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[5564] The Postal Service's proposal for Periodicals, which entailed an overall increase of 13.5 percent,1 has been marked by two significant developments. One is the impressive effort, spearheaded by the Periodicals Mailers, to identify appropriate post-filing adjustments to Periodicals costs and revenues, and thereby restrain the proposed increase.2 The other is enactment of legislation amending the Revenue Forgone Reform Act of 1993 (RFRA).3 This alters the development of all Periodicals rates. It also allows the Commission to give effect to the Service's proposed merger of the Nonprofit, Classroom and Regular subclasses into a combined "Outside County" subclass.4
[5565] Mailers' interest in the possibility of post-filing adjustments (mainly in the cost area) was fueled not only by the unexpected size of the proposed increase, but also by the alleged cause: persistent-and unexplained-increases in mail processing costs. Other factors-such as cost attribution changes and Periodicals' share of a 2.5 percent contingency request-also contributed to an unprecedented effort to address possible errors, omissions, cost reduction programs and other alternatives.
[5566] This initiative dominated the record on Periodicals, spilled over into other classes, and culminated in the Service's agreement, prior to close of the record, to a variety of post-filing adjustments. The Commission has accepted nearly all of the agreed-upon items as appropriate adjustments. Along with adjustments in other areas, this allows the Commission to reduce the recommended increase for Periodicals to 9.4 percent.5
[5567] The mid-October enactment of an amendment to RFRA, which the Service had anticipated in its filing, changes Periodicals rate development in two significant ways. First, commercial rates are to be developed by applying the ratemaking criteria in 39 U.S.C. § 3622(b) to the combined attributable costs of Regular, Nonprofit and Classroom mail, instead of to the attributable costs of Regular alone. Second, rates for Nonprofit and Classroom are to be 5 percent lower than the rates for Regular, as developed on "combined cost" basis.6 The development of Within County rates is affected by the new legislation only in that the benchmark subclass becomes Outside County.
[5568] This legislative change is part of a broader initiative to resolve what many view as anomalous outcomes under the original RFRA rate formula, which set the markup on preferred subclasses at one-half the level of their commercial counterpart. The reasons why anomalies occur differ somewhat from class to class, but in Periodicals, higher-than-expected costs and relatively low markups for the benchmark subclass are generally cited as the causes.
[5569] Given the attention to post-filing adjustments, discussion of other matters, such as rate design, has been limited. The Commission makes several rate design adjustments that are essentially technical in nature. It supports the Service's proposed solution to the question of extending eligibility for destination delivery unit (DDU) discounts to publications entered under exceptional dispatch arrangements. It does not recommend an intervenor-proposed pallet discount.
[5570] The Commission compliments the Service and the Periodicals Mailers on their initiative and cooperation in reaching substantial agreement on most of the post-filing adjustments affecting Periodicals in this case. Continued efforts will be needed to ensure that desired outcomes are achieved. The Commission also appreciates the Service's efforts to devise an effective solution to the DDU rate eligibility matter.
[5571] A comparison of proposed and recommended rates follows. The rates recommended for Within County represent an average increase for Within County of 6.8 percent. The remaining discussion addresses several preliminary considerations; addresses each of the post-filing adjustments suggested by intervenors; reviews details of the merger and resulting rate design; discusses Within County rates; and resolves remaining issues.
[5572] Periodicals is currently comprised of four subclasses: Regular, Nonprofit, Classroom, and Within County. The latter three are known as preferred subclasses because they receive special (i.e., reduced) rate treatment under the Postal Reorganization Act.7 One category in Regular-Science of Agriculture-also receives special treatment in the form of reduced pound rates on advertising content within zones 1 and 2.
[5573] Eligibility for the Periodicals class is conditioned, among other things, on a minimum amount of nonadvertising-or editorial-content.8 The presence of this type of content entitles all Periodicals mail to special consideration, given explicit statutory recognition of educational, cultural, scientific and informational value as a ratemaking criterion. See 39 U.S.C. § 3622(b)(8). Additional consideration for the preferred subclasses and the Science of Agriculture rate category is codified in 39 U.S.C. § 3626.
[5574] The four Periodicals subclasses have similar rate structures, which are based on per-piece and per-pound charges. The piece charges reflect several worksharing options (presorting, prebarcoding, and dropshipping) and, with the exception of Within County, recognize the proportion of editorial content. The per-pound charges (except for Within County) are tied to advertising and editorial content. The advertising pound charge varies by postal zone and entry point. The editorial pound charge is held to a reduced level, and does not vary by zone or entry point; thus, it is often referred to as the "flat editorial rate." Within County pound rates do not vary depending on the proportion of editorial content, and are not zoned.
[5575] The Service's Periodicals proposal assumes a merger of three of the four Periodicals subclasses, based on anticipated legislation. (Legislation along the lines the discussed by Postal Service witness Taufique was later introduced and enacted prior to issuance of the Commission's recommendation.) The merger combines the Regular, Nonprofit and Classroom subclasses into a single subclass referred to as "Outside County." Proposed Domestic Mail Classification Schedule provisions identify Nonprofit and Classroom as "preferred qualification" rate categories, rather than as subclasses. Postal Service Request, Attachment A at 33. The Service proposes one rate schedule for the new subclass, which includes a footnote indicating that Nonprofit and Classroom mailings are eligible for the specified 5 percent discount. Postal Service Request, Attachment B at 27 (Rate Schedule 421.)
[5576] Volume and revenue. In FY 1999, Periodicals volume amounted to 10.3 billion pieces and revenue was $2.1 billion. The Regular subclass accounted for the largest share, with 7.2 billion pieces and $1.7 billion in volume. Nonprofit generated 2.1 billion pieces and $331 million in revenue; Classroom generated 59.6 million pieces and $13.2 million in revenue pieces. In the Within County subclass, there were 893.5 million pieces and $77.1 million in revenue.9
[5577] Sharply increasing mail processing costs are a major cause for the Service again proposing above-average rate increases for Periodicals. Therefore, the Commission pressed the Service to assist in identifying definitive reasons for the historical pattern of above-average mail processing cost increases.10 Initially, an Information Request presented a table showing Cost Segment 3 unit mail processing costs for Regular Periodicals for FY 1989 through FY 1998, adjusted for wage inflation and for material costing method differences. P.O. Information Request No. 4 (February 25, 2000), Attachment 1. The POIR observed that "the basic trend is up," and requested the Service to provide shape-related cost data for other classes "to help ascertain if this upward trend in flat-shaped mail costs occurs for other mail categories and shapes as well."11 Id. at 1. It also asked the Service to discuss the adequacy of the costs for analytical purposes. Id. at 2.
[5578] The Postal Service supplied the requested data, but Postal Service witness Smith, who had coordinated its production, expressed doubt about its analytical utility. He agreed that overall trends may be obtainable, but said that it is likely that "the true magnitude of changes over time will not be accurately captured by these costs," given discontinuities in the underlying data and inadequacies of the LIOCATT-based costs. Postal Service Response to P.O. Information Request No. 4. Tr. 46D/21812.
[5579] After considering the response to P.O. Information Request No. 4, the Commission issued Order No. 1289, which set out several graphs based on data the Service had provided. It observed:
Two trends in particular stand out, one of which warrants further study. The inflation-adjusted costs of processing letters are steadily declining, which has alleviated the pressure for rate increases. The other pronounced trend is the increase in the inflation-adjusted costs of processing Periodicals since 1993. This is a negative trend that should be analyzed so that if possible, rates and classifications can be designed that will assist the Service in changing it.
[5580] The Commission directed the Service to present detailed evidence explaining the causes of the trend in the costs of processing Periodicals from a witness qualified to respond to participants' questions, noting that one "with high-level managerial responsibility over flat handling operations would appear to be best suited to this need." Id. at 2. It also asked for an explanation of why First-Class Mail and Standard A Regular (which have large volumes of flat mail) had exhibited a sharp increase in unit flats processing costs in FY 1998. Ibid. A supplemental ruling asked for an analysis of the productivity of flats processing on the flat sorting machine (FSM) 881. P.O. Ruling No. R2000-1/31 (April 7, 2000).
[5581] In response to the Commission's directive, the Postal Service sponsored the testimony of witnesses O'Tormey and Unger. Witness O'Tormey is the manager of Processing Operations, Operations Planning and Processing, and has extensive responsibility for letter, flat and package processing operations.12 USPS-ST-42 at 2. Witness Unger is the manager of Operations Support for the Southeast Area. USPSST-43 at 2.
[5582] With respect to the graphs in Order 1289, witness O'Tormey says the trend lines show that the experience with all types of flats is mixed, but acknowledges that Periodicals represents "a special case." USPS-ST-42 at 7. He asserts that a full understanding of why the cost trends for Periodicals flats have been different from other flats costs lies in differences between classes. In particular, he notes that Periodical mail piece and preparation characteristics make processing Periodicals even more of a challenge than processing First-Class Mail and Standard A flats. These characteristics include differences in makeup requirements for packaging, in typical volumes in a mailing, in densities of destinations, in presort levels, in whether they are sequenced by line of travel (LOT), and in whether they are in skin sacks. Id. at 13.
[5583] O'Tormey also cites other factors, such as the effects of the recent reorganizations, which reduced the number of experienced supervisors, and a change in the treatment of workhours. He says the latter resulted in a significant number of hours associated with prepping and dispatching mail for FSM operations being shifted from indirect to direct workhour costs. Id. at 17.
[5584] Witness Unger provides a field operations perspective; addresses the increase in flats costs in FY 1998; and reviews FSM 881 performance. Among other things, he describes the introduction and evolution of the Service's flat mail automation program; identifies the challenges this program has - and continues - to pose; discusses distinguishing characteristics of letter mail and flat mail; and discusses differences between Periodicals flats and Standard A flats. USPS-ST-43 at 3 et. seq.
[5585] Unger offers three general explanations for the overall Periodicals cost trend. These are essentially the same as those identified by witness O'Tormey. They include the characteristics of Periodicals mail; measures taken to improve service for Periodicals, but not for mail in other classes; and operational considerations. As examples of the latter, Unger cites the use of polywrap and the fact that smaller-volume Periodicals' mailings generally are not as suited to long-run machine operations as Standard A mailings. Id. at 3 and 14.
[5586] The FY 1998 cost spike for flat-shaped mail. Witness Unger points to two factors that might account for the higher reported costs for all flat mail in FY 1998: the after-effects of the United Parcel Service strike, as the pent-up volume from mailers of flats was introduced into a stressed system, and expenses incurred in preparing for the Fall 1998 mailing season, so that service levels would be acceptable. Id. at 11-13. He explains: "Fiscal Year 1998 had opened in September 1997 with overloaded processing systems, high use of overtime, and extra transportation. It closed with the impact of more costs that were being incurred to ensure that a different fall mailing season would occur in 1998." Id. at 12. As it turned out, Unger says, there was less volume than mailers had predicted, but he contends that "[a]s planned, service benefited from the extra complement, transportation, and processing capacity; but additional expenses were incurred to ensure that service." Ibid.
[5587] Declining FSM 881 productivity. Witness Unger also acknowledges that FSM 881 productivity has declined. For the machines in operation during 1995-1999 in his area, he states: "The combined productivity (keying and BCR/OCR read) has declined from 711 total pieces handled per workhour to 545 total pieces handled per workhour." Id. at 13. However, his assessment is that this "indicates that while some operational inefficiencies have occurred, beneficial operational changes have had a very significant impact, but have also contributed to the impression of a loss in productivity." Ibid.
[5588] In addition, Unger cautions against using machine productivity as a performance indicator. Id. at 14. In his view, the considerations relevant to assessing performance are the type of sortation; whether automation assets are fully utilized within the available operating window; the extent to which related operations are costed with the sortation operation; the cost of the workhours involved; and the impact on downstream operations. Unger says these considerations come together in the operating budget, so he contends that using dollars as the common denominator is the most valid approach to assessing performance. Id at 15.
