Chapter5A.html

[5001] Express Mail is a premium service advertised as offering guaranteed next-day and second-day delivery nationwide for mailable matter weighing up to 70 pounds, but not exceeding 108 inches in length and girth. Computerized Tracking and Tracing gives customers information on the acceptance, arrival at the destination post office, and the delivery of Express Mail. If performance standards are not met, postage will be refunded. Postal Service witness Plunkett describes Express Mail service options as: (1) Next Day and Second Day Post Office to Addressee Service (representing 98 percent of Express Mail volume), (2) Next Day and Second Day Post Office to Post Office Service, (3) Custom Designed Service, and (4) Same Day Airport Service. USPS-T-36 at 2-4. The latter has been suspended for security reasons but the Service wants to retain it in the DMCS. Id. at 3.

[5002] Express Mail rates are unzoned and rounded to the nearest nickel. A letter rate for items weighing up to eight ounces is available. For Post Office to Addressee or Post Office to Post Office Services, the Service offers a two-pound rate for pieces that fit into a standardized flat-rate envelope. This standardized envelope, labeled as EP 13F, is widely distributed at no charge by the Postal Service, e.g., in post offices and through the Service's web site.

[5003] Plunkett says that Express Mail volume grew rapidly between its inception in FY 1971 and FY 1985, but that in FY 1986, volume declined nine percent. He attributes this to a 15 percent increase in rates, competition from private carriers, and airline service problems that affected Express Mail service quality. Id. at 5. Declines in FY 1991-93 are attributed to another rate increase, but since then volume has grown at an average annual rate of 4.6 percent. Plunkett says that the effect of rate increases from R971 can not yet be measured directly; however, the before rates volume forecast (USPST8, Table 1) calls for test year before rates volume to be approximately unchanged from FY 1998.

[5004] Plunkett projects Express Mail to produce a test year cost coverage of 210 percent before rates (USPS methodology), with revenues of just over $1 billion, and costs of $483 million including contingency. The effect of the proposed rates is to increase revenue by $48 million. Costs increase slightly due to a modest volume increase. As a result, cost coverage after rates increases to 218 percent. To meet this cost coverage target Express Mail rates must be increased by an average of 3.76 percent. The Service proposes no structural changes to the Express Mail rate schedule.

[5005] Rate increases for each rate element were constrained to be no more than 4.5 percent, consistent with rounding constraints, and rates for Post Office to Addressee are set to be at least twice the Priority Mail rates for zone 5. The letter rate (78 percent of Express Mail volume) would be increased from $11.75 to $12.30, or about 4.7 percent. For pieces weighing between 20 and 35 pounds, Plunkett manually adjusts rates to preserve reasonable relationships between adjacent weight cells.

[5006] Postal Service witness Mayes states that the rate levels proposed for Express Mail are appropriate for an expedited and competitive service of relatively high value, and that the class of mail has demonstrated sufficient stability in costs and volumes to be able to endure the relatively low rate increase required to obtain this rate level. USPST32 at 28 et seq. She contends that Express Mail's value of service (criterion 2) is very high. It receives the highest priority of delivery, uses air transportation extensively and has a substantial collection system. It benefits from tracking capability and a service guarantee. On the other hand, its price elasticity, at (1.565), is the highest own-price elasticity of all the subclasses, indicating an extremely low economic value of service. Similar expedited services provided by private companies may be viewed as more valuable because their overnight service areas are more extensive. Additionally, the Postal Service does not extend credit to its customers.

[5007] Mayes says that the 3.8 percent increase, well below the system average, will have a modest and reasonable effect on mailers (criterion 4), even considering the high own-price elasticity of demand for this product. Because of its small presence in the market for expedited delivery and its modest growth, the proposed rate increase should not have a significant effect on competitors. She notes the Express Mail rate schedule provides for separate rates depending on whether the customer picks up the Express Mail at the post office or has the item delivered by the Postal Service, and whether the piece is dropped off at the post office or picked up by the Postal Service. The customer who drops off or picks up the piece at the post office reduces postal costs and the rate schedule reflects this cost-saving activity with lower rates (criterion 6). Revenues clearly and significantly exceed the costs associated with Express Mail (criterion 3). She concludes the proposed rate level is fair and equitable (criterion 1), reflecting a consideration of all the relevant criteria, including the effects on Express Mail users as well as competitors.

