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[5014] Introduction and Summary. In this proceeding, the Postal Service proposes a one-cent increase in the rate for single-piece First-Class Mail weighing one ounce or less, thereby raising the price of the First-Class stamp from 33 cents to 34 cents. A one-cent increase in the additional ounce rate is also proposed, increasing the rate from 22 cents to 23 cents. The Service correspondingly proposes a one-cent increase for single-piece cards, increasing the rate from 20 cents to 21 cents.
[5015] The Postal Service proposes maintaining the nonstandard surcharge at 11 cents for single piece letters weighing one ounce or less, and 5 cents for presort/automation letters weighing one ounce or less. Also, the Postal Service proposes maintaining the heavy piece discount at 4.6 cents per piece.
[5016] Under the Postal Service proposal, the nonautomation presort letter discount decreases from 2.5 cents to 2 cents. This increases the price for sending a nonautomation presort letter from 30.5 cents to 32 cents. All automation letter discounts are proposed to remain at their present levels in relationship to the first-ounce single-piece rate, which effectively decreases the discount on a percentage basis in comparison to the single-piece rate. By maintaining the current discount levels, the price for sending mail in each of the four automation letter categories increases by one cent, corresponding to the one-cent increase in the single-piece rate.
[5017] The Postal Service proposes a classification change to the automation flats 3/5-digit category by splitting the 3/5-digit category into separate 3-digit and 5-digit categories. This proposal parallels the rate structure now in place for letters and cards. The proposed new rate for the 3-digit category is 29.5 cents and for the 5-digit category is 27.5 cents. The net effect is a discount increase of approximately 0.3 cents above the current 3/5-digit discount level. Also, the Postal Service proposes to increase the basic automation flats rate by one cent, from 30 cents to 31 cents.
[5018] Under the Postal Service proposal, the nonautomation presort card discount is maintained at 2 cents. This increases the nonautomation card rate from 18 cents to 19 cents. The Postal Service proposes to slightly increase the basic automation cards discount by 0.2 cents. This has a ripple effect that also increases the 3-digit, 5-digit, and carrier route card discounts by 0.2 cents in relation to the single-piece card rate, with the discount levels between automation categories proposed to remain at their present levels.
[5019] The Postal Service proposes a 3-cent discount for Qualified Business Reply Mail (QBRM) letters and cards. This maintains the current 3-cent discount for QBRM letters, and increases the discount for QBRM cards by one cent. Under the proposal, the QBRM letter rate increases from 30 cents to 31 cents and the QBRM cards rate is maintained at 18 cents. The Postal Service proposes several rate and classification changes to the QBRM accounting function, which are separately discussed in the Special Services Business Reply Mail section of this opinion.
[5020] Overall Impact. The Postal Service's First-Class rate proposals reflect an average class wide increase of 3.6 percent, based on increases of 3.5 percent for letters and 5.0 percent for cards. The Postal Service expects these increases to generate revenues that are 197.1 percent of its calculated volume variable costs for letters and 148.5 percent of volume variable costs for cards.
[5021] Recommendations for Single-Piece Letters and Cards. For the first ounce of single-piece letter mail, the Commission recommends the one-cent increase the Postal Service has requested. However, the Commission recommends maintaining the 20-cent single-piece card rate.
[5022] The Rate for Additional Ounces of First-Class Mail (Single-Piece and Presorted.) The Commission recommends decreasing the additional ounce rate from 22 cents to 21 cents.
[5023] Nonstandard Surcharges, Heavy Piece Discount. The Commission recommends maintaining the nonstandard surcharge at 11 cents for single-piece letters and 5 cents for presort/automation letters. The Commission also recommends maintaining the heavy piece discount at 4.6 cents.
[5024] Worksharing Rates and Discounts. The Commission recommends the nonautomation presort letters rate as proposed by the Postal Service. The Commission recommends cost-based rates for the automation letters category that are lower than the rates proposed by the Postal Service, except for the 5-digit automation letters rate. The recommended rates for automation letters are: 27.8 cents for basic automation letters, 26.7 cents for 3-digit letters, 25.3 cents for 5-digit letters, and 24.3 cents for carrier route letters.
[5025] The Commission recommends the classification change proposal to split the 3/5-digit flats category into separate 3-digit and 5-digit flats categories. The Commission recommends the worksharing rates for flats at the rates proposed by the Postal Service.
[5026] The Commission recommends maintaining the 18 cents nonautomation presort cards rate. The Commission recommends cost-based discount rates for the automation cards category that are lower than proposed by the Postal Service. The recommended rates for automation cards are: 16.4 cents for basic automation cards, 15.8 cents for 3-digit cards, 15.1 cents for 5-digit cards, and 14.0 cents for carrier route cards.
[5027] QBRM. The Commission recommends the proposed 3-cent discount for both QBRM letters and QBRM cards. Recommendations to reduce the per piece QBRM fees are discussed separately in Chapter 5, Section F. 4, the Special Services Business Reply Mail section.
[5028] Intervenors' First-Class Mail proposals. E-Stamp, Stamps.com, Pitney Bowes, American Bankers Association (ABA), National Association of Presort Mailers (NAPM), Major Mailers Association (MMA), and the Office of the Consumer Advocate (OCA) have each presented additional proposals in this docket that potentially could affect rates, classifications, or rate case procedures.
[5029] E-Stamp and Stamps.com individually propose a worksharing discount for Information Based Indicia Program (IBIP) mail. The Commission recommends, as a "shell" classification, a discount for IBIP mail where the indicium of postage is printed directly on the mail piece. The Commission does not recommend a discount at the proposed 4-cent rate, or a discount for IBIP postage printed on labels.
[5030] Pitney Bowes proposes a one-cent discount for First-Class Mail that uses metering technology to produce the indicia of postage. The Commission does not recommend this proposal.
[5031] MMA, NAPM, and ABA&NAPM propose extending the heavy piece discount to workshare pieces weighing between one and two ounces. Each intervenors' proposal differs in applicability to letters, flats, or letters and flats. The Commission does not recommend these proposals.
[5032] ABA&NAPM propose to maintain the current additional ounce rate. The Commission recommends an additional ounce rate based on Commission methodology, but incorporating some of the ABA&NAPM suggestions.
[5033] ABA&NAPM and MMA propose changes to the First-Class automation discount rates proposed by the Postal Service. Commission recommends automation discount rates based on Commission methodology, that incorporates some of the ABA&NAPM and MMA suggestions.
[5034] ABA&NAPM propose a worksharing discount for mail collected in private collection boxes, presorted to the greatest extent possible by workshare mailers, and then delivered to the Postal Service. The Postal Service would print and sell "P" rate stamps at a 2-cent discount from the single-piece First-Class letter rate. The Commission does not recommend this proposal.
[5035] The OCA has presented several First-Class Mail proposals in this docket. The first is a renewal of the Courtesy Envelope Mail (CEM) proposal for courtesy reply mail pieces. Under the proposal, CEM mail would receive a 3-cent discount based on the QBRM cost savings. The Commission again recommends the CEM proposal as a "shell" classification. The OCA proposes the elimination of the nonstandard surcharge for low aspect ratio letters. The Commission does not recommend this proposal. The OCA proposes to retain the 33-cent First-Class letter rate. Although the Commission does not specifically recommend this proposal, the Commission has taken into consideration the data presented in the proposal in recommending the First-Class letter rates. The OCA puts forth a First-Class single-piece rate stability proposal. The Commission does not recommend this proposal. The OCA proposes the establishment of a rates working group. The Commission always encourages informal communication between parties to resolve issues without Commission intervention. The Commission supports, but does not recommend this proposal on a formal basis. Finally, the OCA proposes that the Postal Service provide mailers with 10 one-cent make up stamps combined with an informational mailing. The Commission sees benefits in this proposal, and recommends that Postal Service management give this idea consideration.
[5036] First-Class Letters and Sealed Parcels Rates. Table 5-1 presents a comparison of current, proposed and recommended First-Class Mail rates.
[5037] First-Class Mail consists of mailable matter weighing 13 ounces or less. All mailable matter weighing 13 ounces or less may be sent as First-Class Mail. USPS-T-33 at 5. The proposals addressed in this section affect the Letters and Sealed Parcels subclass, and the Cards subclass of First-Class Mail. The Postal Service proposals maintain the existing composition of the First-Class Mail subclasses and the major worksharing rate categories, except for a proposal to split the automation flats 3/5-digit category into separate 3- and 5-digit categories.
[5038] Postal Service witness Fronk presents the Service's First-Class Mail rate and classification proposals. See generally USPS-T-33. He begins his analysis with the overall revenue requirement and subclass cost coverage targets provided by Postal Service witness Mayes. See generally USPS-T-32. Fronk then relies on Postal Service cost witness Miller for letters and cards worksharing cost savings calculations, and nonstandard surcharge cost data. See generally USPS-T-24. Postal Service witness Daniel develops a new weight study that Fronk relies on that is relevant to the additional ounce rate. See generally USPS-T-28. In addition, Postal Service witness Yacobucci develops mail processing costs for flat-shaped mail. See generally USPS-T-25. Mayes concludes the Postal Service presentation by discussing how the First-Class Mail rate proposals are consistent with the statutory ratemaking criteria of the Act (§ 3622(b)).
[5039] First-Ounce Rate. The Postal Service proposes a one-cent increase in the first-ounce single-piece First-Class letters rate, thereby raising the rate from 33 cents to 34 cents. This is a 3.0 percent increase. The Postal Service continues the practice of proposing this rate in whole cent increments for administrative ease and to avoid unnecessary complexity for the general public. Witness Fronk asserts the rate proposal is consistent with the proposed revenue requirement and the statutory ratemaking criteria of the Act. He states: "In view of that revenue requirement, a proposal not to change this rate would impose unreasonably large rate increases in other classes of mail. Conversely, a two-cent increase in the basic rate would unfairly relieve other mail classes of their fair share of the institutional cost burden." USPS-T-33 at 21.
[5040] OCA's Proposal to Retain the Current First-Class Single Piece Rate. OCA witness Callow proposes maintaining the single-piece First Class letter rate at 33 cents. He analyzes the rising institutional cost burden of First-Class letter mail using the cost coverage, cost coverage index, and mark-up index. He then compares the institutional cost burden of First-Class letter mail with Standard A Regular mail to show a widening gap in the indices between the subclasses of mail. Callow alleges that the increasing First-Class letter institutional cost burden shown by his analysis results in First-Class letter mail contributing revenue in excess of the share found reasonable by the Commission. He concludes by proposing a 33-cent single-piece letter rate as a method of mitigating the increasing institutional cost burden on First-Class letter mail. Tr. 22/10104-27.
[5041] Callow examines the "actual" cost coverage, cost coverage index, and mark-up index derived from Postal Service cost and revenue data over the past twelve years for First-Class letter mail.1 He shows that the actual cost coverage has increased from 162 percent in FY 1988 to 197 percent in FY 1999, the actual mark-up index has increased from 1.256 in FY 1988 to 1.439 in FY 1999, and the actual cost coverage index has increased from 1.084 in FY 1988 to 1.177 in FY 1999. Finally, he compares the actual mark-up index and cost coverage index to each index recommended by the Commission in the four opinions issued during the time period covered by his analysis. These comparisons show the actual mark-up index and cost coverage index to be above the recommended indices in a majority of the years depicted.
[5042] Callow continues his analysis by comparing the actual mark-up index and cost coverage index of First-Class letter mail to Standard A Regular mail. For example, he shows the actual mark-up index of First-Class letter mail rising from 1.169 to 1.439, while the Standard A Regular actual mark-up index is declining from 1.080 to 0.828 for the five years beginning in FY 1995. A similar trend is shown using the actual cost coverage indices. He also depicts similar trends when comparing the First-Class letter mail and Standard A Regular mail actual cost coverage index and mark-up index to the indices recommended by the Commission in its opinions over the same time periods. Overall, Callow shows that First-Class letter mail is contributing more in absolute terms to institutional costs than Standard A Regular mail. Furthermore, over time the relative share of institutional costs contributed by First-Class letter mail is increasing relative to the institutional costs contributed by Standard A Regular mail.
[5043] Callow claims that the rising institutional cost burden of First-Class letter mail shown in his analysis has produced substantial additional revenue for the Postal Service. He alleges that the additional revenue has exceeded the revenue contribution intended by the Commission. By using a 12-year average of the First-Class letter mark-up index taken from Commission opinions, he estimates that First-Class letter mail has contributed $6.8 billion more than intended by the Commission over the FY 1988 through FY 1999 time period.
[5044] In conclusion, Callow proposes maintaining the single-piece First-Class letter rate at 33 cents in order to mitigate the increasing institutional cost burden of First-Class letter mail. He alleges that recommending the Postal Service's proposed rates only maintains the status quo with respect to the First-Class letter mail institutional cost burden. Furthermore, he claims that an increase in rates cannot be justified because costs for First-Class letter mail as a share of total postal costs have declined over the time period of his analysis. Finally, he states that reducing the institutional cost burden on First-Class letters would enhance fairness and equity (§ 3622(b)(1)).
[5045] Postal Service Rebuttal. The Postal Service opposes the OCA's proposal to maintain the current 33-cent basic rate for First-Class Mail. The Postal Service argues that witness Callow ignores the fact that Commission opinions only address cost coverages during specific test years and not the intervening years. Therefore, it is only speculation as to what the Commission might have found as acceptable cost coverages during the intervening years. From this argument the Postal Service infers that witness Callow should not suggest that the Commission focus on the historical relationships between recommended and actual institutional cost burdens for First-Class Mail in recommending a level of institutional cost burden for the subclass in this case. Postal Service Brief at VII-29-VII-31.
[5046] The Postal Service argues that the success of the automation program and changes in the mail mix have made it possible to propose a single-piece rate increase that is below the rate of inflation and below the rate of increase for the postal system as a whole. Thus, the Commission should also recognize the relative percentage rate increases between subclasses, because of the limitations of focusing on relative markups.
[5047] Postal Service witness Mayes discusses the effect that mail mix has on the indices. She states that the cost for single-piece letters is increasing and the cost for workshare letters is increasing, but the aggregate cost for all letter mail is decreasing. At the same time, the cost coverage is also increasing, given a constant revenue per piece. This can be explained by a mail mix shift to more low cost workshare letters. Tr. 11/4505-6, 4518.
[5048] Finally, the Postal Service states that if the Commission were to maintain the 33 cent rate it could not do so based on the R97-1 decision, but would have to review the criteria of the Act based on the record in this docket. It notes that witness Callow has not provided the Commission with guidance in this area.
[5049] Other Intervenor Positions. The contribution to institutional costs by First-Class Mail relative to the contribution to institutional costs by Standard A Mail was a highly litigated issue in this proceeding. First-Class mailers, along with the OCA, argue that the cost coverage, which is one measure of relative contributions to institutional costs, for First-Class Mail and Standard A Mail should be similar. Similar cost coverages would decrease the contribution to institutional costs by First-Class Mail, but increase the contribution by Standard A Mail. Standard A mailers are opposed to similar cost coverages and argue for a lower cost coverage for Standard A Mail, which then necessitates a higher cost coverage for First-Class Mail. One First-Class mailer, MMA, suggests increasing the first-ounce single-piece First-Class rate, which will increase the First-ClassMail contribution to institutional costs. At the same time, MMA proposes to mitigate this increase by suggesting changes to the heavy piece discount and raising the workshare discounts. The different intervenor positions as summarized below.
[5050] ABA&NAPM witness Clifton argues that the cost coverage for First-Class workshared Mail has become discriminatory relative to Standard A commercial mail and single-piece First-Class Mail. His analysis shows that since 1994 the cost coverage for First-Class presort mail has increased, and caused the cost coverage for all First-Class Mail to rise above the system wide average, while Standard A Regular mail has continued below the system wide average. He concludes that the trend between cost coverages for single-piece versus workshared mail in the allocation of institutional costs shows unfair, inequitable, and discriminatory treatment toward workshare mailers. Tr. 26/12458-62.
[5051] On brief, Association for Postal Commerce and Mail Advertising Services Association International (PostCom/MASA) oppose the proposals offered by OCA witness Callow and by ABA&NAPM witness Clifton. PostCom/MASA states the rationales behind the proposals are not sound. It views both proposals as arguments for shifting institutional cost burdens from First-Class Mail to Standard A Mail. PostCom & MASA Brief at 6-14.
[5052] PostCom/MASA asserts that one theme of Clifton's testimony is that the cost coverage of First-Class and Standard A mail has impermissibly deviated from standards articulated in the Docket No. R90-1 decision. They also infer that Clifton may consider some of the rates at issue unlawfully violate provisions of the Act. PostCom/MASA concludes that the Commission has broad discretion and is not bound by the standards set forth in Docket No. R90-1, as allegedly argued by Clifton.
[5053] PostCom/MASA interpret Callow's testimony as arguing First-Class letter mail contributions to the Postal Service's institutional costs have exceeded the revenue contributions intended by the Commission. PostCom/MASA proffers a possible explanation for this occurrence. They argue that an internal change in the First-Class mail mix to a higher proportion of more profitable First-Class mail pieces results in contributions above the cost coverages set by the Commission. PostCom/MASA concludes that a rate freeze should not be substituted for the Commission's analysis of the statutory criteria for institutional cost coverage based on inexact volume/mix projections.
[5054] On brief, Direct Marketing Association, Inc. (DMA) also concludes the relevant statutory criteria supports giving First-Class Mail a substantially higher cost coverage than Standard A Mail. Therefore, the record also supports decreasing the proposed Standard A cost coverage relative to First Class. DMA contends that the arguments made by OCA witness Callow and ABA&NAPM witness Clifton in support of maintaining the single-piece First-Class rate are fatally flawed. The alleged common flaw is that Callow and Clifton do not base their positions on evidence on the record in this proceeding. DMA further states that Callow and Clifton do not address the statutory pricing factors relative to this docket's record. DMA Brief at 4-9.
[5055] Greeting Card Association and Hallmark Cards, Inc. address the trend of First-Class Mail bearing an increasing institutional cost burden on brief. They argue the Postal Service effort to increase the institutional cost burden on First-Class Mail is inconsistent with considerations of fairness, the educational cultural, scientific, and informational value of First-Class Mail, and the legislative purpose of postal regulation as a protection for the captive mailer. GCA & Hallmark Brief at 1, 3-7.
[5056] Major Mailers Association (MMA) suggests that the Commission recommend the Postal Service's one-cent increase in the first ounce and additional ounce rates. MMA also suggests that the First-Class Mail revenue burden be lowered by applying the heavy piece discount to workshared letters weighing between one and two ounces, and increasing the workshare discounts. MMA witness Bentley reviews several previous decisions and concludes that the Commission is in the same situation that it faced in Docket No. R97-1. Bentley testifies that rejecting the one-cent First-Class single-piece rate proposal would have a potentially adverse impact on other mailers. "[E]ach penny decrease in the proposed 34-cent First Class rate represents about $1 billion of net revenue loss that would have to be made up by other classes." Tr. 26/12281, see also id. at 12279-83.
[5057] MOAA argues against decreasing the cost coverage of First-Class Mail in relation to Standard A Mail. MOAA alleges that Clifton has disregarded past Commission decisions and uses data that ignores increases in revenue and contribution for Standard A Mail in his analysis. Therefore, no basis exists for increasing the Standard A Mail cost coverage. Tr. 44/19313-20.
[5058] Commission Analysis. The Commission recommends a first-ounce single-piece First-Class letter rate of 34 cents. The first-ounce single-piece rate is the most prominent rate in the eyes of the public, and has the single greatest impact of any rate on Postal Service revenue. All of the First-Class letters and flats worksharing discounts are set in relation to this rate. The additional revenue generated by a one-cent increase from 33 cents to 34 cents is approximately $940 million. This additional revenue is essential in meeting the Postal Service revenue requirement. Without this additional revenue, the rates of the other classes of mail would have to increase significantly to make up the revenue shortfall.
[5059] OCA witness Callow shows through a variety of indices that the contribution to institutional cost by First-Class letter mail is increasing. Postal Service witness Mayes proffers a logical explanation that some of this increase may be due to a shift in the mail mix from higher processing cost single-piece mail to lower processing cost worksharing mail. The net effect is that the contribution to institutional costs by single-piece mailers is not rising as rapidly as the aggregate of all First-Class letter mail.
[5060] This may mean that the institutional cost burden on First-Class workshare mail is increasing. However, when discounts pass through 100 percent of avoided costs to the workshare mailer, the contribution made by that mailer to institutional costs is the same as the mailer would have made without worksharing. Thus, workshare mailers and non-workshare mailers provide the same contribution, which is fair and equitable. In this case the Commission has set the majority of the recommended discounts for First-Class to pass through 100 percent of the avoided costs. This maximizes the discounts and effectively reduces the institutional cost burden on workshare mailers as much as possible.
[5061] The Commission also recommends reducing the additional ounce rate in this opinion. As pointed out by witness Clifton, there is no cost justification for the rapid relative escalation in the First-Class rates for heavy letters. This rate produces important revenue, but a reduction in the rate should further reduce the institutional cost burden on First Class Mail. Furthermore, it is consistent with the reductions the Postal Service suggests for heavy (pound rate) Standard A Mail.
[5062] The Postal Service is critical of Callow's analysis because it applies Commission recommended cost coverages to years other than test years. The Service also suggests that the Commission should look at relative rate increases between subclasses instead of comparing indices. The Commission examines rates from several different perspectives as a check on its rate analysis and recommendations. It is not illogical to look at trends in the indices as witness Callow has, or to use Commission recommended indices as an approximation during the intervening years. What Callow has successfully done is to depict a trend. However, this trend is only one factor to be examined in a very complex process. As the Postal Service suggests, the Commission also looks at relative rate increases, and rate increases compared to the rate of inflation as other checks to its recommendations.
[5063] The Commission briefly considered fractional rates for single-piece First-Class Mail to alleviate the restrictions caused by the integer constraint and reduce the institutional cost burden on First Class Mail. Fractional rates are one of the aspects of the OCA's rate stability proposal that the Commission found interesting. However, a record was not developed in this docket that would allow the Commission to seriously consider single-piece fractional rates at this time.
[5064] Recommending the single-piece First-Class rate entails balancing several unpleasant choices. As MMA noted, each penny of this rate affects hundreds of millions of dollars in Postal Service revenue that would otherwise be assessed to other mail classes. Balancing this is the already high institutional cost contribution of First-Class mailers. On the other hand, the rate increase for First-Class Mail is in line with inflation, and is lower on a percentage basis than the system wide rate increase. For these reasons, the Commission recommends the Postal Service's proposed first-ounce single-piece rate.