[5589] Cross-examination. On cross-examination, witness Unger agrees that an evaluation of his testimony should consider not only the cost increases the Service has incurred, but also cost savings that mailers achieve on behalf of the Service.
[5590] Tr. 21/8221. He then acknowledges that over the period in question, numerous practices that should have tended to offset cost increases, at least in part, have been introduced or expanded. For example, he agrees that dropshipping (undertaken at mailers' expense) reduces the Service's costs, and is a practice that has grown since 1993. Id. at 8239. He also agrees that the volume of automated Periodicals mail has increased since 1993 and that, all other things being equal, this should tend to reduce the Service's mail processing costs. Id. Moreover, he agrees that the Service has installed more automated flat processing capacity over the period in question, and states that this should-and does-reduce the costs of mail processing. Id. at 8240. He also acknowledges that more Periodicals mail is entered on pallets in 1999 than in 1993; that the percentage of Periodicals mail presorted to the carrier route level has grown, and that some newspapers are now barcoded, while none were in 1993. Id. at 8246-47.
[5591] Similarly, cross-examination of witness O'Tormey also elicited agreement that the advent of various automated functions should have reduced total unit mail processing costs, at least for the distribution function. Moreover, as to the effect of supervisors' retirements, O'Tormey acknowledges that the bulk of the "unusual bulge" was over by the end of FY 1993, and that "average" attrition has occurred since then. Id. at 8336.
[5592] Conclusion. Notwithstanding its attempt to address the disturbing Periodicals cost trend, the Commission's inquiry found no definitive reasons why Periodicals mail processing costs have increased. Certainly, as one witness for the Periodicals Mailers concludes, there is no "smoking gun." Postal Service witnesses O'Tormey and Unger discuss numerous and varied factors that, at first impression, may appear to be contributing factors; however, on cross-examination, both witnesses agree that a stream of mechanization and technological improvements should have generated cost reduction benefits.13 Further, they acknowledge that increases in mailer worksharing-such as presorting, barcoding and dropshipping-plus widespread use of pallets-should have had a downward influence on costs. They also concede that some events, such as supervisors' retirements and the United Parcel Service strike, were essentially one-time occurrences.
[5593] The only conclusion is not comfortable: there are many reasons for believing that costs should have decreased; only a few factors that could be associated with increases; and a persistent net upward trend. It is clear that mailers and the Service must aggressively pursue the cost reduction opportunities identified on this record, and explore other aspects of the "operational realities" they face.
[5594] The Periodicals Mailers developed extensive testimony identifying potential post-filing adjustments that could be recognized on this record. This effort addressed not only mail preparation and processing changes, but also the contingency, an additional revenue source, and costing methods.14 With the Postal Service's support, their effort has produced concrete results: namely, the identification of nearly $100 million in post-filing projected test year adjustments. Along with other changes the Commission recommends, this allows the Commission to recommend a single-digit increase for Periodicals. The Service does not oppose an increase at this level.
[5595] In the Commission's view, the favorable outcome achieved on this record can be traced to the creation and sustained efforts of the joint USPS-Periodicals Industry Operations Review Team15 and to ongoing work of the Mailers' Technical Advisory Committee (MTAC). The Review Team, established following Docket No. R971, visited more than a dozen postal facilities, related delivery post offices, and two mailer plants, in the final quarter of calendar 1998. The purpose of the visits was to investigate the causes of, and seek solutions to, continuing cost increases. USPS-LR-193 (Item 2-March 15, 1999 Team Report) at 2-3. An MTAC Package Integrity Work Group has pursued many issues related to bundle breakage.
[5596] Significantly, the Review Team's report stated that it had "identified actions that should be taken by industry, local postal managers, and national postal management to improve Periodicals processing and drive costs from the system." Id. at 3. The related recommendations were grouped into 15 broad issues, as follows: mail make-up; mail containerization; address quality; enforcement and enhancement of entry/acceptance requirements; flats operation plan; combination and separation of mail classes in the incoming mail stream; bundle preparation and handling; operations management; transportation; mail processing annexes; flats automation; inter-class cost impact; the relationship between low costs and good service (specifically, that these are not mutually exclusive propositions); allied operations and cost attribution methods; and rate design. Id. at 4-6.
[5597] In its report, the Review Team expressed its hope that the results of a number of specific initiatives could be reflected in this rate case. Id. at 7. As filed, the Service's Request did not include any recognition of the cost savings associated with initiatives that were underway; however, over the course of this case, the Service has expressed its support for many proposed adjustments related to mail preparation and mail processing changes. As discussed below, the Commission finds that most of these adjustments should be reflected in its recommendation.
[5598] This result would not have been possible without the joint efforts that preceded the filing of this case, that have been put forth on this record, and that are expected to follow. The Commission compliments the Review Team and applauds the industry support behind its formation and ongoing work. It recognizes the longstanding contributions that MTAC has made to improving the mailing environment and, in particular, compliments the work of the MTAC Package Integrity Work Group. The Commission also acknowledges the Service's cooperation in addressing this difficult, but important, matter. It urges individual members of the Periodicals industry, their suppliers, and postal management to accept the clear import of the Review Team's recommendations: without effective change, costs cannot be constrained, nor can rate increases be moderated.
[5599] Note on post-filing adjustments. In virtually every omnibus filing, the Commission finds it appropriate-and often necessary-to reflect post-filing adjustments. These adjustments can range from the purely technical (such as the correction of an obvious error or omission) to the highly controversial (such as those associated with methodological differences). There is no single standard for making such adjustments, but threshold considerations are the extent to which they materially assist in the development of an appropriate base for the Commission's rate and classification recommendations and the extent to which they have record support.
[5600] Historically, these adjustments have had a comparatively limited impact on any particular class of mail in terms of percentage rate increase. The adjustments proposed by the Periodicals Mailers in this case, considered as a whole, reduce the originally proposed Periodicals rate increase by almost one-third. Some of these are typical rate case adjustments (making a correction or a conforming change), but others rely to a great extent on substantial prospective (test-year) changes in mailer behavior and Postal Service operations.
[5601] The Commission generally concludes that the record supports a finding that all of the items identified in the jointly proposed changes reflecting improvements in mail processing and mail preparation constitute appropriate post-filing adjustments. Moreover, the Commission is cautiously optimistic that associated savings (and savings from additional changes) can be increased in the period beyond the test year, assuming continued attention from the industry and postal management to critical issues.
[5602] The Periodicals Mailers and the Postal Service jointly identify several cost reductions arising from changes in mail preparation and mail processing expected to be in place for all or part of the test year. Some of these require mailers to undertake changes in the way they prepare their mail for acceptance; others require the Service to adjust processing operations in a variety of ways.
[5603] The Periodicals Mailers represent that their trade associations are working in three areas to ensure that the proposed makeup requirement changes are publicized to all Periodicals mailers. These efforts include publicizing the changes to their own members, discussions at association postal committee meetings, and anticipated notification to their entire membership when final rules are promulgated. They also include participation in panel discussions on mail preparation changes and preparation of updates to educational materials. The Periodicals Mailers also note that the Postal Service is undertaking its own educational efforts.
[5604] Reduction in bundle breakage. There is no clear agreement on the extent to which increased bundle breakage has contributed to higher mail processing costs, but the Review Team concluded that bundle breakage appears to add significantly to Periodicals costs. Based on changes being made in the preparation and processing of bundles, MPA witness Glick projects that there will be a 50 percent reduction in breakage, and that this will produce test-year cost savings of approximately $21 million for Periodicals. Tr. 24/11236 (Table 3). This estimate is based on witness Stralberg's revision of witness Yacobucci's mail flow model, discussed further below. The Service, on the other hand, contends that a reduction of no more than 25 percent is feasible, and that this will yield savings of $15 million. Postal Service Brief at VII-141. The Postal Service estimate is based on the Yacobucci model as filed.
[5605] This is one of the few areas where the Service and the mailers have not reached complete agreement. The Commission agrees that some savings from improved bundle preparation and processing will occur. Both witnesses O'Tormey and Unger state their belief that bundle breakage reduction measures will work. USPS-ST-42 at 22-23; Tr. 21/ 8169. Precise quantification on this record is not possible, but the Commission believes that it is appropriate to adopt witness Glick's reduction of 50 percent, given the extensive attention being given to this issue by the mailers and the Postal Service. Following the Postal Service's use of the Yacobucci's model as filed, updated to FY 1999 and for Commission costing results, the savings are found to be $27.6 million for Periodicals, before the application of piggyback factors.16
[5606] Preparation of presorted carrier route Periodicals in LOT sequence. LOT sequencing generally approximates carriers' actual sequence of delivery. USPS-ST-43 at 4. Postal Service witness Unger says preparing mailings in this manner results in significant savings because carriers spend less time casing the mail, as the next piece to be sorted is usually very close in the line of travel to the compartment for the piece just sorted. Ibid.
[5607] Under the terms of a new mailing requirement that will take effect upon implementation of Docket No. R2000-1 recommendations, Periodicals mailers will be required to prepare their carrier route presorted mail using up-to-date Postal Service line-of-travel information.17 65 FR 46363-64. Both the Periodicals Mailers and the Postal Service propose recognition of $23 million in associated cost savings. Tr. 24/11275; Periodicals Mailers Brief at 7; and USPS-LR-I-307.
[5608] This proposal seeks a substantial adjustment based on prospective compliance with a new mail preparation rule. The Commission finds that recognizing estimated savings of $23 million is appropriate, assuming widespread compliance with, and enforcement of, this now-optional mail preparation method. A significant factor influencing the Commission's decision to recognize savings at the proposed level is that the record shows extensive education efforts that have been underway. Moreover, printers may already be familiar with this requirement, as it currently exists in Standard A.
[5609] Preparation of mail is a manner compatible with the Service's use of a 5-digit sort scheme-the "L-001" requirement. The Periodicals Mailers also propose recognition of $4.972 million associated with a new regulation requiring mailers to combine mail from 5-digit sacks or pallets destinating at the same station, which allows creation of a five-digit scheme container. 65 FR 46361-63. According to witness O'Tormey, this preparation method takes its name from the label used for pallets and sacks prepared this way, and has been an option since July 1999. He asserts that this practice has had a positive impact. USPS-ST-42 at 25.
[5610] The Commission concludes that the record shows that this practice allows greater densities (because there are more direct containers) at locations where piece distribution takes place. The Commission has recognized these savings.
[5611] Elimination of skin sacks for carrier route mailings in sacks. Witness O'Tormey notes that "skin sacks" are often prepared by the Periodicals industry to improve or protect service. He says the theory is that pieces in direct sacks (those that do not have to be opened until they reach the carrier) are less likely to be delayed during interim processing steps (sack sorting, opening, dumping, distributing bundles, etc.). O'Tormey states that eliminating this sacking option for carrier route mailings would reduce the number of sack handlings in the system without jeopardizing service, since those sacks would not be opened until they were at the delivery unit.18 Id. at 24.
[5612] In a final rule published in the Federal Register (65 Fed Reg 46361-63), the Service has adopted a change that effectively eliminates skin sacks by increasing sack minimums from 6 to 24 pieces. Both the Periodicals Mailers and the Postal Service support recognition of $1.587 million associated with this rule. Periodicals Mailers Brief (ANM, et al) at 8; Postal Service Brief at VII-140.
[5613] The Commission agrees with the recognition of this change, in the amount proposed by the Periodicals Mailers and the Postal Service.
