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[5747] The Postal Service proposes to rename Standard B Mail, which consists of Parcel Post, Bound Printed Matter, Special, and Library Mail, as Package Services mail. USPS-T-36 at 9. In addition, the Postal Service proposes to rename Special Standard Mail as Media Mail. USPS-T-37 at 1. The Postal Service requests that the Commission recommend conforming changes to the DMCS. USPS-T-36 at 10 and USPS-T-37 at 1. The Commission recommends that the DMCS be amended to reflect the proposed name changes.
[5748] Currently, Parcel Post is defined as Standard Mail weighing 16 ounces or more that is not mailed as Bound Printed Matter, Special, or Library Mail. Standard Mail is mailable matter that is neither mailed nor required to be mailed as First-Class Mail nor entered as Periodicals. In addition, Parcel Post, which is generally used to ship merchandise, may not exceed 70 pounds or 130 inches in length and girth combined. Finally, Parcel Post is the only subclass available for mailing eligible matter measuring over 108 inches but not over 130 inches in combined length and girth. Such mail is subject to the prevailing oversized rate.
[5749] The current Parcel Post rate structure, which was revised extensively in Docket No. R97-1, is based on weight, distance from origin to destination, mail preparation requirements, and machinability. The revisions, which became effective in January 1999, included: establishing three new rate categories for parcels entered at Sectional Center Facilities (SCF), Destination Delivery Units (DDU), and Origin Bulk Mail Center (OBMC), reestablishing a balloon rate for pieces weighing less than 15 pounds that exceed 84 inches, but not 108 inches, in combined length and girth, expanding eligibility and adding a separate surcharge for oversized pieces, and establishing a discount for prebarcoded parcels. Additional, preexisting rate categories include Inter-BMC,1 Intra-BMC,2 and Destination Bulk Mail Center (DBMC). Nonmachinable Inter-BMC mail is subject to a surcharge, currently $1.65 per piece. Pickup service is available for Parcel Post mail.
[5750] Background. A preliminary, but significant issue concerning Parcel Post is the sufficiency of the Postal Service's systems for estimating revenue, pieces, and weight. For these estimates, the Postal Service relies on the Revenue, Pieces, and Weight System (RPW), which includes, among other things, the Bulk RPW (BRPW) and the Domestic RPW (DRPW) subsystems. See USPS-T-5 at 2-5, USPS-T-4 at 3-7, and Tr. 31/15021 et seq. The remaining RPW subsystems are the International RPW and the Miscellaneous/OMAS RPW. Tr. 31/15021; see also USPS-LR-I-30 at 1.
[5751] Briefly, the BRPW system provides total revenue and volume estimates for various bulk mail categories, including permit imprint Parcel Post. See USPS-T-5 at 2-3. The bulk mail categories also include presort First-Class Mail, permit imprint Priority Mail, Periodicals, Standard Mail (A), and permit imprint Bound Printed Matter. The BRPW utilizes postage statements collected from an ongoing panel of post offices consisting of all of the automated bulk mail entry offices under the PERMIT System, supplemented by a stratified random sample of non-automated offices. Id. at 3; see also Tr. 2/810-11.
[5752] The DRPW system, a continuous probability sample of single-piece mail exiting the postal system, including Parcel Post, provides estimated revenue, pieces, and weight for mail categories not corresponding exactly with the Postal Service's revenue accounting system and for which data are not available from postage statements. USPS-T-4 at 4. Among the other mail categories for which DRPW estimates are available are single-piece First-Class Mail, non-permit imprint Priority Mail, non-bulk Library and Special Mail, and most Special Services. Revenue, volume, and weight estimates from the RPW subsystems are fed into the RPW Adjustment System "to develop the official U.S. Postal Service RPW data by mail class, subclass and rate class for each Accounting Period, Postal Quarter, and Government Fiscal Year." USPS-LR-I-30 at 1; see also Tr. 2/759-60 and Tr. 31/15021. In other words, as indicated by witness Pafford, the RPW Adjustment System combines estimates from the BRPW and DRPW along with Alaska Bypass mail and official mail estimates to produce revenues, pieces, and weight for all categories of mail. Tr. 2/710.
[5753] Prior to FY 1999, the Postal Service's Parcel Post revenue and volume estimates were derived exclusively from the DRPW. In FY 1999, the Postal Service changed this approach and began utilizing both the BRPW and the DRPW to develop Parcel Post estimates. The Postal Service restated FY 1998 Parcel Post revenue and volume totals based on the combined BRPW and DRPW estimates. According to Postal Service witness Prescott, the restatement was needed to facilitate comparisons to the prior year and to provide more accurate data in this proceeding. Tr. 43/18790. As compared to the FY 1998 DRPW-only Parcel Post estimates, the combined estimates increased Parcel Post volumes to approximately 316 million parcels (from approximately 266 million) and increased revenues to approximately $948 million (from approximately $824 million). Tr. 46-D/21543-44.
[5754] UPS, through witness Sellick's testimony, broadly challenges the Postal Service's restated FY 1998 Parcel Post estimates. Among his criticisms are that the Postal Service's restated BY 1998 estimates are not adequately documented, that the BRPW process cannot be replicated, and that the BRPW Parcel Post estimates are untested and unreliable. Tr. 31/15017 et seq. In support of the latter point, Sellick argues, inter alia, that the Postal Service failed to apply a trial balance account adjustment to its 1998 Parcel Post BRPW estimates, that Parcel Post volumes are overstated, and that the BRPW system provides insufficient weight data. Witness Sellick recommends that the Commission reject the Postal Service's combined FY 1998 BRPW/DRPW Parcel Post estimates and instead adopt the FY 1998 DRPW-only estimates for base year purposes. See UPS Brief at 66-78.
[5755] In rejoinder, the Postal Service submitted the rebuttal testimony of witness Prescott, who addresses the discrepancy in BY 1998 Parcel Post estimates and argues that Sellick's various criticisms are speculative and unsupported. See Tr. 43/18782 et seq. and 18800 et seq. PSA witness Glick also submitted rebuttal testimony criticizing Sellick's analysis of BRPW data as unpersuasive. Tr. 41/18062-69; see also Postal Service Reply Brief at III-13-22.
[5756] Analysis. Witness Sellick's testimony is commendable on several levels, including, for example, its useful review of the RPW system and its attention to the discrepancy in BY 1998 Parcel Post estimates. However, the Postal Service used FY 1999 volumes to project test year revenues, and there is no DRPW-only estimate available for FY 1999. See Tr. 46-D/21542. In response to P.O. Information Request No. 17 questions 2, 3, and 8, the Postal Service provided only the portions of the FY 1999 BRPW/DRPW Parcel Post estimates generated by the various RPW subsystems, including the DRPW. See id. at 21535, 21225, and 21234. Hence, as a practical matter, the Commission could not, even if so persuaded, adopt Sellick's proposal.3 Nonetheless, while the Commission ultimately has not adopted his recommendation, Sellick has raised fundamental questions about the Postal Service's Parcel Post estimates, which, in the end, have led to a thorough examination of the RPW system.
[5757] That process began by exploring the reasons for the discrepancy. When asked why the DRPW was undercounting Parcel Post volume, the Postal Service indicated that data collection, as opposed to sample design, data processing, or data estimation, was the cause of the problem. Tr. 46-C/21031. In support, the Postal Service stated that data collectors were incorrectly treating all permit imprint Standard Mail (B) as non-countable in the DRPW system. Ibid. Other factors cited by the Postal Service included data collectors' failure to sample certain Parcel Post, e.g., volumes endorsed "Bulk," or pieces weighing less than one pound that might be misidentified as Standard Mail (A). Ibid.
[5758] The Postal Service explored the discrepancy in greater depth in the rebuttal testimony of Prescott. See Tr. 43/18782 et seq. and 18800 et seq. Responding to Sellick's contentions, Prescott outlined the steps the Postal Service pursued to validate the BRPW data and to identify the reasons for the discrepancy. Id. at 18792-94. Noting that the discrepancy surfaced late in FY 1997, the Postal Service considered two possible causes: (a) whether DBMC parcels were being properly endorsed, and (b) whether the DRPW panel reflected the PQ 1 FY 1998 update to include all CAG C offices. In addition, the Postal Service reviewed whether the PERMIT System data were being summarized correctly in the Corporate Business Customer Information System (CBCIS). To address these concerns, the Postal Service conducted various analyses or studies, which, as outlined by Prescott, concluded that: (a) DBMC volumes were being properly endorsed, (b) PQ 1 FY 1998 sampling improvements did not significantly affect DRPW parcel Post data, (c) the roll-up of PERMIT transaction level data through CBCIS to the BRPW input file revealed no material errors, and (d) comparisons with the Origin Destination Information System (ODIS) correlated well with the PERMIT system data. Id. at 18793. Finally, conferences with Statistical Program managers and data collectors corroborated the belief that data collection was the root cause of the discrepancy. Id.
[5759] Simultaneously, the Postal Service designed and tested a BRPW module for permit imprint Parcel Post. The Postal Service also measured the volume of permit imprint Parcel Post entered at non-PERMIT System offices, enabling it to assess the need for a supplemental BRPW panel. Only thereafter, beginning in PQ 1 FY 1999, did the Postal Service use PERMIT System data to generate Parcel Post permit imprint estimates. Id. at 18793-94.
[5760] The Commission's concern with the discrepancy is simple - the Postal Service's estimation systems, which underlay the ratemaking process, must produce accurate, reliable estimates if the rates the Commission recommends are to be fair and equitable.4 The Commission concludes that the Postal Service's explanation of the cause of the discrepancy in BY 1998 Parcel Post data is plausible. Based on the record, the discrepancy is not due to a systemic problem with either the BRPW or DRPW, but rather, as indicated by the Postal Service, to data collection errors in the DRPW. See Postal Service Reply Brief at III-15-16; see also PSA Brief at 19-21. Furthermore, as discussed below, the record supports the conclusion that the BRPW/DRPW estimation methodology represents an improvement over the DRPW-only procedures.
[5761] UPS advances several arguments that the Postal Service's Parcel Post volume estimates are overstated. Each is flawed. First, UPS argues that the PERMIT System incorrectly counts some Standard Mail (A) parcels as Parcel Post. Tr. 37/16957-58; see also UPS Brief at 67-70. In support, UPS notes that Single-Piece Standard Mail (A) rates were, for certain ounce increments, higher than those for Parcel Post during FY 1998 and part of FY1999. As a consequence, citing the volume of Single-Piece Standard Mail (A) in those years, UPS contends that BRPW Parcel Post estimates are inflated. UPS Brief at 67-68. While unable to quantify the overstatement, UPS suggests that it may be substantial. This conclusion is not adequately supported.
