell in TW-T-1 and does not advocate further tempering the recognition

of costs. However, Time Warner recognizes that the Commission may reach a

different conclusion. We have therefore endeavored to place at the Commission's

disposal the means to further mitigate the impact of the proposed rates as it feels

necessary.

In his response to ABM/TW-T1-2 (Tr. 31/10464-65), Mitchell provided the

following instructions for adjusting the percentages for passthrough of bundle, sack,

and pallet costs, the costs represented in the "presort tree," and the costs of non-

machinability:

[T]he effects of changing the degree of moderation can be developed using my workpaper, WP-Mitchell-3F-O6.xls. Go to sheet 'Inputs'. Changing the figure in cell D123 changes the passthrough on the bundle costs. Changing the figure in cell D148 changes the passthrough on the sack costs. Changing the figure in cell D177 changes the passthrough on the pallet costs. In addition, the passthrough for any selected cell or group of cells in the bundle, sack, and pallet charges may be adjusted by changing the proportions in cells C124 through C197, although it should be noted that these compound with the passthroughs selected in the corresponding cells in column D. Withdrawing the averaging across origin entry points can be done by following the instruction in cell J146 and cell J175 for the sack costs or the pallet costs, respectively. The passthroughs relating to non-machinability can also be adjusted, by changing the center figures in the yellow boxes in the presort tree, in cells like G54. Any and all of these can be changed, one at a lime or in groups, and the new rates will show on the 'Rates' sheet.

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Once alternative rates are obtained, differences between them and the rates I propose can be obtained by subtraction.

All the flats mail flow models presented in the rate case analyze the costs of

machinable and non-machinable flats separately. But whereas the other models

average the costs of machinable and non-machinable flats within each rate category

before presenting their results, which then are used as inputs to rate design, the

Time Warner model presents separate results for machinable and non-machinable

flats in each category. In the resulting rates, this deaveraging leads to considerable

variation in impact: many publications whose flats are not machinable today would

experience a large increase in postage.

If the Commission wishes to recognize the cost of non-machinability but

believes that a full passthrough of the cost differential would create too great a “rate

shock” on some publications, it might wish to mitigate the impact by passing through,

for example, only 50%. One method of doing so is described by witness Mitchell in

the passage quoted above. However, employing that method without also affecting

the passthrough of other cost differentials, e.g., those based on presort level or the

presence of a barcode, may pose difficulties.. The following is a simple way to

mitigate the passthrough of the cost of non-machinability, without affecting other

things such as the allocation of costs between presort levels.

This tool will do only one thing, partially deaverage the costs of machinable

and non-machinable flats within a rate category. It is a form of passthrough–within a

rate category a portion of the cost of non-machinability is passed through to the non-

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machinable flats, while the remaining costs continue to be shared by all the flats

within the category.

Consider two groups of flats that are similar except that one group is

machinable and the other is not (i.e., they are in the same subclass, have the same

level of presort, and either all or none of them have a pre-applied barcode). Let VM

and VNM be the number of flats in each group and CM and CNM their unit costs. The

average unit cost is then:

CA = (VM*CM+VNM*CNM)/(VM+VNM)

This is the unit cost one would use if one simply ignored the cost differential

between the two groups, as the Postal Service’s and the MPA/ANM models do with

regard to flats machinability.

It is possible to reflect only some of the cost differential, e.g., a fraction F,

where F is between zero and one, but to do so without changing the average unit

cost (CA) of the two groups, by assigning the following unit costs to the two groups:

CM,F = CA +VNM*F*(CM-CNM)/(VM+VNM); and

CNM,F = CA +VM*F*(CNM-CM)/(VM+VNM)

It can easily be verified that the volume weighted average of the two modified

costs remains CA, and that the differential between CM,F and CNM,F is F times the

differential between CM and CNM. It can also be verified that if F is zero (i.e., no

passthrough of the cost differential), then both costs become equal to the average

(CA), and that if F is equal to one, then CM,F=CM and CNM,F=CNM.

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There are several ways the above can be applied to reduce the passthrough

of the cost difference between machinable and non-machinable flats in the rate

design model presented by witness Mitchell. Perhaps the easiest way is through

spreadsheet R2006Volumes-Rev.xls in Library reference TW-5 Revised. This

spreadsheet contains the per-piece unit costs that are used in Mitchell’s rate design

spreadsheet, to which it is linked. The unit costs used in Mitchell’s rate design are in

cells G37-G54 on worksheet ‘Pc costs’. The corresponding test year Outside

County volumes are in cells P7-P24 on worksheet ‘Pieces’. The unit costs and piece

volumes are arranged in pairs of non-machinable and machinable categories with

otherwise similar characteristics.

Table 1 below shows the results of applying the method described above to

the unit costs used by Mitchell. For example, the first two categories represent flats

in mixed ADC bundles without pre-barcoding. According to Stralberg’s cost model,

the per-piece processing costs for such pieces are 50.75¢ if non-machinable but

only 33.81¢ if they are machinable, as shown in the third table column.17 The

differential in this case is 16.94¢. In the last column, the difference has been

reduced to half. The resulting costs still have the same volume-weighted average.

Applying Mitchell’s rate design to these cost estimates would produce the same

overall revenues but a smaller rate increases for publications that currently use a

non-machinable format. It would, of course, raise the postage for machinable

categories.

17 Note that the costs shown in the table are not the rates Mitchell designed, only the per-piece mail processing unit costs that went into his rate design. Note also that these costs do not include the costs of sorting the bundles or the containers in which these pieces were originally presented to the Postal Service.

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Table 1: Example Of Mitigating Impact Of Cost Differentials Due To Non-Machinability (Differential Reduced 50%)

Bundle Piece ModeledCosts Test Year

MitigatedCosts

Level Type ($/piece) Volumes ($/piece)MADC NBC/NM $0.5075 1,981,562 $0.4316   NBC/M $0.3381 17,009,405 $0.3469   BC/NM $0.4574 2,915,249 $0.4014   BC/M $0.3095 9,132,816 $0.3274 ADC NBC/NM $0.4117 10,927,535 $0.3583   NBC/M $0.2798 46,395,549 $0.2923   BC/NM $0.3719 23,827,617 $0.3250   BC/M $0.2587 115,946,182 $0.2684 3d NBC/NM $0.3484 68,750,964 $0.3163   NBC/M $0.2548 149,754,482 $0.2695   BC/NM $0.3171 195,831,056 $0.2845   BC/M $0.2369 845,304,673 $0.2445 5d NBC/NM $0.2070 92,831,283 $0.1991   NBC/M $0.1818 157,796,440 $0.1865   BC/NM $0.2059 420,474,080 $0.1924   BC/M $0.1733 2,098,946,912 $0.1761 CR NM $0.0751 485,008,677 $0.0749   M $0.0746 3,468,792,818 $0.0746

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