[5614] Combined automation and presort mailings. The Periodicals Mailers and the Postal Service also support recognition of $7.924 million associated with another rule change, which would allow mailers to combine barcoded and non-barcoded bundles in the same sack (but not the same package). 65 FR 50054-89; Tr. 46-D/21512-14; USPS-LR-I-332; Postal Service Brief at VII-141. The Commission also agrees that savings in the amount proposed on this record should be recognized.
[5615] Implementation of vertical flat casing. The Periodicals Mailers and the Service point to savings of $7 million from implementation of a work method change, pursuant to a Memorandum of Understanding with the National Association of Letter Carriers. This entails converting routes in a delivery point sequencing (DPS) environment that use the composite bundle work method to the DPS vertical flat casing method, and generates a cost reduction in carrier operations. Tr. 46-C/20958-59. USPS-ST-42 at 23. Witness O'Tormey says the agreement gives management the authority to implement the vertical flats casing method for those routes not currently using it. Under this method, flats are sequenced in the order of delivery in one handling by the carrier rather than in two handlings, as occurs under the more traditional flats sorting method. USPS-ST-42 at 23-24. The Service has included $7 million for this item in its July 7 update. Tr. 46C/20874.
[5616] The Commission agrees with the recognition of this change. As responsibility for ensuring that the projected savings are realized lies primarily with the Postal Service, the Commission expects management to foster a smooth transition on affected routes.
[5617] Productivity improvements and postal equipment enhancements. The Periodicals Mailers and the Postal Service also support recognizing cost reductions associated with several mail processing changes. These include $2 million in savings for increased manual productivity (Tr. 46-C/20961-62); $4 million in savings for improved AFSM 100 performance; and $250,000 associated with retrofitting FSM 1000s with an optical character reader and an automatic feeder.
[5618] Witness O'Tormey says one area where the Service has already realized improvement is in manual flats distribution operations, where the Service is achieving increased productivity levels. USPS-ST-42 at 22. The Service confirms that its July 7 update includes $6.266 million associated with these improvements and enhancements. Tr. 46C/20874.
[5619] "Ride-along" revenue. Both the Periodicals Mailers and the Postal Service support the recognition of $10 million dollars in "ride-along" revenue associated with certain attachments and enclosures. This is based on the expectation that at least this much revenue will be generated by a recently-approved experimental classification change (in Docket No. MC2000-1) that allows Standard A material to be included in (or "ride along" with) Periodicals publications for a fee of 10 cents.19 Tr. 24/11296 and Tr. 38/17077.
[5620] The Commission agrees that this revenue should be recognized. It not only accepted witness Taufique's representations in the recent experimental case that estimated ride-along revenue would amount to at least $10 million, but specifically noted that Taufique said the revenue would thereafter be associated with Periodicals. PRC Op. MC2000-1 at 5. Neither the Service's Request nor the hybrid billing determinants recognize this revenue.
[5621] As to the amount that should be recognized, the Postal Service states that data show approximately 42 million pieces mailed at the "ride-along" rate as of August 3, 2000, or $4.2 million in revenue. Given the time lag between the filing of mailing statements and tabulation, the Service indicates that this figure could be somewhat understated. It also suggests that seasonal effects and "ramping up" might lead to increased usage later in the year. Tr. 46C/20871 (response to MPA/USPS-69).
[5622] Projected AFSM savings. MPA witness Cohen says witness Buc's correction to the Service's estimate of test year cost savings related to the installation of AFSM 100s increases savings by approximately $200 million for all mail classes. Tr. 24/11316. She determines Periodicals' share by using mail processing cost distribution keys in Postal Service witness Van Ty Smith's testimony. Consistent with Buc's analysis, which estimates that half of the savings is from replacing manual sorts and the other half is from replacing machine sorts, Cohen distributes half of the savings using the key for manual flat sorting and half using the FSM distribution key. Ibid. Her estimate for Periodicals adds $28 million to the savings projected by the Service. Id. at 11278.
[5623] In response to Order No. 1294, the Postal Service increases its estimate of savings from installation of AFSM 100s from the original $169.4 million to $226.4 million. Using available information on sorting productivities for FY 1999, witness Buc revised his correction to the Service's estimates, leading to a net amount of $176 million. Tr. 38/17191 (Table 2). Cohen estimates that $24 million of this should accrue to Periodicals. Id. at 17076.
[5624] On rebuttal, Postal Service witness Patelunas raises a number of questions about the data and assumptions used by witness Buc, and argues that Buc's figures are out of line with the amounts the Postal Service has set in its field budgets. Tr. 38/17145; see also Postal Service Brief at II-26-28, and Reply Brief at VI-51; Periodicals Mailers Brief at 14, and Reply Brief at 7; DMA et. al. Brief at 22, and Reply Brief at 9.
[5625] The Commission agrees that some caution is needed in projecting operating savings. It appears witness Buc's assumptions are overly optimistic. Accordingly, the Commission accepts the amount the Service estimates in its response to Order No. 1294.
[5626] Billing determinants play an important role in this case due to mailers' worksharing patterns and changes in the structure of presort discounts as a result of Docket No. R97-1.20 To create a set of billing determinants for FY 1998 that accurately reflects the discount structure of Docket No. R97-1, witness Taufique uses data from postal quarter three of FY 1999 to adjust the billing determinants for FY 1998. USPS-T-38 at 5. When cost information for FY 1999 became available, the Commission asked the Postal Service to submit an appropriate set of billing determinants for FY 1999. P.O. Information Request No. 16 (July 14, 2000). In response, the Postal Service asserted that because two different rate structures were in effect for FY 1999, it would be better to use the billing determinants for the postal fiscal year consisting of the last two quarters of FY 1999 and the first two quarters of FY 2000. The Postal Service prepared these "hybrid" billing determinants and submitted them as part of USPSLRI435.
[5627] To provide a reference point for assessing these determinants, witness Cohen develops an adjusted set of FY 1999 determinants, using a process that is analytically similar to the process Taufique used to adjust the FY 1998 determinants. She then observes that there was more mailer worksharing in the hybrid billing determinants than in her adjusted FY 1999 determinants. As increased worksharing should lower the Service's costs, Cohen proposes to adjust the FY 1999 costs downward to align the costs with the hybrid billing determinants. Tr. 38/17077-78 and MPA-LR-13.
[5628] Witness Cohen observes that the Postal Service made final adjustments to test year after rates (TYAR) cost estimates for all major classes except Periodicals. Tr. 38/17078. To correct for the increased worksharing, the adjustments Cohen proposes are $31 million for Periodicals Regular and $8 million for Nonprofit. Ibid., citing MPA-LR-13, Exhs. 7.1 and 8.1. She says her method follows Postal Service precedent: she uses the Periodicals Mailers' mail processing cost avoidance model (MPA-LR-2), witness Stralberg's DDU cost avoidance estimate, and the Service's unit delivery and transportation costs for Periodicals. Id. at 17078.
[5629] The Service agrees that some adjustment is in order, but indicates it might not make the adjustment in exactly the same way as Cohen proposes. Postal Service Brief at I-23-24; Postal Service Reply Brief at VI-48. Given the Commission's decision to use a hybrid test year, an adjustment is warranted. Based on models updated for FY 1999 and Commission costing, the amount is $39.1 million.21
[5630] In direct testimony, witness Cohen estimates $22 million in test year cost savings associated with Periodicals rail and highway transportation. Tr. 24/11279-80. This estimate is based on MPA witness Nelson's analysis. In supplemental testimony, Cohen asserts that the Service has acknowledged highway transportation savings, but has not incorporated "easily achievable" efficiencies in rail transportation. She says this portion represents $16 million in additional savings. Tr. 38/17076.
[5631] The estimates of witness Nelson for savings in rail transportation are related to shifting mail off Amtrak, and to the potential benefits of negotiating more favorable contracts as a result of increased competition in the rail industry. His estimates were discussed extensively by Postal Service witnesses Pickett, (USPSRT9) and Young (USPSRT10). See also Postal Service Brief at V147-48. The Commission concludes, following review of these materials, that it would be speculative to project that these savings will occur in the test year even though the Postal Service will surely continue to seek lower transportation costs across all modes, consistent with its needs.
[5632] Witness Cohen notes the existence of air transportation dollars for Periodicals. She says the Periodicals Industry Operations Review Team noted these as well and concluded that such "extraordinary transportation was inappropriate." Tr. 24/11276. Cohen indicates that the Postal Service generally agrees. She then points to the fact that air transportation costs for Periodicals were $11 million lower in FY 1999 than in FY 1998, and argues that this is evidence that the Service already has reduced this type of air transportation usage. Cohen believes test year costs should be reduced by this amount.
[5633] This suggestion was effectively overtaken by later developments, which led to the Commission's use of actual FY 1999 costs to estimate test year costs. If the Commission were developing test year costs using FY 1998 as a base, Cohen's suggestion appears to have merit. As it stands, however, the issue is moot on this record.
[5634] Costing theory: volume variability and the ES study. Two issues receiving considerable attention in this case are Postal Service witness Bozzo's volume variability analysis and Postal Service witness Raymond's use of an Engineering Standards (ES) study to analyze city carrier costs. As summarized in the testimony of witness Cohen, the Periodicals Mailers support the Bozzo analysis, but oppose the use of the ES study. Assuming the Bozzo analysis is used, the Periodicals Mailers support its extension to non-MODS offices and to bulk mail centers (BMCs). According to witness Cohen, this extension reduces Periodicals costs by $106 million dollars; rejecting the ES study reduces them by another $50 million.22
[5635] As explained in detail in the costing sections of this Opinion, the Commission is not accepting the Bozzo analysis or the ES study. The sections that follow provide a brief discussion of a number of other proposals of the Periodicals Mailers. Most are discussed in more detail in other sections.
[5636] Distribution of mixed-mail and not-handling costs. The Periodicals Mailers propose a $17 million decrease in base year Periodicals costs related to a change in the distribution of allied mixed mail costs. This entails extending the broader mixed mail procedures used by the Service for the MODS and BMC Platform cost pools to the allied mixed mail pools. The Postal Service agrees with this change. As discussed in the costing section, the Commission adopts it. In a related matter, the Periodicals Mailers support a broader distribution of not-handling tallies than the Service proposed, specifically using the response to In-Office Cost System question 19. Tr. 24/11288 and 11378. The Postal Service does not support this broader distribution. Postal Service Brief at V-61-69 and Postal Service Reply Brief at VI-54. The Commission agrees with the Service on this issue.
[5637] Use of annual volume data from rural carrier cost system. The Periodicals Mailers and the Service jointly support a $17 million decrease in Periodicals base year costs based on a change in the rural carrier mail shape adjustment using a full year of volume data from the rural carrier cost system. Tr. 46-C/20840 and USPS-LR-I-335. Postal Service witness Kay endorses this change, which was presented by MPA witness Glick. Postal Service Brief at I-21. The Commission accepts this adjustment.
[5638] New regression analysis for load time variability. The Periodicals Mailers propose use of a new regression analysis for the variability of load time. This change produces a $50 million reduction for Periodicals. The Postal Service says the proposed change produces more accurate and more reliable results. Tr. 43/18695-96. USPS-LR-I-402 and 450. The Commission adopts this change.
[5639] Zero variability for loop/dismount costs. The Periodicals Mailers propose recognizing $46 million from a costing method change related to setting the variability for loop/dismount costs on city park-and-loop routes at zero. Tr. 43/18723-28. The Postal Service agrees with this position, on grounds that witness Baron has demonstrated the appropriateness of this change. Ibid., and Postal Service Brief at I-21. The Commission's variability adopts this change.