[5762] As PSA points out, single-piece parcels are generally not permit imprint and thus would generally be counted by DRPW, not BRPW. PSA Brief at 17. Moreover, the issue became moot following the elimination of single-piece Standard Mail (A) in January 1999. Ibid.; see also Postal Service Reply Brief at III-16-17. Furthermore, the Postal Service required Standard Mail (A) paid at Standard Mail (B) rates to be marked as Standard Mail (B). Ibid.; see also Tr. 43/18804.
[5763] Second, UPS argues that DRPW data collectors fail to accurately distinguish between permit imprint and other indicia mail, thereby causing permit imprint volumes to be double counted. See UPS Brief at 77. While this conclusion may have superficial appeal, it, too, fails for lack of support. As witness Glick notes, if witness Sellick's premise is accurate, then the reverse would also be possible, i.e., that metered mail would be incorrectly categorized as permit imprint pieces, and thus not be counted by DRPW or BRPW. Tr. 41/18067-68; PSA Brief at 18-19; Postal Service Reply Brief at III-22.
[5764] Further, characterizing witness Sellick's testimony as speculative and without evidentiary support, Postal Service witness Prescott suggests that "there is no reason to conclude DRPW data collectors cannot distinguish between a permit imprint and a stamp or meter." Tr. 43/18796. PSA gives some credence to this position, noting that the task of distinguishing between a permit imprint and meter mail is relatively easy. PSA Brief at 18-19. While the acknowledged data collection errors associated with DRPW-only FY 1998 estimates cast some doubt on data collectors' abilities, Prescott is correct in this respect -- the record fails to demonstrate that double counting is a problem, let alone the extent of the problem, if any.
[5765] Third, although apparently not addressed by UPS on brief, witness Sellick contends that volumes reported in the Carrier Cost System, comprised of the City Carrier Cost System and the Rural Carrier Cost System, corroborate the DRPW-only results. However, as pointed out in rebuttal and on cross-examination, this contention rests on an incomplete analysis. Witness Sellick failed to include mail delivered to firm holdouts and box sections. See Tr. 43/18805-06 and Tr. 37/16977-85; see also PSA Brief at 21. Thus, far from demonstrating the reasonableness of the DRPW-only estimates, the omission lends support to the Postal Service's estimates.
[5766] Fourth, on brief, UPS contends that the PERMIT System data are inaccurate. UPS Brief at 70-75. For example, UPS argues that the Postal Service failed to apply a trial balance account adjustment to its 1998 Parcel Post BRPW estimates. Although this is true, it does not necessarily follow that DRPW-only estimates are more accurate. Nor has UPS shown them to be. Again, the use of 1999 data effectively moots this criticism.
[5767] The Postal Service implemented a unique trial balance for FY 1999. Witness Sellick criticizes the Postal Service's use of an "interim" factor for PQs 1 and 2 as inappropriate. Tr. 37/16960. The unique trial balance adjustment factors for PQs 3 and 4 were substantially higher than the interim factor used for the earlier quarters. Tr. 46-C/21232. While a unique trial balance adjustment factor is always preferable, the use of the interim factor, under the circumstances, is acceptable since, among other things, witness Sellick was unable to suggest what the factor should be for the two quarters in question. Tr. 37/16976. Moreover, use of the interim factor yields lower estimates than, for example, annualizing the unique trial balances. See Postal Service Reply Brief at III-17-19; PSA Brief at 13-15.5
[5768] Fifth, citing witness Sellick's testimony, UPS argues that the BRPW error-checking process is flawed. UPS Brief at 71-72, citing Tr. 1/15039-45. For example, UPS asserts that "Standard Mail (A) pieces could easily be mistakenly entered into the PERMIT System as Parcel Post and not be detected." UPS Brief at 71 (citation omitted). Again, without quantification, it is difficult to accept UPS's conclusion as much more than speculation. As the Postal Service points out, USPS-LR-I-279, a study undertaken by an independent accounting firm, found "no instances of error in capturing and reporting of the PERMIT System postage statement revenue and volume used in the BRPW." Postal Service Reply Brief at III-20.6 In a similar vein, UPS contends that information on Form 8125 may be recorded inaccurately. UPS Brief at 73.7 While this may occur, absent a demonstration of a pervasive problem, it is, as the Postal Service argues, largely "irrelevant since PERMIT System data are entered from mailing statements, not [Form] 8125s." Postal Service Reply Brief at III-22.
[5769] Additional criticisms by witness Sellick merit brief comment. He argues that, as compared to the DRPW system, the BRPW system provides insufficient weight data, thus rendering billing determinants less accurate. Tr. 31/15041. While witness Prescott concedes the point that the PERMIT System provides less weight distribution detail, he argues that this does not mean that applying DRPW-based distribution keys to the PERMIT System-derived estimates produce inaccurate weight distributions. Tr. 43/18795-96. The Commission concurs. Moreover, BRPW, which provides near census estimates, is markedly superior to DRPW in generating volume and revenue estimates. Ibid.
[5770] Witness Sellick's final criticism is that "[t]he Postal Service's RPW results assume that BRPW provides accurate weight estimates by rate category and zone." Tr. 37/16961-65. This criticism is essentially meaningless because, as witness Prescott notes, PERMIT System data are not used to distribute weight to rate category and zone. Tr. 43/18806-07. The PERMIT System provides total weight as a billing determinant input. Id. at 18807. However, base year RPW total estimates are not dependent on BRPW weight estimates by rate category and zone. Such estimates rely on BRPW estimates for total revenue, volume, and weight, but not for the distribution of these items to rate categories and zone. Id. 18806.
[5771] In sum, the Postal Service's defense of its estimation systems, including its explanation of the discrepancy in base year estimates, provides sufficient confidence in the BRPW Parcel Post estimates to allay, for purposes of this proceeding, the Commission's concerns regarding the adequacy of the base year Parcel Post estimates. That conclusion is also influenced by the demonstrable superiority of PERMIT System derived Parcel Post estimates as compared to DRPW-only derived estimates. This is perhaps best illustrated by examining the reasons behind the Postal Service's decision to use the PERMIT System, beginning PQ 1 FY 1999, to develop permit imprint Parcel Post estimates in the RPW.
[5772] The decision to expand the PERMIT System to include Parcel Post data was driven by three factors. First, the PERMIT System provides census or near-census estimates as compared to sample based estimates. Consequently, as compared to the DRPW, statistical variance is minimized. Second, for various reasons, e.g., endorsement requirements and mail acceptance policies, DRPW data collectors are unable to record with certainty the actual revenue per piece for some categories of bulk entered mail. Indeed, the data collection errors manifest this problem. In contrast, this is not a problem under the PERMIT System, which utilizes postage statements to provide accurate per piece revenue estimates. Third, the introduction of new dropship discounts in January 1999 accelerated the need to use the PERMIT System for Parcel Post. Given the lack of a specific endorsement for each rate category, DRPW data collectors would have been unable, as a practical matter, to distinguish among the three new rate categories. Again, that problem does not arise under the PERMIT System since such data are readily available from postage statements. Thus, the Commission adopts the Postal Service's FY1999 Parcel Post estimates.8
[5773] On behalf of the Postal Service, Plunkett proposes to increase Parcel Post rates, on average, by 1.3 percent. USPS-T-32 at 40; see also USPS-T-36 at 9 et seq. This increase reflects a cost coverage of 115.1 percent, which is sponsored by witness Mayes. See USPS-T-32 at 40-43. Witness Plunkett developed his proposed rates in two phases. First, the transportation costs identified by witness Eggleston were distributed to weight and zone separately for Intra-BMC, Inter-BMC, and DBMC. Witness Plunkett also proposes to continue the existing convention of including an add-on of two cents per pound to recover weight-related non-transportation costs. Estimated revenues associated with this add-on are subtracted from the non-transportation costs. The remaining costs are recovered via proposed per piece rates. USPS-T-36 at 13. Witness Plunkett indicated that his preliminary rates were designed "to establish the cost basis for rates within a given category, and to provide a preliminary estimate of the magnitude of price changes to which underlying cost data give rise prior to application of the other statutory ratemaking criteria." Tr. 13/4980. The first phase produced rate increases that, in Plunkett's opinion, were generally excessive, although the rates for certain zones and categories would have declined. To rectify this, Plunkett imposed rate constraints in phase two. More specifically, no rate was allowed to increase more than 10 percent, and for the DSCF and DDU rate categories, no rate could change by more than two percent. USPS-T-36 at 13-14. In certain instances, narrower constraints were imposed to smooth rate relationships. Id. at 14.
[5774] Witness Plunkett proposes to maintain the existing rate design, except for the following changes. He proposes to eliminate the one pound minimum weight requirement for Parcel Post. In lieu of a separate rate for pieces weighing less than one pound, Plunkett proposes that the up to two-pound rate be charged. Witness Plunkett also proposes extending the non-machinability surcharge, which currently applies to Inter-BMC parcels, to parcels mailed at intra-BMC and DBMC rates. He suggests that there be three separate non-machinability surcharges. In addition, Plunkett proposes the pickup fee be increased from $8.25 to 10.25.
[5775] Two witnesses propose cost coverages for Parcel Post. A third witness addresses cost coverage and, while not proposing a specific coverage, proposes that, at a minimum, Parcel Post destination entry rate categories not be increased. Postal Service witness Mayes recommends a cost coverage of 115.1 percent over volume-variable costs as estimated by the Service.9 In support of her proposal, Mayes discusses how the various ratemaking criteria of the Act influenced her decision. For example, she argues that Parcel Post exhibits a low value of service (criterion 2) as demonstrated by its low intrinsic value, e.g., low delivery priority, and its low economic value of service as reflected in its relatively high own-price elasticity of above 1.0 in absolute value (-1.23). Witness Mayes asserts that the proposed increase, 1.3 percent, will neither materially effect mailers, nor preclude competitors from continuing to compete successfully (criterion 4). She also contends that the degree of mail preparation (criterion 6) is adequately recognized through the rate structure revisions adopted in Docket No. R97-1. In addition, she argues that criterion 3 is satisfied because estimated revenues, $1,211 million, exceed estimated incremental costs, $1,052 million. Exhibit USPS-32B at 1, revised April 21, 2000. Finally, she contends that the proposed rate level (criterion 1) is fair and equitable. USPS-T-32 at 40-43.
[5776] UPS witness Sappington recommends a 24.9 percent increase in Parcel Post rates, reflecting a cost coverage of 111 percent over attributable costs as estimated by UPS. Tr. 31/15260. As revised by the Supplemental Testimony of witness Luciani, UPS apparently is proposing an increase of 38 percent. Tr. 38/17249; see also Amazon.com Reply Brief at 1-2. Witness Sappington cites five factors in support of his proposal. First, he argues that attributable costs have increased substantially, comparing test year Docket No. R97-1 estimates with his test year estimates in this proceeding. Tr. 31/15261. Second, citing data for the 1990s, he claims Parcel Post volumes and revenues "have grown substantially in recent years," thus suggesting that Parcel Post can sustain a healthier margin than that adopted in Docket No. R97-1. Id. at 15261-62. Third, he contends that in FY1998 and in prior years "Parcel Post revenue seems to have failed to cover its attributable costs." Id. at 15264. Fourth, he claims that features like DDU, coupled with service by a consolidator and delivery confirmation service, markedly increase the value of service of Parcel Post. Finally, he argues that if the Postal Service's new methodology for measuring volumes is accurate, it would support a more robust cost coverage since any concerns that "a sizeable increase in rates would reduce Parcel Post volumes to unacceptably low levels" are lessened. Id. at 15266-67.