[5065] The Postal Service proposes to reduce the nonautomation presort letters discount from 2.5 cents to 2 cents. The 1999 IOCS method may have caused the costs of nonautomation presort to be overestimated. The cost savings from presortation is smaller than the proposed discount. The Service cautions that this discount may be smaller in the future. No participant comments on this proposal, and thus the Commission recommends the suggested 2-cent discount. Also, a 2-cent discount represents a significant reduction of the current 2.5-cent discount.
[5066] The Postal Service proposes to maintain the current rate structure for First-Class automation letters, and increase the rate in each category by one cent. This results in proposed rates of 28 cents for basic automation, 27.1 cents for 3-digit automation, 25.3 cents for 5-digit automation, and 24.8 cents for carrier route automation.
[5067] The Postal Service estimates savings from worksharing activities using a method similar to that employed by the Commission in Docket No. R97-1. However, Postal Service witness Miller proposes some significant modifications to the accepted methodology, and proposes rates that are not strictly cost-based.
[5068] The CRA derived mail processing unit costs, which Miller uses in his model, are based on the Postal Service's proposed mail processing cost attribution as calculated by witnesses Bozzo, Degen, and Van-Ty-Smith. Tr. 7/3037. Also, the CRA derived mail processing unit costs for nonautomation presort letters and automation non-carrier route letters are isolated and utilized. In prior cases, these costs had been combined into one cost for "non-carrier route presort."
[5069] Miller reclassifies the CRA cost pools into those he deems worksharing related (proportional), worksharing related (fixed) and non-worksharing related (fixed). As in R97-1, the worksharing related proportional costs are used to calculate a proportional (multiplicative) CRA adjustment factor, and the worksharing related fixed costs make up the fixed (additive) CRA adjustment factor. These factors are applied to the modeled costs to determine the mail processing cost of each rate category for purposes of calculating avoided costs, or savings. Unique to this case is the Postal Service's proposal to exclude those pools it now defines as non-worksharing related from the determination of cost avoidance. Id. at 3072-74.
[5070] Intervenor's Positions. ABA&NAPM witness Clifton proposes letter rates of 27.4 cents for basic automation, 26.2 cents for 3-digit automation, and 24.5 cents for 5-digit automation. He justifies these rates based on his estimation of worksharing savings, which he calculates using a method that differs from that proposed by the Postal Service. Tr. 26/12394.
[5071] Clifton advocates abandoning the use of bulk metered mail (BMM) as the benchmark for First-Class workshared mail. He argues that BMM has become a hypothetical type of mail, which does not exist in the mail stream. Mail that does not exist cannot convert to worksharing, and therefore is not an appropriate benchmark. While Clifton uses metered mail letters (MML) as the benchmark in his calculations, he claims that if his "P" rate proposal were in place, aggregate single piece letter costs would be the appropriate benchmark. Id. at 26/12418-22; see also, ABA&NAPM Brief at 18-19.
[5072] Clifton agrees with many of the Postal Service classifications of the worksharing related cost pools between proportional, and fixed. However, he argues that 12 of the pools Miller classified as non-worksharing related should instead be considered worksharing related. For each pool in question, Clifton asserts that much or most of the difference in cost between the benchmark and automation letters is due to work performed by mailers which helps the Postal Service to avoid or reduce costs. Tr. 26/12469-73.
[5073] Clifton addresses the implications of updated information provided by the Postal Service in response to PRC Order No. 1294 (May 26, 2000) in his supplemental testimony. Therein, he states that as a result of the update to FY 1999 data, avoided costs did not change appreciably from those based on FY 1998 data. He also states his belief that "other cost change factors" and "breakthrough productivity" savings incorporated into the Postal Service's update are skewed and biased against First-Class mailers. To remedy this, Clifton suggests that if the Commission is to use the FY 1999 data, it should modify the cost data using what he terms "balanced cost reductions". Essentially, he proposes to reduce several mail processing cost pools for First-Class automation letter mail to the level of their Standard A counterparts. Tr. 45/20086-98.
[5074] The Postal Service's supplementary response to P.O. Ruling R2000-1/116 presents cost avoidance figures based on FY 1999 costs recast using the 1998 method of distributing IOCS tallies between automation and nonautomation letters. Tr. 46C/21071-72. In his testimony, Clifton suggests that perhaps the best way to deal with the conflicting estimates of cost savings between the IOCS methodologies is to take the midpoint of the two. Tr. 45/20146.
[5075] MMA witness Bentley also estimates First-Class automation letters worksharing related cost savings. He proposes automation letter rates of 27.8 cents for basic automation, 26.6 cents for 3-digit automation, 24.8 cents for 5-digit automation and 24.3 cents for carrier route automation. Tr. 26/12279.
[5076] Bentley estimates cost savings using methods that differ from the Postal Service methods in three ways. He uses data based on the attribution methodology approved by the Commission in Docket No. R97-1. He argues reducing attribution increases the pricing discretion of the Postal Service. Also, he argues, the Postal Service has traditionally assigned an excessive portion of institutional costs to First-Class Mail. Id. at 26/12287-90.
[5077] Bentley rejects the Postal Service's proposed new non-worksharing related cost pool classification. Instead he applies the two category system used in R97-1. In his direct testimony, he questions the statistical reliability of IOCS data by specific cost pool. He argues that the accuracy of the final results is improved by including all of the cost pools in the analysis. Bentley also finds the Postal Service's explanation of the differences in excluded cost pools between the benchmark and automation letters unsatisfactory. He concludes that, if the cause of lower costs is in doubt, it is best to include the difference in the analysis. Id. at 12291-94.
[5078] Bentley describes mail preparation requirements that mailers must meet to qualify for discounts in his revised supplemental testimony. He asserts that some of these preparations help the Postal Service to save money in platform operations, and that these savings should be included in the estimation of savings from worksharing activities. Bentley takes exception to the Postal Service's exclusion of cancellation and mail preparation costs from the bulk metered mail (BMM) benchmark and from the cost savings estimation. He claims that BMM mailers do not face, sleeve and otherwise prepare their mail in the same manner that workshare mailers are required to do, and so the assumption that BMM incurs no mail preparation costs is invalid. Tr. 44/19087-90.
[5079] For this and other reasons, he uses metered mail letters (MML) as the benchmark, instead of bulk metered mail. Bentley states that as time has passed, the mail converting to worksharing has become less "clean." He concludes that the mail most likely to convert to workshare no longer resembles BMM. Tr. 26/12294-97.
[5080] Bentley urges the Commission to consider three attributes of presorted letters that he claims add 2.8 cents of cost savings, separate from and above the cost savings estimated in his more traditional model. He estimates that the requirement that reply envelopes enclosed in workshared letters meet automation specifications saves the Postal Service 0.46 cents per First-Class automation letter. He also estimates savings of 0.9 cents per piece resulting from the required compliance with Move Update programs. Finally, Bentley estimates that window service costs average 1.5 cents per single piece letter, and he points out that workshared mail does not incur these costs. While he does not rely on these savings to justify his proposed discounts, Bentley urges the Commission to consider them in its rate design. Id. at 12297-99.
[5081] Bentley states that because of the number and timing of the Postal Service's updates and revisions, he was not able to sufficiently analyze each of the revisions on the record related to the updating for FY1999 data and the differing IOCS tally methods. Therefore, he recommends that the Commission should not rely on MMA's updated estimates of cost savings, and instead insert whatever costs the Commission accepts into his cost model. Tr. 44/19077.
[5082] Table 5-2 presents a comparison of the current worksharing discount rates with the discount rates proposed by the Postal Service, ABA&NAPM, and MMA.
(USPS)
(ABA&NAPM)
(MMA)[5083] Postal Service Rebuttal. The Postal Service's arguments in defense of its attribution methodology are discussed in the mail processing variability portion of the costing section of this decision. See Chapter II A, and Appendix F.
[5084] The Postal Service defends the statistical reliability of the cost pool estimates. The Service points out that the pools classified as worksharing-related by Miller have the greatest number of tallies, and therefore should have the least degree of error. It states that the presence of sampling error could justify Miller's eliminating some cost pools with few tallies from the cost savings analysis. The Service also attacks Clifton's classification of cost pools as being inconsistent and arbitrary. Postal Service Brief at VII-73-VII-76.
[5085] Postal Service witness Miller criticizes Bentley's rejection of the bulk metered mail benchmark as inconsistent with his claim that he follows the method used by the Commission in Docket No. R97-1 to the extent possible. Tr. 45/19647-48. He also presents evidence suggesting that, despite the doubts of MMA and ABA&NAPM, at least some bulk metered mail does exist in the mail stream. Id. at 19648-49 and 19696-97.
[5086] The Postal Service has repeatedly expressed its position that the base year 1998 data used in its initial filing should be relied upon in this case. In the alternative, it takes the position that if 1999 data is used, the Commission should rely on base year 1999 First-Class Mail cost estimates that incorporate the FY 1998 IOCS methodology. Tr. 46C/21072.
[5087] Commission Analysis. The Commission relies on mail processing costs which do not incorporate the Postal Service's proposed cost attribution method. See Chapter II A, and Appendix F.
[5088] The Commission adopts the Postal Service's concept of excluding from the calculation of savings those cost pools which are not related to worksharing. However, activities performed to meet mail preparation standards are worksharing activities. It follows that mail processing savings which result from this work are worksharing-related savings. Because of this, some pools the Postal Service considered non-worksharing related (fixed) are reclassified as worksharing related (fixed).
[5089] The Commission 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.
[5090] Cancellation and mail preparation costs are affected by mail preparation activities. Therefore, the Commission does not accept the Postal Service treatment of this pool as non-worksharing related. Given that the workshared mail categories have costs in this cost pool, the Postal Service assumption that bulk metered mail actually incurs no costs in this pool is not plausible. There is no record quantification of this amount. To be conservative, the Commission uses 1/3 of the single-piece metered mail letter costs for cancellation and mail preparation as a proxy for the BMM costs, and the pool is classified as worksharing related (fixed).
[5091] The Postal Service classifies cost pools containing costs for allied mail processing operations as non-worksharing related. Postal Service witness Miller confirms that worksharing could affect the costs in platform, support, and non-MODS allied pools. Tr. 7/3152-57. The Commission finds these pools are affected by worksharing activities (including mail preparation), and treats them as worksharing related (fixed) in the calculation of First-Class Mail worksharing savings.2
[5092] The Commission does not agree with MMA's claim that the savings from inclusion of automation compatible reply envelopes, compliance with Move Update programs, and avoided window service should be considered in setting worksharing discounts. Including an automation compatible reply envelope in a mailpiece does not avoid mail processing costs in the original mailing. CEM and QBRM mailpieces do recognize worksharing related savings, but only when the reply mailpiece is actually mailed and undergoes mail processing. Therefore, contributions from mailpieces generated in response to a mailing are not relevant to the estimation of costs avoided by worksharing performed on the original mailpiece.
[5093] It is not appropriate to include cost savings from compliance with the Move Update program in this stage of calculating worksharing related savings. The cost pools that reflect return and forwarding costs are already included in the worksharing related cost savings estimates. Therefore, adding a separate estimate of savings from Move Update compliance would count the same savings twice. Tr. 7/3130.
[5094] In addition, the Commission continues to hold the position that window service costs are not a basis for setting worksharing discounts. Chapter V, Section B.2.b discusses a Pitney Bowes meter discount proposal essentially based on window service and stamp costs. In this discussion, the Commission agreed with the Postal Service that metered mail will not convert back into stamped mail because meter users have other reasons for applying postage with a meter. The Commission considers this a similar scenario, with mailers avoiding window costs and typically using permit indicia in place of stamps for other reasons than avoiding Postal Service costs.
[5095] The Commission uses FY 1999 costs to develop workshare savings. It uses the 1999 IOCS method for dividing tallies between nonautomation and automation letters. The 1999 IOCS method reflects a revision implemented to prevent a potential understatement of nonautomation costs, and it appears that the logic behind the change is valid. Although it expressed concern that the correction may go too far, the Postal Service does not know the potential magnitude of overstatement by the new method or understatement by the old method, and it fails to present a convincing argument supporting its preference for the 1998 method. Tr. 46C/21038-39 and 21072.
[5096] The Commission recommends discounts equal to 100 percent of the estimated worksharing related savings for First-Class automation letters and cards, with the exception of carrier route letters. The Commission recommends a one-cent discount for automation carrier route letters. This represents a doubling of the current discount of 0.5 cents, and a pass-through of 67 percent of cost savings. A larger increase in the discount is not recommended in order to avoid major disturbances in the rate structure. Table 5-3 shows the recommended discounts, cost savings estimates, and related passthroughs for First-Class Letters and Cards.
[5097] Recommended First-Class Mail Automation Letters Rates. Table 5-4 summarizes the rates recommended by the Commission for First-Class automation letters.
[5098] First-Class Mail automation flats currently has two rate tiers: basic and 3/5-digit presort. Postal Service witness Fronk proposes disaggregating the 3/5-digit presort tier into separate 3-digit and 5-digit tiers. The proposal is designed to recognize the additional mail preparation involved in sorting to the 5-digit level, and avoid burdening other mailers with mandatory 5-digit separations. Approximately 90 percent of the current 3/5-digit volume is sorted to the 5-digit level, and 10 percent to the 3-digit level. The basic category will continue to operate as the residual tier. Witness Fronk proposes increasing the basic rate by one cent, from 30 cents to 31 cents. He proposes setting the new 3-digit rate at 29.5 cents and the new 5-digit rate at 27.5 cents. The weighted average of the 3-digit and 5-digit rates is 27.7 cents. This is an increase of 0.7 cents above the current 27-cent 3/5-digit rate. The proposed rates are summarized, along with the Commissions final recommendations, in Table 5-5.
[5099] Witness Fronk states that bulk automation flats rates are designed to preserve the appropriate rate relationships between automated letters and flats, and between the automation flats and the non-automation presort rate that applies to both letters and flats. With the proposed rates, barcoded flats pay less postage than non-automation presort flats, and more postage than barcoded letters at all automation tiers. In his testimony, witness Fronk demonstrates the consistent rate relationships for two-ounce letters and flats.3 He states that the rate proposal is consistent with the ratemaking criterion of simple, identifiable relationships among rates.
[5100] The Commission recommends splitting the 3/5-digit tier into separate 3-digit and 5-digit tiers. Participants have not opposed this proposal. The proposal is fair and equitable, recognizing the extra effort of mailers who choose to separate to the 5-digit level. It encourages mailers to sort to the greatest extend possible thereby improving Postal Service automation efficiency. The proposal also simplifies the classification schedule by making the treatment of 3-digit and 5-digit Automation Flats consistent with 3-digit and 5-digit Automation Letters. The Commission also recommends the automation flats rates as proposed by the Postal Service.
[5101] The Postal Service proposes to increase the First-Class additional ounce rate from 22 cents to 23 cents for both single-piece and presorted mail. The primary considerations in this proposal are the achievement of the revenue requirement and First-Class cost coverage. The First-Class Mail weight study presented by Postal Service witness Daniel is also loosely relied upon to protect against large disparities between the additional ounce rate and its underlying costs. USPS-T-33 at 24 (revised April 17, 2000).
[5102] In its initial proposal, the Postal Service included a test year forecast of additional ounces that was calculated using a different method than that used in previous omnibus rate cases. In prior rate cases, an assumption was made that the number of additional ounces per piece remained constant from the base year to the test year for each category of First-Class Mail (single-piece, nonautomation, automation, and carrier route). Because of the faster volume growth of lighter-weight workshared letters compared to heavier-weight single-piece letters, this method has the effect of forecasting a decline in additional ounces per piece for the letter subclass as a whole.
[5103] In this docket, the Postal Service instead initially made the assumption that the number of additional ounces per piece would remain constant for the letter subclass and for workshared letters.4 This assumption has the effect of forecasting an increase in additional ounces per piece for single-piece letters. Such a result is consistent with the migration of mail from the single-piece category to the workshare category in response to worksharing incentives. If the pieces migrating from single-piece to workshare are typical of existing workshare pieces, the migrating pieces would be lighter than the average piece of single-piece mail. The average weight of the remaining single-piece mail would increase. Tr. 21/9180. The steady increase in additional ounces per piece within single-piece letters from 1990-1999 appears to support this concept. See Notice of Inquiry No. 3 (June 30, 2000), Attachments 3 and 4.
[5104] As part of its response to Interrogatory OCA/USPS-106(d), the Postal Service announced that it was revising its forecast of additional ounces. Tr. 21/9178-82. Essentially, it proposed to change the forecasting method from the initial, or "as-filed" method to the revised or "historical" method, which had been applied in previous omnibus rate cases. The Postal Service also corrected for the omission of revenue adjustment factors (RAFs) from the calculation of First-Class Mail revenues. Id. at 9179. The RAF correction is not controversial; all commenting parties agree that it is appropriate.
[5105] To develop the record on this issue, the Commission issued Notice of Inquiry No. 3, First-Class Revenue Adjustment Factor (RAF) Error and Additional Ounce Method Change, which explains the theory and execution of the initial and revised methods, and requested the parties to comment on the merits of each.
[5106] Intervenors' Positions. Postal Service witness Fronk presents testimony in response to Notice of Inquiry No. 3, in which he defends the Postal Service's revised forecasting method. Fronk asserts that the most recent empirical data (from 1999 and 2000) show that the previous trend of increasing additional ounces per piece has not continued. He points out that the initial forecast overestimated the number of additional ounces per piece in the interim periods for which actual data now is available. Tr. 34/16538-41.
[5107] Fronk also argues that, between 1990 and 1999, the two years with the largest increases in additional ounces per piece are aberrant and such increases are not likely to occur between 1998 and the test year. He explains how the increase between 1997 and 1998 may have been affected by the implementation of classification reform, and how the increase between 1994 and 1995 is partially explained by the implementation of Docket No. R94-1 and a change in the RPW sampling method. Id. at 16541-47.
[5108] Major Mailers Association submitted comments on Notice of Inquiry No. 3 that focused on considerations of due process and the evidentiary status of the Postal Service's revision. It claims that the Postal Service did not present the change in a manner that would make clear the impact on affected parties. MMA emphasizes its belief that the institutional response to OCA/USPS-106(d) does not meet the appropriate legal standard necessary to implement the proposed change in method. See Tr. 21/9178-82.
[5109] Finally, MMA believes that there is insufficient evidence that the long-term trend of increasing average weight of single-piece letters has come to an end to justify using the revised method.
[5110] The OCA submitted both comments and testimony in response to Notice of Inquiry No. 3. In its comments, the OCA questioned the timing and analytical validity of the revised forecast. The testimony of witness Callow follows up on the issue of whether the revision is justified by the available data. Tr. 36/16879-900.
[5111] Callow fits regression lines to the historical data included in Notice of Inquiry No. 3, and concludes from this analysis that the initial forecast more accurately reflects the upward trend in additional ounces per piece. Id. at 16886-88. When asked to compare the competing forecasts to an extension of his regression lines forward to the test year, he concluded that the results of the initial forecast track very closely with the projected trend lines. Tr. 46B/20593.
[5112] ABA&NAPM filed comments in support of the MMA and OCA comments on Notice of Inquiry No. 3. ABA&NAPM oppose the revised forecasting method for the reasons cited by MMA and OCA.
[5113] ABA&NAPM propose that the additional ounce rate be maintained at 22 cents.
[5114] Commission Analysis. The application of revenue adjustment factors in the calculation of test year revenue for First-Class Mail is valid and necessary for the reasons described in the Postal Service's response to OCA/USPS-106 (d). No party opposes this correction and the Commission adopts it in its First-Class revenue calculations.
[5115] The central issue in determining the appropriate method of forecasting additional ounces is the relative significance of the long-term trend of increasing additional ounces per piece and the recent data showing a slower increase. The Postal Service does not dispute the existence of the long-term upward trend. Indeed, it was this trend which apparently inspired the initial forecasting method. It instead argues that new data have convinced it that this trend will not continue, at least through the test year.
[5116] The Postal Service's argument that the long-term trend is the product of two years (1994-1995, 1997-1998) in which additional ounces per piece increased due to unique, one-time effects is not convincing. The Postal Service did not justify its implication that the one-time changes were responsible for the entire increases in the years in question. And even if these years were removed from the analysis, additional ounces per piece would still have increased in every year for single-piece, and on average for the letters subclass as a whole.
[5117] The observation made by Postal Service witness Fronk that the trend in additional ounces per piece exhibits something of a "stair-step" shape does point out that the trend is not steady from one year to the next. Tr. 34/16542. The irregular pace at which additional ounces per piece has increased suggests that examining a longer time period, over which the variations balance out, provides a more reliable picture of what is likely to happen in the future. Thus, the Commission rejects the Postal Service claim that only increases for the most recent 1 years (1998-1999 and 1999-Q3 2000) are relevant to what will happen in the test year.
[5118] An examination of the trend lines drawn by OCA witness Callow supports the conclusion that the initial forecasting method provides a better reflection of the long-term trend. Tr. 46B/20593-95. It is worth noting that the trend line actually passes above both the initial and revised forecasts of single-piece and subclass additional ounces per piece in the test year. However, it is not appropriate to simply ignore the more recent data.
[5119] Therefore, in order to best reflect both the long-term trend and the current data, the Commission has forecast additional ounces for the test year using the initial method, incorporating the actual billing determinants from the Hybrid (FY99 Q3 - FY00 Q2) base year. As a result, the Commission forecasts fewer additional ounces in the test year than the Postal Service's initial filing, but more than its revised forecast.
[5120] The Commission recommends reducing the additional ounce rate by one-cent to 21 cents. This rate exceeds the average additional ounce costs calculated by Postal Service witness Daniel of 12.42 cents for single-piece First Class Mail and 14.8 cents for presort First-Class Mail. USPS-T-28 at 10 and 13 (Rev. March 1, 2000). The Commission recognizes that Daniel's average costs are biased upward by the effects of shape change from letters to flats as additional ounces increase. Therefore, the Commission believes that even by reducing the rate by one-cent, the recommended rate exceeds cost by a greater margin than indicated by Daniel's cost numbers. An additional consideration in this recommendation is the apparent increasing institutional cost contribution of First-Class Mail. This upward trend has been commented on by several intervenors in this proceeding. See Chapter V, Section B.1.b. Reducing the additional ounce rate will help to mitigate the increasing burden of First-Class Mail and lower overall cost coverage of this class.