[5640] Roadrailers costs. "Roadrailers" refers to a hybrid service that combines operational aspects of freight rail with the service responsiveness of direct long-haul transport. Tr. 46-C/20851. Both the Periodicals Mailers and the Postal Service propose an adjustment in the distribution of some of these costs, but disagree on the amount. MPA witness Nelson contends $3.1 million should be recognized. The Service supports a $2.3 million redistribution, based on a special study witness Pickett presented in rebuttal testimony. Tr. 43/18531 and USPS-L-1-432 and 433; Postal Service Brief at I-20. The Commission adopts the Service's proposed $2.3 million redistribution.
[5641] Distribution of empty equipment rail costs. The Periodicals Mailers also propose a revised distribution key for empty rail equipment costs, based on MPA witness Nelson's testimony. Tr. 28/13414. This has the effect of lowering Periodicals costs by $5 million. Witness Degen indicates that the Postal Service does not challenge this change. Tr. 38/17332. On brief, the Service confirms this position. Postal Service Brief at VII-144. The Commission adopts this change.
[5642] Several participants not only seek a reduction in the contingency, but also urge the Commission to eliminate any portion relative to Periodicals. MPA witness Cohen proposes that the Commission recommend one-quarter of 1 percent, rather than the 2.5 percent the Service requested, and further proposes that none of the reduced contingency be applied to Periodicals. Tr. 38/17078-79. ABM witness Morrow also proposes the elimination of any contingency burden on Periodicals. Tr. 29/13543-60.
[5643] The Service opposes both the overall reduction in the contingency and the elimination as to Periodicals. Postal Service Brief at II-2-8; Postal Service Reply Brief at II-38.
[5644] The overall level of the contingency is discussed in the Revenue Requirement section of this Opinion. The Commission rejects the suggestion that the contingency should be applied selectively among subclasses.
[5645] Witness Taufique, who presents the Service's rate proposals for Periodicals, relies on costs from witness Kashani (USPS-T-14); volumes from witnesses Tolley and Thress (USPS-T-6 and T-7); distance-related transportation cost proportions developed by witness Pickett (USPS-T-19), and fee estimates from witness Mayes (USPST32).
[5646] In the worksharing area, witness Crum (USPS-T-27) provides cost savings estimates for the proposed destination entry discounts. Witnesses Yacobucci, Daniel, and Miller provide cost savings estimates for the presort, barcode, high density and saturation discounts (USPS-T-25, T-28, and T-24, respectively.) Proposed changes to Yacobucci's flats flow model (which applies to Periodicals, First-Class Mail and Standard A) are discussed in this section of the Opinion. The Daniel study of carrier delivery costs for letters, flats and parcels in First-Class Mail and Standard A, is also relied on by the Service, in part, to identify delivery costs for flats in Periodicals. This study and witness Crum's estimates are also discussed. There is no controversy on the use of the Daniel study of the costs for high density and saturation mail in Standard A which is used for those low volume categories in Periodicals. Similarly, Miller's letter presort cost study, which analyzes First-Class Mail and Standard A, is applied by the Service to the small number of letters in Periodicals.
[5647] The Yacobucci model. Witness Yacobucci's model (USPSLRI90) focuses on the flow of flats and bundles of flats through mail processing facilities. It recognizes types of containers, machinability, and automation compatibility. It develops costs by presort level for barcoded and non-barcoded pieces. An underlying assumption - critical to all cost levels - is that the bundle breakage rate is 10 percent for bundles both on pallets and in sacks each time they are sorted. This assumption is based on a survey of postal managers.
[5648] Witness Stralberg, on behalf of the Publishing Mailers, proposes several adjustments to Yacobucci's model. First, in place of the common bundle breakage assumption for pallet and sacks, he uses separate bundle breakage rates for each type of container. He derives these alternative rates from an MTAC Package Integrity Work Group study, which provides separate breakage rates for Periodicals and for Standard A, and further separates these into rates for bundles in sacks and for bundles on pallets.
[5649] The MTAC study also divided problem bundles into those that were broken when observed and those that were not broken, but were "suspect" because of damage that had already occurred. Stralberg assumes the MTAC breakage rates on the first sort, assumes that the "suspect" bundles broke on the second sort, and then assumes no more breakage.
[5650] Stralberg also introduces a variable to control the number of pieces from broken bundles that are sorted on small parcel and bundle sorters (SPBSs) instead of on flat sorting machines (FSMs). In response to Order No. 1294, Stralberg updates the model for FY 1999 costs. MPA-LR-14.
[5651] Extent of Commission reliance on cost studies. The Postal Service has not sponsored testimony on any aspect of the changes, technical or otherwise, that Stralberg makes to the Yacobucci model. On brief, it points favorably toward the model as originally filed, and does not mention Stralberg. Postal Service Brief at VII155. In its reply brief, it argues that the average bundle breakage rates in the MTAC study relied on by Stralberg are roughly the same as the 10 percent rates assumed by witness Yacobucci, and that the use of the average "does not `introduce new non-presortation-related bias into cost differences between rate categories'." Postal Service Reply Brief at VI56, citing Tr. 5/1441. A bias was suggested by witness Stralberg. Tr. 24/11391.
[5652] The Commission has reviewed both models. It accepts the modified version presented by witness Stralberg for purposes of estimating test year cost avoidances.232 Since there are significant differences in the proportion of sacks to pallets in Periodicals and Standard A, using average rates is not adequate. Also, Stralberg's recognition of suspect bundles is an improvement, as is his model's ability to control the proportion of pieces from broken bundles sorted on flat sorters instead of SPBSs. Both refinements appear to be a better reflection of operational realities.
[5653] Witness Yacobucci's observation about non-presortation bias was included in a response to an interrogatory asking about the effect on presort discounts of recognizing that, according to the MTAC study, the breakage rates for bundles in sacks is as much as 15 to 31 times the breakage rate for bundles on pallets. Neither the nature nor the size of the bias is explained on the record. The Commission's preference for Stralberg's modifications is not based on any conclusion regarding bias in cost differences in the original model.
[5654] In supplemental testimony, witness Stralberg updated his model to accommodate FY 1999 costing results, although his update was limited to the costs for Periodicals. Tr. 38/17066. The Commission has further updated the model to reflect FY 1999 costs for all classes, and for Commission costing.24
[5655] The Daniel carrier delivery cost model. There is no opposition or discussion on the record concerning witness Daniel's carrier cost model; however, certain features of the model and its use were clarified in response to several P.O. Information Requests.25 The Commission has reviewed Daniel's carrier model, and finds that it is an improvement over previous models.26 The Commission has updated it for FY 1999 costs and for Commission costing.
[5656] Witness Crum's dropship study. Studies supporting the sectional center facility (SCF) and destination delivery unit (DDU) dropship savings for Periodicals were performed by witness Crum, who analyzes Regular and Nonprofit separately. Witness Stralberg proposes an improvement to these models to account for the operational practice that mail delivered to DDUs is unloaded by mailers rather than the Postal Service. Tr. 24/11403-05. The Service does not oppose this change. Postal Service Brief at VI-146.
[5657] The Commission accepts the dropship models, with Stralberg's revisions. They have been updated for Commission costing. This entails updates to the test year hourly wage rate, premium pay, and piggyback factors. It also entails using the density (in pieces per pound) from the hybrid billing determinants and the Commission's variability factors.
[5658] The Service's proposal anticipates passage of a statutory amendment that would allow merger of the Nonprofit and Classroom subclasses with Regular, thereby forming a combined "Outside County" subclass. The new subclass would have one set of rates, with the preferred nature of Nonprofit and Classroom recognized through a "bottom-line discount" of 5 percent on total postage, excluding postage for advertising pounds. USPS-T-38 at 3-4.
[5659] Rationale for the merger. Under the RFRA, the markup for the Regular subclass is determined on the basis of the cost coverage criteria in 39 U.S.C. § 3622(b). This then serves as the benchmark coverage for the three preferred subclasses (Nonprofit, Classroom, and Within County), which are given markups set at one-half this amount. Taufique indicates that one apparent goal of this approach is to keep preferred rates lower than Regular, while providing some contribution to institutional costs. However, he says:
This goal was not entirely met by the recommended rates resulting from Docket No. R971 . . . . These rates, in some instances, provided lower postage for preferred publications when the Regular rate schedule was used . . . . While no Nonprofit or Classroom rate cells were higher than the corresponding rate cell in the Regular schedule, a combination of rate cells with certain discounts produced this anomaly. Only in some instances when Regular rates are combined with some relatively large Regular discounts, a preferred mailer may pay lower postage using the Regular schedule rather than the preferred rate schedule.
[5660] Taufique says this led to the filing of the Periodicals Classification Change case (Docket No. MC99-3) and an ensuing Commission recommendation that provides Nonprofit and Classroom mailers with the option of using the Regular rate schedule, if these rates are lower. Id. at 2-3. He states that the Service had hoped to be able to propose Nonprofit and Classroom rates uniformly lower than Regular rates in this case, but application of the statutory formula will not keep preferred postage below Regular in all instances, especially given the low markup for Periodicals. Ibid. He suggests that this may not have been envisioned when RFRA was enacted, given that the benchmark markups prior to its passage ranged from 23 to 25 percent, and thus provided a "buffer." Id. at 3. Taufique points out that circumstances have changed substantially, as evidenced in the Docket No. R971 outcome and in this case.
[5661] Thus, Taufique says cost trends and the proposed low markup for Periodicals- proposed to be 1.45 percent in this case-will keep the rate anomaly issue alive, barring a change in RFRA. Ibid. He asserts that legislative change is the only certain way to avoid rate anomalies in current and future proceedings. He notes that under the terms the Service has proposed, postage for Nonprofit and Classroom, by definition, would be lower than Regular. He says this is appropriate, given they are preferred classifications. He also says that Nonprofit and Classroom are not believed to have different cost causing characteristics compared to Regular mail of the same profile.
[5662] Taufique contends the combined subclass as a whole will cover its costs and provide a contribution "deemed reasonable" for Periodicals based on the pricing criteria. The proposed combination, which results in two subclasses rather than four, would simplify, consolidate, and provide stability in Periodicals volume and cost estimates. He indicates that for ratemaking purposes, the Service intends to combine data for Regular, Nonprofit and Classroom for the subclass. Thus the statistical systems will become more reliable under the merger, with volumes and costs for the new subclass attaining greater stability. Id. at 4.
[5663] Consistency with classification criteria. Section 3623(c) of title 39, U.S. Code sets out the criteria for classification changes. Taufique reviews the Service's proposed merger in terms of these criteria, and concludes that it is consistent with them. With respect to fairness and equity, he notes that Nonprofit and Classroom rate categories pay the same rates as their Regular counterpart for worksharing activities, but receive a discount in recognition of their preferred status. Id. at 15. He indicates that discovery of a rate anomaly following Docket No. R97-1 and the expectation that such anomalies would persist point to the desirability and justification for the type of change proposed here. Taufique further notes that the combined subclass permits more stable cost data to be used, a desirable result from the point of view of both Periodicals mailers and the Postal Service, thereby fulfilling the requirements of criteria 2 and 5. Id. at 15-16. Taufique says the Service makes no distinction between Regular, Nonprofit and Classroom Periodicals in terms of degree of reliability and speed of delivery, which are relevant considerations under criteria 3 and 4. Id. at 16.
[5664] Participants' positions. The Alliance of Nonprofit Mailers (ANM), American Business Media (ABM), Magazine Publishers Association, as well as Consumers Union, specifically express their support for merger legislation. Tr. 24/11036 (Milani). The Periodicals Mailers express vehement opposition to the size of the rate increase proposed by the Service, but not to the merger. The Classroom Publishers Association (CPA) and the Coalition of Religious Press Associations (CRPA) take issue with various aspects of the legislation.