[5777] As noted, initially, witness Sappington proposes a rate increase of 24.9 percent, incorporating a cost coverage of 111 percent. Tr. 31/15260. Subsequently, UPS revises its suggested rate increase up to 38 percent. Tr. 38/17249. UPS continues to propose a cost coverage of 111 percent, a result that, under the circumstances, is not tenable. See UPS Brief at 57-59. To be sure, cost coverage is a matter of judgment influenced by sometimes-conflicting considerations. Nonetheless, to maintain a 111 percent cost coverage, notwithstanding that the revised rate increase is more than 50 percent greater than UPS's original proposal, suggests a result driven more by expediency than circumstances.
[5778] On brief, UPS asserts that Parcel Post cost coverage should be increased from the Docket No. R97-1 level to 111 percent. Ibid. Conspicuous by its absence, however, is any mention of the specific increase proposed (38 percent) or that its coverage initially reflected a lower rate increase. UPS's goal of increasing the cost coverage for Parcel Post cannot be so easily divorced from the rate increase it seeks to impose. Coverage may be influenced by the rate increase proposed, and it is incumbent on the proponent to adequately support both. The Commission concludes, based on an analysis of UPS's proposal as a whole, that it has not justified its proposed rate increase. This does not mean, however, that Parcel Post cost coverage should not be increased. While, as a general matter, the Commission has rejected UPS's attempts to attribute additional costs to Parcel Post, the Commission has, nonetheless, increased Parcel Post's attributable costs above the levels proposed by the Postal Service, and based on consideration of the statutory criteria increased Parcel Post's cost coverage above recent levels and the level suggested by UPS.
[5779] The Commission's recommended rates are tempered by two additional considerations. First, in Docket No. R97-1, Parcel Post rates increased substantially more than the system average and reflected a cost coverage of 108 percent. In this proceeding, Parcel Post costs have not increased to an extent that would require an above average rate increase. Second, designing fair and equitable Parcel Post rates involves practical considerations, including intra- and inter-subclass rate relationships, which, on balance, make further adjustment to the Parcel Post cost coverage unwarranted. Attempts to increase coverage were hindered by inter-subclass rate relationships and the need to avoid illogical and unacceptable rate anomalies, e.g., Parcel Post rates above those for Priority Mail. On the other hand, the current record does not support maintaining the current coverage.
[5780] PSA witness Zimmermann contends that the Postal Service's proposed Parcel Post cost coverage is excessive. Tr. 29/14143, 14146-49. The predicate for this position is his belief that the Postal Service would not have proposed that coverage but for its error in Docket R97-1 "underestimating both revenues and volumes for Parcel Post, producing a rate increase that was five times the system-wide average increase." Tr. 29/14147. Comparing the sum of the systemwide average increase from Docket No. R97-1, 2.5 percent, and that proposed by the Postal Service in this proceeding, 6.0 percent, with the 12.3 percent recommended by the Commission in Docket No. R97-1 for Parcel Post, Zimmermann asserts that a 4 percent decrease in Parcel Post rates would be justified. Ibid. see also PSA Brief at 5-6. Witness Zimmermann does not propose a specific cost coverage for Parcel Post. He does, however, conclude that the Commission should recommend no increase in Parcel Post rates and "increased discounts for Drop Ship rate categories." Id. at 14149. Regarding the "Drop Ship rate categories," elsewhere in his testimony Zimmermann recommends that the Commission "reject all increases for DBMC, and recommend larger increases in the DSCF and DDU discounts." Id. at 14143.
[5781] On brief, PSA argues that the cost coverage for Parcel Post should remain at its Docket No. R97-1 level, 108 percent. PSA Brief at 7. It notes that witness Mayes adjusted her coverage from 114 percent to 115.1 percent, and concludes, therefore, that "the Postal Service has no justification for its increased coverage..." Ibid. This argument is not convincing. Witness Mayes explained her rationale for increasing the cost coverage, even if not the slightly higher figure. See USPS-T-32 at 40-43. PSA ignores this testimony entirely, except to note her comments concerning criterion 2. PSA Brief at 8. Consideration of one criterion is rarely dispositive of cost coverage. PSA also suggests that but for the DRPW estimation error in Docket No. R97-1 current Parcel Post rates "would be much lower," a result that "argues in favor of a small rate increase and a low cost coverage in this proceeding." Id. at 7. This claim is more about rates than cost coverage. In any event, the Commission declines to speculate what it might have done if the record in that proceeding had been different.
[5782] Upon a thorough review of the record, the Commission recommends Parcel Post rates that increase, on average, by 2.7 percent, reflecting a cost coverage of approximately 115 percent. This represents an increase over the current coverage and yields a markup index of .253, which is also above recent indices for Parcel Post. The modest but meaningful increase reflects a careful consideration of competing factors.
[5783] Parcel Post has a low value of service, reflecting its non-preferential processing, surface transportation, and lack of access to collection boxes. In addition, its estimated own-price elasticity is above 1.0 in absolute value (-1.23), second highest among all subclasses. USPS-T-32 at 6. Delivery confirmation, an option that may add value for certain customers, is available only upon payment of a separate fee. On the other hand, Parcel Post lacks standard features offered by competitors, e.g., free insurance and tracking. See Postal Service Brief at VI-24.
[5784] UPS also cites the availability of the DDU rate category as evidence of improved Parcel Post value of service. UPS Brief at 58. Workshare activities cut across several criteria. The Commission must consider them under criterion 6, and they have cost and rate structure implications under criteria 3 and 7, respectively. As a general matter, worksharing rate categories reduce the Postal Service's costs, while affording mailers opportunities to achieve efficiencies through their own efforts or in coordination with consolidators.
[5785] The recommended Parcel Post rates satisfy criterion 3. They recover attributable costs and, given the increased cost coverage, make a reasonable contribution to institutional costs. In addition, the increased cost coverage provides further assurance that the recommended rates will be fully compensatory in the test year.
[5786] Generally, criterion 4 requires the Commission to consider the effect of rate increases on the public, business mailers, and private carriers. A related consideration is criterion 5, alternative delivery options. Parties representing mailer and private carrier interests participated actively in this proceeding. PSA urges the Commission to recommend lower Parcel Post rates than proposed by the Postal Service. AMZ endorses the Postal Service's proposal. UPS proposes that Parcel Post rates be increased. While there was testimony about parcel markets and estimates of relative market shares, no testimony claimed any specific adverse impact due to the Postal Service's Parcel Post proposal. Along with whatever relevant, record information is available, the absence of specific allegations of harm bears on the Commission's consideration of the effects of rate increases. Based on the "imperfect information at its disposal," (Tr. 31/15462, Tr. 44/19537) the Commission concludes its recommended rates will not burden users unfairly.
[5787] Shipper interests cite reliance on the Postal Service and the competitive role the Service plays. Tr. 29/14131-35, Tr. 41/18127-34. UPS cites advantages inherent to the Postal Service, e.g., its statutory monopoly and exemption from certain taxes and fees. UPS Brief at 52.10 UPS, however, has not asserted that the Postal Service's proposed rates will cause it competitive injury. See, e.g., P.O. Ruling R2000-1/112. In the absence of such testimony, the Commission finds no basis to conclude that the recommended rates will occasion competitive injury.
[5788] Plainly, the parcels market, however defined, is competitive. There is some evidence that UPS is the dominant carrier. See, e.g., USPS-T-6 at 158, PSA Brief at 9-11, and Tr. 44/19525-29. On the other hand, UPS makes the case that the Postal Service carries more parcels. UPS Brief at 60-61. For purposes of this proceeding, it is immaterial which, if either, position is more accurate. That alternatives exist does not require the Commission to recommend rates causing the Postal Service to cede markets to competitors. See United Parcel Service, Inc. v. United States Postal Service, 184 F.3d 827, 845 (D.C. Cir. 1999) ("[t]he Commission has consistently, and reasonably, held that [criterion 5] authorizes a reduction in rates to maintain the position of the Postal Service as a competitor in the mail delivery industry.") Nor is it the Commission's role to assure market share for the Postal Service. The Commission's role is to protect competition, not competitors. Direct Marketing Association, Inc. v. United States Postal Service, 778 F.2d 96, 106 (2nd Cir. 1985). The recommended rates are designed with that goal in mind.
[5789] Criterion 6 is reflected in the rate schedule in the form of workshared rate categories. While these mailing options may be attractive to certain mailers, they cannot be exercised without cost. See Amazon.com Brief at 30-31. Consistent with criterion 7, the various Parcel Post rate categories, including the relatively new destination entry categories, are reasonably simple, familiar to mailers, and bear a direct relationship to the costs and the service provided. In sum, considering all the statutory criteria, the Commission concludes that its recommended Parcel Post rates are fair and equitable.
[5790] In Docket No. R97-1, the Commission recommended significant rate design revisions to Parcel Post, including, as noted above, establishment of DSCF and DDU rate categories. Those revisions became effective January 10, 1999. In this proceeding the Postal Service has proposed a few rate design changes, which, while relatively minor, nonetheless merit close attention.
[5791] As might be expected with a zoned rate structure designed for pieces weighing up to 70 pounds, Parcel Post rates are complicated by a number of practical considerations. Rates within the various rate categories should bear a reasonable relationship to one another. This is largely accounted for by basing discounts on cost savings, which yields lower rates for greater worksharing. Care must be taken however to avoid anomalies if at all practicable. Similarly, conflicts with Priority Mail are to be avoided. These practicalities necessitate using interim constraints to smooth rate relationships, and to develop fair and equitable Parcel Post rates. Longer term, continued use of constraints imposes rate design difficulties, particularly for zoned parcels, which may be rectified best through classification reform. See, e.g., Tr. 13/4998. The Postal Service is encouraged to study the issue.
[5792] The Commission's discussion of rate design is organized by topic as follows: weight-related non-transportation costs, rate categories (inter-BMC, intra-BMC, Parcel Select DBMC, DSCF, and DDU), discounts (BMC presort discount, OBMC discount, and barcode discount), separate, parcel-specific charges (oversize parcel, balloon rate, and nonmachinable surcharge, including the Postal Service's proposal to expand the nonmachinable surcharge to intra-BMC and DBMC parcels), and additional services (pickup service and delivery confirmation). The final rate design issue addressed is the Postal Service's proposal to eliminate the minimum weight requirement for Parcel Post.