[5121] The Postal Service proposes maintaining the 4.6-cent heavy-piece discount for presort mail weighing more than two ounces. Postal Service witness Fronk states the "discount recognizes that initial additional ounces cost less for presort, but this cost difference does not continue to grow as the pieces get heavier." USPS-T-33 at 31.
[5122] Intervenor Proposals. MMA, NAPM, and ABA&NAPM individually propose extending the heavy piece discount to the one to two ounce range. The proposals differ as to the shape of the mailpiece that the discount applies to.
[5123] MMA witness Bentley proposes adjusting the 4.6-cent heavy piece discount by allowing presort letters weighting from 1 to 2 ounces to qualify for the discount. Bentley states that his proposal will eliminate a rate anomaly between First-Class and Standard A, provide relief for 2-ounce workshare letters that cost less than the current additional 22 cents being charged, and bring rates more in line with costs without modifying the current uniform rate structure. Tr. 26/12305.
[5124] MMA witness Salls discusses this alleged rate anomaly that exists between First-Class and Standard A. He demonstrates that certain mailers with First-Class mailings weighing between 1 and 2 ounces will pay less postage if they are able to break up their mailing into two separate mailings-a First-Class mailing under 1 ounce and a Standard A mailing up to 3 ounces. This is anomalous, he argues, because the cost to the Postal Service is greater for two individual mailings than for a single First-Class mailing. He concludes by demonstrating that if the heavy piece discount is extended to the one to two ounce range, the price difference between a single mailing and two individual mailings will narrow to the point where there is no incentive for a mailer to break up its mailing. Id. at 12261-64.
[5125] NAPM witness MacHarg proposes adjusting the 4.6-cent heavy piece discount by allowing presort flats weighting from 1 to 2 ounces to qualify for the discount. MacHarg demonstrates what he alleges is an anomaly in the flats rate structure. He examines the total discounts available to flats in the under one ounce, one to two ounce, and greater than two ounce ranges. As a starting point, he uses the regular non-presort price in each weight range. He considers the effects of the reduced presort nonstandard surcharge in combinations with the heavy piece discount and the discount rates for both 3-digit and 5-digit presort categories. From his analysis he shows that the available discount for the one to two ounce range is approximately one half the total discount available in the under one ounce range and the over two ounce range. He argues that extending the heavy piece discount to presort flats weighting from 1 to 2 ounces would alleviate the problem and at the same time encourage workshare mailers to prebarcode the prevalent second ounce flats. Id. at 12146.
[5126] ABA&NAPM witness Clifton proposes adjusting the 4.6-cent heavy piece discount by allowing both presort letters and flats weighting from 1 to 2 ounces to qualify for the discount. He alleges the effect of his proposal is to align presort extra ounce rates in the lighter weight ranges with presort costs, making the rates for this mail closer to being cost based. Id. at 12456-57.
[5127] Commission Analysis. The Commission has not been presented with convincing evidence that letter mail in the 0 to 1 ounce range is processed any differently than letter mail in the 1 to 2 ounce range. The same is true for flats in these weight ranges. Thus, additional worksharing savings to the Postal Service have not been shown that warrant extending the heavy-piece discount into the 1 to 2 ounce range for letters or flats. The Commission recommends maintaining the current 4.6-cents discount for presort mail weighing more than two ounces.
[5128] Postal Service Proposal. The Postal Service assesses a nonstandard surcharge on First-Class Mail weighing one ounce or less if the aspect ratio (length/height) of the mailpiece does not fall between 1:1.3 and 1:2.5 inclusive, or if the mailpiece exceeds 11.5 inches in length, 6.125 inches in width, or 0.25 inches in thickness. The nonstandard surcharge is important to signal the mailer that the cost of processing nonstandard mailpieces is higher. If the fee is not set sufficiently high, the mailer may not receive this signal. If the fee is set too high, the fee may appear to punish those mailers who cannot alter the shape of their mailpieces. Some standardization of mailpieces is necessary because mail processing operations could be adversely affected by a large number of nonstandard mailpieces. The Postal Service proposes maintaining the nonstandard surcharge for nonpresort mail weighing one ounce or less at 11 cents and the nonstandard surcharge for presort mail weighing one ounce or less at 5 cents. USPS-T-33 at 27-30.
[5129] In Docket No. R97-1, the cost analysis supporting the Postal Service surcharge proposal drew criticism. Witness Miller makes progress in addressing these concerns. However, the estimates do not achieve the ideal of completely excluding the affect of the cost of pieces weighing over one ounce from the nonstandard cost calculations. Miller assumes that all nonstandard letters are processed manually, recognizing the fact that this may not always to true. He states that this assumption has little impact on the total results because nonstandard mailpieces are overwhelmingly (75-85 percent) flats shaped. Thus, nonstandard flats shaped mailpieces are the primary cost driver. USPS-T-24 at 19-24.
[5130] The Commission criticized the use of average CRA mail processing costs as a proxy in Docket No. R97-1. In response to this criticism, witness Daniel reports mail processing unit costs for mail pieces that weigh less than one ounce. However, Miller's analysis of this data indicates it is difficult to estimate CRA mail processing costs by both ounce increment and shape for low volume categories such as nonstandard First-Class Mail. Furthermore, use of this data results in a higher cost than using the average mail processing unit costs. Thus, the average mail processing unit costs were used in this docket.
[5131] Miller calculates a weighted nonstandard cost for both nonstandard single piece letters and nonstandard presort letters using FY 1998 volume percentages by shape. He estimates the additional cost for nonstandard single piece letters is 23.343 cents and the additional cost for nonstandard presort letters is 9.196 cents.
[5132] OCA Proposal to Eliminate Non-standard Surcharge on Low-Aspect Ratio Letters. Witness Callow presents the OCA's proposal to eliminate the nonstandard surcharge on low aspect ratio mail. He defines low aspect ratio mail as mailpieces with aspect ratios between 1:1 and 1:1.3 inclusive. He alleges that advances in technology have made the surcharge obsolete for low aspect ratio mail, and this renders the underlying cost estimates unrealistic. Tr. 22/10147-67.
[5133] Callow asserts it is not reasonable to assume 100 percent manual processing of low aspect ratio letter mail. He cites the existence of a barcode on a delivered low aspect ratio mailpiece as evidence of at least some processing on automated equipment. Callow develops probabilities for successful processing of mail on the Advance Facer Canceller System (AFCS) that separates out mail not appropriate for further processing on automated equipment. He develops a linear model, assuming a square mailpiece has a 50 percent chance of remaining in the automation mail processing flow, and an 1:1.3 aspect ratio mailpiece has a 100 percent chance. Callow uses the Postal Service manual mail flow model developed by Miller, and the probabilities discussed above to determine low aspect ratio nonstandard letter mail costs. Callow's calculations show costs associated with processing low aspect ratio nonstandard letter mail that are lower than the costs developed by the Postal Service, and lower than the proposed surcharge for nonpresort mail. Costing evidence for presort nonstandard mail has not been presented.
[5134] Postal Service Rebuttal. Witness Miller presents the Postal Service argument for maintaining the nonstandard surcharge in its present form, including for low aspect ratio letter mail. He addresses Callow's primary contentions that today's mail processing technology can successfully process low aspect ratio letters, and that there is no cost basis to support a charge for low aspect ratio mail.
[5135] Miller discusses the variety of mail processing equipment utilized by the Postal Service and the process for deploying new equipment-one piece at a time. He explains how the standardization of mailpiece characteristics has enabled the Postal Service to transition to new equipment as the mail flow changes. He argues that even if mail processing equipment is more sophisticated than in the past, it operates at greater mail flow speeds. Thus, it is not logical to assume that nonstandard mailpieces that were a problem in the past low speed environment are no longer a problem in today's higher speed environment. Tr. 45/19675-82.
[5136] Miller notes that every cost cell in Callow's analysis contains costs greater than the average single-piece letter mail processing cost. Thus, additional costs are incurred to process low aspect nonstandard letter mail. Furthermore, entering Callow's adjusted mail processing cost of 18.6 cents into Miller's nonstandard surcharge formula results in 22.414 cents representing the additional weighted cost by shape for nonstandard single-piece mail. This is still higher than the 11-cent fee proposed by the Postal Service.
[5137] Commission Analysis. The Commission recommends maintaining the nonstandard surcharge for nonpresort mail weighing one ounce or less at 11 cents and the nonstandard surcharge for presort mail weighing one ounce or less at 5 cents. The cost analysis used by the Postal Service shows some of the same infirmities as presented in the previous docket. However, it is also evident that the Postal Service has taken steps to analyze and improve the methodology used. Considering the primary purpose of this fee is to send a signal to mailers to standardize mailpieces because of the implications that standardization has for providing a low-cost environment for processing mail, and that the proposed rates are below estimated costs, the proposed fees are acceptable.
[5138] OCA witness Callow has provided a novel approach for calculating costs for low aspect ratio nonstandard mail. However, the underlying assumptions made, such as the probability for successfully processing low aspect ratio mail on automated equipment, have not been supported in the record. This costing methodology requires more development before it can be reliably used in a rate proceeding. Furthermore, as the Postal Service has stated, Callow shows that there is some additional cost associated with low aspect ratio mail.
[5139] The Commission does not recommend the elimination of the nonstandard surcharge for low aspect ratio mail. It is not reasonable to assume that because modern mail processing equipment is more technologically advanced, it can reliably process low aspect ratio mail. The record does not contain any evidence that relates technological advancement with the ability to process low aspect ratio mail. Evidence that a small quantity of mailpieces have successfully been barcoded does not indicate the overall machinability of low aspect ratio mailpieces through the complete automation cycle. A comprehensive study, or information from mail processing equipment manufacturers on the capabilities of their equipment, could aid in this analysis. However, it is reasonable to assume from an operations viewpoint that it is desirable to have some mailpiece standardization to facilitate processing of mail using the various and ever changing pieces of mail processing equipment. The Commission has no doubt that a low aspect ratio mailpiece may be successfully processed on some pieces of mail processing equipment. However, this fact is not sufficient to recommend a classification change that may adversely effect overall mail processing operations.
[5140] The Commission finds that the recommended rates for First-Class Mail in the Letters and Sealed Parcels subclass are consistent with the factors set out in § 3622(b). Based on the Commission's projected test year after rates volume, First-Class Letters and Sealed Parcels revenue will exceed estimated attributable costs by $16.0 billion. Thus, recommended rates will recover all attributable costs, in compliance with § 3622(b)(3).
[5141] First Class Mail also will contribute to institutional costs consistent with the comparatively high value of service (§ 3622(b)(2)) for mail in this subclass. Postal Service witness Mayes notes First-Class Mail is sealed against inspection and receives forwarding at no additional charge. It receives a high priority of delivery relative to other non-expedited classes of mail. It also benefits from an extensive collection system, and may travel by air for deliveries at considerable distances. USPS-T-32 at 20.
[5142] The impact of the recommended rate changes is modest (§ 3622(b)(4)). Although the first-ounce single-piece letter rate increases by one-cent, other First-Class rates were either maintained or reduced to mitigate the cost burden on First Class Mail. For example, the additional ounce rate was reduced by one-cent, the Qualified Business Reply Mail cards discount was increased by one-cent, and the nonstandard surcharge, heavy piece discount, and single piece cards rates were maintained at their current levels. The average increase for the Letters and Sealed Parcels subclass is 1.8 percent, which is below the system wide increase of 4.6 percent.
[5143] Available alternatives (§ 3622(b)(5)) are somewhat limited for mailers in the Letters and Sealed Parcels subclass. Nevertheless, witness Mayes notes non-postal alternatives are available. These include growing use of facsimile machines, computers incorporating faxing capability, the Internet, and the acceptance of electronic payment options. Id. at 21-22.
[5144] The recommendations recognize mailers' worksharing efforts, in accordance with § 3622(b)(6), through presorting and prebarcoding discounts. In most cases, the recommended letters and cards automation discounts pass through close to 100 percent of the recognized cost savings. Also, the Qualified Business Reply Mail discount has been increased for cards reflecting the efforts of the card recipient. Furthermore, the "shell" recommendations for CEM and IBIP mail recognize the automation compatibility features of those mail types.
[5145] The division of the automation 3/5-digit flats category into separate 3-digit and 5-digit categories adds some complexity to the First-Class schedule (§ 3622(b)(7)). The Commission finds this acceptable, given that the structure of the automation flats category will now parallel the structure of the automation letters and automation cards categories, and the mailers that use these categories tend to be the more sophisticated mailers. The "shell" recommendations of CEM and IBIP mail also adds complexity to the schedule, but does not unduly complicate the schedule because their use will be voluntary.
[5146] The Commission finds that recommended rates appropriately reflect § 3622(b)(8) considerations, which relate to the informational value of business and personal correspondence, as well as the cultural value of greeting cards. The Commission's overall conclusion is that the recommended rates are fair and equitable (§ 3622(b)(1)). The markup index for First Class Letters and Sealed Parcels is 1.342. This is slightly higher than the 1.307 markup in Docket No. R97-1. The Commission finds that the markup index in this case is appropriate on the record that has been developed in this case.
[5147] Three proposals are presented to the Commission for consideration concerning discounts for First-Class single-piece automation compatible letter mail. The OCA proposes a discount for Courtesy Envelope Mail (CEM). The proposal is substantially the same as the CEM proposal that the Commission recommended as a shell classification in the previous omnibus rate case. E-Stamp proposes a discount for letter mail with postage printed directly on the envelope by systems meeting the requirements of the Information Based Indicia Program (IBIP). Stamps.com proposes a discount, similar to the discount proposed by E-Stamp, for mail meeting the IBIP requirements with postage printed directly on the envelope. Stamps.com also proposes a discount for mail meeting the IBIP requirements with postage printed on labels.
[5148] CEM mail pieces and IBIP mail pieces share many of the same physical characteristics. Both mail pieces have machine printed addresses, facing identification marks, proper barcodes (and ZIP Codes), and are automation compatible. CEM mail piece addresses will be reviewed by the Postal Service for accuracy, whereas every IBIP address is verified against a Postal Service approved database. Furthermore, CEM and IBIP mail pieces share similar physical characteristics to QBRM mail pieces, and thus should potentially have similar mail processing costs. The Commission considers CEM and IBIP mail as different species in the same genus.
[5149] The Commission recommends a shell classification for CEM mail. The Commission also recommends a shell classification for IBIP mail with postage printed directly on the envelope, but not for postage printed on labels. The Commission finds the QBRM analysis relevant in considering cost savings for either CEM or IBIP mail.
[5150] OCA's Renewal of CEM Proposal. OCA witness Willette renews and refines the Courtesy Envelope Mail (CEM) proposals OCA has presented in previous proceedings.5 Willette describes CEM mailpieces as preprinted, self-addressed business reply envelopes that bear a facing identification mark, a proper barcode, a proper ZIP Code, and an indicia identifying the mailpiece as eligible for the CEM rate. The mailpiece also must meet automation compatibility standards and be approved by the Postal Service. The OCA proposes a discount of 3 cents for qualifying mailpieces based on the proposed 3-cent discount for Qualified Business Reply Mail (QBRM). Willette argues it was demonstrated in Docket No. R97-1 that the cost avoidances associated with CEM and QBRM are the same. Furthermore, CEM does not require the QBRM accounting function, thus no accounting fee is involved. The CEM discount will not extend to cards. A key element of the proposal, as with its predecessors, is that the mailer affixes a Postal Service issued CEM stamp to the mailpiece in a denomination reflecting the CEM rate. Tr. 23/10727-65.
[5151] The main features of the instant CEM proposal are identical to those presented in Docket No. R97-1. Willette offers CEM as a method to slow the diversion of bill payment mail to other forms of payment, such as electronic payment, by providing consumers with a convenient and less expensive way to return bill payments by mail. She says that CEM offers mailers the opportunity to directly share in the benefits of technology advances within the Postal Service. Also, CEM more closely aligns Postal Service costs with rates for household mailers. Furthermore, she claims CEM is relatively simple to implement, because providers of CRM envelopes would only need to signify on the mailpiece that the consumer could choose to apply a CEM stamp.
[5152] Willette estimates there are approximately 10 billion potential CEM mailpieces. If all of these mailpieces convert to CEM, the revenue impact could reach $300 million. She estimates the cost of an educational campaign to inform consumers on the proper usage of CEM to be similar to the telemarketing fraud campaign, which cost $9.2 million. Generally, underpayment of postage does not appear to be a problem for the Postal Service. Willette states that overpaid postage recently exceeded underpaid postage by $204.6 million. Therefore, it is reasonable to assume that mailers will err on the conservative side when applying postage. Furthermore, some mailers do not want to keep two denominations of stamps on hand, inferring that mailers may continue applying full rate First-Class stamps to CEM envelopes out of convenience. This will act to reduce the revenue loss.
[5153] Postal Service Rebuttal. The Postal Service opposition to the CEM proposal is presented through the rebuttal testimony of witnesses Miller and O'Hara. Miller discusses the operations problems the Postal Service might have with CEM and the revenue impact of the CEM proposal, and O'Hara discuses the benefits of an averaged single-piece First-Class Mail rate.
[5154] Miller disagrees with the OCA premise that a CEM discount is a fairly modest concept of sharing the benefits of automation compatible mail with the public. He says that First-Class mailers already benefit directly from the letter automation programs that the Postal Service has implemented. He maintains that this CEM proposal is virtually no different than the Docket No. R97-1 proposal, with the exception of understated education costs. Miller states that the Postal Service maintains the same position in opposition to the CEM proposal as it did in Docket Nos. R87-1, R90-1, MC95-1, and R97-1. Tr. 45/19650-62.
[5155] Arguments against the CEM proposal focus on four areas. Miller alleges that CEM will unnecessarily complicate the nation's mail system, will result in a loss of revenue that would have to be recovered, will result in additional costs to the Postal Service that also would have to be recovered, and will not fairly and equitably distribute postage costs. He outlines potential complications to the mail system such as envelope standardization and design issues, customer confusion, stamp manufacturing and distribution problems including the possibility of multiple make up stamps, and enforcement concerns.
[5156] Miller discusses several areas of cost and revenue losses that will have to be recovered. He concludes that if every CRM mailpiece converts to CEM, the revenue reduction could approach $300 million. Miller estimates that short paid mail due to mailers applying CEM stamps to non-CEM letters may result in a revenue loss of between $11 and $76 million. He proposes that a public education program would be required that is estimated to cost $33 million. This does not include the costs to train Postal Service personnel. He estimates that window service costs, including CEM stamp purchases and CEM inquiries, may increase by $19 million. Miller states that CEM would require an increase in the revenue protection program of $70 million to $267 million to ensure proper usage of CEM stamps. This range is based on the percentage of short paid mail varying from 2 percent to 7.35 percent. He concludes that it would not make financial sense for the Postal Service to spend in the range of $122 million to $300 million to realign a maximum of $300 million worth of postage.
[5157] Miller argues that CEM would not fairly and equitable distribute postage costs. He says the CEM proposal is one-sided because it does not propose a higher rate for high cost mail pieces such as handwritten letters. Therefore, inequities would be created because mailers who choose not to use CEM stamps will be perceived as paying more than their fair share of postage. Finally, he says revenue losses and CEM related costs would have to be recovered. He states that it is ironic that businesses supplying CEM envelopes may end up paying higher rates on the mail they send out containing CEM return envelopes, and pass these costs back onto their customers. Id. at 19662.
[5158] O'Hara explains how single-piece First-Class mailers benefit from an averaged first-ounce rate, and why the CEM proposal should be rejected. He states that the general mailing public already benefits from a single-piece rate that is lower than it would have been absent automation. He concludes that the letter automation projects implemented over the last decade have had a direct impact on the rates paid by residential and small business mailers by keeping proposed rate increases at moderate levels. He discusses the benefits, which the Commission has also recognized, of an averaged first-ounce rate for the multitude of mail characteristics that make up single-piece First-Class mail. He also distinguishes the characteristics of QBRM from the characteristics of CEM and the problems that a two-stamp system may cause. Finally, witness O'Hara argues there is no evidence to support the premise that the public would prefer a two-stamp CEM system to the current one-stamp system. He cites research presented in Docket No. R97-1 by witness Ellard which he interprets to show that 86 percent of the respondents preferred a one-stamp system given the possibility of an additional increase to the regular single-piece stamp rate. Tr. 46E/21944-49.
[5159] Commission Analysis. The instant CEM proposal contains many of the same arguments and counter arguments that were presented in Docket No. R97-1. This is understandable, with the instant proposal being essentially the same as what was presented in the last docket. In Docket No. R97-1, the Commission recommended CEM as a "shell classification," and allocated $33 million for educational efforts related to CEM. On balance, the Commission again finds CEM beneficial to the mailing public, and again recommends CEM as a "shell classification." A 3-cent discount, equivalent to the proposed QBRM discount, is appropriate for CEM. The Commission finds much of the analysis contained in the Docket No. R97-1 Opinion relevant to the instant proposal, but also finds is necessary to review several of the arguments made in this proceeding.
[5160] The record consistently shows that mailers using stamps have a tendency to overpay postage. This is evident in the net dollar surplus of overpaid versus underpaid mail. This historic tendency, along with the probability that some mailers will find a two stamp system inconvenient, and apply full rate stamps to all of their mail, make it very unlikely that CEM will result in an underpayment problem for the Postal Service. Nevertheless, if Miller's argument is accepted, and additional amounts must be expended for enforcement, his cost estimates do not withstand scrutiny. Using his most conservative estimates, he argues that the Postal Service may spend $70 million to protect an estimated $10 million in short paid revenue due to misuse of the CEM stamp. It defies logic, and good business practice, that a business would spend seven times as much on enforcement as the revenue at risk. The grossly overstated costs presented serve to undermine the credibility of the Postal Service's objections to implementing CEM. The Commission has consistently found that mailers want their important business mail to reach its destination. Thus, even minimal enforcement efforts should reinforce proper CEM stamp usage.
[5161] Miller argues that public education on the proper usage of CEM will require $33 million, versus the $9.2 million estimated by witness Willette. The Commission recognizes that an educational campaign will have to be developed, but does not agree that it will be an overly onerous task. Furthermore, the Commission notes that $33 million has previously been allocated for this purpose in Docket No. R97-1.