[5665] CPA contends that a 5 percent discount is inadequate, given that Congress established the statutory "classroom" rate at 60 percent of the Regular Rate in 1962, and that this differential was maintained until 1996. CPA Brief at 4. It asserts that a 25 percent discount is more reasonable, and notes that it proposed an amendment to S. 2686 that reflects this amount. Id. at 5 and 9. CPA also contends that the proposed merger would introduce structural and legal problems, and may be counterproductive. Id. at 7. It sees no logic in the combination, except for using the joint sampling data "as an expedient financial cost measurement tool until a better and more accurate sampling system or approach can be implemented." Id. at 8.
[5666] Further, CPA says classroom publications are usually bundled, palletized or sacked to 5-digit ZIP Codes or carrier routes going directly to their destinations. Id. at 8. It says most classroom publishers exercise all possible worksharing opportunities, which produces considerable savings for the Postal Service, and differentiates them from the typical Nonprofit Periodical mailing.
[5667] CRPA asserts that the rate anomaly situation that the Service uses as a rationale for the merger has occurred "because USPS has an irrational costing system for periodicals which produces irrational results . . .." CRPA Brief at 8. It contends that if the alleged flaw in attributable costs were corrected, the anomaly would no longer exist, and there would be no reason not to maintain separate subclasses. Ibid. CRPA also says that Nonprofit publications "would pay exorbitant and inequitable rates under either a unitary Periodicals Class rate schedule, with a 5 percent discount for nonprofit publications, or under a schedule which maintains separate regular and nonprofit subclasses . . .." Ibid.
[5668] If the proposed revision to RFRA is enacted and if the Commission makes substantial reductions in Periodicals costs, CRPA asks the Commission to "seriously consider whether or not it is in the public interest" to merge Nonprofit and Classroom with Regular Periodicals. Id. at 9.
[5669] Commission recommendation. The Commission finds that the Service's proposed merger of the Regular, Nonprofit, and Classroom into a new subclass identified as "Outside County" is consistent with the newly-enacted legislation.27 It acknowledges the concerns CRPA and CPA have raised regarding a merger. To the extent these concerns are directed at the inadequacy of a 5 percent discount, the Commission has no flexibility under the terms of the legislation. To the extent they run to other concerns, the Commission believes the merger poses no material legal or structural problems. Moreover, it notes that the conference report accompanying S. 2686 indicates that the Service is to continue to monitor Classroom rates. In addition, the report states: "The Postal Service is urged to examine available options to help ensure that postal rates for classroom periodicals and teacher guides remain at a price that ensures their availability and affordability to all classrooms." Report of the Senate Committee on Governmental Affairs, to Accompany S. 2686 at 3 (S. Rep. No. 106-468) (2000). In general, the Commission adopts Taufique's assessment of the proposal's consistency with the classification criteria.
[5670] Introduction. Rate design questions often arise when subclasses are merged. In this case, which involves the merger of Regular, Nonprofit, and Classroom Periodicals, several difficult issues must be faced. What proportion of the revenue of the joint subclass should come from the piece rates, as opposed to the pound rates? On what basis should the pound rate differences between the zones be developed? 28 How should the worksharing discounts for the joint subclass be determined? How should the per-piece editorial discount of the joint subclass be determined?
[5671] Taufique says the proposed rate design for the new subclass remains "essentially unchanged" from the Commission's recommended methodology in Docket No. R971. USPS-T-38 at 7. The only difference is that the rates are designed for the combined subclass using combined billing determinants, and a cost coverage 101.45 percent is applied to combined costs. It is the Service's position that rates for the combined subclass should be developed using the cost avoidances and the rate design conventions of the existing Regular subclass. This approach seeks to neutralize the effect of the merger on Regular mailers. Differences from past practice relate to the development of the dropshipping discounts and to the level of the per-piece editorial discount. No participant challenges the rate design incorporated in the Service's proposed rates.
[5672] The Commission agrees that Regular subclass mailers should not be harmed by the merger; thus, the Service's rate development, in many respects, is an appropriate response to several of the questions posed by the merger. However, because separate cost results will not be available in future cases and because of an interest in basing rates on actual costs incurred, the Commission finds it preferable to base the discounts on weighted averages of the merged subclasses.
[5673] Proportion of revenue generated from pound and piece rates. An initial question relates to the proportions of revenue to be generated from the subclass's two basic structural elements. Under the proposed design, the pound-piece split is 40 percent-60 percent, as in current rates for the Regular subclass. Based on this split, the Service's pound rate development follows the traditional approach, with the editorial pound rate set at 75 percent of the zone 1 and 2 rate. Science of Agriculture DDU, DSCF, and zone 1 and 2 rates are set at 75 percent of corresponding rates for advertising pounds, as required by RFRA. Id. at 7-9.
[5674] Discussion. As indicated, witness Taufique proposes to apply the 40-percent figure (from Regular) to the joint subclass, which has a per-piece weight of 7.3 ounces. The per-piece weights of the formerly independent components, however, are quite different. Specifically, the per-piece weight in Regular is 8.2 ounces and in Nonprofit is 4.5 ounces.
[5675] For any cost based set of rates, the proportion of the revenue obtained from the pound rate increases as the weight per piece increases. If rates for Regular mailers are to be cost based, the proportion of revenue from the pound rates for the joint subclass should be a weighted average of the current 40percent proportions for Regular and the current 30percent proportion for Nonprofit and Classroom. This moves the proportion of revenue from the pound rates in the direction of the findings of the weight study witness Daniel presents in USPS-LR-I-93.
[5676] There is a further consideration, though, that needs to be recognized. The weight per piece of the Regular subclass in Docket No. R971 was 7.4 ounces. The 8.2-ounce figure in this case, then, represents an increase of 19 percent. Ordinarily, an increase in the weight per piece should lead to an increase in the proportion of the revenue from the pound rates. As one would expect then, using a weighted average of the 40percent and the 30percent proportions results in significantly lower increases in the pound rates than in the piece rates. Therefore, in order to move toward costs, and to balance the sizes of the rate increases, the Commission is obtaining 40 percent of the joint revenue from the pound rates and 60 percent from the piece rates.
[5677] Editorial per-piece benefit. The current editorial benefit for Regular is 5.9 cents per piece. As explained in response to P.O. Information Request No. 2, question 3, Taufique proposes increasing this by an amount equal to two percentage points below the average percentage increase for the joint subclass, before the 5 percent discount to the preferred categories, to balance the rate increases experienced by various mailers. Tr. 46D/21839.
[5678] Discussion. Unless this method is used to modify an imbalance caused by another factor, the Commission does not consider the two-percentage-point reduction appropriate. Absent other influences, this reduction will tend to cause higher rate increases for editorial material than for advertising. Therefore, the Commission recommends rates developed by increasing the current figure of 5.9 cents by the percentage increase experienced by the Regular mailers as a result of the jointly developed rates. This results in a per-piece discount of 6.5 cents.
[5679] In connection with the decision to base the per-piece editorial discount on the current discount for Regular, a weighting effect occurs. The Regular subclass has 36.3 percent advertising (weighted on a per-piece basis), while Nonprofit has 16.3 percent. Regular, therefore, has more advertising over which to spread the per-piece editorial discount. This means that for a given discount, only a moderate elevation in the advertising rates is needed to absorb the editorial discount. In Nonprofit, on the other hand, much less advertising is available and the rates for the advertising must be increased by a greater amount in order to finance the same editorial discount.
[5680] When the subclasses are combined, there is less advertising, proportionately, than Regular considered alone. Therefore, the joint advertising rate will be higher than for Regular alone, resulting in a slight elevation in all rates (assuming the same editorial per-piece discount).
[5681] Dropshipping discounts. Dropshipping discounts (for DDU and DSCF entry) are based on transportation costs and on the non-transportation savings identified in witness Crum's study. Taufique proposes allocating transportation cost savings on the same basis as now, but changes the allocation of non-transportation cost savings from the current 50/50 split to 70 percent piece related and 30 percent pound related. USPST38 at 9 (revised).
[5682] The rationale for this change is that the new split will provide a more meaningful discount to mailers who provide their own transportation. Id. at 9-10 (citing Docket No. MC95-1). Taufique notes that on the pound side, the value of this discount diminishes because less than half of all pounds actually pay the zoned advertising rates. Therefore, he contends that the piece discount provides a more efficient vehicle for providing dropship incentives because the value of the discount applies to every piece, regardless of the editorial and advertising proportions. Id. at 10.
[5683] Discussion. Witness Crum's cost study shows that the savings per pound are almost the same for Regular and Nonprofit, even though the weight per piece of Regular is 8.2 ounces and of Nonprofit is only 4.5 ounces. In response to a Presiding Officer's Information Request asking whether this means the savings tend to be pound oriented, as the Service had argued in Docket No. R90-1, Taufique explained that the savings are per container and that the near equality of savings could mean that Nonprofit and Regular containers weigh approximately the same. P.O. Information Request No. 2, question 2. Tr. 46D/21836-37.
[5684] It would seem, however, that if the savings are the same for a container with many light-weight pieces as for a container holding fewer heavy-weight pieces, then the savings are, in fact, pound oriented. If, under these conditions, the discount is given on a per-piece basis, the container with many lightweight pieces will receive a discount larger than the Postal Service's savings and the container with fewer heavy-weight pieces will receive a discount smaller than the savings. The incentive thus provided would be for mailers of lightweight pieces to dropship and receive an excessive discount.
[5685] The Commission appreciates that the effective passthrough of a discount on the pound rates is reduced by the unzoned editorial pound rate, but this is a necessary outcome of the decision not to zone editorial rates. It is not appropriate to try to overcome this effect by providing a discount that is not cost based, and gives inappropriate incentives. Therefore, the Commission recommends rates that continue to give 50 percent of the non-transportation discount on a piece basis. For the joint subclass, the dropship savings of Regular are recognized on a savings per-pound basis (which are only 0.17 cents per pound higher than the savings for Nonprofit). The savings per pound are converted to a piece basis using the joint density.
[5686] Piece rates. The Service's proposed piece rates are based on the Yacobucci, Daniel and Miller studies. Specifically, the presort discounts and the automation discounts for flats are developed based on mail processing costs for Periodicals flats, and delivery costs drawn from Daniel's estimates for Standard A. USPS-T-38 at 11, citing USPST25 at 4 (Table II2); USPST28 at 26 (Table 5). The Carrier Route High Density and Saturation rates are developed using Daniel's estimates for the Standard A ECR subclass. Ibid., citing USPST28 at 29 (Table 7). Miller's cost estimates for Standard A letters are used to set discounts for automated letters based on both shape differential and barcode. Ibid., citing USPST24 at 18 (Table 1).
[5687] Presort tiers. Taufique proposes passing through 100 percent of the estimated costs at both the 3- and 5-digit tiers, which are required presort levels in Periodicals. The 3-digit rate increases from 25.3 to 27.4 cents, for an 8.3 percent increase; the 5digit rate goes up from 19.7 to 22.2 cents, a 12.7 percent increase. Ibid.
[5688] For carrier route presort, Taufique proposes to pass through 129 percent of the savings, relative to the 5-digit level. Taufique argues that this passthrough holds the increase in the carrier route piece rate, proposed to be 14.1 cents, to 15.6 percent. This is approximately 2 percentage points above the 13.4 percent overall increase for the new subclass, prior to reductions for the two preferred subclasses. Id. at 12. He says limiting the passthrough to 100 percent would result in an even larger increase, and he believes this should be avoided. Taufique further notes that approximately 40 percent of the mail volume of the Outside County subclass is carrier route sorted, and says the 2 point limit was designed to mitigate the combined impact on mailers affected by both the general increase for Periodicals and carrier route pieces in particular.
[5689] Discussion. Based on weighted average costs (which are somewhat higher than the Postal Service's costs given changes explained elsewhere in this Opinion), the Commission recommends a uniform passthrough of 95 percent of the costs at the 3digit, the 5digit, and the carrier route tiers. Relative to the next higher tier, the resulting discounts are 4.9 cents for 3-digit presort, 6.2 cents for 5-digit presort, and 7.8 cents for carrier route. The first two of these discounts are higher than those proposed; the carrier route discount is somewhat smaller. These discounts preserve reasonable worksharing incentives and do not unduly alter current rate relationships.