[5793] The Postal Service proposes Parcel Post rates that reflect the use of the existing convention of including an add-on of two cents per pound to recover weight-related non-transportation costs. This two cents per pound charge has been employed in designing Parcel Post rates "from as far back as Docket No. R84-1." Tr. 13/4987. According to witness Plunkett, who could provide no data supporting the charge, it "provides a means through which rates may reflect sortation and mailhandling and delivery costs that are presumed to be caused by weight." See Ibid.
[5794] Florida Gift Fruit Shippers Association (FGFSA) witness Ball notes, inter alia, that there is no evidentiary support for the charge. In the absence of data demonstrating the affect of weight on non-transportation costs, i.e., handling costs, he argues that the charge discriminates against heavier parcels, "charging [them] with a greater portion of the costs than can be justified." Tr. 30/14306. In lieu of the charge, he proposes that the imputed cost, approximately $39 million, be assigned on a per piece basis using the cube/weight relationship on which transportation costs are distributed. Id. at 14305-06; see also USPS-LR-I-62, Attachment H, Cell 09. He cites Exhibit USPS-T-26, Attachment K, which is attached to his direct testimony as Table B, as setting forth an appropriate cube/weight relationship. Alternatively, Ball proposes that the add-on be reduced from two cents to one cent per pound. In its brief, FGFSA emphasizes that no cost data support inclusion of the two cents per pound add-on. FGFSA Brief at 11-12.
[5795] The Postal Service did not address this issue in rebuttal testimony or on brief. Nor did any other participant.
[5796] The Commission has repeatedly suggested that this issue be studied. See PRC Op. R97-1, para. 5662; see also PRC Op. R90-1, para. 6409, and PRC Op. R87-1, para. 5908. That suggestion has fallen on deaf ears. In Docket No. R97-1, in response to FGFSA's general suggestion the curvilinear relationship for transportation costs be used to distribute weight-related handling costs, the Commission concluded that "no alternative has been well developed." PRC Op. R97-1, para. 5662. In this proceeding, FGFSA has refined its proposal by tying it to USPS Exhibit -T-26.
[5797] FGFSA's proposal represents an improvement over the status quo. It is reasonable because parcel handling costs would appear to be related to both weight and cube. FGFSA's proposal is that non-transportation costs be distributed based on an established cube/weight relationship, albeit for transportation. In that regard, witness Plunkett was "not aware of any reason why there would be a difference between the weight/cube relationship" of parcels being processed as opposed to those being transported. Tr. 13/5036. While not holding himself out to be an expert on either transportation costs or processing operations, Plunkett did provide examples of the influence of weight on costs. Id. at 5042, 5031-32, and 5045-46. Similarly, the rationale behind the balloon rate gives credence to the influence of cube on costs even if its relationship with weight is not measured precisely. Id. at 5037. Absent a more quantitative analysis, FGFSA's proposal represents a more rational distribution of the imputed costs, one more compatible with the Commission's goal of cost based rates, particularly as compared to the status quo.
[5798] Inter-BMC and Intra-BMC. In designing rates for Inter- and Intra-BMC the Postal Service followed the established methodology described briefly in section c. above. The Commission's rate design for inter- and intra-BMC Parcel Post is similar to the Postal Service's design with one exception. The Commission distributes the weight-related, non-transportation handling costs as proposed by witness Ball.
[5799] An apparent anomaly exists in the rate design of the Intra-BMC rate schedule. This schedule consists of five separate zones despite there being only two distinct transportation costs, one for the `local' zone and one for all the other zones. But for the fact that rates were forced upward by imposing constraints, the rates for zones 1 & 2, 3, 4, and 5 would be the same. Maintaining this artificial five zone Intra-BMC structure puts downward pressure on the DBMC rates in zones 3, 4, and 5 because these rates must be lower than the comparable Intra-BMC rates to avoid an illogical rate structure. The Service is advised to study this issue.
[5800] Parcel Select. The Postal Service has employed the term Parcel Select to refer to destination entry discounts. The Commission recommends that the DMCS be modified accordingly. Destination entry rate categories include DBMC , DSCF, and DDU. Prior to considering proposals specific to each rate category, the Commission will address an issue common to each, namely passthroughs.11
[5801] Witness Plunkett proposes to pass through approximately 100 percent of the cost savings arising from the various Parcel Post worksharing programs. Attachment H to USPS-T-36, revised April 17, 2000. The passthroughs range from 99 percent for the BMC presort discount to 102 percent for the prebarcoded discount. Ibid. Postal Service witness Eggleston presents the cost savings. See USPS-T-26 at 11-17. Witness Plunkett suggests that because, during the rate design process, he constrained rates for certain discounted rate categories, e.g., DDU, so as not to decrease by more than 2 percent, the passthroughs could be viewed as less than 100 percent. Tr. 13/4996, 5009; see Postal Service Reply Brief at VI-100. In other words, the constraints result in higher rates, an effect akin to limiting passthroughs.
[5802] Witness Luciani proposes a 63 percent markup on the attributable cost of DDU-entered Parcel Post, which he suggests is appropriate based on a comparison with Priority Mail. Tr. 25/11805. The predicate for this markup is that, in Luciani's view, Priority Mail and Parcel Post receive "a comparable level of service once they reach the DDU." Id. at 11959; see also Id. at 11805. Using that markup and the Postal Service's costs, Luciani calculates the DDU passthrough at approximately 50 percent. Id. at 11805-06 and 11821; see also Id. at 11821. He recommends that the Commission follow a similar method to derive the DDU passthrough utilizing his DDU-entry costs. He acknowledges that his DDU-entry costs are significantly higher than the Postal Service's due to the costing changes he proposes. Id. at 11805, fn. 15. At a minimum, he recommends that the DDU passthrough not exceed 80 percent, a level he claims results from Plunkett's rate constraints. Id. at 11806. See also UPS Brief at 84-86.
[5803] Two witnesses criticize Luciani's proposal as flawed. First, Amazon.com, Inc. witness Haldi argues that the use of what he characterizes as an explicit markup for a rate category is inappropriate.12 He contends that under Luciani's approach rates for workshared rate categories would not be determined in a consistent fashion. Stated otherwise, he argues that Luciani inappropriately employs both a top-down and bottom-up approach to ratemaking. Tr. 44/19544. Witness Haldi contends that Luciani's approach is problematic and, if adopted, would cause "confusion and irrational rates." Ibid.; see also Amazon.com Brief at 17-19.
[5804] Second, PSA witness Glick argues that Luciani's implicit markup method is essentially unworkable. It would, according to Glick, lead to "rate anomalies," contrary to the principle of cost based rates. Tr. 41/18083. Moreover, he asserts that assigning a rate category an implicit markup based on the characteristics of a separate subclass confounds the ratemaking process since, unlike Luciani's implicit markup, explicit markups are not based solely on value of service. Id. at 18084. Witness Glick also takes issue with Luciani's suggestion that the passthrough should in no event exceed 80 percent. Based on his proposed DBMC cost avoidance, which is smaller than that developed by Eggleston, Glick argues that rate mitigation is less of a concern, thus justifying a passthrough "significantly more than 80 percent of the DDU cost avoidance . . . ." Id. at 18084-85. Witness Glick urges the Commission to follow its recommendation from Docket No. R97-1, which set the DDU passthrough at approximately 100 percent. Id. at 18082-83; see also PSA Brief at 30-31.
[5805] The Commission finds that use of an implicit markup to derive a passthrough is neither justified nor consistent with efficient component pricing ratemaking. As Luciani testified, he backs into a passthrough he thinks is appropriate in pursuit of another objective, namely, to increase the institutional cost contribution of DDU-entered Parcel Post mail. See Tr. 25/11933, 11595; see also Id. at 11805-06, 11932. It represents a "backdoor" attempt to do indirectly what more appropriately should be addressed directly in the design of rates for the Parcel Post subclass. Furthermore, the result of Luciani's approach is contrary to the principle of cost based rates reflected in the Commission's practice to recommend passthroughs at or near 100 percent of cost avoidance whenever feasible. This is not to suggest that under certain circumstances, e.g., implementing a new rate category, a lower passthrough may not be appropriate. In this instance, however, Luciani's proposal is not justified by such circumstances.
[5806] As both witnesses Haldi and Glick testify, rates based on an implicit markup may defy rational development and lead to inconsistent and unreasonable results. See, e.g., Amazon.com Brief at 17-18, PSA Brief at 30-31. The Commission develops markups for subclasses by balancing numerous conflicting considerations. It then attempts to use efficient component pricing to obtain reasonable contributions from each segment of each subclass. It would be contrary to sound economic and pricing principles to ascribe a unique markup to individual rate cells. Accordingly, the Commission rejects Luciani's passthrough proposal.
[5807] The Commission recommends passthrough levels of 100 percent for DBMC and a somewhat lower percent for DSCF and DDU, in order to achieve a rate design that is more consistent with efficient component pricing.
[5808] Specifically, the Parcel Select rates are not constrained to a particular percentage change.13 Rates are set by distributing transportation costs and weight-related non-transportation handling costs to weight increments on the basis of the cube/weight relationship developed by the Postal Service. The per piece portion of the rate is calculated by subtracting the unit cost savings of each successive workshared category from the previous per piece rate. By removing constraints and passing through close to 100 percent of the mail processing cost savings these rates reflect the Commission's preference for cost based rate setting. Thus, to achieve efficient component pricing, subclasses that become heavily workshared will generally bear increasing cost coverages over time. This recommendation is consistent with that general pricing principle.
[5809] DBMC cost savings. The Postal Service develops its estimate of the cost savings achieved by DBMC-entry parcels through use of a cost avoidance model that includes both window service cost savings of 10.5 cents, and outgoing mail processing savings of 59.3 cents, subsequently revised to 57.4 cents and further revised to 55.7 cents. USPS-T-26, Attachment C. Witness Plunkett proposed to pass through 100 percent of this cost savings although his rate constraints lowered the effective passthrough to approximately 80 percent. Tr. 13/4996, 5009.
[5810] UPS witness Luciani contends that the cost savings calculated by the Postal Service for the workshared categories are overstated. For DBMC, he claims that the Service uses an "outdated `top-down' estimation technique." Tr. 25/11795. According to Luciani, this approach is flawed because it uses LIOCATT costs, stale volume estimates, and an erroneous presumption that DBMC-entry parcels cannot incur non-BMC outgoing mail processing costs. Id. He proposes an alternative calculation that begins with witness Eggleston's model costs for Parcel Post. He then adjusts these models to remove the non-machinable parcels, claiming that the savings should be based on machinable differences only because the proposed non-machinable surcharge for DBMC mail reflects any cost difference between DBMC and Intra-BMC related to machinability. Finally, he adds the DBMC mail processing costs avoided at origin AOs that are not reflected in the models. This results in a unit cost savings for DBMC of 35.8 cents. Id. at 11796-800.