[5162] The Commission reviewed Postal Service witness Ellard's research presented in Docket No. R97-1 and found it to be unconvincing. This was acknowledged by witness O'Hara in this docket. Id. at 22021. Nevertheless, witness O'Hara continues to interpret witness Ellard's research to infer that a majority of mailers prefer a one-stamp system. The Commission disagrees that this conclusion can be reached based on witness Ellard's research.
[5163] The Commission continues to see benefits in a CEM classification. CEM will allow mailers to directly share in the benefits of automation to a greater extent than they enjoy now. The impact on envelope suppliers of converting CRM envelopes to CEM envelopes appears minimal. CEM shares many of the efficient mail processing characteristics of QBRM mail. Overall, the Commission finds that the potential problems and additional costs associated with CEM have been overstated. For these reasons, and consistent with the reasoning and recommendation of Docket No. R97-1, the Commission recommends CEM as a "shell classification." The Commission also finds that the cost savings analysis supporting a 3-cent QBRM discount could naturally extend to CEM.
[5164] E-Stamp Proposal. E-Stamp witness Jones proposes a 4-cent discount for what he describes as Category 2 Open System PC Postage letter mail. PC Postage allows a mailer to print postage using a personal computer and either a laser or inkjet printer. Postage is purchased via the Internet through a Product Service Provider such as E-Stamp, Stamps.com or Pitney Bowes.
[5165] PC Postage is provided through either an open or a closed system. Closed systems are conceptually similar to postage meters. Open systems have greater requirements for address cleansing, delivery point POSTNET barcodes, and indicia characteristics. Jones classifies open systems as category 1 or category 2. Category 1 systems generate postage for any mail piece created with an Open System PC Postage product regardless of mail class or mail piece characteristics, provide a certain level of address cleansing, and print a POSTNET bar code. Category 2 systems print postage directly on an envelope, utilize a FIM-D, have an address that is an exact match to the AMS CD-ROM database, and have a full delivery point POSTNET bar code printed with the address as well as the delivery point included in the indicia. It may be used on First-Class Mail that does not weigh more than the 3.3103 ounce automation breakpoint. Jones alleges that the only difference between bulk mail preparation and PC Postage is the lack of presorting. He concludes that a lack of a discount for PC Postage will stand in the way of PC postage gaining full acceptance. Tr. 29/13638-55.
[5166] PC Postage may be printed on florescent labels or directly on an envelope. Jones does not propose a discount for PC Postage printed on fluorescent labels. He states that florescent labels make the FIM unusable and do not allow the same efficiency in the sortation process.
[5167] E-Stamp witness Prescott explains the reasons for providing information based indicia (IBI) mail with a discount, develops the proposed cost savings associated with IBI mail, and recommends a passthrough percentage for the proposed discount. He develops IBI cost savings for letters based on information contained in USPS-LR-I-81, and alternatively from information contained in Postal Service witness Miller's testimony. He also develops IBI cost saving for flats. Id. at 13753-70.
[5168] Postal Service LR-I-81 develops mail processing costs related to First-Class letters. Prescott uses this information to calculate a cost savings for single piece automation mail, inferring that this is equivalent to IBI mail. First he calculates a cost savings of 6.28 cents for presorted automation BMM by subtracting the 4.06 cents per piece cost for presorted automation BMM from the 10.34 cents per piece cost for presorted non-automated BMM as presented in LR-I-81. Because IBI mail is single piece and not presorted, he subtracts an additional 0.13 cents to eliminate the cost savings associated with presortation. The cost savings for presortation are calculated by subtracting the 10.34 cents per piece cost for presorted non-automation BMM from the 10.47 cents per piece cost of single piece BMM also presented in LR-I-81. Prescott arrives at a final cost savings of 6.15 cents for single piece automation, or IBI equivalent mail. With a 4-cent discount, Prescott proposes to pass through 65 percent of the 6.15 cents cost savings.
[5169] Postal Service LR-I-481 updates LR-I-81 to reflect FY 1999 data. On brief, E-Stamp incorporates this new data into Prescott's calculations. Using the new data, the net savings for single piece automation is reduced from 6.15 cents per piece to 4.86 cents per piece. E-Stamp Brief at 7.
[5170] As an alternative, Prescott calculates a worksharing related cost savings based on witness Miller's analysis of the differences in mail processing and delivery costs for First-Class letters. First, Prescott determines a cost savings for automation presort letters of 5.115 cents per piece by subtracting the 8.603 cents per piece cost of automation basic presort letters from the 13.718 cents per piece cost of non-automation presort letters contained in witness Miller's analysis. From this he subtracts the cost avoided by presortation of 0.091 cents per piece. He calculates the costs avoided by presortation by subtracting the 13.718 cents per piece cost of non-automation presort BMM from the 13.809 cents per piece cost of non-presort BMM. Removing the costs avoided by presortation from the cost savings due to automation of presort letters results in a 5.024 cents per piece worksharing related cost savings due to automation. This is his estimation of cost savings for IBI mail. Prescott proposes to pass through 80 percent of the 5.024 cents cost savings, with a 4-cent discount. On brief, E-Stamp states it did not have sufficient information to update this cost savings analysis to reflect FY 1999 data.
[5171] Stamps.com Proposal. Stamps.com witness Heselton proposes a slightly different discount for Information Based Indicia (IBI) PC Postage mail. He similarly proposes a 4-cent workshare discount for IBI prepaid letter mail when postage is printed directly on a mailpiece. However, he also proposes a discount of 3-cents for IBIP mail when the postage and addressing information is printed on labels and then applied to the mailpiece.6 His proposed lower discount for printing on labels allows for the possibility of error in applying address labels to the mailpiece. Tr. 23/10451-93.
[5172] In support of Heselton's discount proposal, Stamps.com witness Kuhr describes the Stamps.com Information Based Indicia PC Postage product. His testimony includes a description of the Information Based Indicia Program (IBIP), the requirements for registering with Stamps.com and the Postal Service to use PC postage, the mailpiece requirements and process of printing PC postage, and the Stamps.com quality assurance measures. Id. at 10297-333.
[5173] Stamps.com witness Heselton uses a different methodology to calculate cost avoidances than E-Stamp witness Prescott. However, he states that his pricing methodology is applicable to both the Stamps.com and the E-Stamp discount proposals. Heselton calculates an IBIP mail cost avoidance of 4.13 cents. He analyzes cost avoidances in remote barcode system and mail processing costs, return-to-sender costs, and carrier delivery costs. Id. at 10451-93.
[5174] Heselton claims that letters prepared under IBIP and QBRM procedures meet essentially the same standards for automated processing, are entered as single piece mail, and therefore avoid the same processing costs. He estimates IBIP preparation of letters to automation standards results in 2.99 cents of avoided cost per piece. This is based on Postal Service witness Campbell's cost avoidance estimates for QBRM mail using Commission methodology from Docket No. R97-1. On brief, Stamps.com notes that updated Postal Service QBRM costs have ranged from a high of 4.48 cents per piece (USPS LR-I-471 (L)) to a low estimate of 2.60 cents per piece (USPS LR-I-480 (L)).
[5175] Next, Heselton estimates that IBIP mail processed through the AMS database avoids an additional return-to-sender cost of 1.14 cents per piece. He also discusses costs avoided in delivery by eliminating address deficiencies that require additional effort above properly addressed letters. He states that this cost avoidance should amount to several cents, but he does not include this estimate in his final cost avoidance. He concludes that IBIP mail avoids 2.99 cents per piece in mail processing costs equivalent to QBRM, and 1.14 cents per piece by eliminating address deficiencies for a total cost avoidance of 4.13 cents per piece.
[5176] Heselton concludes his testimony by arguing that an IBI mail discount meets the classification, ratemaking, and policy requirements of the Act. Included in this discussion, he contrasts previous Citizen's Rate Mail and Courtesy Envelope Mail proposals with the IBI mail proposal. He states that an IBI mail discount will not de-average rates and therefore there is no significant rate impact on other mailers as in the previous proposals. On brief, Stamps.com explains this by stating that the rates proposed by the Postal Service do not consider the cost savings and efficiencies related to PC Postage. Therefore, an IBIP discount will not de-average rates or increase the rates of any other class of mail.
[5177] Stamps.com witness Lawton performed a retrospective study of Stamps.com customers to determine how PC postage has affected their processing of outgoing mail. Specifically, she studies if customers use postal services more while visiting actual post offices less, and if customers address their mail with greater accuracy and with greater automation compatibility. She concludes that Stamps.com customers are more aware of services offered by the Postal Service, use Express Mail and Priority Mail more frequently, and visit the post office less (an estimated 1,000,000 fewer visits each month). She also concludes that mailers usually did not include POSTNET barcodes, FIM codes, or 9-digit ZIP Codes prior to becoming Stamps.com customers. Id. at 10359-78.
[5178] E-Stamp and Stamps.com Joint Survey. E-Stamp and Stamps.com jointly sponsor the testimony of witness Boggs. Boggs interprets and presents the results of research conducted by International Data Corporation on small business and home office postage usage, and on market forecasts for current and future usage of PC postage and products. He estimates that total spending by small businesses and home offices on postage will increase from almost $11.6 billion in 1998 to $16.3 billion in 2003 with small businesses accounting for the largest share of the postage spending. Total spending on PC postage will grow from $8.2 million in 1999, to $292.8 million in 2000, to $1,632.3 million in 2003. Boggs estimates that PC postage will come to represent over 10 percent of total postage spending by small businesses and income generating home offices with the largest share coming from small businesses. Finally, Boggs reports on small business attitudes towards PC postage. He states that more than one PC owner in 10 indicated they were very or somewhat interested in the PC postage concept. Tr. 29/13814-58.
[5179] Postal Service Rebuttal. The Postal Service opposition to the IBI discount proposals is presented through witnesses Miller, Staisey, and Gordon. Miller addresses the worksharing cost savings estimates and the mail processing of IBI mail. Staisey comments on the surveys preformed by witnesses Boggs and Lawson. Gordon discuses revenue security, PC Postage revenue projections, and discount implementation concerns.
[5180] Miller outlines the fee structures for using E-Stamp's or Stamps.com's IBI product. He concludes that it is not coincidental that a 4-cent discount will offset the fees charged by each of the companies. This would imply a net zero cost to PC Postage customers. He then proceeds with analyzing the worksharing cost avoidances presented in the discount proposals, and the mail processing characteristics of IBI mail. Tr. 45/19670-75.
[5181] Miller alleges that witnesses Prescott and Heselton have overstated worksharing related savings. Prescott uses two different methods to calculate cost avoidance. His first method calculates the cost difference between non-automation presort letters and automation non-carrier route presort letters. Miller states that non-automation presort letters is a CRA rate category in itself, whereas automation non-carrier route presort letters aggregates costs for automation basic, 3-digit, and 5-digit presort letter rate categories. He compares the characteristics of these categories, inferring that the features of each category are so different that it is doubtful a comparison could isolate the cost savings for IBI mail. Prescott's first methodology attempts to remove the cost associated with presortation from the above calculation by examining the difference between BMM letters and non-automation presort letters. Miller states that these categories are also vastly different inferring that they should not be compared.
[5182] Prescott's second approach for calculating a worksharing related savings estimate is to compare the difference between non-automation presort letters and automation basic presort letters using data from Miller's testimony. Miller alleges that this approach has the same flaws as the first approach.
[5183] Heselton's approach relies on QBRM and return-to-sender cost avoidances to estimate savings. Miller states that the QBRM benchmark is handwritten mail, whereas Heselton indicates that two thirds of IBI mail may convert from machine printed/typewritten mail. On brief, the Postal Service contends that a weighted average reflecting the true mix of mail converting to PC Postage should have been used as a benchmark. Postal Service Brief at VII-60. In addition, the mailpiece that is used to calculate QBRM cost avoidance is processed through different operations than an IBI mailpiece. Hence, basing IBI mail cost avoidance on QBRM applies an incorrect benchmark and results in an overestimate of IBI mail cost avoidance.
[5184] Finally, Miller asserts that a cost savings based on a machine printed benchmark would result in little to no savings because mail processing operations are not currently configured to capture PC Postage savings. He traces an IBI mailpiece from the Advance Facer Canceler System (AFCS), to the Multi Line Optical Character Reader Input Sub System (MLOCR-ISS), to the outgoing secondary operation. He states that under the current configuration, the FIM "D" marking has little impact on how a mailpiece is sorted on the AFCS. If the IBI mailpiece did not go through the MLOCR-ISS, it would still likely incur an additional processing step in the outgoing secondary operation. Thus, there would be little to no cost savings using the current mail processing configuration.
[5185] Witness Staisey offers critiques of the surveys conducted and conclusions drawn by E-Stamp and Stamps.com witness Boggs and Stamps.com witness Lawson. Staisey states that Boggs' survey fails to provide respondents with a comprehensive description of the PC postage concept such as how PC postage actually works, its specific characteristics, the benefits/burdens, and pricing information. The result of this is that the responses provided by the sample of small businesses regarding their interest level in PC postage are not made with a complete understanding of the product. Therefore, conclusions from the survey concerning interest level are not valid or reliable. She also concludes that the 16.5 percent survey response rate is low and does not allow for conclusions that are indicative of the total small business population. Furthermore, Staisey alleges that Boggs, in analyzing the survey data, inappropriately relies on expert opinion to arrive at his conclusions and implications concerning PC postage. Tr. 45/19931-34.
[5186] Staisey states that bias in Lawson's survey and questionnaire, and flaws in the methodology that she uses lead to invalid conclusions. The design of Lawson's study was intentionally retrospective. Staisey questions whether Lawson can draw a conclusion on how Stamps.com has changed how customers run their postal processes given the high risk of response error due to the poor recall of respondents in a retrospective survey. Staisey is critical of the survey questions concerning the reduction in the number of trips to the post office. Respondents that indicated they made fewer trips to the post office were asked to quantifying the number of fewer trips made. Respondents that indicated they made more trips were not given the option to quantify this number. She concludes that this will bias the results in favor of overestimating fewer trips to the post office. In this line of questioning, the survey also did not specify a time frame for reporting the number of trips, or provide a relative comparison of trips made before and after beginning use of Stamps.com. Staisey notes other areas of the survey where respondents showed confusion as to the time orientation of the questions. She also cites methodology flaws such as a low 20.4 percent response rate and problems with a lack of clarity in survey questions. Id. at 19927-31.
[5187] Witness Gordon is the Manager of the Information Based Indicia Program at the Postal Service. He discuses revenue security, PC Postage revenue projections, and discount implementation concerns. He provides a brief history of the IBIP where he states that the development of IBIP is primarily related to revenue security. Thus any changes to IBIP systems, such as implementing a discount, would be subject to Postal Service processes and procedures to ensure that the products meet Postal Service security requirements. He outlines concerns with the implementation process of PC Postage vendors modifying their product to incorporate a discount, and the Postal Service approval cycle. He alleges this is a fairly complex process that may take 6 to 12 months to implement after the Governors recommend a change. Id. at 20008-20.
[5188] In conclusion, Gordon questions the revenue projections made by witness Boggs. Boggs projects $292.8 million in revenue from PC postage in calendar year 2000. Gordon presents actual data from the Postal Service IBIP database. He states that nearly 321,000 customers representing six different PC product vendors have generated $29.8 million in postage revenue in FY 2000 to date (through AP 11). He estimates that approximately 57.3 percent of this is First-Class Mail revenue. He ends by discussing the need for an awareness campaign that would be implemented to inform Postal Service personnel of any IBIP changes.
[5189] Intervenor Comments. Intervenor Carlson opposes the proposed discounts for IBIP mail. He alleges that IBIP letters are not sufficiently distinctive from other non-courtesy-reply single-piece First-Class letters that are typewritten or computer printed, automation-compatible, and often contain delivery-point bar codes. He claims that IBIP mail and typewritten mail currently undergo the same mail processing. Therefore, IBIP mail should not receive a discount when other automation compatible mail does not receive a discount. Carlson Brief at 21-22.
[5190] Commission Analysis. The Commission recommends a "shell classification" for IBIP prepared mail. The recommendation is applicable to First-Class letter mail with postage and addressing information printed directly on the mailing envelope, and otherwise meeting the requirements of the Information Based Indicia Program. The mail piece must be automation compatible and not exceed the 3.3-ounce automation breakpoint in weight. It must utilize a FIM, have an address that has been verified against a Postal Service approved database, and have a full delivery point POSTNET barcode. At this time, the Commission recommends that this classification exclude IBIP prepared mail where postage or addressing information is applied with labels. Although the Commission does not recommend a specific discount for IBIP prepared mail, it finds that the cost savings analysis for QBRM may be applicable in calculating an appropriate discount.
[5191] The basis of this recommendation is the belief that IBIP mail offers the potential for real Postal Service mail processing cost savings. IBIP mail that meets the characteristics described in the recommended shell classification is fully automation compatible, clean mail, with the additional benefit of address hygiene. When examining an IBIP mail piece, there are many similarities with QBRM mail such as machine-printed addresses, facing identification marks, proper barcodes (and ZIP Codes), and at least theoretically, correct addresses. These features were very pertinent in recommending a discount for QBRM, and also should be applicable to IBIP mail.
[5192] The Commission is not recommending a discount rate at this time, but has carefully considered the approaches for analyzing cost avoidances contained in each IBIP proposal. The Commission does not accept E-Stamp witness Prescott's cost methodologies used to calculate cost savings associated with IBIP mail. Prescott uses Postal Service models in a way that they were not intended to be used. As the Postal Service highlights, Prescott also uses cost categories that may not be directly comparable, thus skewing the results of his analysis. Without careful analysis, this approach may lead to unexpected and unreliable results.
[5193] Stamps.com witness Heselton bases his cost avoidance estimates on the Postal Service cost avoidance estimate for QBRM and avoided return-to-sender costs. The Commission has not considered avoided return-to-sender costs as worksharing related, and a convincing argument for why the Commission should consider these costs worksharing related has not been made on this record. The Commission does find it appropriate to analyze cost avoidances in similar terms to the QBRM cost avoidance analysis due to the physical similarity of the mail pieces, and the potential similarity in mail processing costs.
[5194] The Postal Service argues that current mail processing operations are not configured to capture the potential mail processing cost savings associated with IBIP mail, and the current volumes do not justify making mail processing equipment and mail flow changes necessary to realize those savings. Postal Service Brief at VII-62-VII-63. The Commission has not been presented with any rationale for why the Postal Service could not modify the current mail flow to take advantage of the IBIP mail piece characteristics given sufficient volumes. Postal Service witness Gordon has reported that IBIP has generated $29.8 million in postage revenue in FY 2000 to date (through AP 11). Thus, if the optimal mail processing scheme is not in place, the immediate revenue impact should be minimal. The current low volume should provide the Postal Service with an opportunity to develop, test, and experiment with different mail flows to determine what is best for IBIP mail and prepare for the future. The Commission does not place much weight on the Postal Service's argument, because if volumes increase, it should be in the best interest of the Postal Service to process this mail as efficiently as possible and put the appropriate mail processing procedures in place. The Service can refine applicable cost avoidance estimates, and propose an appropriate rate discount, while it tests and creates procedures for capturing IBIP cost savings. This is one of the advantages to establishing a shell classification prior to implementing a new rate discount.
[5195] Finally, Stamps.com proposed extending a discount to IBIP mail that is prepared with labels. At this time, the Commission does not recommend that the IBIP classification apply to IBIP prepared mail that utilizes labels for applying postage or addressing information. As witness Jones states, the labels make the FIM unusable, therefore this type of IBIP mail should not have the same mail processing efficiencies as IBIP mail with the postal information printed directly on the envelope. There is a further risk that mailers may misapply the labels in a way that may negatively affect the automation compatibility of the mail piece.
[5196] Pitney Bowes proposes a one-cent discount applicable to the first ounce of First-Class single-piece mail that has postage affixed by metering technology. Throughout the proposal, First-Class Mail is understood to refer to First-Class letters, cards, flats, and irregular parcels and pieces (IPPs). Metering technology is understood to refer to both stand-alone dedicated postage evidencing devices (e.g., postage meters) and PC postage devices (e.g., a personal computer and printer connected via the Internet applying Information Based Indicia Program (IBIP) postage).
[5197] The Pitney Bowes proposal is presented through three witnesses. Witness Martin introduces the one-cent discount proposal and provides rationale on why the Commission should favorably recommend the discount. Witness Heisler sponsors a marketing survey that is used to estimate the mail volume that will convert from postage stamps to metering technology under three different discount levels. Witness Haldi estimates the Postal Service cost savings realized through metering technology and calculates the potential economic impact of the proposed metering technology one-cent discount on First-Class mail.
[5198] Witness Martin identifies a need to provide innovative services to small office, home office, and residential mailers. These mailers may have individual mailings that are too small to qualify for bulk discounts. She alleges the evolution of metering technology now makes it possible to recognize the worksharing efforts of small office, home office, and residential mailers. Furthermore, a metering technology discount could benefit mailers and the Postal Service by encouraging migration from stamps to metering technology, as stamps are the most costly method of collecting revenue and evidencing payment of postage. Tr. 23/10558-66.
[5199] Martin characterizes the cost of creating, distributing and selling stamps as very substantial in absolute terms, and as a percentage of revenues collected. She contrasts this against the lower cost of collecting revenue through metering technology. Recent metering technology innovations such as digital postage meters with remote resetting, and PC postage, further help lower the cost of collecting revenue. The use of metering technology also reduces pressure on window service operations and increases "what is widely recognized to be [the] cleanest type of mail in the First-Class mailstream." Id. at 10565. Martin concludes that a one-cent discount is conservative because it represents less than one-half of the cost savings calculated by witness Haldi, and because conservative assumptions are used to estimate migration from stamps to metering technology.
[5200] Witness Heisler sponsors and explains market research conducted by Opinion Research Corporation International on behalf of Pitney Bowes Inc. The market research, conducted via survey, measures household and non-household reactions to possible postage discounts for metered single piece First-Class Mail. The postage may be affixed by either a postage meter, or by a personal computer via the Internet (PC postage). The study indicates there is a "substantial" market interest in PC postage and postage meters when associated with a one-cent discount on First-Class postage by households and small businesses that are currently not using meters. Id. at 10582-604.
[5201] Two telephone studies were conducted, a household study and a non-household study. The household study examines qualifying household reaction to discounts on PC postage for First-Class Mail. The non-household study divides the survey population into two approximately equal groups. One group was asked for reaction to discounts on PC postage for First-Class mail, and the other group was ask for reaction to discounts on "postage meter" mail for First-Class mail. Each of the non-household subgroups were further subdivided into qualifying businesses with 25 or fewer employees, or qualifying businesses with 26 to 50 employees.