[5008] On brief, United Parcel Service (UPS), after concluding that Express Mail demonstrably has a high value of service, recommends a 13 percent rate increase using FY 1998 data and a 17 percent increase using FY 1999 data. UPS Brief at 65-66. The UPS sponsored witness Luciani to perform costing analyses for Parcel Post, Priority, and Express. Tr. 25/11789-90, Tr. 38/17246.

[5009] Intervenors David Popkin and Douglas Carlson conclude there are a number of service problems with Express Mail that have widespread implications. Popkin Brief at 10-11, Carlson Brief at 24-26. Popkin says that when the Service accepts Express Mail which it knows cannot meet the guaranteed delivery time (e.g., because of a lack of transportation), it is engaging in false advertising and perpetuating a fraud on the mailing public. Carlson echoes the concern about the Service accepting Express Mail when the "guaranteed" delivery cannot be made and says the Commission should recommend that the Service develop a new class of Express Mail service guaranteeing delivery on the next day that delivery services are possible. Carlson also contends retail terminals should provide information on service commitments the Service can actually meet so consumers can decide whether they really want to pay the premium Express Mail rates. Carlson Brief at 26.

[5010] The Postal Service in responding to DBP/USPS-62 notes that about 91.2 percent of Express Mail articles are delivered on time (Tr. 21/8730) and that only 1-2 percent of those senders entitled to apply for a refund actually do so (Tr. 46C/20762). He concludes that the requested increase in Express Mail rates should be denied until the Postal Service is able to design its service to be capable of delivering what is guaranteed. The Service disagrees with the UPS proposed rate increase, saying that most of the Luciani costing adjustments are inappropriate. Postal Service Reply Brief at V25. It also argues that UPS and Luciani did not address the statutory pricing criteria.

[5011] Commission Analysis. The Commission concurs with witness Mayes' assessment of the statutory criteria. Conversely, the UPS proposal, if recommended, could severely harm mailers. Both volume trends and the costs for this service have recently become stabilized, and a sharp increase in rates would disrupt those mailers that have come to rely on this service. A 17 percent increase also would harm the Service, which points out that Express Mail competes in a highly competitive market, and that large rate increases may have stunted Express Mail growth at various times.

[5012] The Commission finds that the UPS proposal is not analytically well founded. While UPS uses cost adjustments presented by Luciani to support its rate increase argument, it essentially offers nothing more than a generalized justification for its proposed pricing changes: "The Commission should adopt that rate increase in order to begin to restore Express Mail's cost coverage to a level that is more appropriate for the Postal Service's premium service offering." UPS Brief at 66. Indeed, Luciani appeared to engage in his Express Mail pricing analysis almost as an afterthought, since he states his Express Mail "calculation was performed for illustrative purposes to assist the Commission in its considerations of the UPS recommended costing changes." Tr. 25/11901.

[5013] The Commission recommends a cost coverage for Express Mail overall of 151 percent, resulting in a cost increase of 3.6 percent. Although the Commission agrees that Express Mail has a high value of service, this view is tempered by the Carlson and Popkin arguments concerning quality of service. The Commission is concerned that the Postal Service is not properly informing consumers about the limitations of its delivery network, and that the Postal Service accepts Express Mail knowing that the published delivery standards are impossible to achieve. The Commission suggests the Service review its overall advertising and consumer information for Express Mail so that consumers are made aware of potential limitations of the service. The Commission also is concerned about the high on-time failure rate (8.8 percent), which seems inconsistent with a guaranteed service. Express Mail provides the most rapid service available from the Postal Service, but it is already quite costly, and its quality of service can not really be considered "premium". The intrinsic value of service ascribed to Express Mail seems to justify an increased cost coverage and a markup index near the systemwide average, but not the double digit rate hike suggested by UPS.