[5811] PSA witness Glick agrees with Luciani's argument that some DBMC parcels incur outgoing non-BMC costs but criticizes his alternative method. Glick claims that Luciani's alternative is flawed for three reasons. First, he agrees with witness Eggleston's assessment that the Parcel Post models are insufficient to estimate the DBMC cost avoidance. Second, Luciani's technique excludes some customer service facility costs that should be included. Third, Luciani conducted no independent checks of his alternative to ensure accuracy. Witness Glick proposes a third method which "assumes that DBMC parcels incur a smaller amount of outgoing, non-BMC mail processing cost than do non-DBMC parcels" and results in a cost savings of 42.4 cents. Tr. 41/18072-74.
[5812] On brief, the Postal Service dismisses witness Luciani's assertion that the DBMC cost avoidance uses LIOCATT costs, claiming that the LIOCATT data are used only as a breakdown of basic functions. It also reiterates witness Eggelston's assessment that her models would have to be substantially altered in order to be used to estimate DBMC cost avoidance. Finally, it accuses witnesses Luciani of using a model that is "at least as `outdated' as witness Eggleston's" because of the method he used to incorporate the AO costs avoided. Postal Service Brief at VII-115. The Service does not address witness Glick's alternative.
[5813] While the Commission employs worksharing models in estimating cost savings for rate categories where actual unit costs are not available, in this instance that would be inappropriate. Witness Eggleston says her models "were not developed for the purpose of estimating DBMC cost savings." Tr. 13/5167. Extensive changes would need to be made to these models to use them for this purpose and those changes have not been made on this record. Therefore, the Commission finds the original DBMC cost savings model more appropriate. It does, however, find that some DBMC parcels incur outgoing non-BMC mail processing costs and modifies the model to reflect these costs. The Commission calculates a window service costs savings of 11.1 cents and an outgoing mail processing savings of 56.2 cents.
[5814] DSCF and DDU cost savings. The Postal Service proposes DSCF and DDU cost savings of 42.8 cents and 73 cents respectively. PSA witness Zimmerman contends that these cost savings estimates are understated because the Service fails to apply the `CRA adjustment' to its modeled costs. The CRA adjustment is used to reflect non-modeled costs and make the results of the models conform to the estimated CRA unit cost. It is used extensively with other worksharing mail categories. Applying the CRA adjustment would increase the modeled costs and therefore the cost savings. Zimmerman claims that the resulting understatement is compounded by the fact that Postal Service witness Plunkett effectively passed through only 80% of the cost savings when designing his Parcel Post rates.
[5815] During oral cross examination witness Eggleston justifies her omission of the CRA adjustment by explaining that the DDU and DSCF categories are new and the uncertainty of the costs requires conservatism:
For the DDU and DSCF I am estimating cost savings, so I am estimating what we think is happening. Since we do not have a lot of data on what is happening we want to be cautious that we don't overstate those savings and give mailers the wrong price incentive because my costing goes into pricing, so we are very cautious by not applying a CRA adjustment factor in the first few years it is introduced. Tr. 13/5252.
[5816] On brief, the Service also points out that the fixed CRA adjustment factor is the same for both DSCF and DDU so the only effect of applying the factor would be to multiply the difference. Postal Service Brief at VII-117.
[5817] The Commission agrees with the Service that not applying the CRA adjustment in this case is justified. Because the DDU and DSCF rate categories were introduced in Docket No. R97-1 and the rates did not go into effect until January 1999 reliable cost data are not yet available. It is unclear what costs, if any, are absent from the cost models. In this proceeding, the Commission accepts the Postal Service's cost savings estimation method as presented by witness Eggleston.
[5818] Witness Luciani claims that the transportation costs for DSCF and DDU are underestimated because Alaska air costs have not been allocated to them. Tr. 25/11803. He proposes to allocate the costs of one intermediate transportation leg to those rate categories. Ibid. On brief, the Postal Service asserts that, because the transportation costs were extrapolated from a base year that did not include the DDU and DSCF rate categories, DBMC was used as a proxy. DBMC does not incur Alaska air costs. The Postal Service argues that Luciani's proposal is irrational since those rate categories did not exist in the base year. Postal Service Brief at VII-117; see Postal Service Reply Brief at VI-103-04. In USPS-LR-I-470, which updates transportation costs to reflect FY 1999 data, the Service allocates local transportation costs to DSCF and DDU. The Commission's cost analysis incorporates these data. It is not apparent that distribution based on an intermediate transportation leg is appropriate for service in Alaska. However, since these rate categories were introduced relatively recently, data should be available in the next proceeding to analyze the issue. Cf. Tr. 25/11962.
[5819] In contrast to PSA's view that DSCF and DDU cost savings are understated UPS argues that the cost saving estimate for DDU is overstated because it includes cost avoidance related to sack shakeout. Witness Luciani bases this conclusion in part on the Commission's decision in Docket No. R97-1 to exclude these costs from consideration of the cost savings. He also bases his opinion on the minutes from a Mailer's Technical Advisory Committee Meeting that he claims "make clear that Postal Service employees at the DDU will assist in unloading DDU-entry mail when they are available." Id. at 11800.
[5820] PSA witness Wittnebel supports the Service's contention that these costs are avoided by DDU parcels. Wittnebel is the Vice President of Delivery Services at CTC, which uses the DDU discount. He states that CTC's drivers are responsible for unloading the trucks and the Service incurs no sack shakeout costs because none of the DDU mail is entered in sacks. He also explains that the minutes from the meeting were taken out of context and that he has never seen Postal Service employees assisting drivers unload the trucks. Tr. 41/18044-46. Based on this testimony, the Commission finds that including the sack shakeout costs in the avoidance model is appropriate. The Commission's cost savings for DSCF and DDU are 41.1 cents and 69 cents, respectively.
[5821] Finally, in the Postal Service's roll-forward model the final transportation costs for Parcel Post are adjusted downward to account for a change in mail mix due to the DSCF and DDU discounts introduced in Docket No. R97-1. UPS witness Luciani claims that this final adjustment is overstated because of a double-count in DSCF volume. He argues that 7.11 percent of DBMC parcels were entered at the DSCF even before the DSCF discount was available. Therefore, no cost savings accrue from these parcels and they should be excluded form the mail mix adjustment. He contends that fixing this `error' results in an increase in transportation costs for Parcel Post of $7.7 million in the test year. Tr. 25/11798-99. On brief, UPS argues that "some parcels were clearly entered at DSCFs in 1998." UPS Brief at 42. It does not address the Service's contention that there is no evidence of double-counting.
[5822] In rebuttal testimony, witness Eggleston asserts that Luciani's correction assumes that 7.11 percent of DBMC volume is dropped at the DSCF in the pre-mix volume but not the post-mix volume. She claims that this assumption is not rational and that the correct assumption under witness Luciani's argument is to assume the portion of DBMC dropped at DSCF is zero percent in both the pre-mix and post-mix volume. The effect of this change is to decrease Parcel Post costs by $1.9 million in the test year. Tr. 41/18161-62; see Postal Service Brief at VII-113-14.
[5823] Witness Luciani's assumption that 7.11 percent of the pre-mix DBMC parcels dropped at the DSCF become DSCF parcels in the post-mix environment is questionable, as even he appears to acknowledge. See Tr. 25/11927; see also Tr. 41/18161. Moreover, as witness Eggleston notes, this assumption suggests that the percentage of DBMC parcels dropped at the DSCF should be zero for both pre-mix and post-mix volumes. Id. at 18161. Based on the evidence, the Commission concludes that this approach is preferable. Thus, the Commission's final adjustment is consistent with Eggleston's rebuttal testimony.
[5824] BMC Discount. The BMC discount is available for inter-BMC mailings of at least 50 pieces, separated into machinable and nonmachinable pieces and presorted to the destination BMC or secondary sort operation. The Service proposes increasing this discount from the current 22 cents to 23 cents. This proposal is unopposed and accepted by the Commission.
[5825] OBMC Discount. The OBMC discount is available to inter-BMC mail that is entered at a BMC other than the destination BMC. The pieces must be presorted. The current discount is 57 cents and the Postal Service proposes an increase to 93 cents. The proposal is unopposed. The Commission recommends a discount of 90 cents based on its costing methodology.
[5826] Barcode Discount. The parcel sorting machine (PSM) is the only mailhandling operation affected by the presence of a barcode. Witness Eggleston modeled the cost of this operation to develop an estimate of prebarcode cost savings. USPS-T-26 at 10. Her estimated test year per piece cost savings is 2.9 cents. USPS-T-26, Attachment B. Based on this analysis, Plunkett proposes a barcode discount of 3 cents, which is the same as the current discount. The Postal Service's proposal is unopposed and, accordingly, the Commission recommends it be implemented.
[5827] Oversize Parcel Post. Pieces that measure more than 108 inches, but not more than 130 inches, in combined length and girth are subject to the applicable Parcel Post oversized rate, regardless of weight. The oversized rate was implemented pursuant to the Commission's recommendation in Docket No. R97-1. See PRC Op. R97-1, para. 5702. Witness Eggleston develops modeled costs for inter-BMC, intra-BMC, and DBMC oversized NMOs. USPS-T-26 at 9-10, revised March 22, 2000. For each of these rate categories, she calculates the cost differences between the adjusted modeled cost of NMOs and oversize NMOs. See USPS-T-26, Attachment A at 1. Witness Plunkett employs these estimated cost differences to develop proposed oversize Parcel Post rates.
[5828] The principal cost driver behind the proposed oversize rates is the average cube of the oversize parcel. Witness Eggleston used 8.04 cubic feet, based on a sample of oversize parcels in PQ 3 FY 1999. Tr. 13/5156. PSA witness Karls contends that the Postal Service's sample is too small to be reliable. Tr. 23/10811; see also PSA Brief at 34. Based on a survey of two mailers' experience with oversize parcels, Karls suggests that reducing the average cube to 6 feet would be appropriate. Tr. 23/10813. He indicates that his employer, Fingerhut Companies, Inc., which ships three times as many oversize parcels as the Postal Service's estimated test year volumes, makes little use of the oversize rate "because the cost is prohibitive." Ibid. see also PSA Reply Brief at 6.
[5829] On brief, the Postal Service opposes PSA's proposal, contesting both the theoretical mathematical sample used to derive the estimated average cube as well as the reliability of the data from two shippers concerning oversized parcels. Postal Service Brief at VII-112-113. In reply, PSA contends that the Postal Service distorts the record, and that Karls' analysis, based on a large volume of oversized parcels, provides a better estimate of average cube than the Postal Service's estimate that was based a statistically insignificant sample. PSA Reply Brief at 4-7.