[5202] Survey respondents were asked a series of qualifying questions, and a question about current First-Class Mail volume. They were read a concept statement about postage meters, or PC postage, as applicable. The respondents were then asked how likely they would be to use the concept described at three different price levels: no discount, a one-cent discount, and a two-cent discount. The responses were ranked on a scale of one to five with one being not likely at all, and five being extremely likely to use the concept described. Once a respondent answered that he or she would be extremely likely to utilize a concept at a given price level, they were not asked about a higher discount price level.
[5203] The survey data underwent processing and weighting, including the application of an 80% intent factor, before being converted into mail volume estimates. The mail volume estimates summarized in Table 5-6 represent the estimated volume of mail converted from postage stamps to metered mail at a no discount level and a one-cent discount level, by category of customer.
[5204] Witness Haldi testifies on the high transaction costs associated with the use of stamps to collect revenue and evidence postage. He also explains how a one-cent metering technology discount will assist the Postal Service lessen its dependence on stamps and encourage customers to use low cost automated forms of evidencing postage. He states that transaction costs for stamped mail and metered mail are now averaged. Because of this, a mailer that incurs the cost of obtaining a metering device that helps reduce Postal Service costs, does not receive any recognition or benefit. He notes that the introduction of low cost, low volume meters, and PC postage has made metering technology an affordable option for households. Tr. 29/13888-943.
[5205] Haldi contends that the proposed discount will help the Postal Service to promote and retain its highly profitable First-Class Mail product while avoiding some of the problems of the OCA's Courtesy Envelope Mail proposal. Metering technology does not require a customer to maintain an inventory of two stamp denominations, and because a customer does not have to be vigilant about which stamp to use, Postal Service revenue would be protected from use of the wrong stamp. Haldi explains that the differences in transaction costs, and mail processing and delivery costs have previously been recognized. Qualified Business Reply Mail (QBRM) recognizes lower mail processing and delivery costs, but assesses an accounting fee of 5 cents per piece to cover transaction costs. The metering technology proposal examines just the transaction costs.
[5206] In developing the cost savings associated with metering technology, Haldi compares the attributable cost of stamps to the attributable cost of metering technology. He limits the attributable cost of stamps to stamped envelopes and cards, window time, indirect costs, stamps and accountable paper, fees for managing the stamp consignment program, credit card fees, and several miscellaneous items. He limits the attributable cost associated with meters to window time, as meters do not require Postal Service supplies. Haldi calculates an attributable cost of stamps and accountable paper of $746 million. He concludes this is substantially greater than the calculated attributable cost of $6.3 million for meters. In terms of the proposed 34-cent First-Class rate, the attributable transaction cost for stamped mail amounts to approximately 6.7 percent of the revenue collected, or 2.3 cents per piece. The attributable transaction cost for metered mail is negligible in comparison.
[5207] Haldi proposes a one-cent metered mail discount. This corresponds to a 44 percent passthrough of the 2.3-cent attributable transaction cost that is avoidable by not using stamps. He states that a higher discount could be supported, but a higher discount at this time may force the rate for first ounce First-Class stamped mail to increase from 34 to 35 cents.
[5208] The effect of the proposed one-cent discount is estimated to be a net reduction in revenue during the test year of $156.5 million. Haldi first explains there will be an approximate $245 million reduction in revenue from implementation of the discount for existing metered mail. Additionally, revenue will be reduced by another $49.5 million from the 4.954 billion pieces of mail that convert from stamps to metering technology. The number of mailpieces that will convert is estimated using Heisler's study that projects the household PC postage respondents and the non-household postage meter respondents that would convert with no discount and with a one-cent discount. The 2.6 billion mailpieces attributable to the non-household PC postage respondents are not included because the survey is not able to resolve the volume overlap between non-household postage meter respondents and the non-household PC postage respondents. The gross revenue reduction thus amounts to $294.5 million.
[5209] Offsetting the revenue reduction are the cost savings from additional use of metering technology and the increased volume from the reduced rates. Assuming 4.954 billion pieces of mail convert to metering technology and the previously calculated attributable cost savings of 2.3 cents per piece, the resulting attributable transaction costs savings will be $114 million. The proposed discount should also negate the mail volume loss caused by a one-cent increase in the First-Class rate. The avoided loss is estimated at $24.1 million from this affect. By combining the gross revenue reduction with the above offsetting factors, Haldi concludes the net revenue reduction associated with a one-cent metering technology discount is $156.5 million.
[5210] Postal Service Response. The Postal Service opposes the one-cent metering technology discount proposed by Pitney Bowes through the rebuttal testimony of witness Miller. Tr. 45/19665-69. Witness Staisey also provides further support of the Postal Service position in her rebuttal testimony by offering a critique of the marketing survey performed by Pitney Bowes witness Heisler Id. at 19921-27.
[5211] Witness Miller provides a brief history of the postage meter and explains how postage meters were originally developed to save the mailer mail clerk costs, not to save the Postal Service costs. Since the advent of the postage meter, many forms of evidencing postage and methods of distributing stamps have been made available to the public. Arguably, some may claim that each of these evidencing or distribution methods has different costs that should be reflected in the rate schedule.
[5212] In Docket No. R77-1, the Commission did not include the cost associated with stamp procurement in determining presort mail cost avoidance. The Commission reasoned that if "presorted first-class mail were not presorted, it would still be metered or imprinted and deposited in bulk. Therefore, these cost effects are present regardless of presorting and are not properly included as avoided costs." PRC Op. R77-1 at 258-59. (footnote omitted). Miller argues that the proposed discount presents a similar situation because meter users find meters to be the most convenient and cost effective method of evidencing postage. Pitney Bowes does not present a compelling basis to define worksharing as including stamp-related costs because without a discount, this mail will continue to be metered.
[5213] Miller makes a final argument that First-Class workshare mail, Standard Mail A workshare mail and PC postage also avoid stamp manufacturing and distribution costs. If the discount were consistently extended to these classes of mail, the revenue loss to the Postal Service would be very substantial.
[5214] Staisey argues that the conclusions Pitney Bowes witness Heisler draws from his research are misleading due to flaws present in his survey questionnaires, and the methodology used to analyze the survey responses. She states that all basic factual and neutral information should be provided to a survey respondent concerning the product under consideration to allow for an informed decision on the likelihood of adopting the product. However, in Heisler's survey, multiple sources of bias in the description of the product has led to an oversizing of the metered postage market. Staisey finds bias in the survey concept statement, product description, failure to describe the additional burdens of using PC postage, and failure to describe the net savings/cost to the respondent.
[5215] Another area that Staisey critiques is the methodology of analyzing the survey results. She states that the small sample size and small number of positive respondents preclude meaningful estimates of pieces of mail affected by PC postage. She also states that a survey response rate has not been provided to assess the degree to which the survey results are representative of the population surveyed.
[5216] Commission Analysis. Implementing a one-cent discount could result in the immediate revenue loss of approximately $245 million from metered mail that converts to the new rate. Haldi, using volume estimates from Heisler's survey, calculates offsetting savings that may reduce the net test year revenue loss to $156.5 million. However, Postal Service Staisey is notably critical of Heisler's survey and its ability to accurately predict conversion rates to metered mail. The Commission agrees with Staisey's criticism up to a point. Her comments on customers not having enough information on total product costs to make an informed decision, and the reasonableness of the small sample size used to predict large mail volumes appear logical. However, she may be overly critical of certain aspects of the survey related to customer knowledge and customer ability to follow a consistent line of questions. The Commission also notes that the survey does not specify a time period over which new customers may adopt metering technology. Because of this, the Commission concludes that the net test year revenue loss may be substantially higher than the loss predicted by Haldi.
[5217] A revenue loss of hundreds of millions of dollars is substantial and would have to be recouped elsewhere. Haldi limits the cost savings passthrough to 44 percent because he concludes a higher passthrough would likely necessitate a further increase in the stamped single-piece rate. Deaveraging the single-piece First-Class rate under this proposal, with the possibility of a higher single-piece stamp rate, is a concept that the Commission views as non-beneficial to the majority of users of First-Class stamps.
[5218] The Commission previously has not recognized cost avoidance associated with stamp manufacturing and distribution as worksharing related. The Postal Service argument that metered mail will not convert back into stamped mail if no discount is established appears correct. Most meter users have other reasons for using meters than the possibility of a single piece First-Class discount. Although metered mail may save the Postal Service stamp costs, it cannot be concluded that these costs are in the same category as historically recognizable worksharing costs.
[5219] Individual pieces of single-piece First-Class Mail may be differentiated by many mail characteristics, including means of paying of postage. Each characteristic may result in a different cost to the Postal Service. The different distribution channels for stamps also have different cost characteristics. In this rate case, there are several proposals, other than the metered mail proposal, that could increase the complexity of the rate schedule. This could create an undesirable situation where a multitude of mailpiece characteristic have to be examined before determining a proper postage rate. See § 3622(b)(7) and § 3623(c)(5). The Commission must consider all aspects of a classification proposal, such as the metered discount proposal, before making a recommendation that inevitable will complicate the rate schedule.
[5220] A metered mail discount potentially may discriminate between different single-piece First-Class mailers. Persons with the means to afford metering technology, by their status, would be given lower postage rates without providing any recognized cost savings to the Postal Service. Persons that can least afford technology, and the price of postage, would be forced to pay higher rates. From this vantage point, the proposal may not be fair or equitable to all single-piece First-Class mailers. § 3623(c)(1). The possibility that this proposal may further increase the stamped mail rate due to deaveraging compounds this problem.
[5221] In conclusion, implementing the metered discount proposal could result in a significant test year revenue reduction that would have to be recouped, burdening other types of mail. Furthermore, the costs associated with payment of postage are not an appropriate basis for worksharing savings. Finally, providing a discount to mailers that can afford to purchase certain technology that reduces only stamp costs is not fair or equitable to all users of single-piece First-Class Mail. Therefore, the Commission does not recommend the Pitney Bowes one-cent metered discount proposal.
[5222] ABA&NAPM Proposal. ABA&NAPM witness Clifton proposes a 2-cent discount for the first ounce of "P" rate mail. He describes "P" rate mail as First-Class letter mail using a "P" stamp or "P" meter imprint as indicia of postage. Under the proposal, a consumer places "P" rate mail in a private collection box. The mail from the private collection box is collected by a workshare mailer such as a presort bureau. The workshare mailer prebarcodes and presorts the collected mail to at least the basic presort level. The workshare mailer then delivers this mail to the Postal Service for final processing and delivery. The Postal Service credits the workshare mailer the difference between the final level of presort and the discounted "P" rate. This proposal benefits the Postal Service by providing a higher quantity of prebarcorded, presorted mail that can be more efficiently and cost effectively processed. Tr. 26/12435-42.
[5223] Clifton envisions that workshare mailers would contract with the owners of property such as churches, gasoline stations, grocery stores, and banks for the placement of private collection boxes for the collection of "P" rate mail. They would also implicitly be responsible for acquiring or modifying mail processing equipment to process the "P" rate mail. Clifton states that it would take about a year to work out the details between the Postal Service and the private sector, produce an advertising campaign, and contract for the manufacture and placement of private collection boxes. Therefore, it is unlikely that "P" rate mail will influence Postal Service revenue and volume for Test Year 2001. Clifton further proposes that the Postal Service be authorized and funded to sustain a public relations campaign about the availability and proper use of the "P" rate. It is also implicit in the proposal that the Postal Service would develop, manufacture, and sell the "P" rate stamps.
[5224] Postal Service Rebuttal. The Postal Service opposition to the "P" rate proposal is presented through the rebuttal testimony of witness Miller. Miller questions whether the presort industry is capable of processing "P" rate mail. He argues that presort bureaus/Multi Line Optical Character Reader (MLOCR) qualified mailers do not currently house cancellation equipment such as the Advance Facer Canceler System (AFCS) that would be required to cancel the "P" rate stamps. Miller also alleges it is not clear, as MacHarg states, whether presort bureaus can modify MLOCR's to efficiently cancel and process "P" rate mail. Furthermore, he questions the capacity of the presort industry to finalize "P" rate mail in volume using Remote Computer Read (RCR)/Remote Bar Code Sorter (RBCS). He expresses a concern that the Postal Service may receive large quantities of mail with little to no worksharing being preformed because of the questionable capacity of workshare mailers. Tr. 45/19662-65.
[5225] Miller highlights several areas where information is needed to help analyze the proposal. He states there are no "P" rate volume forecasts to determine the revenue impact on the Postal Service. There is no presort industry equipment inventory to analyses the industry capability. Also, the discount is difficult to analyze because it is not based on a cost savings estimate. He concludes by arguing that the "P" rate suffers from the same two-stamp problems as the CEM proposal. If the "P" rate and CEM proposals were both implemented, the Postal Service would then have to contend with three alternative basic rate First-Class Mail stamps.
[5226] Commission Analysis. The "P" rate proposal is a novel idea that possesses some benefits. A discount rate is made available to individual mailers that allow them to share in the benefits of worksharing and the Postal Service automation program. Workshare mailers would have access to a new source of business that has the potential to provide substantial and somewhat continuous revenue. Finally, the Postal Service may benefit through receiving a higher quantity of workshare mail that is more economical and profitable to process. Although the benefits highlighted above are worthwhile, there are drawbacks to the proposal, and many potential unresolved or unanswered questions. Many of the issues are highlighted below, but more issues are sure to arise if this proposal is further developed. Although conceptually simple, this proposal contains many complex issues that must be resolved. Until this proposal undergoes substantial further development, the Commission cannot recommend the "P" rate.
[5227] Clifton was presented with several issues during his oral testimony that are indicative of the issues that need to be discussed and resolved such as:
ˇ The Postal Service handling of "P" rate mail deposited in Postal Service collection boxes. The potential return of this mail to presort bureaus. The selection of presort bureaus for this returned mail. Id. at 12688-90.
ˇ The requirements with respect to handwritten versus typed addressing. The projected "P" rate volumes. The handling of non-readable mail. Id. at 12724-26.
This sampling represents only a few of the issues that would have to be resolved before the Commission could consider recommending the "P" rate proposal.
[5228] The proposed "P" rate program places burdens on the Postal Service. The burdens include, but are not limited to, a public relations campaign, the manufacture and sale of "P" rate stamps, and revenue protection and enforcement issues. Clifton proposes that the Postal Service fund and sustain a public relations campaign informing the public about the "P" rate program. A budget has not been proposed or estimated. Nevertheless, without "P" rate volume and revenue projections, the reasonableness of this campaign cannot be analyzed in relation to the total program. Furthermore, the Postal Service has to support and be shown to benefit from the "P" rate concept if it is expected to mount an effective public relations campaign.
[5229] In this proposal, the Postal Service will be selling a product, represented by the sale of a "P" rate stamp, in which a third party is providing a crucial part of the service. The record is not clear as to the conceptual or legal relationship between the Postal Service and the multiple third party workshare mailers. It is also not clear if this relationship could be explained to a consumer without risking the reputation of the Postal Service if mail delivery problems arise with one or more workshare mailers. There is a further possibility of customer confusion about the status of the "P" rate stamp. May a customer that purchases a "P" rate stamp from the Postal Service apply the stamp toward regular First-Class postage and deposit such mail with the Postal Service. For the reasons discussed above, the Commission finds this proposal premature, and does not recommend implementation of the "P" rate proposal at this time.
[5230] The OCA proposes that the Postal Service sponsor a "Rates Working Group" to discuss ratemaking issues between rate cases. OCA witness Gerarden cites the complexity of rate cases and the short ten month rate case time frame as reasons why it would be beneficial to convene a group to discuss ratemaking issues in the interim periods between rate cases. The working group could be used to discus novel, complex, or difficult issues and to build consensus in a neutral rather than an adversarial setting. He offers as support his opinion that the Postal Service is contemplating shorter intervals between rate cases. He concludes that this will place an even greater burden on participants to quickly analyze and respond to complex rate case proposals. Tr. 29/13581-85.
[5231] Gerarden proposes that the Rates Working Group be organized by the Postal Service, and function under ground rules established by the Postal Service and the participants. The focus of the group should be on technical, not legal issues. It should not be a forum for discovery, or indirectly used as a litigation weapon, and should not be viewed as a substitute for the Postal Rate Commission. It should be a good faith effort to focus on a limited number of important issues when no rate case is pending.
[5232] Commission Analysis. The Commission frequently suggests that parties use informal means to discuss issues and resolve problems. In this context, a Rates Working Group may benefit the free flow of information between parties and resolve issues before intervention by the Commission becomes necessary. The Commission is aware that the Postal Service already consults with various industry groups on a variety of issues between rate cases. The Commission suggests that these discussions should be as inclusive as possible so that interested parties, such as the OCA, are made aware of the discussions and invited to contribute accordingly.
[5233] The OCA proposal requests the Commission to recommend that the Postal Service sponsor a forum for discussion. This goes beyond the Commission suggesting that parties meet and informally resolve issues. A recommendation to establish a Rates Working Group will tend to formalize what should be informal discussions, and may have the unintended effect of stifling the free flow of information. This is a potential negative to recommending the proposal, along with the concern that the legal requirements for a formally recommended working group have not been addressed. Therefore, the Commission supports the idea of a Rates Working Group, but abstains from making a formal recommendation.
[5234] OCA witness Callow proposes that adjustments to the single-piece First-Class rate for letters and cards be limited to every other rate proceeding. The proposal is structured to accommodate OCA's perception that household mailers are interested in longer periods of rate stability, but business mailers prefer smaller, more frequent, rate adjustments. Callow also assumes that in future years the Postal Service will file rate cases more frequently, at somewhat evenly spaced time intervals. Tr. 22/10128-46.
[5235] The proposal requires the Commission to follow a two step process to recommend a single-piece First-Class rate that will remain in effect for two successive rate cycles. During the first rate proceeding (rate case one), the Commission would first determine an "actual rate" (AR1) for single-piece First-Class letters and cards in the same manner as it has in previous rate proceedings. This includes consideration of the test year break-even criteria, but does not require the Commission to adhere to the integer constraint.7 The second step is to use the "actual rate" (AR1) as a basis for determining a "recommended rate" (RR). The recommended rate (RR) would be higher than the actual rate (AR1), and would conform to the integer constraint. The recommended rate (RR) is in effect based on a prediction of the First-Class revenue required to break even over two rate case cycles.
[5236] Single-piece First-Class mailers would pay the recommended rate (RR). The difference between the higher recommended rate (RR) and the lower actual rate (AR1), multiplied by the actual mail volumes, would accumulate in a single-piece First-Class "reserve account" while the rates from the first rate case are in effect.
[5237] When the subsequent rate proceeding is initiated (rate case 2), the Commission would determine a new actual rate (AR2), considering the break-even requirement, but without regard for the integer constraint. The single-piece First-Class mailers would continue to pay the recommended rate (RR) determined in the previous rate proceeding.
[5238] Callow assumes that the new actual rate (AR2) would be greater than the recommended rate (RR) that mailers pay for First-Class postage. The net underpayment of postage calculated by taking the different between the lower recommended rate (RR) and the higher new actual rate (AR2), multiplied by the actual mail volumes, would by subtracted from the previously created reserve account on a periodic basis. Ideally, the reserve account would be drawn down to zero in the test year of the second rate case. If this does not happen, the reserve account balance would be taken into account in setting rates in the third rate case (rate case 3).
[5239] The proposal recognizes that if it is determined there are unacceptably insufficient funds available in the reserve account to cover predicted negative payments the Commission would have to recommend a new rate in the second rate case (rate case 2).
[5240] The OCA also proposes that workshare discounts be determined in relation to the actual rates, and not in relation to the recommended rate. Assuming that workshare discounts remain constant over the duration of the two rate case cycle and the actual rates vary, the net worksharing discount, which accounts for the difference between the recommended rate and the actual rate, will also vary. The OCA predicts that this will cause a volume shift between the single-piece rate and the workshare discount rates depending on what is more advantageous to individual workshare mailers.
[5241] Postal Service Comments. On brief, the Postal Service argues that the OCA proposal is founded on several unsubstantiated premises. First, the claim that the Postal Service has established a policy of requesting general rate increases every two years is incorrect. Second, Callow's assertions concerning the different interests of the general public and business mailers with respect to the timing and frequency of First-Class Mail rate increases is without foundation. The Service suggests that this proposal be shelved in the absence of a suggestion from Postal Service management that this idea should be explored. The Postal Service concludes by cautioning the Commission that it should not recommend rates in a manner that imposes an unsolicited change in long-standing rate implementation policy. Postal Service Brief at VII-86-89.
[5242] Intervenor Comments. On brief, DMA opposes the rate stability proposal alleging numerous legal and practical flaws. DMA questions whether the "break even" requirement of the Act could be interpreted to apply over two rate cases, and whether the first rate case under the proposal could be appealed based on the excess revenues generated in the first test year. DMA also questions how the Postal Service management's prerogatives could be maintained when they are constrained in the second rate case to maintaining the rate which is the most important feature of the entire rate structure, the single-piece First-Class rate.
[5243] From a practical perspective, DMA says that it is highly speculative that the excess revenue generated under the first rate case will adequately offset the shortfall under the second rate case. Also, the proposal would primarily affect business mailers who may not agree that paying higher rates as a result of the first rate case is in their business interest. Finally, the proposal may distort the worksharing incentives because the actual rates would not reflect the actual cost differences. DMA Brief at 9-14.
[5244] On brief, PostCom & MASA outline several areas where the rate stability proposal needs further development, and suggests it also would be prudent to undertake a closer legal analysis of the proposal. PostCom & MASA conclude that the proposal needs further development before it can be given meaningful consideration. PostCom & MASA Brief at 8 and Reply Brief at 10-13.
[5245] Commission Analysis. The Commission finds some aspects of the rate stability proposal interesting. For example, the ability to set the single-piece First-Class rate without regard to the integer constraint would allow the Commission more freedom in accurately setting all other rates. However, the Commission does not recommend this proposal because the major premises of this proposal are not supported on the record, and other areas of the proposal need further development.
[5246] Through a series of interrogatories, the Postal Service explores the basis of OCA's premise that households prefer longer periods of a stable single-piece First-Class rate, and the associated confusion caused by more frequent rate changes. Tr. 22/10205-10. The Commission does not doubt that some transient confusion may exist when rates change, and that some households may prefer rate stability, especially when rates are rising. However, the answers to the interrogatories indicate the OCA is not aware of any surveys, focus groups, or other studies conducted that quantify its premise.