[5690] Automation flat (barcode) discounts. Based on a significant decline in the value of a barcode relative to current discounts, the changing environment for flats processing, and the high rate increase faced by Periodicals mailers, Taufique applies a restriction to the barcode discounts similar to that in carrier route. He notes that this results in unconventional passthroughs. The basic automation rate for flats would increase from 24.8 cents to 28.6 cents (based on a passthrough of 109 percent); the 3digit automation rate would increase from 21.4 to 24.7 cents (119 percent passthrough) and the 5digit automation rate would increase from 16.8 cents to 19.4 cents (284 percent passthrough). Id. at 12-13. The respective discounts are 3.2, 2.7 and 2.8 cents, compared to current discounts of 4.6, 3.9 and 2.9 cents.29 These increases are approximately 15.4 percent, or 2 percentage points above the overall 13.4 percent increase for the combined subclass. Ibid.
[5691] The Commission agrees with the Service that maintenance of automation incentives is important and that substantial reductions in discounts from current levels should be avoided. Also, it is important to maintain reasonable rate relationships and to recognize costs. The cost avoidance for barcoded 5-digit pieces (2.98 cents in R971 versus 0.65 cents in this case, at Commission costing) seems anomalous, and this has led Taufique to propose the passthrough of 284 percent.
[5692] The recommended passthroughs, applied to weighted average costs at the basic, 3digit, and 5digit levels are 120 percent, 112 percent, and 375 percent, respectively. This allows the barcode discount at the basic level, now 4.6 cents, to decrease only to 4.1 cents, instead of to the proposed level of 3.2 cents. Similarly, the discount at the 3digit level decreases from 3.9 cents down only to 3.4 cents, instead of to 2.7 cents. At the 5digit level, the recommended barcode discount is 2.4 cents. This is lower than both the current level of 2.9 cents and the proposed level of 2.8 cents. Comparing the basic level, the 3digit level, and the 5digit level, the discounts decline from 4.1 cents, to 3.4 cents, to 2.4 cents. This relationship is better aligned with operational realities than the proposed pattern of 3.2 cents, 2.7 cents, and 2.8 cents, as cost savings due to automation should be higher for pieces that must undergo more processing. Passthroughs of over 100 percent are recommended under exceptional circumstances, and will be revisited in future cases.
[5693] Discussion: barcode discounts for letter-size Periodicals. The Service takes the position in this case, as it has in the past, that the barcode discounts for letter-size Periodicals pieces (which are few in number) should be based on the savings for the barcode plus the difference in costs between a letter and a flat. Developed this way, letter-size pieces with barcodes effectively receive a discount for being a letter, while letter-size pieces without a barcode do not. The Commission commented on this procedure in Docket No. R971 and suggested that it should receive attention. PRC Op. R971, para. 5826. There is no indication on this record, however, that attention has been given to this problem. The difference in cost between a letter and a flat is developed in two separate cost studies, one for flats and the other on letters. It seems possible that differences in costs between cells within a given study might be more meaningful than differences in specific cells between studies. The cost difference between letters and flats in Regular is 14.2 cents; the corresponding difference in Nonprofit is only 10.7 cents. Whatever the correct level is, it is difficult to understand why there is such a large difference between the two subclasses.
[5694] Witness Taufique does not address specifically the proposed barcode discounts for letter-size pieces. At the basic, 3-digit, and 5-digit levels, current discounts, respectively, are 6.2 cents, 4.7 cents, and 3.5 cents. The corresponding proposed discounts are 5.6 cents, 4.5 cents, and 4.8 cents. The resulting pattern provides a larger discount for barcoded letter-size pieces at the 5-digit level than at the 3-digit level. As discussed above, this is counterintuitive. Taufique's passthrough at the three levels, in order, are 30 percent, 25 percent, and 25 percent. These are low because the costs include the letter/flat cost differential. They are also consistent with the Commission's passthroughs in R971 of 25 percent at each level.
[5695] The Commission continues to recognize the letter/flat cost differential and supports the continued application of low passthroughs. Based on weighted average costs, the Commission recommends passthroughs of 37 percent, 32 percent, and 25 percent, at the basic, 3digit, and 5digit levels. These provide discounts of 6.5 cents, 5.1 cents, and 4.0 cents. The Commission's discounts are increases from current levels and maintain reasonable relationships; in addition, they continue to support the Postal Service's automation program.
[5696] Watchtower Bible and Tract Society of New York, Inc. (Watchtower), a mailer of letter-shaped Periodicals publications, objects to the Service's proposed increases for automation-compatible letter-shaped mail. It asks the Commission to retain current rates for letter-shaped Periodicals or to implement modest increases commensurate with the proposed First-Class Mail increase. Watchtower Brief at 8. Watchtower's rationale for this approach is that the physical characteristics and preparation standards of Periodicals letter-shaped mail allow it to be processed on the same automation equipment as First-Class and Standard A letter-shaped mail. Id. at 3-4. Therefore, it asserts that rates for Periodicals letter-shaped mail should not increase due to increased costs for processing flat-size mail, since letters are handled using entirely different mail processing equipment and processes than are flats. Id. at 3. It contends: "It logically follows that the same percentage of increase should apply to Periodicals letter mail as applies to First-Class and Standard A letter mail." Id. at 4.
[5697] The Commission's recommended rates and discounts for letter-size automation pieces provide a more favorable result than those proposed by the Postal Service. Therefore, Watchtower obtains some relief. Its interest in parity with other subclasses, however, requires consideration of factors beyond those addressed in its brief, such as service standards, average weight, and other distinctions among the subclasses.
[5698] Other discounts. There are several other per-piece discounts. Specifically, there are high-density discounts, saturation discounts, and discounts for DDU entry and destination SCF entry. Witness Taufique does not discuss them in detail. The destination entry discounts, however, are influenced substantially by Taufique's proposal to provide 70 percent of the savings on a per-piece basis. As discussed above, the Commission does not recommend this proportion.
[5699] The current high-density discount is 1.9 cents per piece. The Service's proposal is to increase this to 2.5 cents, which is an increase of 31.6 percent. On a passthrough of 65 percent (which was 50 percent in R971), the Commission recommends the 2.5cent discount. Taufique suggests the current saturation discount of 3.7 cents, be increased to 4.3 cents. Based on a passthrough of 95 percent (which was 90 percent in R971), the Commission recommends the 4.3cent discount. This is an increase of 16.2 percent.
[5700] For the per-piece discounts for DDU entry and destination SCF entry, respectively, which are currently 1.3 cents and 0.7 cents, Taufique proposes discounts of 2.1 cents and 1.2 cents, increases respectively of 61.5 percent and 71.4 percent. These are high because of the proposal to shift the discount to 70 percent on a per-piece basis. Based on a 100 percent passthrough of costs, with 50 percent being recognized on a per-piece basis, the Commission recommends discounts, in the same order, of 1.7 cents and 0.8 cents. These are increases of 30.8 percent and 14.3 percent. In Docket No. R971, the same passthroughs were 70 percent and 100 percent.
[5701] Pound rate zone differences. In the Service's proposal and in the Commission's recommendation, the transportation costs and the billing determinants are combined before the pound-rate differences among zones are developed. Under the assumption that the transportation costs on a dollars-per-pound-mile basis are the same for Regular and Nonprofit, the pound rate differences among the zones should not be affected by the merger. These differences are designed to be directly equal to the cost per pound-mile of transporting the mail from one zone to another, without a markup. The absolute levels of the zone rates, however, will be affected somewhat, due to differences in the amount of advertising in each subclass.
[5702] While most of the zoned pound rates "fall out" from the transportation analysis and the decision to obtain 60 percent of the revenue from the pound rates, a decision must be made on the pound rate discounts for DDU and destination SCF entry. In going from zones 1 and 2 down to the destination SCF and then down to the DDU levels, the Service proposes reductions of 3.7 and 3.0 cents per pound. Based on 100 percent passthrough of the cost differences, the Commission recommends reductions, in the same order, of 4.2 cents and 4.0 cents. These discounts are, again, affected by the decision to apply 50 percent of the dropship discounts on a per-pound basis, and they provide support for mailer worksharing.
[5703] Billing determinant issues: cost adjustment (related to worksharing) and correction. The Commission's acceptance of MPA witness Cohen's proposal regarding a final cost adjustment to reflect worksharing changes identified by utilizing adjusted FY 1999 billing determinants was discussed earlier. The Commission has made the adjustments, based on the hybrid billing determinants, as suggested.
[5704] The Service's proposed cost coverage for the new subclass is 101.45 percent, based on witness Mayes' assessment of the statutory pricing criteria. USPS-T-38 at 1, citing USPS-T-32. The main issue that has emerged with respect to her analysis is the likely impact on business mail users (39 U.S.C § 3622(b)(4)), as nearly every Periodicals participant strongly objects that the Service's proposal is far more severe than the Service realizes. Another issue, related to the value of service factor embodied in 39 U.S.C. § 3622(b)(2), is Professional Football Publications Association (PFPA) witness Jones's testimony on delayed and inconsistent service experienced by PFPA members' publications.
[5705] Impact. Periodicals mailers testify that the Service's proposal, in terms of individual publications, imposes double-digit increases on top of the substantial increases already incurred as a result of reclassification and Docket No. R971. Witness Morrow, an executive of Crain Communications Inc. appearing for participants collectively referred to as the Periodicals Mailers, says the average increase for his company's publications would be 14.76 percent, and that Cahner's would be nearly 15 percent. He also describes the impact of the proposed increase in Periodicals rates on the type of small-circulation Periodicals published by Crain, by other members of ABM, and by smaller-circulation Periodicals publishers in general. Tr. 29/13545-46. He states that the increase would not be financially ruinous, but would have a significant impact, and could stifle development of new Periodical products. Id. at 13547.
[5706] Witness Milani, on behalf of ANM, MPA and American Business Media, describes the impact of the Service's proposed increases on Consumers Union.30 He describes the organization's efforts to perform additional worksharing, but says despite the size and sophistication of its mailing operations, postage expenses have continually outpaced inflation in recent years. Tr. 24/11034.
[5707] In the nonprofit area, CRPA witness Stapert suggests that the increase could be as high as 21.8 percent for a high-editorial, lightweight Nonprofit publication under the proposed merger, and even higher (26.8 percent) if the merger is not effected. Tr. 30/14438. For classroom publications, CPA points to higher-than-average increases, estimating that classroom publication rates will increase by 15 percent. CPA Brief at 1. Moreover, it says that this increase represents an increase of 65 to76 percent (depending on mail characteristics) over 1996 rates. Ibid.
[5708] Witness Navasky, testifying on behalf of The Nation, L.P.,31 describes The Nation's status as a journal of opinion. He notes that the most recent audit statement shows 94,176 mailed subscriber copies, and 3,037 single copy newsstand sales. He says the publication uses two entry points, with copies destined for the Northeast trucked to New York City, and the rest entered into the mail stream in Harrisburg, PA, near the printer's location. He says copies are barcoded and presorted to carrier-route where possible. He notes that 11 percent of a recent representative issue was sorted to carrier route. Tr. 28/13360. Witness Navasky states:
. . . we were shocked when we asked the mailing specialist at our printer for a preliminary analysis of our circulation file and the impact of the proposed rate increase. He has informed us that the new rates would mean an increase of 18.6% to The Nation, or approximately $140,000 annually.