[5830] The evidence developed on the average cube of oversized parcels is flawed. While it may properly be characterized as random, the Postal Service's sample is so small, representing only .0004 of total oversized volumes, as to raise doubts about its reliability. The sample size, however, may simply be a reflection of the relatively small universe of oversized parcels. See Tr. 13/5160-61. On the other hand, notwithstanding that greater volumes were measured, Karls' analysis relied on selected data from only two shippers. Karls candidly acknowledges that the experience of two shippers may not be representative. Tr. 23/10813. Moreover, as the Postal Service notes, Karls' attempt to buttress his estimate by reference to the 95 percent confidence interval of the sample, 6.55 to 9.53, is unavailing. Postal Service Brief at VII-113.
[5831] Upon careful evaluation of the testimony and arguments on brief, the Commission recommends adoption of the Postal Service's proposal. Although PSA criticizes the Postal Service's sample as "so small as to be statistically insignificant," (PSA Reply Brief at 6) it proffered no testimony to support this contention. The Postal Service's sample reflects, at least to some degree, oversized pieces in its mailstream. In contrast, none of the oversized parcels for one of the shippers for which PSA provided data shipped those parcels via the Postal Service. Certainly, price is an important consideration, but, in some circumstances, other factors may be overriding. The Commission appreciates PSA's effort to develop an alternative to the Postal Service's average cubic feet. On this record, however, that alternative is not adequately supported to warrant its adoption. Given shipper interest in the oversized rate plus a market for such parcels, the Commission urges the Postal Service to provide a more thorough analysis of cube in the next rate proceeding.
[5832] Balloon Rate. In Docket No. R97-1, the Postal Service proposed and the Commission recommended the reestablishment of the "stop-loss" or "balloon" rate applicable to Parcel Post items weighing less than 15 pounds which exceed 84 inches, but not 108 inches, in length and girth combined. Such mail is charged the 15-pound rate for the applicable zone. Witness Plunkett proposes to continue the balloon rate. See USPS-T-36 at 12; see also USPS-T-36 Attachment D and Attachment K, revised April 17, 2000. Eggleston sponsors volume and cube data concerning balloon-rate parcels. See USPS-T-26 at 2 and USPS-LR-I-105.
[5833] The Postal Service's proposal is unopposed. The Commission recommends that it be adopted.
[5834] Proposed Nonmachinable Surcharge. Generally, the nonmachinable surcharge applies to parcels weighing more that 35 pounds or measuring more than 34 inches long, 17 inches wide, or 17 inches high. USPS-T-26 at 8. Other criteria, as specified by the Postal Service, are applicable to nonmachinable parcels. See DMM §630.1.4. Currently, the surcharge applies only to items mailed at inter-BMC rates. The surcharge does not apply to items mailed at the oversized rates. Witness Plunkett proposes to extend the surcharge to the intra-BMC and DBMC rate categories. His rationale is that such mail "can be assumed to receive a BMC handling." USPS-T-36 at 14, revised April 17, 2000; see also Postal Service Brief at VII-111.
[5835] Witness Eggleston develops the estimated cost of processing inter-BMC, intra-BMC, and DBMC non-machinable outsides (NMOs). USPS-T-26 at 8-9. For each rate category, the adjusted modeled cost of NMOs is compared to the adjusted modeled cost of machinable parcels. The cost differences, inter-BMC $1.79, intra-BMC $1.173, and DBMC $1.277, form the basis for Plunkett's proposed non-machinable surcharges. Witness Plunkett proposes to pass through 100 percent of the processing cost difference for inter-BMC Parcel Post, increasing the non-machinable surcharge to $1.79, or by 8.5 percent. In contrast, he proposes to pass through only 35 percent of the cost differences for intra-BMC and DBMC, yielding surcharges of $.40 and $.45, respectively. This decision rests on his belief that "passing through 100 percent of the costs would result in rate changes that are excessive given the magnitude of the rate changes I propose for these categories generally." USPS-T-36 at 14, revised April 17, 2000; see also Postal Service Brief at VII-111.
[5836] No participant opposes the proposed surcharges. The Commission recommends that the proposed non-machinable surcharge be adopted with modifications. First, based on its costs, the Commission recommends a surcharge of $2.00 for inter-BMC NMOs. Second, the Commission finds that Plunkett's rationale for limiting the passthrough on intra-BMC and DBMC NMOs is not persuasive. At the Postal Service's proposed Parcel Post rates, exclusive of the surcharge, the increase to intra-BMC and DBMC mail subject to the surcharge is approximately 8 percent. Including the surcharge, the increase averages about 17 percent. Percentage increases, however, are but one factor that the Commission must consider. The surcharge is designed to recover the processing cost differences associated with NMOs. This purpose is thwarted if, as the Postal Service has proposed, the passthrough is inadequate. As proposed by Plunkett, substantially more than half of the processing cost differences attributable to NMOs would not be borne by such mail. Stated otherwise, the proposed passthrough is inadequate, inappropriately burdening non-NMO-mail with NMO-related costs. Consistent with its policy of setting passthroughs at or near 100 percent, where feasible, the Commission recommends the following surcharges for NMOs: intra-BMC $1.35, and DBMC $1.45. The recommended surcharges coupled with the Commission's rate design for Intra-BMC and DBMC strike a reasonable balance among affected mailers, while, at the same time, better reflecting the Commission's preference for cost based rates. In addition, the recommended surcharges better serve as an incentive to mailers to mail, where practical, machinable items. To the extent the incentive works, the Postal Service's costs will decline. On the other hand, to the extent that mailers continue, for whatever reason, to mail NMOs, such mail will bear its share of the costs incurred.
[5837] Pickup Fee. Pickup service is available on a scheduled or on-call basis. The current pickup fee is $8.25. Based on witness Campbell's estimated average cost per stop, witness Robinson develops a weighted average cost of $10.01, based on the TY estimated number of stops for Express Mail, Priority Mail, and Parcel Post. See USPS-LR-I-160, section I at 1 and USPS-T-34, Attachment I. Witness Eggleston proposes a fee of $10.25. The Postal Service's proposal is unopposed and the Commission recommends that it be adopted.
[5838] Delivery Confirmation. PSA witness Zimmermann proposes that delivery confirmation be free for Parcel Select mailers using an electronic manifest. Tr. 29/14141-42. In response to that proposal, Postal Service witness Davis reexamined the assumptions underlying the initial delivery confirmation cost estimates. Tr. 39/17422-31. Witness Davis estimates that the total, unit volume variable cost for the Standard Mail electronic option is $0.079. Id. at 17431. On brief, the Postal Service indicates that the revised unit cost of Standard Mail (B) manual (retail) option is $0.425. Postal Service Brief at VIII-31. As discussed below, the Commission recommends delivery confirmation fees that are based on the reduced unit cost figures.
[5839] As noted, the Postal Service proposes to eliminate the one pound weight minimum for Parcel Post. A separate rate for Parcel Post mail weighing less than 16 ounces is not proposed. Instead, "the lowest rate in each category would be applicable to all pieces weighing up to two pounds." USPS-T-36 at 12.
[5840] Witness Mayes suggests that eliminating the weight minimum will provide mailers with flexibility. USPS-T-32 at 42. First, retail mailers, i.e., single piece mailers, will have a mailing option other than First-Class or Priority Mail. Such an option existed until Single Piece Standard Mail (A) was eliminated following Docket No. R97-1. Ibid. Second, bulk mailers may combine eligible mail of various weights as Parcel Post, utilizing worksharing rate categories to avoid the need to separate the mailing into separate subclasses. Ibid.
[5841] On behalf of PSA, witness Zimmermann endorses the proposal as beneficial to the Postal Service and mailers. Tr. 29/14136. No testimony was submitted opposing the proposed change. On brief, however, UPS urges the Commission to reject it, arguing, inter alia, that the Postal Service failed to address the consequences of the proposal. Postal Service Brief at 89-92. UPS cites as particularly troublesome the Postal Service's failure to consider the impact on Priority Mail. Id. at 91-92. In reply, the Postal Service argues that its proposal simplifies the classification schedule, which, among other things, will enable Parcel Post mailers to commingle merchandise of various weights. Postal Service Reply Brief at VI-100-101. Further, the Postal Service contends that there is no need for the analysis UPS seeks. Id. at VI-101.
[5842] The Commission recommends the proposal be implemented. The change is simple, provides mailers with greater flexibility, and is unopposed by and beneficial to mailers. Prior to its elimination in January 1999, Single-Piece Standard Mail (A) was an option available to mailers of lightweight (less than one pound) mailable matter not required to be mailed as First-Class Mail. This proposal restores that option. By the same token, as of January 1999, three new destination entry rate categories were made available to bulk Parcel Post mailers. As both witnesses Mayes and Zimmermann note, this new provision will enable bulk Parcel Post mailers to more easily satisfy minimum volume requirements. USPS-T-32 at 42; Tr. 29/14136.
[5843] UPS contends that "most or all" of the estimated 172 million pieces of Priority Mail weighing more that 13 ounces but less than a pound "could shift to Parcel Post." UPS Brief at 90. UPS's contention is unsupported by any showing about markets or rates that may influence mailers to switch from Priority Mail to Parcel Post. Absent such a showing, the volume that potentially might shift is purely speculative. In the abstract, however, the potential shift would not appear to be meaningful. Much of lightweight Priority Mail consists of items subject to the Private Express Statutes which could not "switch" to Parcel Post. Some former Single-Piece Standard Mail (A) might be expected to shift to Priority Mail. In its rollforward model, the Postal Service assumed that only five percent of Single-Piece Standard Mail (A) migrated to Priority Mail in FY 1999 with no cost level change or volume effect thereafter. USPS-ST-44 at 10. Thus, the potential shift would appear to be inconsequential. In any event, UPS suggests no compelling reason why the mailing option formerly available to mailers of Single-Piece Standard Mail (A) should not be restored in the form of Parcel Post.
[5844] UPS also argues that it is unclear whether the change is "either needed or wanted by mailers." UPS Brief 91. The record, of course, reflects PSA's endorsement. Furthermore, no mailer has opposed the change. On balance, the simplicity and benefits of the proposal support its recommendation.
[5845] Finally, the current Parcel Post rates are designed in one pound increments beginning with an up to two-pound rate. For purposes of this proceeding, the proposed rate for mail weighing less than one pound is satisfactory. In the next proceeding, however, the Postal Service will be expected to discuss the potential benefits of a separate rate for such mail, assuming continuation of the current classification and rate design.
[5846] The Bound Printed Matter (BPM) subclass is restricted to advertising, promotional, directory, or editorial material, which is bound by permanent fastenings and weighs between one and 15 pounds. See proposed DMCS § 522.1. Correspondence of a personal nature is prohibited. Examples of BPM include catalogs, books, telephone directories, and similar bound volumes. USPS-T-37 at 26, revised April 17, 2000.