[5247] For the proposal to work with somewhat predictable results, the dates pertinent to the rate case that initially implements the rate stability proposal (rate case 1), and at least the rate implementation date and the test year date for the following rate case (rate case 2) must be approximately known. OCA assumes that the Postal Service will file more frequent, regularly spaced rate cases. However, there is no record evidence that confirms this assumption. Without estimates of test year and rate implementation dates, the recommended rate (RR) could not be set with any certainty. Furthermore, even if the Postal Service agreed to file omnibus rate cases at regular intervals, the rate stability proposal would require the Commission to estimate rates over two rate cycles instead of one, adding more uncertainty to setting rates. Witness Callow acknowledges that the farther out in time one goes to look at costs the less certain the projection will be. Id. at 10257.
[5248] Witness Callow was requested to comment on whether the rate stability proposal violates the provisions of the break-even requirement. Id. at 10186-87. The break-even requirement in § 3621 states in part: "Postal rates and fees shall provide sufficient revenues so that the total estimated income and appropriations to the Postal Service will equal as nearly as practicable total estimated costs of the Postal Service." The rate stability proposal would require the Commission to recommend rates in excess of break-even for the first rate case, and break even in the second rate case test year. Because this proposal is not being accepted for other reasons, the Commission does not reach a conclusion on whether this proposal meets the break-even requirement, but notes that this issue would have to be resolved before recommending any similar proposals.
[5249] Finally, the integer constraint as proposed by Callow also causes fluctuation in workshare discounts, and as recognized by Callow that may not be desirable. See Tr. 22/10137-44. The Commission reviews proposals from all intervenors in an omnibus rate case proceeding, and it may be possible to develop a proposal that is not subject to the objection described in this section. The rate stability concept is the type of idea that might benefit from free discussion outside of a formal rate proceeding.
[5250] The OCA proposes that if the Commission recommends and the Governors approve a one-cent First-Class first-ounce rate increase, the Postal Service deliver an informational mailpiece to every delivery address, and include with the mailpiece ten make-up stamps at no charge. Witness Gerarden alleges this will benefit the public by spreading out the rush to purchase make-up stamps, and reduce some of the customer frustration associated with rate changes such as waiting in line to purchase new denomination and make-up stamps. It will also benefit the Postal Service by improving the process of transitioning to new rates, and improving the Postal Service's public image. Tr. 29/13572-81.
[5251] Gerarden estimates the net financial impact of this proposal will result in little to no additional cost to the Postal Service. He argues that the cost of implementing the OCA proposal should be offset by a reduction in window service costs and costs avoided by combining the proposed mailing with a mailing that the Postal Service already has planned. He estimates the costs of mailpiece production, stamp production, and saturation mailing to every delivery address to be $13.8 million. He estimates the revenue foregone by providing the make-up stamps at no charge to be $11.7 million. He calculates offsetting cost savings from a reduced number of window transactions to purchase make-up stamps of $17.9 million. Assuming that the Postal Service is planning an informational mailing regardless of the OCA proposal, Gerarden offsets the OCA proposal costs by $9.5 million as a result of combining the two separate mailings. Gerarden concludes a net saving of $1.9 million to the Postal Service may result from implementing the OCA proposal.
[5252] Postal Service Comments. On brief, the Postal Service argues that the manner in which the public is informed about the rates to be implemented, and the manner of implementation are matters left to the sole discretion of Postal Service management, and are beyond the Commission's authority to recommend rates and classifications. The Postal Service respectfully requests the Commission to defer to Postal Service management regarding this issue. Postal Service Brief at VII-86.
[5253] Commission Analysis. The Commission perceives the OCA proposal as a novel idea that deserves consideration by the Postal Service. Informing the public about Postal Service changes through mailings or other means may educate the public, and smooth the transition to the implementation of new rates and services. Providing make-up stamps at no charge may spread out the rush to purchase make up stamps in the month surrounding the rate change. It also may encourage the recipient to read the informational mailing and promote Postal Service goodwill. The Commission is fully aware that designing and implementing public information programs are matters left to the discretion of Postal Service management. Nonetheless, the Commission is certain that management is open to new ideas that would benefit both the Postal Service and individual mailers. In that spirit, the Commission recommends this idea for management consideration.
[5254] The First-Class Mail Cards subclass consists of Stamped Cards and postcards. Stamped Cards are purchased through the Postal Service as a special service. See DMCS Section 962. Postcards are privately printed mailing cards of uniform thickness that do not exceed 6 inches in length, 4-1/4 inches in width, or 0.016 inches in thickness. In FY 1998, cards generated approximately $1.0 billion, or 3.0 percent, of First-Class Mail revenue, and represented about 5 percent of First-Class Mail volume. Over the past 10 years, volume has been relatively constant in the single piece category, with growth shown in the presort/automation category. USPS-T-33 at 8-11.
[5255] The Postal Service proposes increasing the current 20-cent rate for single-piece cards by one cent, paralleling the increase in First-Class letters. Single-piece cards account for approximately 60 percent of card revenues. A one-cent increase retains the 13-cent gap with the single-piece letter rate and represents a 5 percent increase above the current single-piece card rate. A one-cent increase is also proposed for nonautomation presort cards. This increases the nonautomation presort rate from 18 cents to 19 cents. It retains the current 2-cent gap between the single-piece card rate and the nonautomation presort card rate and is consistent with the difference between the single-piece letter rate and the nonautomation presort letter rate. The Postal Service proposes maintaining the discount rate of 18 cents for Qualified Business Reply Mail (QBRM) cards. An 18-cent rate effectively increases the QBRM discount from 2 cents to 3 cents. Campbell calculates a QBRM cost avoidance of 3.4 cents for both letters and cards. A 3-cent discount passes through roughly 90 percent of the calculated cost avoidance. Id. at 38-40.
[5256] The automation presort card rate structure consists of four tiers: basic, 3-digit, 5-digit, and carrier route. Miller calculates a cost avoidance of 1.682 cents between nonautomation presort cards and basic automation cards. Fronk proposes to increase the amount of the cost avoidance passthrough, and to increase the rate difference between nonautomation presort cards and basic automation presort cards from 1.4 cents to 1.6 cents. This results in an increase in the basic automation card rate from 16.6 cents to 17.4 cents. The Postal Service proposes increasing the 3-digit card rate from 15.9 cents to 16.7 cents. This maintains the current 0.7-cent gap between the basic card rate and the 3-digit card rates, but passes through more than 100 percent of the calculated cost avoidance. The Postal Service proposes retaining the current 1.3-cent gap between 3-digit and 5-digit cards by increasing the 5-digit card rate from 14.6 cents to 15.4 cents. The proposed 5-digit card rate, as with the proposed 3-digit card rate, has greater than a 100 percent passthrough of the calculated cost avoidance. The Postal Service proposes to increase the carrier route cards rate from 14.1 cents to 14.9 cents. This maintains the current 0.5-cent gap between 5-digit cards and carrier route cards. Id. at 40-43.
[5257] Fronk recognizes that the calculated cost savings for 3-digit cards and 5-digit cards are now less than the proposed discounts. Thus, if the discounts were tied strictly to avoided costs, the discounts would have to be reduced. Instead, the discounts and passthroughs were selected to balance several other goals, including: achieving the Postal Service cost coverage target, recognizing the value of worksharing, acknowledging the importance of mailer barcoding, and avoiding discount level changes which result in disruptive rate impacts. Id. at 41.
[5258] Intervenor Comments. On brief, Carlson opposes increasing the single-piece card rate to 21 cents. He quotes the Docket No. R97-1 decision concerning the importance of maintaining at least one inexpensive postal category that can be widely used, and the somewhat more limited value of service that cards offer, especially in terms of privacy. In addition, Carlson argues that cards provide a lower value of service than letters based on lower on-time delivery performance (citing EXFC data). Carlson Brief at 20-21.
[5259] Intervenor Popkin alleges that stamped cards have lower mail processing costs than postcards, and are thus more cost effective for the Postal Service to handle. He argues that increasing the card postage rate to 21 cents combined with increasing the special service stamped card rate to two cents may encourage mailers to use less cost effective postcards. Therefore, he argues for maintaining the 20-cent single-piece card rate as a way to encourage mailers to use the more cost effective stamped cards, instead of postcards. Popkin Brief at 9.
[5260] Commission Analysis. The Commission finds the record supports retaining the current single-piece card rate of 20 cents. At this rate, test year single-piece cards revenue is estimated at $593 million. This is nearly equal the single-piece cards attributable cost estimation of $597 million. The recommended 20-cent rate continues to help ensure that there is at least one relatively inexpensive postal category that can be widely used by the general public, businesses, and organizations.
[5261] The First-Class cards subclass is part of the larger First-Class Mail class. In this proceeding, several intervenors comment on the increasing institutional cost burden on First-Class Mail. See Chapter 5, Section B.1.b. Maintaining the single-piece card rate at its current level to mitigate this increasing cost burden is an important consideration in the Commission's recommendation. Furthermore, the recommendation also reflects the Commission's determination that the whole-cent integer constraint continues to be a significant consideration in establishing appropriate single-piece rates.
[5262] The Commission recommends a 3-cents discount for QBRM cards. This is the same discount recommendation as for QBRM letters and is based on similar cost avoidances. A 3-cents discount results in an 17-cents QBRM card rate.
[5263] The Commission recommends an 18-cents rate for non-automation presort cards. This maintains the 2-cents difference between single-piece cards and non-automation presort cards. The Commission recommends cost-based rates for the remainder of the worksharing tiers based on the avoided costs. The recommended rates continue to acknowledge the importance of mailer barcoding, but also recognize the decrease in avoided costs between automation 3-digit and 5-digit cards. To make rate increases as small as possible, the recommendations are based on a cost avoidance passthrough as close to 100 percent as possible, given a 0.1-cent rounding constraint.
[5264] The Commission estimates avoided costs of 1.606 cents between non-automation presort and basic automation cards, 0.562 cents between basic automation and 3-digit cards, 0.711 cents between 3-digit and 5-digit cards, and 1.111 cents between 5-digit and carrier route cards. The Commission recommends discount increments of 1.6 cents between non-automation presort and basic automation cards, 0.6 cents between basic automation and 3-digit cards, 0.7 cents between 3-digit and 5-digit cards, and 1.1 cents between 5-digit and carrier route cards. The resulting recommended rates are 16.4 cents for basic automation cards, 15.8 cents for 3-digit cards, 15.1 cents for 5-digit cards, and 14.0 cents for carrier route cards.
[5265] The Commission's recommended rates for the Cards subclass reflect an average increase of 0.4 percent. This is lower than the First-Class letters increase of 1.8 percent and lower than the system-wide average increase of 4.6 percent. It is a modest increase when considering the Docket No. R97-1 card rate increase of only 0.2 percent. Based on the Commission's projected test-year after-rates volume, First-Class card revenue will exceed estimated attributable costs by $256 million. Thus, card rates cover attributable costs, as required by § 3622(b)(3). The Commission's recommended 20-cent postcard rate reflect consideration of the somewhat more limited value of service that cards offer, especially in terms of privacy (§ 3622(b)(2)). No record evidence suggests that the recommended rates may have an unduly negative impact on mailers (§ 3622(b)(4)).
[5266] The recommended cost-based rates appropriately recognize the worksharing efforts of mailers presenting bulk presorted or prebarcoded cards (§ 3622(b)(6)). The rate schedule for cards generally provides identifiable relationships. The recommended 17-cent rate for QBRM cards parallels the discount considerations for QBRM letters. (§ 3622(b)(7)). Overall, the Commission finds that the card rates it recommends are fair and equitable (§ 3622(b)(1)). The markup index for Cards is .561. This is somewhat lower than the Docket No. R97-1 markup of .913 and the Docket No. R90-1 markup of .919, but close to the Docket No. R94-1 markup of .645. The Commission finds the markup index for Cards appropriate on this record.
[5267] Priority Mail constitutes the extension of First-Class Mail for pieces weighing more than 13 ounces,8 and is available for all mailable items up to 70 pounds in weight. Because it receives expedited handling and transportation, and offers some other features of services sold by private competitors-including delivery confirmation9-Priority Mail competes in the two-day document and package delivery market. Consequently, Priority Mail contains both monopoly letter mail and items that competing carriers could carry outside the restrictions of the Private Express Statutes. Priority Mail makes a contribution to postal revenues that is disproportionate to its volume; while it accounted for only 0.6 percent of total volume in FY 1999, it contributed 7.2 percent of total revenue. 1999 Revenue, Pieces and Weight Report.
[5268] Priority Mail rates are unzoned for pieces up to five pounds, with a current 2pound rate of $3.20 and 3-pound, 4-pound and 5-pound rates that increase in increments of $1.10. The rates for heavier mailings are zoned. Currently a flat-rate envelope is made available by the Postal Service that is charged the 2-pound rate, regardless of the actual weight of the contents. Pickup service is available for Priority Mail; the current fee is $8.25. While the rate schedule extends up to 70 pounds, 74 percent of Priority Mail weighed 5 pounds or less in FY 1999, and the average postage weight was 2.0 pounds. Library Reference PRC-LR-1. In the same period, 65 percent of Priority Mail was sent at the unzoned rate for items weighing two pounds or less.
[5269] As in Docket No. R97-1,10 Priority Mail rates are affected by costs resulting from a contract between the Postal Service and Emery World Airlines for processing, surface transportation, and air transportation of mail in a network of Priority Mail Processing Centers (PMPCs). Postal Service witness Robinson testified that the Service is currently evaluating the Priority Mail processing network, and has not decided how it will be configured in the future. However, for the purposes of this case, the Service's cost studies assume that the current network configuration of 10 PMPC sites located in the Northeast and Florida will exist in the test year. USPS-T-34 at 13. Because of the uncertainty surrounding the future of the PMPC contract after the test year, and of the Postal Service's method of accounting for contract costs, the PMPC contract raises questions concerning both the costs properly attributable to Priority Mail and the method for designing its rates. These matters will be addressed below.
[5270] The Postal Service proposes an overall increase of 15 percent for Priority Mail, based on its estimated costs and witness Mayes' recommended markup of 180.9 percent over volume variable costs, or 162.7 percent expressed as a markup over incremental costs. USPS-T-32 at 25. As in Docket No. R97-1, the Service proposes to recover the costs of providing the electronic invoice variant of delivery confirmation service in the basic rates for Priority Mail. USPS-T-34 at 18.
[5271] The Service proposes increasing the two-pound rate from $3.20 to $3.85. For the three-, four- and five-pound unzoned rates, the Service proposes an increase from the current uniform rate increment of $1.10 to $1.25, to produce rates of $5.10, $6.35, and $7.60, respectively. Id. at 9, 17.
[5272] In addition to these pre-existing unzoned rates, the Postal Service proposes introduction of a one-pound unzoned rate of $3.45. However, the flat-rate Priority Mail envelope would continue to be charged the two-pound rate under the Service's proposal. Id. at 9.
[5273] For the zoned rates applicable to Priority Mail pieces weighing more than five pounds, witness Robinson develops per-piece and per-pound rate elements to allocate total volume variable costs, including an "Emery adjustment" to apportion costs associated with the PMPC contract between per-piece and per-pound elements. Id. at 11-15.11 In order to mitigate the impact of the Emery contract's costs on the current structure of rate relationships in the Priority Mail schedule, witness Robinson constrains the rates she develops to remain within a five percent band around the 15 percent average rate change for Priority Mail as a whole. All such rates are then rounded to the nearest five-cent increment. Id. at 17-18.
[5274] Pickup service is available for Priority Mail as well as for Express Mail, and Parcel Post. Witness Robinson uses the average cost per stop for each option, which witness Campbell develops, to derive a weighted average cost, which she marks up by 105 percent to produce a proposed fee of $10.25. Id. at 18-19.
[5275] Emery (PMPC) contract costs. The Postal Service treats the costs of the PMPC contract as 100% attributable. The PMPC contract is solely for the delivery of Priority mail. Contract costs are incurred on a per piece basis. In response to an interrogatory from APMU, witness Robinson responded that "100% of the increase in Emery contract costs from BY 1998 to the Test Year Before Rates is the result of increased volume." Tr. 7/2695. No party has challenged the Service's attribution of the contract costs and the Commission accepts the Service's treatment.
[5276] Transportation Network Costs. Under the Postal Service's proposal the premium costs for the Christmas network are treated as incremental to Priority mail. Under the Commission's methodology these costs are attributed to Priority mail. The premium costs for the Eagle and Western network are treated by the Postal Service as incremental to Express mail. In this proceeding UPS suggests that these costs be treated as attributable to both Express and Priority mail. As discussed fully in section III-4 of this opinion the Commission find UPS' argument unpersuasive and treats these costs as solely attributable to Express mail. UPS also suggests an alternative method of allocating empty space in purchased highway transportation. This alternative is discussed in Chapter III. D.
[5277] Section 3622(b)(2) directs the Commission to consider "the value of the mail service actually provided each class or type of mail service to both the sender and recipient," as gauged by "the collection, mode of transportation, and priority of delivery[.]" However, as the subsection specifies, the Commission's assessment of value is not limited to these measures.
[5278] In this proceeding, parties have advanced conflicting views regarding what considerations are appropriate for gauging the value of Priority Mail service, as well as the proper conclusions to be drawn. In addition to the assessment of Postal Service witness Mayes offered in support of her pricing recommendation for Priority Mail, intervenors APMU and UPS sponsored testimony containing independent evaluations leading to quite different appraisals of Priority Mail's value of service and consequent recommendations for pricing the subclass. APMU contends Mayes overestimates the value of Priority Mail, while UPS argues her estimate of value is too low.
[5279] Witness Mayes testifies that "Priority Mail has a fairly high intrinsic value of service[,]" inasmuch as it receives air transportation and enjoys the same priority of delivery as First-Class letters; that the large segment of unzoned, lightweight pieces enjoy the convenience of the collection system if they are under one pound or are metered; and that the availability of Delivery Confirmation Service enhances its intrinsic value. USPS-T-32 at 26. However, she also states that Priority Mail has a lower economic value of service, as its own-price elasticity of -0.819 is considerably higher in absolute value than that of First-Class Letters in this case, and somewhat higher in absolute value than the corresponding estimate of -0.771 for Priority Mail in Docket No. R97-1. Ibid.
[5280] Witness Mayes also appraises Priority Mail's value of service in comparison with similar services offered by private firms. She testifies that Priority Mail does not offer all the product features associated with services offered by United Parcel Service, FedEx, and other private service providers, such as guaranteed service commitments, free insurance, and free tracking service. Nonetheless, she surmises that adding Delivery Confirmation and Signature Confirmation services to Priority Mail, as well as using the PMPC network in an effort to improve service, "may be helping to move the perception of Priority Mail service closer to the image of the services provided by the private firms." Ibid.
[5281] United Parcel Service witness Sappington also provides an appraisal of the quality of Priority Mail service as part of the analysis leading to his recommendation that the subclass receive the same markup proposed by the Postal Service for First-Class Mail in this case.12 In general, he concludes that "Priority Mail provides a high level of service quality relative to First-Class Mail." Tr. 31/15241, 42.
[5282] As a matter of perspective, witness Sappington testifies that "all available direct measures of service quality and value should be studied carefully[,]" and that "[a] thorough consideration of more indirect potential indicators of service quality and value can also be instructive." Id. at 15252. He also cautions that, "excessive focus on a single imperfect measure of service quality should be avoided." Ibid.
[5283] Witness Sappington's appraisal of the extent to which Priority Mail achieves its delivery service standards illustrates the rationale underlying the latter recommendation. Beginning with a table apparently indicating that Priority Mail does not meet its service standards as frequently as First-Class mail achieves its standards, he nevertheless posits that Priority Mail may systematically delivers high service quality in the form of more expeditious delivery, even though it "meets its more exacting service standard less frequently." Id. at 15248. This is because Priority Mail could, illustratively, experience a "failure rate" in achieving its two-day standard of 50 percent yet still never provide slower delivery than First-Class Mail, even if the latter met its three-day delivery standard perfectly. Id. at 15250. Furthermore, because Priority Mail includes flats and parcels weight up to 70 pounds, and First-Class Mail includes pieces weighing no more than 13 ounces, the majority of which are letters, "even an identical delivery standard for an identical ZIP code pair may not pose an identical challenge to Priority Mail and to First-Class Mail." Id. at 15251.
[5284] According to witness Sappington, these difficulties in drawing meaningful conclusions about relative service performance are further compounded by concerns about the accuracy of the data available for the purpose. He notes apparent anomalies between results reported by the Postal Service's Origin/Destination Information System (ODIS), which tracks pieces only between receipt at originating post offices and arrival at destination post offices, and superior results reported by the Priority-End-to-End (PETE) system, which tracks pieces from their entry into the mail stream up to the time of delivery to addressee. In light of these counter-intuitive results, he voices concern about the accuracy of the reported service quality statistics. Id. at 15851-52.
[5285] Turning to other direct measures of value, witness Sappington testifies that Priority Mail fares well when measured against standards of reliability, convenience, security, freedom from content damage, and the options available for purchase as value-added features. Illustratively, he notes that Priority Mail is sealed against inspection; enjoys the convenience of the collection system for a large segment (nearly 39 percent in FY 1999); offers packaging materials and electronic Delivery Confirmation without charge; and can be purchased with pick-up service and manual Delivery Confirmation Service for a fee. Id. at 15252-53.
[5286] In the areas of "collection, mode of transportation, and priority of delivery" specified as indicia of value in § 3622(b)(2), witness Sappington identifies six distinguishing features of Priority Mail: (1) the dedicated PMPC processing and transportation network, supplemented by the main mail network; (2) clearance before First-Class Mail, and thus priority in access to transportation resources; (3) air transportation for many origin-destination pairs, versus surface transportation for First-Class Mail; (4) assignment of Priority Mail typically to earlier flights on the Eagle Network and commercial airlines than First-Class Mail; (5) delivery before First-Class Mail if it is not possible to deliver both; and (6) Sunday delivery at times during the peak year-end season, which First-Class Mail does not receive. Id. at 15253-54.