[5709] Witness Navasky claims it is essentially infeasible to pass the increased postal costs on to readers and/or raise advertising rates. Ibid. He also says he has explored co-mailing, but has not been able to find another publisher working "with compatible deadlines or complementary business imperatives." He summarizes: "For advertising-heavy periodicals, with circulation in the millions, the proposed new rates will cut into their profits; for journals of opinion, there are no profits to cut into. The proposed new rates could put a number of them out of business." Id. at 13363.
[5710] Cost coverage reflected in Commission's recommendation. The Commission's recommended rates for the merged subclass reflect a cost coverage of 100.6 percent for the new Outside County subclass.32 As with the Service's proposal, this reflects a constrained coverage to moderate the impact of the sustained, substantial underlying cost increases in this class. Additionally, this low coverage will serve to moderate disparate impacts on individual publications that might result from the legislation. In general, the Commission believes that it is preferable for the class to make more than a nominal contribution to institutional costs; therefore, this coverage is not necessarily a benchmark for future cases. It does, however, allow the Commission's recommendation for the newly-combined subclass to be consistent with the requirement, in 39 U.S.C. § 3622(b)(3), that rates cover attributable costs.
[5711] The Commission's recommended rates increase significantly less than those proposed by the Postal Service, so the impact is less severe than it might otherwise have been. As to PFPA witness Jones's testimony, the Commission has considered whether service problems warrants some adjustment in cost coverage. Even if the narrow margin above the cost floor were not a consideration, the Commission does not find that the service inconsistencies apparently experienced by PFPA members justifies a cost coverage change. At the same time, the Commission is sympathetic to the concerns witness Jones raises. A more effective forum for achieving better service for individual PFPA member publications may be assistance from postal headquarters, rather than at the local level. The Commission encourages the Service to address PFPA's concerns, should these be pursued outside this rate case.
[5712] The Within County subclass consists of publications that meet certain circulation restrictions and are addressed for delivery within the county (or parish) where published and entered.33 DMCS § 423.21. The proposed increase for Within County is 8.5 percent.
[5713] The Service's proposal for Within County is unaffected by the legislation. Taufique says the rates are designed to cover volume variable costs and to provide a contribution to institutional costs. Rate development is based on essentially the same inputs as for Outside County. In particular, the presort and barcode discounts are based on Nonprofit Periodicals mail processing cost savings developed by witness Yacobucci. USPS-T-38 at 13, citing USPS-T-25, at 8 Table II-3.
[5714] Taufique says the passthroughs for Within County "are by necessity" much smaller than other classes, because the cost studies for Nonprofit are not in all cases directly applicable. He also says that mitigation of a relatively large increase for Periodicals affects the choice of passthroughs in this subclass. Id. at 14.
[5715] Discussion. Several observations on distinctions between Within County and Outside County rate development are important. First, Within County rates do not recognize any difference between advertising and non-advertising matter. Second, there are no zones in the subclass, based on the presumption that nearly all of the mail is entered at the destination SCF or at a facility associated with that SCF. In other words, very little, if any, of this mail would be entered at one SCF and then transported to another for further processing and delivery. Third, as noted above, no separate cost studies are available for Within County.
[5716] Witness Taufique's workpapers show that his reliance on the Nonprofit cost studies differs in one regard from the procedure used by the Commission in Docket No. R971. The cost basis for the destination delivery unit (DDU) discount has traditionally had a non-transportation portion and a transportation portion. Witness Taufique does not recognize the transportation portion, which is taken as the transportation cost difference between DDU mail and SCF mail in Nonprofit. The Commission reinstates this difference in its recommended rates.
[5717] Also, witness Taufique builds the non-transportation portion of the DDU discount off the per-piece savings for Nonprofit for DDU mail relative to zones 1 and 2 mail. This raises two issues. First, the savings should be for DDU mail relative to SCF mail since, as described above, very little Within County mail is handled at two SCFs. Second, as discussed above for Outside County Periodicals, the reliance should be on the per-pound savings measured for Nonprofit, rather than on the per-piece savings. The Commission relies on the per-pound savings for Nonprofit, focusing specifically on the difference between the DDU savings and the SCF savings. The per-piece savings are calculated by multiplying the per-pound savings by the density (in pounds per piece) of Within County mail.
[5718] In a procedure that differs from the way he handles the corresponding Outside County discount, witness Taufique recognizes all of the savings on a per-pound basis, with 46 percent passthrough, and all of the savings on a per-piece basis, with 30 percent passthrough. For the reasons that apply to Outside County Periodicals above, plus the lack of separate recognition of advertising and non-advertising in Within County, the Commission continues to recognize one-half of the savings on each basis and to select the passthroughs as a separate step.
[5719] Rate design. In line with the Commission's recommendation in Docket No. R971, witness Taufique proposes to obtain 60 percent of the Within County revenue from the piece rates and 40 percent from the pound rates. No questions concerning these proportions have been raised on the record. Also, in part to provide continuity over time and in part because the cost studies for Nonprofit do not apply directly to Within county, witness Taufique proposes that passthrough decisions for the discounts be based on recognizing costs, while tempering the effect on mailers. The Commission agrees with this approach.
[5720] The Commission's recommended Within County rates were developed by considering the cost avoidances associated with each discount, the current rates, the specific rates proposed by the Service, and the effect on mailers. In general, the Commission favors passing through worksharing savings to mailers, but this is not always possible, given other important considerations. For example, the Postal Service proposes to include the cost difference between letters and flats in the cost avoidance for barcoded letter-size pieces. This avoidance, at the 5-digit level, is 14.3 cents. Using this as a discount could easily lead to negative rates, which would be an unacceptable result. Partly for this reason, the Commission agrees with Taufique's proposal to keep the passthrough very low for automation letters.
[5721] Presorting and density discounts. For the 3-digit, 5-digit, and carrier route discounts, the Commission recommends passthroughs of 20 percent, 17 percent, and 50 percent respectively. The passthroughs for high density and saturation are 42 and 52 percent, respectively. These proportions provide 3digit, 5digit and carrier route discounts (of 0.8 cents, 0.9 cents and 3.6 cents) that are equal to or slightly larger than those proposed. At 1.5 cents, the high density discount is one-tenth of a cent smaller than proposed. The saturation discount, at 2.1 cents, is the same as proposed. These discounts are equal to or slightly higher than the current discounts.
[5722] Destination entry and barcode discounts. For the DDU discount, the passthrough is 70 percent on the pound rate portion and 100 percent on the piece rate portion. The resulting discounts support worksharing activities and are larger than the current discounts. At the basic, 3digit, and 5digit levels, the passthroughs for barcoded letters are 39 percent, 35 percent, and 27 percent. The discounts thus provided (5.1 cents, 4.5 cents, and 3.9 cents, respectively) are each larger than the avoidance without the letter/flat cost differential. For barcoded flats, passthroughs are 100 percent, 100 percent, and 325 percent. These provide discounts that decline as the presort level increases, and bear a reasonable relationship to current rates and to the proposed rates. They also support the automation program. The passthrough of 325 percent for barcoded flats at the 5-digit level is equal to that proposed by the Postal Service. It is necessary to support the automation program, to provide reasonable rates, and to account for a cost result that is inexplicably low.
[5723] Cost and volume issues. As in past proceedings, NNA (through witnesses Heath and Elliott) raises questions about reported costs and volumes for the Within County subclass. In Docket No. R971, the Commission adjusted Within County volumes, citing the fact that the subclass is small, which tends to cause fluctuations over time in estimates of both costs and volumes.
[5724] In this case, NNA witness Elliott submits a survey to show that there is little support for a finding that the Within County volumes have been declining. Tr. 24/11043. The survey is a stratified random sample of newspapers drawn from a database supplied by NNA. One thousand sixteen surveys were sent out and 340 responses were received. Of these responses, only 161 provided data for both 1992 and 1998. According to Elliott, "the survey results show an increase of 3 percent in in-county volume over this 6-year period." Id. at 11045.
[5725] NNA witness Heath provides additional reasons for believing that volume may not have declined. First, he notes that he has been active in NNA's postal affairs since 1986, and has never seen another organized group appearing to defend Within County mail, nor has he encountered any other type of publication that claims to be a heavy user of this subclass. Id. at 10907. He believes that if there is another industry group with a strong usage pattern, another voice would have been heard. Therefore, he contends that is reasonable to assume that newspapers-particularly weekly newspapers-drive the Within County subclass. Id. at 10907-08.
[5726] Heath also states that, as a non-statistician, he is skeptical about the accuracy of the Revenue, Pieces and Weight (RPW) system. He points in particular to RPW's reliance on only 25 post offices out of more 26,000 to obtain the volume data that is "blown up" to produce totals, and to the possibility that this panel is "infrequently refreshed." Id. at 10908. Heath also states that he believes there is substantial reason to question the manner in which rural post office data is collected, given the results shown by NNA's data. Ibid.
[5727] Heath also contends that the accuracy of certain costs cited in Postal Service witness Patelunas's supplemental testimony (providing FY 1999 updates) should be treated with skepticism, and that adjustments should be considered before using them to develop Within County rates. Tr. 43/18508. Heath's focus is cost segments 3.1 and 6.1, but he says much of his concern could be applied to other segments as well. Id. at 18509. With respect to cost segment 3.1, which represents clerk and mail handler costs, Heath notes that NNA has questioned the accuracy of these costs in the past.
[5728] Discussion. NNA's effort to provide sound statistical data from a professional survey is commendable, but certain aspects of the survey's design and execution mar its usefulness as an analytical tool. For example, the survey has a number of very wide confidence intervals and a coefficient of variation of nearly 300 percent. Tr. 24/11088. Certain other weaknesses are summarized in the Postal Service Brief at III15.
[5729] In addition, the record shows that the Postal Service's data systems have been improved since NNA initially raised doubts about their validity. Id. at III14. Thus, the Commission finds less reason to believe that there are significant problems with reported Within County volumes. However, the reported volume for this subclass remain unstable. To allow for the possibility that there is still some failure to capture Within County volume in its entirety, the Commission is continuing the approach it employed in Docket No. R971: namely, using a four-year average of volumes.
[5730] NNA witness Heath presents a revised version of a proposal raised in previous dockets pertaining to Within County Periodicals delivered by the mailer to the destination delivery unit (DDU) under the Exceptional Dispatch arrangements. He again contends that such copies should be eligible for the DDU discount. Tr. 24/10914-18. See also Docket No. R971, paras. 5870-5873 and Docket No. MC95-1, para. 5308. Previously, the Service has objected to allowing the discount based on concerns relating to acceptance, verification, and payment arrangements. In Docket No. R971, however, the Service explained that these mailers could achieve the DDU discount by entering their mail through Plant Verified Drop Ship (PVDS) procedures. The Commission noted this possibility and strongly encouraged use of this alternative. PRC Op. R971, paras. 5877-5881.
[5731] In this proceeding, witness Heath explains a number of reasons why the PVDS procedures are not working well for Within County mailers. Tr. 24/10917. He also identifies the new conditions NNA proposes attaching to eligibility. These include postmaster authorization to meet time-sensitivity needs; a 100-mile limit on length of haul from the entry office to destination office or zones 1 and 2 short hauls; and a 2 percent limit on volume fluctuation from issue to issue. Id. at 10916-17. NNA witness Elliott proposes applying Postal Service witness Crum's DDU cost study to Exceptional Dispatch mailings.34 Id. at 11048.
[5732] In witness Taufique's rebuttal testimony, (USPS-RT-25) the Service agrees in principle with the Heath proposal, but suggests several revisions. It also suggests that the proposal be implemented without a formal classification change, through changes in the Domestic Mail Manual (DMM), following publication of a Federal Register notice. The Service-proposed changes to NNA's proposal include extension of the arrangement to all Periodicals mailers, not just Within County mailers; limitation on use of the option to zones 1 and 2 mail; and a restriction on eligibility to mailers with circulations of 25,000 and under, unless specifically approved as an exception by the Postmaster. All existing restrictions on DDU entry would have to be satisfied as well.