[5847] BPM rates are zoned, including a local zone through zone 8. The current rate structure consists of three rate categories: single piece, Bulk Presort (which the Postal Service proposes to relabel as Basic Presort), and Carrier Route Presort. Rates include a per piece and a per pound charge. To be eligible for presort rates, BPM mailings must contain at least 300 properly prepared and presorted pieces, e.g., to 3 or 5-digit, or to carrier route. In addition, properly prepared mailings of at least 50 machinable Single Piece or Basic Presort BPM parcels are eligible for a barcode discount, which currently is $0.03 per piece.
[5848] Postal Service Witness Kiefer proposes BPM rates that will increase, on average, by 18.1 percent. Id. at 2. This increase reflects a cost coverage of 117.6 percent, which was sponsored by witness Mayes. See USPS-T-32 at 43. Witness Kiefer proposes three rate design changes. First, he proposes to establish three dropship discounts for properly prepared and presorted BPM entered at the DBMC, DSCF, and DDU. In addition, witness Kiefer proposes to eliminate the local zone rate as well as the one pound weight minimum for BPM.
[5849] Witness Kiefer develops preliminary BPM rates as follows. He begins by allocating total volume variable costs between weight-related and non-weight-related costs, and between single piece and presort mail costs. See USPS-T-37 at 34 et seq. For greater detail, see witness Kiefer's workpapers WP-BPM-10 et seq. To develop his preliminary per pound charges, he relies on witness Crum's estimated transportation costs per pound, using these estimates to allocate total costs into transportation and non-transportation costs. Non-transportation costs are allocated between single piece and presort using a 2 to 1 ratio for single piece to presort unit processing costs. The preliminary pound charge reflects all transportation costs, plus a two cents per pound add-on for weight-related non-transportation costs.
[5850] Witness Kiefer's preliminary single piece BPM rates are developed by marking up the estimated per unit non-weight-related non-transportation costs to achieve witness Mayes' cost coverage. Id. at 35. The markup includes the contingency. In addition, the per piece rate reflects revenue leakage from barcode mail discounts. The resulting preliminary per piece rate, $1.48, represents a 2.8 percent increase over the existing rate. Id. at 38. To develop the single piece per pound charge, he marks up total estimated weight-related single piece costs, dividing the total by total estimated test year before rates single piece pounds. The resulting preliminary, single piece per pound rates increase by widely differing amounts, ranging from 1.9 percent for zone 7 to 147 percent for zones 1&2. Ibid.
[5851] The preliminary per piece BPM Basic Presort rate is developed in a similar fashion. Per piece revenue leakages, however, reflect barcode and carrier route discounts, plus witness Crum's estimated dropship presort mail cost savings. The resulting preliminary, presort per piece rate increases to $1.062, a 47.5 percent increase over the current rate. The preliminary per pound rate for Basic Presort is developed in a fashion similar to that used for single piece, except that it includes per pound revenue leakages based on estimated cost savings reported by witness Crum for dropshipped BPM. The resulting preliminary, per pound Basic Presort rates range widely, from a one percent decrease in zone 7 to a 147 percent increase in zone 1&2. Ibid.
[5852] Witness Kiefer's proposed destination entry discounts rely on witness Crum's estimated per piece and per pound cost savings. Witness Crum provides the per piece mail processing savings for DBMC-entered pieces compared to non-destination entered pieces, and the DSCF and DDU mail processing savings relative to DBMC entered mail. USPS-T-27 at 14 (revised January 28, 2000) and 15. Based on these cost savings, the resulting preliminary per piece rates are DBMC $0.6882, DSCF $0.533, and DDU $0.406, reflecting 100 percent passthrough of the estimated per piece cost savings. Kiefer workpaper WP-BPM-12. Witness Crum also estimates destination entry per pound transportation cost savings. See USPS-T-27 at 15-16 and Attachment K, Table 6; see also Tr. 13/5286.
[5853] The proposed Presort Carrier Route discount is also based on witness Crum's analysis. USPS-T-27 at 12. Witness Kiefer proposes to passthrough 100 percent of witness Crum's estimated per piece cost savings of $0.077. The discount is calculated off the Basic Presort single piece rate.
[5854] Witness Kiefer's barcode discount is based on witness Eggleston's estimated cost savings of $0.029. Eligibility for the proposed discount, $.03, which is the same as the current discount, is limited to single piece and Basic Presort BPM. Witness Kiefer proposes that for operational reasons the barcode discount not be available for DSCF and DDU rates, or for DBMC mail entered at an ASF, except DBMC mail entered at the Phoenix, Arizona ASF. USPS-T-37 at 36.
[5855] Concluding that the preliminary rates would produce "severe rate shock" if not adjusted, witness Kiefer employs mitigation measures. He adjusts the single piece rate by lowering the per pound rate in zones 1&2 through 5, offsetting that revenue impact by raising the per piece charge and the pound charge in the remaining zones. For Basic Presort, he lowers the per piece charge and the per pound charge for zones 1&2 through 5. To offset that revenue reduction, witness Kiefer increases the DBMC, DSCF, and DDU per piece charges. Stated otherwise, he lowers the passthrough of witness Crum's estimated cost savings. He reduces the per pound rate for dropship rate categories to maintain appropriate rate relationships among the various rate categories. See Kiefer workpaper WP-BPM-15.
[5856] The Postal Service cites changed operations as the basis for eliminating the local zone. Witness Crum testifies that, given its zoned rate structure, BPM mail is already entered deeply into the system, but often in ways that are inconsistent with current Postal Service operations. USPS-T-27 at 13. According to witness Crum, some mail, apparently deeply entered and qualifying for the local rate, can be more costly for the Postal Service to process than less deeply entered mail. This can occur, he asserts, "because the Local rate is no longer consistent with USPS mail processing and transportation networks . . .." Ibid. Witness Kiefer states that the assumption underlying Local mail, and therefore its lower rate, is that it would be deposited at the destination office. Witness Kiefer testifies that BPM is often deposited at a local office that is not the destination facility, thus imposing mail processing and transportation costs on the Postal Service that are not reflected in the Local rate. USPS-T-37 at 33.
[5857] Two intervenors submitted testimony concerning BPM rates. AAP, through the testimony of witness Siwek, roundly opposes the Postal Service's proposed rates and rate structure. Witness Siwek argues that the Postal Service has failed to accurately estimate test year BPM volumes. Tr. 30/14564-67. He also contends that the Postal Service has overstated volume variable costs as well as the distribution of allied labor costs. Id. at 14568-75; AAP Brief at 10-14.
[5858] AAP urges the Commission to reject the proposed DSCF and DDU discounts, arguing that the Postal Service's underlying cost study is flawed and its proposed passthroughs discriminatory. AAP Brief at 14-24; Tr. 30/14575-81. In lieu of separate discounts for destination entry mail, AAP proposes to increase the DBMC discount, representing a passthrough of 51.3 percent of cost savings, with DSCF and DDU-entered mail eligible for the same discount. AAP Brief at 23. AAP also argues that BPM's cost coverage should be lowered substantially, to 105 percent, based principally on full criterion 8 consideration. AAP Brief at 3-10; Tr. 30/14586-90.
[5859] In support of that position, in addition to witness Siwek's testimony, AAP sponsors the testimony of Patricia Schroeder, President and Chief Executive Officer of AAP, and Rosemary Wells, an author of children's books. Among other things, witness Schroeder criticizes the Postal Service's proposed increase, provides data concerning book sales in the U.S., and urges the Commission to give full ECSI consideration to the BPM subclass. Tr. 28/13372-75. Witness Wells expresses her concern over the proposed increase and urges the Commission to consider the value of books, particularly those for children, sent as BPM. Id. at 13381.
[5860] Witness Siwek proposes rates for BPM based on a cost coverage of 105 percent and a single destination entry discount. Tr. 30/14591, 14614. Witness Siwek's BPM after rate revenues equal $503.3 million, a reduction of $60.1 million compared to the Postal Service's. Tr. 38/17106. In his supplemental testimony, witness Siwek urges the Commission to reduce the Postal Service's contingency, with any such reduction used to reduce test year costs for BPM, among others. Id. at 17096-100, 17118-20. The Postal Service contends that neither AAP nor witness Siwek address recovery of the total revenue shortfall under witness Siwek's proposal. See Postal Service Brief at VI-34 and VII-130.
[5861] MOAA sponsors the testimony of Roger C. Prescott, who advocates increasing the DDU passthrough to equal 50 percent of the estimated savings. Tr. 30/14354-63. In support of this proposal, witness Prescott states, among other things, that a passthrough of less than 100 percent burdens dropshipped mail with a higher institutional cost contribution than non-dropshipped mail. Id. at 14361. In addition, he contends that the proposed rate increase for DDU-entered parcels warrants increasing the passthrough for such mail. He suggests that his proposal, which increases the Postal Service's proposed discounts from $0.031 to $0.044 per pound and from $0.297 to $0.331 per piece, will not create a major change in BPM rates for other mailers. Ibid. see also AAP Brief at 27. MOAA states that these "increases can be accomplished with only a slight increase of .5 cents in the base rates under the BPM revenues requested by the Postal Service." MOAA Brief at 27.
[5862] MOAA argues for a sharply reduced cost coverage for BPM, contending that the proposed destination entry discounts, "combined with a very low passthrough of savings, supports a cost coverage lower than the proposed 118 percent." Id. at 23. According to MOAA, such a result would "mitigate the effects of the large cost increase," while affording an opportunity to gain experience under the discounts. Ibid. In addition, MOAA contends that based upon criterion 8, ECSI, the cost coverage of BPM should be 101 percent. Id. at 26.
[5863] On brief, both AAP and MOAA claim that use of actual FY 1999 cost data by the Commission raises due process concerns. AAP asserts that the Commission cannot rely on actual FY 1999 data without impinging upon the parties' due process rights. AAP Brief at 25-28. MOAA argues that the Commission should use FY 1998 data for base year purposes, contending that participants were not afforded an adequate opportunity to review the data. MOAA Brief at 25. These claims are addressed next.
[5864] On brief, AAP expresses its belief that "the FY 99 cost data cannot be incorporated into any decision of the Commission without severely impinging upon the parties' due process rights." AAP Brief at 25. The gravamen of AAP's complaint is that it was unable, notwithstanding its discovery attempts, to obtain any information from the Postal Service that would explain the FY 1999 increase in BPM costs. Id. at 26.
[5865] As discussed previously, the Commission issued NOI No.1 early in this proceeding to explore the issue of using actual FY 1999 data for purposes of developing test year costs in lieu of relying on an estimate of 1999 costs developed from FY 1998 data. Interested participants were invited to comment on the desirability of utilizing FY 1999 data. Notice of Inquiry, No.1 (February 2, 2000) at 5. AAP submitted comments, noting its concern over the proposed increase in BPM rates, and contending, among other things, that "[b]asic precepts of due process and fairness, common to any administrative law proceeding, require that this information [the actual FY 1999 data] be considered by the Commission." AAP Comments in Response to Notice of Inquiry No. 1 Concerning Base Year Data, February 23, 2000, at 2. In addition, AAP argued that "ignoring the FY 1999 data would severely prejudice the Intervenors' rights to a fair hearing." Id at 5.