[5287] Finally, witness Sappington identifies one form of customer behavior as an indirect measure of value of service. Citing data from this proceeding and Docket No. R97-1, he testifies that between 1996 and 1999 the number of pieces sent as Priority Mail-even though they could have been sent more cheaply as First-Class Mail- increased from over 136 million pieces to more than 215 million. These numbers suggest to him that many customers value Priority Mail more highly than they do First-Class Mail, and their impressive growth "suggests that customer perceptions are matched by actual customer experience" Id. at 15254.
[5288] To the extent that its enhanced features enable Priority Mail to deliver greater value to its users than First-Class Mail provides its users, witness Sappington submits that § 3622(b)(2) suggests that the markup adopted for Priority Mail should exceed that established for First-Class Mail. Id. at 15254-55.
[5289] Association of Priority Mail Users witness Haldi presents a strongly contrasting assessment of Priority Mail's value of service. He also relies on somewhat different indicia of value in making his analysis.
[5290] First, witness Haldi testifies that Priority Mail suffers from declining market share, which does not indicate high value of service. Over the past decade, he states, Priority Mail "has suffered a gradual but persistent decline in market share even while the market for expedited delivery of packages and documents has experienced strong growth." Tr. 25/11538. Priority Mail volume has grown during this period, but has slowed, in part because of rate increases and also because of response to raising the First Class/Priority weight threshold from 11 to 13 ounces. According to Mr. Haldi, this volume shift to First-Class Mail indicates that Priority Mail has a somewhat low value of service, even at the two-pound rate of $3.20. Id. at 11536-37.
[5291] In terms of revenue, witness Haldi testifies that Priority Mail's market share has remained essentially unchanged over the last three years. However, in his view this may indicate that intense price competition within the private sector has limited its gains to volume growth rather than revenue growth. Mr. Haldi also observes that Priority Mail's market share of revenue is some 16 to 17 percentage points below its market share of volume, and interprets this as an indication that competitors have garnered more of the market for heavier weight pieces, which are charged higher rates. Id. at 11539-40.
[5292] Witness Haldi also testifies that the negotiated rates offered by competitors, who provide services with more desirable features than Priority Mail, may be "dangerously close" to undercutting existing Priority Mail rates. If the higher rate levels proposed by the Postal Service in this case rise above those of competitors, he opines that this may result in a loss of market share "far more dramatic" than witness Musgrave's econometric forecast projects. Id. at 11540.
[5293] In addition to increased competition within the expedited delivery market, witness Haldi also testifies that the delivery performance of Priority Mail compares unfavorably with that of competitors, also indicating a lower value of service. Lacking competitive intrinsic features such as a day-certain delivery guarantee and track-and-trace capability, Mr. Haldi states that the "bottom line" for Priority Mail is whether delivery is accomplished in accordance with the public's general expectation of overnight, two-day, or three-day delivery. Id. at 11540-42.
[5294] Comparing delivery performance results of First-Class Mail as measured by the External First-Class (EXFC) system and that of Priority Mail as measured by the Priority-End-To-End (PETE) system, he testifies that "no evidence indicates that efforts undertaken by the Postal Service to expedite the handling and transportation of Priority Mail over that of First-Class Mail have borne fruit." Id. at 11546. He also relies on ODIS data to demonstrate that during Fiscal Years 1997 through 1999, Priority Mail performance trailed that of First-Class Mail by 5 percent or more in overnight, two-day and three-day delivery standard areas. Id. at 11547-48. Using one quarter of FY 1999 data from the Delivery Confirmation database, Mr. Haldi notes that these "relatively sparse" data appear to show slightly poorer performance than for the general population of Priority Mail as measured by the PETE system, and even poorer performance than First Class as measured by EXFC. Id. at 11548-49. Finally, he cites witness Robinson's statistic that 29.8 percent of Priority Mail volume consists of pieces that are not identified as Priority Mail, which thus deprives users who paid its rates the advantageous handling due the subclass. This factor alone, he testified, seriously erodes the concept of Priority Mail's enhanced "intrinsic value of service." Id. at 11549-50.
[5295] Summing up, witness Haldi states that the available data show that Priority Mail has failed to equal, much less exceed, the delivery performance of First-Class Mail. He ascribes this to the Postal Service's inability to "figure[ ] out how to run an expedited delivery network that is capable of providing reliable, timely service." The resulting deficient performance "leads to the inevitable conclusion that Priority Mail receives no meaningful `priority.'"13 Id. at 11550.
[5296] On brief, APMU reiterates Dr. Haldi's grounds for concluding that Priority Mail's value of service puts it at an overall disadvantage in comparison with competing services offered by private firms. APMU Brief at 9-14; APMU Reply Brief at 15-17. UPS argues that Priority Mail continues to be a high-value service, citing the appraisal in witness Sappington's testimony. UPS Brief at 44-47. According to UPS, available evidence strongly indicates that Priority Mail also enjoys faster delivery than First-Class Mail most of the time. Id. at 48-51. UPS also argues that Priority Mail remains the dominant provider in the two- to three-day delivery market, asserting that APMU's claim of declining market share is "a myth." Id. at 55-56. In its reply brief, UPS reiterates its arguments that Priority Mail is a healthy, growing, and high-value service. UPS Reply Brief at 2-10.
[5297] Commission analysis. In the Docket No. R97-1 opinion, the Commission noted concerns regarding the value of Priority Mail service, notwithstanding its characteristics that nominally would suggest a high intrinsic value. PRC Op. R97-1, paras. 5301-08. The record of this proceeding indicates that these concerns continue to be warranted.
[5298] The data from various reporting systems presented by witness Haldi on the extent to which Priority Mail meets its expedited delivery standards illustrate several modes of non-achievement: significant failures to satisfy the respective overnight, two-day, and three-day delivery standards; failure to make delivery within three days for a small but not insignificant portion of total Priority Mail volume (approximately 8 percent according to ODIS data, and 9.7 percent according to Delivery Confirmation Service data); and delivery performance trailing that of First-Class Mail for five percent or more of Priority Mail volumes for Fiscal Years 1997 through 1999. Data from some systems may appear anomalous in comparison with data from other sources, as witness Sappington suggests; however, results from all systems agree in showing significant departures from Priority Mail's advertised delivery standards. The extent to which PMPC network operations contribute to these deficiencies is unclear.14
[5299] Even if Priority Mail collectively never provides slower delivery than First Class, as witness Sappington hypothesizes, Priority Mail's documented delivery performance does not justify a conclusion that the subclass delivers a high quality of service. This is because, as witness Haldi testified, the "bottom line" for Priority Mail senders and recipients is whether delivery actually meets the public's expectation of overnight, two-day, or three-day delivery.15 The record clearly demonstrates that the mailing public's expectations are frequently not met.
[5300] This departure from reasonable expectations is problematical, not only as a negative indicator of quality of service, but also as a matter of consumer fairness. The name "Priority Mail" itself implies a superior service, and the Postal Service advertises it as providing delivery in two to three days.16 Given the documented discrepancies between published service standards and actual performance, prospective users are not equipped to make informed choices among Priority Mail, First Class, or some other service.
[5301] The Commission strongly recommends that the Postal Service review its policies with regards to consumer advertising, especially to household consumers, in planning and managing the array of service offerings it provides the public. The rates for Priority Mail are significantly above those for First Class. While there appears to be some origin-destination pairs where Priority Mail has a higher standard of service than First-Class this is not the general rule. Customers presently can not easily determine from the Service's website or from information at post offices when different service standards exist. The Service should take steps to assure that customers are not misled into purchasing a more expensive product that will not provide added service.
[5302] In addition to the documented lapses in achieving delivery service standards, Priority Mail exhibits a declining economic value of service, as measured by its coefficient of own-price elasticity. As witness Mayes testified, the own-price sensitivity of Priority Mail has risen, in absolute value, from -0.771 in Docket No. R97-1 to -0.819 in this case. Witness Sappington counsels against using this measure of economic value in assessing overall value of service for a variety of reasons, including the consequences of alleged undue protection from competition and "Ramsey Pricing in Disguise."17 Tr. 31/15230-33. While the Commission recognizes the potential perils of undue reliance on the use of own-price elasticity to guide pricing recommendations, it remains the pre-eminent empirical measure available across all classes of postal services to gauge the economic value of each. As such, Priority Mail's increased coefficient is the best available evidence of its diminished economic value.
[5303] With regard to the market position of Priority Mail service, the evidence in this case does not appear to indicate any appreciable improvement in its status since the last omnibus rate proceeding. The Postal Service remains the dominant provider of lightweight pieces, but its market share of total pieces has continued to decline, from 62.7 percent in FY 1997 to 61.8 percent in FY1998 and 61.3 percent through the first three quarters of FY 1999. Tr. 25/11538-39, Table 8; USPS-T-34 at 6. In terms of revenue, Priority Mail's market share has been nearly static at about 45 percent, as witness Haldi observed. Tr. 25/11539, Table 8.
[5304] Taken together, these indicia do not bear out the high value of service that Priority Mail's intrinsic features would otherwise imply. In the Commission's view, this conclusion justifies moderation in the assignment of institutional costs to Priority Mail. Nonetheless, the Commission finds that Priority Mail should continue to provide an above average contribution to institutional costs.
[5305] Intervenor APMU also asks the Commission to moderate the cost coverage recommended for Priority Mail in order to mitigate the impact of significant cost increases driven by the Service's PMPC contract. APMU argues that these costs are unlikely to persist beyond the Test Year, and may even be reduced during that period by the termination of the contract between the Postal Service and Emery. APMU Brief at 20-21.
[5306] APMU witness Haldi documents the cost increases associated with the Emery contract, which he characterizes as "hugely expensive." Tr. 25/11504. He notes that actual expenditures under the contract in FY 1998 were $289 million, as compared to the Service's estimate of $265 million in Docket No. R97-1, and that this amount was supplemented by an additional payment of $20.8 million to Emery pursuant to a supplemental letter agreement. Id. at 11510. He also observes that Emery has filed pending claims amounting to more than $685 million that would affect every year from 1998 through the balance of the life of the contract, and has also filed a lawsuit requesting, among other relief, authorization to cancel the contract and stop work prior to its expiration in February, 2002. Id. at 11511. In view of the escalating costs of the PMPC contract, and of Postal Service witness Robinson's testimony that the configuration of the future Priority Mail network is uncertain, witness Haldi testifies that "it-would be inconceivable that the Postal Service would extend what it now knows to be a failed experiment." Id. at 11513.
[5307] On brief, APMU argues that the high costs associated with the PMPC contract drive significant increases in test year cost estimates for Priority Mail, yet should end during the same period. Citing Postal Service responses to discovery, APMU states that increases in Priority Mail volumes handled by the PMPC network are estimated to drive PMPC contract expenditures to $522 million in the test year, an increase of 81 percent over FY 1998 costs. APMU Brief at 20. APMU notes the Postal Service's refusal to identify how much of the estimated $522 million would be attributed if the same volume if Priority Mail were to be processed in-house without the network.
[5308] In any event, APMU argues, test year estimates of Priority Mail costs, which incorporate PMPC-related costs, may be excessive in the aggregate because "it is highly unlikely that the Emery PMPC network will operate throughout the Test Year." Ibid. In addition to witness Robinson's testimony regarding uncertainty as to the future processing network, and thus on Priority Mail's cost structure, APMU cites witness Patelunas's confirmation that postal management has directed the formulation of transition plans that would bring PMPC functions back into the Postal Service within a 90-day period. Id. at 21. Given such uncertainty regarding over more than $500 million in test year costs, APMU asks the Commission to mitigate the impact of the precipitous increase in PMPC costs by restraining the markup on Priority Mail.
[5309] United Parcel Service opposes APMU's argument that test year costs may be overstated because the PMPC contract will likely be terminated. In its Reply Brief, UPS cites the recent decision of the Federal Court of Claims which, among other rulings, denies the Postal Service the right to terminate the contract.18 Furthermore, UPS argues, even if Emery and the Postal Service mutually agree to terminate the PMPC contract, the Service may ultimately spend more to replace Emery with a new contractor, or to do the job of processing Priority Mail itself. UPS Reply Brief at 8.
[5310] Commission analysis. APMU does not ask the Commission to disallow any portion of estimated test year costs for the PMPC network. Nor would the Commission be justified in doing so, as the contract remains in legal effect and the network is expected to continue operations throughout the test period of this case.
[5311] However, as a source of significant, perhaps extraordinary, cost increases for the Priority Mail subclass, the Emery contract provides an additional reason for moderating the markup of Priority Mail on the ground of consequent impact on its users under § 3622(b)(4), as in the last omnibus rate proceeding. PRC Op. R97-1, para. 5330.
[5312] It is possible, as APMU surmises, that operational changes will enable the Postal Service to provide Priority Mail service in the future without continuing the marked escalation of costs documented in the past two rate proceedings. The Commission hopes the Postal Service will accomplish this change, in order to forestall the above-average overall rate increases that recent developments have made necessary.
[5313] In developing a proposed institutional cost contribution for Priority Mail, Postal Service witness Mayes tempers her recommended cost coverage in light of the large increase in estimated subclass costs, coupled with the volume decrease caused by raising the maximum weight of First-Class Mail in Docket No. R97-1. She did so because of concern for the anticipated impact on Priority Mail users under § 3622(b)(4). USPS-T-32 at 27. Her recommended markup corresponds to a 162.7 percent coverage of the Postal Service's estimate of Priority Mail's incremental costs, and requires an average rate increase of 15.0 percent. Id. at 25. Witness Mayes notes that this proposed increase is both significantly above the system average and much higher than the rate of general inflation in the economy as a whole. Id. at 27.
[5314] Intervenors APMU and Parcel Shippers Association (PSA) oppose this proposed level of increase, arguing that it is excessive. Based on witness Haldi's analysis of rates in the market in which Priority Mail competes, APMU argues that the proposed 15 percent increase could affect pre-existing rate relationships sufficiently to cause major competitive damage to the Postal Service. APMU Brief at 15-18. PSA witness Zimmerman, testifying on behalf of a number of members who make significant use of Priority Mail, characterizes the proposed 15 percent increase as "astoundingly large" and "excessive" in a rate proceeding in which the overall increase is 6.4 percent. Tr. 29/14135. On brief, PSA argues that a 15 percent increase for a subclass that already has such high cost coverage cannot be justified, and that an increase of that dimension will result in the Postal Service losing market share to the aggressive tactics of its competitors. Further, it argues that such an increase will create an umbrella under which those competitors will be able to significant increase their own rates, to the serious detriment of consumers and to the competitive process. PSA Brief at 37.
[5315] On the basis of witness Sappington's testimony, United Parcel Service argues that the cost coverage for Priority Mail should be maximized for the benefit of First-Class Mail users, and thus should be assigned a cost coverage at least as high as that for First-Class Mail. UPS Brief at 43-56; UPS Reply Brief at 1-10. According to UPS, the Commission should not heed the arguments of users regarding potential losses of volume and market share resulting from higher rates because the Commission's primary function is "to protect mailers without any readily available alternatives to the Postal Service, not to protect the Postal Service or its market share." UPS Reply Brief at 1-2.
[5316] The Commission recommends a cost coverage of approximately 162 percent for Priority Mail, which represents a markup index of 1.053. Actual FY 1999 Priority Mail costs were markedly higher than the Postal Service projections based on FY 1998 results. Therefore, the Commission's estimate of Priority Mail's test year attributable costs exceeds the Postal Service's incremental cost estimate and this has led to a larger average rate increase than suggested by the Service.
[5317] In addition to the considerations of Priority Mail's somewhat compromised value of service, as suggested by APMU, and the unavoidable "rate shock" caused by the high level of PMPC contract costs, discussed separately above, the Commission finds that a recommended level of coverage slightly above systemwide average is responsive to § 3622(b)(4) and (b)(5) concerns generally. The Commission finds it appropriate to moderate Priority Mail's coverage to this level in order to protect its users-especially those users whose mail falls within the monopoly segment of Priority Mail-from the impact of even higher rate levels. It is also the Commission's opinion that restraining coverage to this level is appropriate under § 3622(b)(5) to avoid the harm that higher rate levels may cause to the Postal Service's position as a competitor in the market in which Priority Mail competes. The Commission rejects the suggestion of United Parcel Service that this is an impermissible or negligible consideration in formulating pricing recommendations.19
[5318] Under the current rate schedule for Priority Mail, the minimum weight interval for which a rate is available is set at two pounds. In this proceeding, the Postal Service proposes introduction of an unzoned one-pound rate for Priority Mail, to be set at $3.45. USPS-T-34 at 9.
[5319] Witness Robinson explains that the proposed one-pound rate is intended as a long-term solution for bridging the rate differential, or "gap," between the maximum rate for First-Class Mail and the minimum Priority Mail rate. She notes that the Commission addressed this concern in Docket No. R97-1 by recommending an increase from 11 to 13 ounces in the maximum weight increment for First-Class Mail. While this change directly addressed the discontinuity between First-Class and Priority rates in R97-1, witness Robinson submits that the specific cause of the problem-the current 19-ounce weight step between the subclasses-requires a different solution. For this reason, she develops proposed Priority Mail rates that include a new one-pound rate. Id. at 15-16.
[5320] Obviously, witness Robinson notes, adding a one-pound element to the current rate design does not change the relative costs associated with a heavyweight First-Class piece and a lightweight Priority Mail piece. However, she testifies that appropriate rate design can select a rate transition between the two subclasses that will produce a smooth transition between their respective cost structures. Her proposed one-pound rate of $3.45 is 40 cents lower than the two-pound Priority Mail rate of $3.85 she develops, and 35 cents greater than the maximum First-Class Mail rate of $3.10 proposed by witness Fronk. Id. at 16.
[5321] For the additional 35 cents, she submits, a postal customer receives considerable additional service: the ability to mail an additional three ounces, the expedited handling and transportation performed for Priority Mail, and the opportunity to purchase delivery confirmation. Additionally, she states, the one-pound rate provides an attractive alternative for customers mailing documents, and affords a lower-price alternative for First-Class mailers who wish to "buy up" to Priority Mail service. Id. at 16-17.
[5322] No participant in this proceeding presented testimony or argument on brief opposing the introduction of a one-pound rate. APMU witness Haldi testifies in support of this change, stating that the proposal "seems sensible" because it reduces the weight step between First Class and Priority Mail, and mirrors the structure of rates charged by major competitors for their services that compete directly with Priority Mail. Tr. 25/11558. However, he also observes that the resulting rate structure "creates something of an anomaly" because the rate increment between one pound and two pounds would be 40 cents, but for the third and additional pounds up to five pounds would be $1.25. According to witness Haldi, any mailer could rightfully ask why the rate increment for an additional pound increases so precipitously. Ibid. He also testifies that Priority Mail users, seeing the "unbundling" of the current two-pound rate, would expect the 20 percent increase in the latter to be accompanied by a reduction in the one-pound rate. Ibid.
[5323] In light of these considerations, witness Haldi states that introduction of the one-pound rate for Priority Mail makes it necessary to consider: (1) reducing the maximum weight of First-Class Mail, and (2) reducing the one-pound rate itself. Over time, he surmises, if the Postal Service is able to reduce Priority Mail costs, it should be possible to evolve to an unzoned rate structure that will feature four equal rate increments from one to five pounds. Id. at 11559. To implement his second recommendation, witness Haldi proposes a one-pound rate of $3.00. Id. at 11566.
[5324] Commission analysis. The Commission recommends the introduction of a one-pound rate as a useful rate design innovation for "bridging the gap" between First Class and Priority Mail rates, and thereby enhancing the fairness and equity of these components of the mail classification schedule in accordance with § 3623(c)(1) and § 3622(b)(2). The potential utility of this new rate element also establishes its desirability and justification under § 3623(c)(2).
[5325] As noted above, no party has objected to the Service's proposed change, and the only controversy involves the appropriate rate to recommend in this proceeding. This issue will be addressed in the discussion of Priority Mail rate design below.
[5326] As noted in the preceding section, APMU witness Haldi proposes a reduction in the First-Class/Priority Mail breakpoint to 11 ounces. Tr. 25/11559-60. This change would reverse the two-ounce elevation in the breakpoint in Docket No. R97-1, which he proposed in that case to address the rate gap between the maximum First-Class rate and the minimum Priority Mail rate.
[5327] Witness Haldi explains that, with the Postal Service's proposed introduction of a one-pound rate, the "fundamental problem" with the rate gap has been solved, and alternatives to the current limit on the weight of First Class should be considered. Ibid. More importantly, given his proposal of a $3.00 one-pound rate, both the Service's proposed First-Class rates and the current rate structure establish "too high a floor" at a 13-ounce maximum. APMU Brief at 24. At current rates, a 13-ounce First-Class piece is charged $2.97; at the Postal Service's proposed rates, the corresponding charge would increase to $3.10.
[5328] On brief, the Postal Service opposes APMU's proposed return to the 11-ounce breakpoint. While it agrees with witness Haldi's premise that there should be a rational relationship between the highest First-Class rate and the lowest Priority Mail rate, the Service asserts that its proposed rates-which incorporate a 35-cent rate step-agree closely with the 36-cent step provided under the witness Haldi's proposal. Moreover, the Service argues that the proposal fails to satisfy the criteria witness Haldi articulated in his R97-1 testimony because it would result in an artificially low first-increment rate for Priority Mail. Postal Service Brief at VII-100-101.
[5329] Commission analysis. In the context of his proposed schedule of Priority Mail rates, witness Haldi's proposal to roll back the First-Class/Priority breakpoint to 11 ounces is a rational adjunct to his other recommendations. However, at the rate levels the Commission recommends for First-Class mail, it is unnecessary to lower the "floor" for the first-increment Priority Mail rate from the current 13-ounce breakpoint. Under the Commission's recommended First-Class rate schedule, a 13-ounce piece would pay $2.86. Inasmuch as the one-pound Priority Mail rate the Commission recommends is 64 cents above this maximum First-Class rate, there is no need to adjust the current breakpoint between the two subclasses. Consequently, the Commission declines to recommend APMU's proposed change.
[5330] APMU also proposes the introduction of a discounted rate category for zone-rated Priority Mail pieces mailed to a destination Sectional Center Facility (SCF) for processing and delivery of their contents. Qualifying pieces would receive discounts ranging from $1.50 to $3.35, based on their weight. Tr. 25/11571, Table 11.