[5733] The Service says these changes reduce the risk of existing PVDS customers increasing operational difficulties by bypassing routine verification and shifting to exceptional dispatch. Witness Taufique suggests that the amount of mail using this discount would likely be small, and thus that the revenue loss would be negligible. This expectation is supported further by the fact that the discount itself is not large.
[5734] Discussion. The Commission compliments the parties on proposing revisions to the original concept that appear to meet publishers' interest in recognition of worksharing efforts and the Service's legitimate concerns about impact on operations and finances. The Commission finds that the Service's proposed terms represent a fair and equitable set of conditions. It also agrees that implementing the changes via the DMM appears to be an acceptable means of adopting the change.
[5735] The Commission views this as a further step in the worksharing area, which is in line with the rate setting and classification guidance in the Postal Reorganization Act. It should lead to be increased overall effectiveness of the mail service received by the mailers and the ultimate recipients. In a future proceeding, the Service and the mailers will be welcome to report on their experience with the arrangements.
[5736] Witness O'Brien, on behalf of many of the Periodicals Intervenors, presents an alternative structure, referred to as a rate grid concept, which he contends would provide incentives for more efficient mailer behavior.35 He acknowledges that the detailed cost data and information needed to "cost out" the grid do not currently exist, but suggests that his approach nevertheless provides the right model for "future development of correct postal prices that will give mailers incentives to change their behavior in order to minimize combined mailer and Postal Service costs." Tr. 24/11190.36
[5737] The cells in the grid reflect a spectrum ranging from what O'Brien identifies as "the least costly mail" in Periodicals-carrier route bundles on a five-digit pallet entered at the DDU-to those that would be the most costly. The latter are non-barcoded pieces in a mixed ADC bundle, in a mixed ADC sack, entered at a printing plant distant from the ultimate destination. Ibid.
[5738] O'Brien says the grid has two goals. One is to reflect "the true cost" of each required processing operation. The other is to allow the Service and the Commission to send "very clear" pricing signals, based on operational efficiencies (or lack thereof), consistent with the statutory ratemaking criteria. Ibid.
[5739] O'Brien acknowledges three potential problems: rate complexity, relative impact, and costing. He dismisses complexity as a substantial barrier, given his belief that the vast majority of Periodicals mailers use a computer to calculate their postage. Id. at 11190-91. He notes that the impact issue harkens back to the "thorny issue" dealt with in Docket No. MC95-1, and acknowledges that the grid shifts rates in ways that help or hurt, depending upon level of mail preparation. In terms of costing, O'Brien says concerted efforts would be needed to refine and make more accurate the distribution of in-office costs and the mail flow models used in rate design. Ibid.
[5740] O'Brien asserts that the costs of more and less efficient mail need to be passed along to mailers in a manner that causes them to react and, where necessary, improve mailing practices. Ibid. He asserts that with the costing grid and a proper rate structure, a number of desirable industry changes would occur, such as a significant increase in DDU deliveries, co-mailing, co-palletization and dropshipping. To verify this prediction, he says "one simply needs to look at Standard A." Ibid. In that class, he says correct rate incentives have produced a substantial increase in dropshipping, and equipment manufacturers are now providing flat sorting machines that perform the merging needed for co-mailing. Id. at 11191-92.
[5741] Overall, O'Brien observes that very little change takes place without the proper financial incentives, and suggests that the rate grid approach could provide the type of rate structure that would cause desirable changes in mailing practices. Id. at 11192.
[5742] Discussion. Although adoption of the rate grid is not a formal proposal on this record, it clearly identifies specific activities in the current operating environment that affect costs. It is likely that it also offers some insight to service considerations, which are necessarily important to mailers of time-sensitive material. The grid also demonstrates the vast changes that have occurred since the class was established. Interestingly, although not apparent from the grid itself, many of these structural changes have occurred relatively recently, with most having been introduced in the past decade.
[5743] Of the three potential problems witness O'Brien raises, two-complexity and costing-are legitimate concerns, but would appear to pose no significant barriers. Relative impact, on the other hand, is a far more challenging issue. This played a major role in reclassification decisions, as witness O'Brien acknowledges, and undoubtedly would do so again, given the logical rate implications of extensive de-averaging. This is not an insurmountable obstacle, but raises policy questions that are quite different from the more pragmatic issues associated with rate complexity and costing. The postal community's attention to the grid's policy implications may foster approaches acceptable to all stakeholders. In any case, the ramifications of specific proposals will have to be thoroughly aired before formal Commission action is possible.
[5744] Witness Stralberg proposes a discount for Periodicals entered at sectional center facilities (SCFs) or destination delivery units (DDUs) on 5-digit pallets. Stralberg indicates that the number of 5-digit pallets at the present time is low, but contends that mail on such pallets is very low-cost, and should be encouraged. He argues that with an incentive more mailers might prepare them, and that there could be some movement toward co-palletization. Given the low number of current 5-digit pallets, Stralberg indicates that the revenue loss from the discount would be very small. See generally Tr. 24/11405-09.
[5745] The Postal Service argues on brief that it is premature to offer such a discount, especially since witness O'Brien has suggested a grid of other discounts that might be offered. Postal Service Brief at V-146.
[5746] Discussion. The Commission agrees with the Service's position that a 5-digit pallet discount should not be recommended at this time. This discount would be useful only to a small group of the largest mailers, and there is little evidence that it would cause meaningful changes in mailer behavior. If further discounts are to be given, an assessment should be made of where potential cost savings are the largest, and of which discounts are most likely to bring about mailer response that enhances Postal Service efficiency.
1This figure is an average for all Periodicals, including Within County, and is based on mail-mix information filed late in the case. The proposed increase for Outside County is 13.7 percent.
2The Periodicals Mailers include Magazine Publishers of America, Inc., Alliance of Nonprofit Mailers, American Business Media (formerly American Business Press), the Coalition of Religious Press Associations, Dow Jones & Co., Inc., The McGraw-Hill Companies, Inc., National Newspaper Association, and Time Warner Inc. These parties also participated in other joint efforts discussed on this record.
6This is subject to an exception which provides that the 5 percent discount will not apply to the advertising pound portion of a preferred rate mailing if the advertising portion exceeds 10 percent. This exception is consistent with the previous direction of Congress (in the Revenue Forgone Reform Act), which provides that equal rates are to be applied to the advertising portion of commercial and preferred Periodicals publications. 39 U.S.C. § 3626(a)(4).
7The Classroom Publishers Association provides a concise review of the preferred rate treatment traditionally afforded the Classroom subclass in its brief. See CPA Brief at 2-6.
8Periodicals mailers must pay a one-time application (original entry) fee. There are three other types of application fees: for additional entry; re-entry and news agent registration. The Service proposes increasing the original entry fee from $305 to $350; maintaining the additional entry fee at $50; and reducing the additional entry and news agency registration fees from $50 to $40. USPS-T-39 at 92.
9The National Newspaper Association's observations on the accuracy of reported Within-County volume are addressed in a later portion of this section.
10This concern had been pursued in the early 1990s and expressed in other omnibus cases. See Order No. 1002 (January 14, 1994) terminating Docket No. RM92-2.
11The subclasses for which data were requested include First-Class Letters and Sealed Parcels; Regular Periodicals; and all four Standard A subclasses (Regular, ECR, Nonprofit and Nonprofit ECR). P.O. Information Request No. 4 (February 25, 2000) at 2.
12Witness O'Tormey also works in other functional groups on issues related to automation, equipment deployment, labor negotiations, facilities, transportation and delivery. USPS-ST-42 at 2.
13Witness Stralberg correctly points out that some of the largest increases in Periodicals costs occurred prior to FY 1989, starting in FY 1986. Tr. 24/11356.
15This team consisted of eight representatives from the Postal Service and its contractors; two representatives of Magazine Publishers of America; one representative of American Business Media (formerly American Business Press); two representatives of Time, Inc.; one representative of Meredith Corporation; and one representative of The McGraw-Hill Companies. Tr. 24/11312.
17As an alternative, the rule allows mailers to prepare mail in actual walk sequence to qualify for basic carrier route rates. 65 FR 31507.
20Specifically, the presort tiers of basic, 3/5-digit, and carrier route were expanded to basic, 3digit, 5digit, and carrier route. This change took effect upon implementation of Docket No. R971 rates on January 10, 1999. Therefore, important FY 1999 has one presort structure prior to January 10, 1999, and a revised one after that date.
23The Commission notes that either model can be used to estimate the savings from a reduction in bundle breakage rates. This is done by running the models under different breakage assumptions and multiplying the difference in the cost outputs by the test year after rates volume levels. The total dollars of test year costs avoided due to reductions in bundle breakage will be smaller using the original Yacobucci model instead of the model as modified by Stralberg. The Commission will use the more conservative (smaller) reductions in bundle breakage estimates produced by the original Yacobucci model, updated to FY 1999 and to Commission costing results.
24In Commission Library Reference 14, the model is labeled PRC-Flat-Yac.xls. The `Data' sheet has been updated for the labor rate, the premium pay factors, and the piggyback factors. The `CRA Cost Pools' sheet has been updated with all Commission costs. The volume variability factors on the `Productivities' sheet have also been updated. Note that in order to obtain the desired costing results, this model must be run separately for each subclass.
25See responses to P.O. Information Request No. 6, question 4 at Tr. 46D21126; P.O. Information Request No. 7, questions 3 and 4 at Tr. 46D21128-29; P.O. Information Request No. 11, questions 1 and 2 at Tr. 46D21130-32; and P.O. Information Request No. 13, questions 3-5 at Tr. 46D21133-38.
26Daniel's agreement that certain of her findings do not apply to Periodicals has no bearing on the Commission's assessment of her model, but assists in developing appropriate cost avoidances.
27Notwithstanding its name, the new subclass will contain some mail whose office of original entry, office of direct entry, and location of final delivery are in the same county.
28Except to outline the procedures used, witness Taufique does not address these issues in his testimony. In response to P.O. Information Request No. 1, question 7 (February 4, 2000), however, he makes the Service's position clear. Tr. 46D/21829.
29As proposed, the barcode discount for 5-digit pieces is larger than the one for 3-digit pieces. This is counterintuitive, as 3-digit pieces receive more processing and therefore can benefit more from the automated processing allowed by the barcode.
30Consumers Union Periodical publications include Consumer Reports (published 13 times a year), Zillions (a bimonthly periodical for children) and two newsletters (Consumer Reports on Health and Consumer Reports Travel Letter. Tr. 24/11033. Milani notes that none of Consumers Union's publications accept advertising. Ibid. He also identifies Consumer Reports Online as on online edition with 421,000 paid subscribers. Id. at 11034.
31Witness Navasky notes that he also appears informally on behalf of the Independent Press Association, which he describes as a community of small circulation periodicals. Tr. 28/13359.
32After the 5 percent discount is recognized for the preferred categories, the resulting coverage for the Outside County subclass is 100.1 percent.
33The total paid circulation of the issue must be less than 10,000 copies, or the number of paid copies distributed within the county of publication must be at least one more than one-half of the total paid circulation of the issue. USPS-T-38 at 13, citing DMCS § 423.21.
34The Commission notes that no questions have been raised in the past about the applicability of the Crum study to Exceptional Dispatch entry, at least with regard to mail processing and transportation operations. The questions raised by the Service related to administrative and control issues.
36O'Brien notes that ABM, CRPA and McGraw-Hill, who are identified as Periodicals Intervenors, take no position on the rate grid concept discussed in his testimony.
 Postal Rate Commission http://www.prc.gov Voice: (202) 789-6800 Fax: (202) 789-6886 prc-admin@prc.gov |
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