[5331] APMU witness Haldi testifies that some mailers (such as through-the-mail photofinishers) who wish to expedite delivery of smaller items of a different class (such as Standard A pieces) currently combine them in a Priority Mail piece for delivery at a Destination Sectional Center Facility (DSCF), where it is opened and the enclosed mail pieces are processed for delivery. This type of mailing is typically referred to as "Priority Mail dropship," and the practice is codified in the Domestic Mail Manual as follows:
Priority Mail drop shipment expedites movement of any other class or subclass of mail (except Express Mail) between domestic postal facilities. The drop shipment receives Priority Mail service from the origin post office to the destination post office of the shipment, where the enclosed mail is processed and provided the appropriate service from that post office to its destination.
[5332] Under the current practice, witness Haldi notes, the illustrative Standard A mailpieces contained in the Priority Mail piece pay a destination entry rate, inasmuch as the dropshipment avoids transportation and handling costs that otherwise would have been incurred. However, the Priority Mail piece itself pays the full applicable rate, notwithstanding the fact that it terminates at the DSCF, and thereby avoids the costs of handling and transportation beyond the SCF, as well as the cost of delivery to a business or residence.
[5333] To promote fairness and equity in the rate schedule, witness Haldi testifies that a discount should be established to recognize these cost savings. Tr. 25/11568-69. He also observes that these heavier, zone rated Priority Mail pieces produce relatively high unit profits for the Postal Service, and submits that this profitable segment should be cultivated by the adoption of a discount. Id. at 11560-61. Moreover, he states, a discount would help prevent loss of such SCF-destinating Priority Mail volume to alternative carriers, which are better able to compete with Priority Mail because of the availability of consolidated national payment options that did not previously exist. Id. at 11570.
[5334] Because Priority Mail delivery cost data are unavailable, witness Haldi develops his proposed discounts from cost data underlying the Postal Service's proposed rates for the DSCF category of Parcel Select service. He derives estimates of the costs of delivering parcels of different weights by dividing a smoothed set of the proposed Parcel Select SCF rates by 113 percent, which witness Plunkett has identified as the coverage implicit in his proposed rates. Applying a passthrough of 75 percent of the cost estimates, he produces a schedule of discounts for each pound up to 70 pounds; averages the discounts over ten-pound weight ranges; and rounds the proposed discount for each weight interval down to the nearest five cents. Id. at 11569-70.
[5335] Witness Haldi testifies that the volume of destination entry SCF Priority Mail used to dropship smaller items is not known, but is reckoned to be as much as 10 percent of all Priority Mail pieces over five pounds. Projecting this level of usage at APMU rates, he estimates that his proposed rates would result in a revenue reduction of $9.95 million. Offsetting this reduction, he states, would be revenues from any increase in Priority Mail volume stimulated by the discounts, as well as additional revenue from the enclosed pieces. Id. at 11570.
[5336] The Postal Service opposes APMU's discount proposal on brief. The Service concedes that witness Haldi has proposed "a novel discount that may merit further study," but argues that it should be rejected because of its "analytic shortcomings[.]" Postal Service Brief at VII-102.
[5337] First, the Service challenges witness Haldi's use of information used by witness Plunkett in designing Parcel Post rates, arguing that Haldi improperly applied Plunkett's113 percent implicit coverage to DSCF volumes, and failed to remove the effects of rate constraints Plunkett imposed in designing DSCF rates. Id. at VII-102-03. Second, the Service argues that witness Haldi's discount proposal ignores several kinds of potential additional processing costs that DSCF parcel post shipments do not incur but Priority Mail shipments may incur. Id. at VII-103-07. Finally, the Service asserts that witness Haldi could not provide specific information on the number or characteristics of the Priority Mail pieces potentially eligible for the discount, and that his assessment of demand for a DSCF category is only anecdotal. Id. at VII-107. In view of the numerous unanswered questions concerning key aspects of the proposed discount, the Service urges the Commission to reject the proposal in the absence of adequate supporting cost studies and market research. Id. at VII-108.
[5338] Commission analysis. Witness Haldi has identified a segment of Priority Mail volume that may merit recognition in the form of a rate category to which discounts would apply. In qualitative terms, the "Priority Mail dropship" segment already identified in the DMM would appear to offer the potential for such recognition. However, as the Postal Service has argued, significant uncertainties remain unaddressed, primarily for lack of cost and demand data specific to this portion of Priority Mail volumes. While the Commission commends witness Haldi for focusing attention on this type of Priority Mail, his discount proposal lacks sufficient support to warrant recommendation at this time. However, the Commission strongly encourages the Postal Service to investigate the bases of such a discount in its ongoing review of the Priority Mail subclass.
[5339] As noted earlier, under the Postal Service's proposal in this docket the Priority Mail flat-rate envelope would continue to be charged the two-pound rate, notwithstanding the proposed introduction of a lower, one-pound rate element. Two participants object to this proposal, arguing that the new one-pound rate should apply.
[5340] Intervenors Douglas F. Carlson and David B. Popkin present several arguments on brief in opposition to the Postal Service's proposed retention of the two-pound rate for the flat-rate envelope. Both claim that application of the two-pound rate would produce an anomaly, inasmuch as 77 percent of flat-rate envelopes currently weigh one pound or less, and this majority volume would be charged 40 cents more than the one-pound rate proposed by the Service. Carlson Brief at 1-2; Popkin Brief at 12-13. Mr. Popkin illustrates the potentially absurd results of this rate application, observing that, "[m]ailers would save money by placing the flat-rate envelope [weighing less than a pound] into another container such as the available Tyvek envelope or crossing out the flat-rate designation." Popkin Brief at 13.20
[5341] Mr. Carlson also challenges what he views as the Postal Service's "only plausible argument" for retaining the two-pound rate, namely that, "over time there would be upward pressure on the one-pound rate as price-sensitive customers mail heavier pieces using the flat-rate envelope to take advantage of the lower rate."21 Carlson Brief at 2. He asserts that the size and capacity of the flat-rate envelope impose an upper limit on the weight they can contain, probably near the 22.89-ounce average weight of those pieces that weigh more than one pound; that potential migration to the flat-rate envelope is limited to a small proportion of Priority Mail volume that weighs, on average, only ounces more than a pound; and that the limited potential pressure of these pieces' migration to the flat-rate envelope at the one-pound rate is not cause for alarm. Even if some upward pressure on the one-pound rate occurs and the rate is raised in a subsequent rate case, he argues, customers would still be better off than if they were charged the two-pound rate. Id. at 2-6.
[5342] Both Mr. Carlson and Mr. Popkin also oppose application of the two-pound rate on the ground that it is likely to cause confusion among Priority Mail users, and has the potential for overcharging them. Mr. Popkin observes that it will require considerable publicity and training of postal employees to make the public aware of the potential savings resulting from not using the flat-rate envelope they are accustomed to, and that those users not savvy enough to change their mailing habits will be victims of "a 40-cent fraud." Popkin Brief at 13. Mr. Carlson discusses the Postal Service's options-including the possible introduction of a new, non-flat-rate envelope-at length, but concludes that, "[t]he clear solution to eliminate confusion and inefficient consumer behavior is to apply the one-pound rate to flat-rate envelopes." Carlson Brief at 8. Mr. Popkin concurs. Popkin Brief at 13.
[5343] Mr. Carlson further claims that, at the two-pound rate, the flat-rate envelope provides little value to Postal Service customers. Contrary to witness Robinson's justification that customers derive value from the absence of the need to weigh their flat-rate envelopes,22 Mr. Carlson notes that customers are required to take Priority Mail pieces weighing over 16 ounces to a retail window because of security concerns. See DMM § D100.2.6. If customers have any doubt about whether their mailing is under this threshold, they must weigh their envelopes-during which process they could as easily determine the applicable postage rate. Because security restrictions on the deposit of mail in collection boxes have eliminated most of the value formerly associated with the flat-rate aspect of such envelopes, Mr. Carlson argues that the Commission should reject the Service's suggestion that customers should pay a higher rate for their purported convenience. Carlson Brief at 7-8.
[5344] Finally, Mr. Carlson asserts that the one-pound rate for the flat-rate envelope is more consistent with applicable statutory pricing criteria because it is fair and equitable; is more consistent with the diminished value of the flat rate; reflects a better alignment with actual cost; would have a more moderate impact on users; and would better reflect simplicity in rates. Id. at 10.
[5345] In response, the Postal Service states that the assertions made by Mr. Carlson and Mr. Popkin on brief were not examined on the record as testimony; that no party has had an opportunity to present responsive testimony; and that "[t]hese procedural inadequacies militate strongly against serious consideration of the classification change sought." Postal Service Reply Brief at VI-39.
[5346] Beyond these alleged procedural defects, the Service challenges the factual bases of the analyses on which Mr. Carlson bases his assertions. Contrary to Mr. Carlson's position, the Service argues that the potential for "push up" on the one-pound rate caused by setting the flat rate at that level cannot be ignored. While recognizing that the record does contain sufficient information to quantify how the adoption of a one-pound flat rate would increase the average weight of (and the costs allocated to) the resulting one-pound/flat-rate envelope rate cell, the Service asserts that the former could increase by 0.41 pounds, or 63 percent above the 0.64 pound figure underlying witness Robinson's proposed one-pound Priority Mail Rate. Id. at VI-40 through VI-42. The Service also notes that neither Mr. Carlson nor Mr. Popkin have addressed the resulting decrease in Priority Mail revenue, which would have to be made up if the revenue target for the subclass is to be met. Id. at VI-43.
[5347] The Service also disputes Mr. Carlson's assertions regarding the limited utility and value of the flat-rate envelope. According to the Service, there is no empirical record support for the assertions that flat-rate envelopes are useful only for documents and other matter not requiring padded protection, or that the envelopes do not hold more than the average of 22.89 ounces. Ibid. On the matter of value, the Service observes that mailers who apply stamps to Priority Mail pieces over one pound may tender them to a letter carrier at their residence or place of business; for mailers with postage meters, the Service submits the value of the flat-rate envelope may be even greater because the prohibition against deposit in a street collection box does not apply. Id. at VI-44 through VI-45. The Service also argues that Mr. Popkin's argument regarding customers' use of more expensive Postal Service-provided packaging material is similarly unsupported by record evidence, and cites the Service's announced intention to design a "non-flat-rate" envelope for weight-rated Priority Mail pieces that will have characteristics similar to the current flat-rate envelope. Id. at VI-45, citing Tr. 7/2872.
[5348] Commission analysis. The Commission agrees with intervenors Carlson and Popkin that the introduction of a one-pound Priority Mail rate, while maintaining the rate for the flat-rate envelope at the two-pound level, would create the potential for confusion among consumers and possible overcharging for the many lightweight mailings currently sent in flat-rate envelopes. Messrs. Carlson and Popkin also raise questions regarding the continuing utility of the flat rate envelope when security restrictions have limited access to mailings of one pound or more, but these concerns seem overstated in light of the extensive use currently made of this mailing option.
[5349] The Commission agrees with the intervenors that the fairness and equity both of the Priority Mail rate schedule under § 3622(b)(1), and of the Domestic Mail Classification Schedule under § 3623(c)(1), are better served by setting the rate for the flat-rate envelope at the new one-pound level.
[5350] When the Postal Service proposed introduction of the flat-rate envelope in Docket No. R90-1, it also proposed application of the minimum rate for Priority Mail, then the two-pound rate. The Postal Service witness presenting the proposal characterized two pounds as being about "the effective maximum weight the envelope will hold[,]", but also recognized the possibility that a three-pound item might be sent in it. Docket No. R90-1, Direct Testimony of Ashley Lyons on Behalf of United States Postal Service, USPS-T-18 at 125. To the degree that pieces weighing more than two pounds might cause the Postal Service to incur additional transportation costs, he anticipated that there would be compensating benefits from reductions in window transaction costs. Id. at 125-26.
[5351] The record in this proceeding reveals that 77 percent of flat-rate envelope Priority Mail pieces would be expected to weigh less than one pound in the test year, prior to introduction of the proposed one-pound rate. USPS-T-34, Attachment C, page 1. Lightweight pieces so dominate flat-rate envelope volumes that the average weight per piece is estimated to be 10.3 ounces. Ibid.
[5352] However, with the introduction of the one-pound rate, witness Robinson's estimate of flat-rate envelope volume undergoes a reduction of nearly 79 percent, from 156,451,596 pieces to 33,148,328 pieces. Id., Attachment B, page 3 of 7; Attachment D, page 1 of 5. This analysis assumes that all Priority Mail pieces of one pound or less-including mailings that would otherwise make use of the flat-rate envelope-would divert to mailing at the one-pound rate. As such, the analysis is premised on an assumption that potential flat-rate envelope users would make the economically rational decision to mail under the one-pound rate using some other type of container, and thereby avoid paying the higher two-pound rate.
[5353] Given the extensive degree to which flat-rate envelopes are used for mailing lightweight Priority Mail shipments,23 the Commission is skeptical of the assumed response, which would require that 100 percent of potential users make a perfectly informed choice between that familiar medium and a different container eligible for the one-pound rate. It appears more likely that many Priority Mail users would continue the ingrained habit of using the flat-rate envelope, and unjustifiably be charged the two-pound rate for mailings of less than one pound. Further, since the security restriction on deposit in collection boxes becomes applicable only when a mailpiece exceeds one pound, the users whose mailings are most likely to overpay at the two-pound rate are also coincidentally those least likely to interact with a window clerk or other potential source of consumer information regarding the availability of the one-pound rate.
[5354] In light of the pre-existing pattern of use of the flat-envelope for mailings predominantly less than one pound, the Commission cannot ignore the potential for widespread overcharging of Priority Mail users if the two-pound rate remains applicable. In the Commission's opinion, the potential detrimental impact on consumers establishes the desirability of a mail classification change under § 3623(c)(2) and (5). See also § 3622(b)(7). Accordingly, the Commission recommends that § 223.5 of the Domestic Mail Classification Schedule be changed to state that Priority Mail sent in a flat-rate envelope is charged the one-pound rate.
[5355] The Commission recognizes that the "desirability of special classifications" must be considered "from the point of view of both the user and of the Postal Service[,]" 39 U.S.C. § 3623(c)(5), and that the Service's opportunity to be heard on the latter point has been limited to arguments on brief, which do not favor the recommended change. It must also be acknowledged that application of the one-pound rate to the flat-rate envelope leads to the development of recommended one-pound and two-pound rates that are slightly higher than they might be if the two-pound rate were retained. Nevertheless, the Commission is sufficiently concerned about the fairness and equity of retaining the two-pound flat-envelope rate while recommending adoption of a new one-pound rate interval that it finds it must recommend a change in rate application in this proceeding.
[5356] With the exception of the new one-pound rate element, the rates the Commission recommends in this docket retain the structural features of current Priority Mail rates. However, because the Commission recommends a larger average rate increase for Priority Mail than the Postal Service proposed, the rates are generally somewhat higher.
[5357] In designing Priority Mail rates, the Commission retains the "Emery adjustment" used by witness Robinson to distribute the costs of the PMPC contract to the piece rate elements and the poundage rate elements. While the allocation factor used to distribute contract costs cannot be traced to any identifiable pattern of cost causation because of the lack of data, the Commission agrees with the Postal Service that this approach is preferable to recovering 100 percent of PMPC system costs from the piece rate element alone.
[5358] The Commission recommends a one-pound rate of $3.50. At the 34-cent first-ounce and 21-cent additional ounce rates recommended for First-Class Mail, this first-increment Priority Mail rate provides a smooth transition between the two subclasses.
[5359] The Commission recommends a two-pound rate of $3.95. The three-pound, four-pound and five-pound rates increase in uniform increments of $1.20 from the two-pound rate.
[5360] For the heavier, zoned portion of the rate schedule, the Commission develops rates using the same cost distribution described in witness Robinson's testimony. However, to produce a more cost-based schedule, the Commission did not constrain rates as witness Robinson did with a five-percent band around the average rate increase of 15 percent. Instead, the Commission imposed an absolute rate increase constraint of 25 percent on all Priority Mail rates. Some rate elements in zones 7 and 8 were also adjusted to provide smoother transitions in rate progression.
[5361] The Commission finds the schedule of rates it recommends for Priority Mail to be consistent with the statutory considerations prescribed in the § 3622(b) factors. As in the last omnibus rate proceeding, a significant increase in estimated test year attributable costs dictates an above-average increase to satisfy the requirement of § 3622(b)(3). Considerations of impact on users under § 3622(b)(4) and of the Postal Service's status as a competitor under § 3622(b)(5) suggest moderating Priority Mail's contribution to institutional costs. Value of service considerations under § 3622(b)(2) also justify moderation in assigning institutional costs to Priority Mail, as previously discussed. Nevertheless, at the Commission's recommended rates Priority Mail will make an above-average contribution to institutional costs.
[5362] Inasmuch as there is no presorted or other worksharing-based category of Priority Mail at present, the "degree of preparation" consideration in § 3622(b)(6) is not applicable in this case.24 The Commission finds the introduction of the one-pound rate element proposed by the Postal Service to be compatible with the § 3622(b)(7) factor; while it represents a slight additional complication of the pre-existing rate schedule, its redeeming feature is the improved transition it provides between the First Class and Priority Mail rate schedules. Finally, the Commission finds resetting the flat envelope rate to match the new one-pound rate to be consistent with fairness and equity, in accordance with § 3622(b)(1).
1The word "actual" is used to signify the results of witness Callow's analysis derived from actual Postal Service data on a yearly basis. It does not signify a test year index derived by the Commission.
2Miller points out that platform costs are included in the calculation of destination entry discounts for Standard A letters, and so it is inappropriate to also include them in the calculation of presort and automation discounts. Tr. 7/3154. There are no destination entry discounts for First-Class Mail. Therefore in the calculation of presort discounts, platform costs are treated as worksharing related for First-Class Mail and non-worksharing related for Standard A letters.
3The consistent relationship is more easily demonstrated for 2 ounce pieces than for 1 ounce pieces because 1 ounce pieces are subject to the nonstandard surcharge.
4There are two classification changes between the filed base year (98) and the test year which complicate the calculations: the change in the maximum weight for First-Class Mail, and the elimination of Standard A single piece. The treatment of these changes is the same in both methods, and updating to the Hybrid year (99-00) as the base year for billing determinants eliminates the need to account for these changes.
6Witness Heselton's testimony states: "I propose a 4 cent workshare discount for First Class single-piece letters and cards prepared and addressed according to IBIP procedures: four cents per piece when printing is directly on the piece, and 3 cents per piece when printing is on labels affixed to the piece." Tr. 23/10457 (emphasis added). Witness Heselton does not develop IBIP worksharing cost avoidance figures for First-Class single-piece cards. Until such time as cost avoidances can be shown, the Commission will not consider an IBIP discount for First-Class single-piece cards.
7The integer constraint refers to the historic setting of single-piece First-Class rates in whole cent increments.
8In Docket No. R97-1, the Commission recommended an increase in the 11-ounce breakpoint between First Class and Priority Mail to provide a smoother transition between the rates for the two subclasses. PRC Op. R97-1, paras. 5234-5235. The Governors approved this recommended change.
9In Docket No. R97-1, the Postal Service proposed establishment of a delivery confirmation special service, to be made available for Priority Mail, Parcel Post, Bound Printed Matter, Special Standard and Library Mail. At present, Priority Mail Base Delivery Confirmation (PMB DC), which requires mailer preparation and electronic registration, is available at no additional charge; Priority Mail Retail Surcharge Delivery Confirmation (PMRS DC), a manual variant, is available at Postal Service retail counters for 35 cents. The Postal Service proposes to make Priority Mail eligible to purchase signature confirmation in this case.
11This adjustment will be described and analyzed in the discussion on Priority Mail rate design, infra.
12Witness Sappington describes his recommendation as a "mitigation" of a potentially higher markup on the order of levels assigned to Priority Mail prior to Docket No. R97-i.e., above both systemwide average cost coverage and the coverage assigned to First-Class Mail-because of the potential impact on users of applying such a markup to the substantially increased attributable cost per piece of Priority Mail in this case.
13In testimony filed in rebuttal to the recommendations of witness Sappington and other UPS witnesses, Haldi testifies that Priority Mail service is less reliable than First-Class Mail. While conceding that performance data that would enable computation of the variance in delivery times of the two subclasses are unavailable, he cites ODIS data as support for an inference that Priority Mail is likely to have a higher variance in delivery times than First-Class Mail. Tr. 45/19609-10.
14As witness Haldi notes, in reviewing the PMPC network's financial and operational impact the Postal Service's Inspector General found no appreciable improvement in service. Tr. 25/11511-12, citing Inspector General's Audit Report No. DA-AR-99-001, a redacted form of which was filed in this docket as Library Reference USPS-LR-I-315.
15As witness Sappington testified, and Dr. Haldi reiterated, reliability-the consistency with which delivery performance is achieved-is also an important determinant of value of service for Priority Mail. Tr. 45/19609-10.
16For example, on the Postal Service's Priority Mail website at www.uspsprioritymail.com, the Service advertises that, "[o]nline purchases sent by Priority Mail can be delivered in 2-3 days for up to 65%* less than what the competitors charge." One must read a footnote to find the clarification: "Priority Mail average delivery 2-3 days."
17However, witness Sappington concedes that own-price elasticity is germane under § 3622(b)(5) as a measure of the competitiveness of the market in which the product is provided. Tr. 31/15230.
18Emery Worldwide Airlines, Inc. v. United States, Docket No. 00-173C, United States Court of Federal Claims, decision filed August 25, 2000, slip op. at 25-26.
19"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. U.S. Postal Service, 184 F.3d 827, 845 (D.C.Cir. 1999).
20In a sealed brief, Mr. Popkin further argues that most knowledgeable mailers would select the non-flat-rate Tyvek envelope provided by the Postal Service-which costs more than twice as much as the cardboard flat-rate envelope-to save the 40-cent difference in postage, thereby imposing additional costs on the Service for retaining the two-pound flat rate. Popkin Initial Brief Filed Under Protective Conditions, September 12, 2000, at 1.
21Responses of the United States Postal Service to Presiding Officer's Information Request No. 5 (Questions 3 through 10), March 24, 2000, Question 7, p. 1 of 2, Tr. 46D/21792.
23On a before-rates basis, some 11.5 percent of all Priority Mail test year pieces are expected to consist of mailings in flat-rate envelopes. Id., Attachment B, page 3 of 7.
24This finding does not address the merits of APMU's proposed DSCF category, which the Commission declines to recommend on other grounds, as discussed earlier in this section.
 Postal Rate Commission http://www.prc.gov Voice: (202) 789-6800 Fax: (202) 789-6886 prc-admin@prc.gov |
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