[5866] Following submission of the FY 1999 data by the Postal Service and an opportunity for the participants to review the data, the Commission issued NOI No. 2, requesting interested participants to comment on the appropriate use of actual FY 1999 data. Notice of Inquiry, No. 2 (April 21 2000).14 To enable the participants to evaluate the actual FY 1999 data, the Commission provided, as attachments to the NOI, comparisons of the estimated FY 1999 and actual FY 1999 costs by subclass and service. AAP did not submit comments in response to NOI No. 2.
[5867] After reviewing comments submitted by the participants, the Commission issued Order No. 1294, directing the Postal Service to provide a basic update of its test year forecasts by "substituting the actual FY 1999 cost data for the estimates for that year presented by Postal Service witnesses Kashani and Tayman." Order No. 1294, May 26, 2000, at 4. In P.O. Ruling R2000-1/71, the Presiding Officer modified the procedural schedule, providing time for the Postal Service to prepare the updates, and opportunities for participants to participate in technical conferences, engage in discovery, submit rebuttal testimony, and submit supplementary testimony to amend their case in chief. The Postal Service provided a timely response to Order No. 1294, submitting the testimony of three witnesses on July 7, 2000. In addition, to respond to discovery requests and Presiding Officer Information Requests, the Postal Service provided numerous library references relevant to the updates.
[5868] AAP argues that if the Commission employs FY 1999 cost data, "the parties must have first been accorded a meaningful opportunity to understand the computations and basis for such data." AAP Brief at 26. Apparently attempting to demonstrate that it was denied this opportunity, AAP cites a response by witness Patelunas to one of its interrogatories for the proposition that it was unable to obtain information concerning the reasons FY 1999 BPM costs increased. Specifically, AAP quotes a portion of witness Patelunas's answer indicating that he had not compared results from BY 1998 with actual results for FY 1999 for lack of time and because it was unnecessary for him to do so. Ibid. citing Tr. 35/16626. The excerpt cited by AAP fails to demonstrate that it lacked a meaningful opportunity to discover why FY 1999 BPM costs increased.
[5869] First, as witness Patelunas observed, a comparison with base year 1998 was unnecessary for purposes of preparing his testimony, which "presents the changes to the Postal Service's Docket No. R2000-1 revenue requirement and test year costs that result from utilizing FY 1999 actual audited accounting data and costs by class of mail as the base year." USPS-ST-44 at 1.
[5870] Second, witness Patelunas explained, in explicit detail, how such a comparison could be undertaken. Hence, AAP had at its disposal the means by which to further investigate the increase in BPM costs.
[5871] Third, given what it obviously perceived as an unsatisfactory response, it was incumbent on AAP to investigate the matter further. This it failed to do, notwithstanding numerous opportunities.
[5872] Initially, technical conferences, convened pursuant to P.O. Ruling R2000-1/71, afforded participants an opportunity to question the Postal Service concerning its response to Order No. 1294. Subsequently, when it received unsatisfactory discovery responses it could have submitted follow-up interrogatories. AAP also had the opportunity to cross examine witness Patelunas, but specifically declined to do so, opting instead simply to designate as written cross the interrogatory responses it now asserts prove its inability to obtain relevant information. See Tr. 35/16724. During witness Patelunas's appearance, he agreed to respond to several requests for additional information from other participants and from the bench. See Tr. 35/16799, and 16830-32. Again, AAP did not request additional information. While it did submit supplemental testimony, that testimony, as relevant to this issue, merely recites AAP's discovery efforts. Tr. 38/17091-92.
[5873] Throughout this proceeding, the Commission has been responsive to the need for developing a complete record, requiring the Postal Service to supplement its filing through testimony to address, among other things, mail processing costs. In Order No. 1289, the Commission directed the Postal Service to provide testimony addressing processing costs of Periodicals, First-Class, and Standard A Regular flats. See PRC Order No. 1289 (March 28, 2000). See also PRC Order No. 1291 (April 6, 2000) (directing witnesses to be prepared to answer questions). The Presiding Officer issued twenty-one information requests, seeking, among other things, specific information concerning BPM as well as Special Mail. For example, in response to POIR 20, the Postal Service submitted, as USPS-LR-I-470, updates to BPM cost models necessary "to allow for the use of FY 1999 cost data." Tr. 46-D/21118; see also id. at 21147 (concerning the change in endorsement requirements for Special Mail and its impact on IOCS observations.) In addition, as AAP notes, the Commission directed the Postal Service to provide a witness to address issues concerning FY 1999 Special Mail costs. See PRC Order No. 1300 (August 18, 2000). AAP had the opportunity to request the Commission to broaden the inquiry to include BPM. It did not do so. AAP did not avail itself of its various opportunities, content, essentially, to sit on its hands. In sum, AAP's inability to obtain information concerning the increase in FY 1999 BPM costs was not due to a lack of opportunity, but rather to its choice not to act on those opportunities.
[5874] For its part, MOAA was silent on this general issue until it submitted its initial brief. There it contends that "the parties have not had an opportunity to pursue adequately the question of how the new costs should affect rate levels, if at all." MOAA Brief at 29. However, it then presents requests for relief that belie this assertion.
[5875] MOAA limits its discussion to the proper treatment of Standard A costs, although its concerns presumably extend to Bound Printed Matter. Recognizing that the Commission may use actual FY 1999 costs, MOAA specifically tailors its request based on an explicit understanding of the "new costs." Noting that the "costs for Standard Mail ECR have increased to some extent between FY 98 and FY 99," MOAA argues that despite the increase in costs "[t]here is no basis for any increase in the proposed ECR rates." Id. at 30. At the same time, citing decreased FY 1999 costs, it argues for reduced Standard Mail (A) Regular rates. Ibid.
[5876] MOAA offers the observation that changing the base year "without affording a reasonable period for the users to assess the data would fail to provide the minimum due process required by the Act." Id. at 29. As far as it goes, this statement is uncontroversial. MOAA, however, fails to expand on it or substantiate any elements of its nebulous claim.
[5877] It makes no attempt to explain or support the implication that it did not have a reasonable opportunity to evaluate the FY 1999 cost data. In fact, it did not submit discovery on the Postal Service concerning either FY 1998 or FY 1999 CRA results, or orally cross-examine the relevant Postal Service witnesses. MOAA cannot sustain a charge that it was denied due process when it neither complained, nor made any attempt to use the opportunities available to it.
[5878] In Docket No. R97-1, the Commission recommended BPM rates that produced a cost coverage of approximately 136 percent and a markup index of 0.643. PRC Op. R97-1, para. 5721. In this proceeding, the Postal Service's proposed coverage is 117.6 percent. USPS-T-32 at 44. As noted above, AAP proposes a coverage of 105 percent, while, on brief, MOAA suggests 101 percent. The BPM rates recommended by the Commission recover all costs attributable to BPM and, under the circumstances, make reasonable contribution to institutional costs. They incorporate a cost coverage of 114 percent and are, on balance, fair and equitable to all mailers.
[5879] In Docket No. R90-1, when the Commission considered including books without advertising in the BPM subclass, testimony was submitted concerning, inter alia, the impact of the proposed change on the BPM subclass. Based on volume trends, the Postal Service's witness concluded that the migration of books from what was then Special Rate Fourth Class was essentially complete. PRC Op. R90-1, para. 6501-02. AAP, among others, offered testimony indicating that most major publishers had already completed their migration to BPM. Id. at para. 6503. In addition, AAP, among others, sponsored testimony indicating that book mailers converting to BPM would take advantage of worksharing discounts not available in Special Rate Fourth Class. Ibid. In recommending the proposed classification change, the Commission observed:
Although section 3683 of the Act provides for special-rate fourth class for books, we believe that the intent of the Act is to encourage widespread dissemination of ideas by considering the postage paid by the senders of books. Our efforts to make low cost options available if possible furthers the policies found in the Act.
[5880] In recognition of the migration of books to the BPM subclass, the Commission "allow[ed] the markup for bound printed matter to decline . . . slightly below average . . .." Id. at para 6519. The Commission's cost coverage was 146 percent. Despite the migration of books to BPM, the Commission specifically declined to give BPM the same ECSI consideration as was accorded Special Rate Fourth-Class mail. Ibid. In subsequent rate cases, the Commission reduced both the cost coverage and the markup, noting, in Docket No. R97-1, that the below average markup reflected consideration of ECSI due to the presence of books in the subclass. PRC Op. R97-1, para. 5722.
[5881] AAP's argument that BPM should receive full ESCI consideration is not persuasive. The linchpin of the AAP argument is that books comprise 63.7 percent of the subclass based on FY 1998 data. AAP Brief at 6-7. The Postal Service takes issue with this figure, contending that books comprise approximately 52 percent of the subclass. Postal Service Reply Brief at V-33.15 Regardless, the percent is substantially less than 100 percent, with the balance, apparently catalogs, not qualified for any ECSI consideration. Compounding this, books and catalogs may exhibit different cost characteristics. For example, catalogs may be entered into the system more deeply and, on average, weigh less per piece.
[5882] The Commission's recommendation in Docket No. R90-1 was predicated, in part, on the availability of a low cost option. Concerns were raised then that the inclusion of books would cause an increase in BPM unit costs. Over time, notwithstanding contentions that migration already had occurred and that book mailers would embrace worksharing, unit costs have increased. The specific causes for these rising unit costs are not successfully documented in this record. As a consequence, the low costs that made migration to BPM initially attractive are less beneficial. Rates for BPM are still substantially lower than the rates for Special (now Media) Mail; however, they apparently now more accurately reflect the impact of the migration of books into the subclass. In an effort to dampen that impact, AAP now argues that the Commission ought to give BPM full ECSI consideration.
[5883] In Docket No. R90-1, the Commission concluded that third-class regular rate and BPM should have a generally similar markup. PRC Op. R90-1, para. 6520. The Commission's recommendation in Docket R94-1 adhered to that view. PRC Op. R94-1, para. 5388-89. Notwithstanding this, over time the cost coverage and markup of BPM have continued to decline as the Commission has taken ECSI value into consideration.
[5884] AAP's reliance on the ECSI value of Periodicals as a benchmark for the value that ought to be ascribed to BPM is misplaced. AAP Brief at 5-7, and AAP Reply Brief at 5-6.16 This argument ignores important distinctions between Periodicals and BPM. First, Periodicals have a long, statutorily preferred history. The migration over the past decade of books into BPM, which was established in 1939 as a classification designed for catalogs and similar bound advertising, was a marriage of convenience. Second, advertising in periodicals is integral to the publication, integrated with editorial matter, and bound together in one piece. Books and catalogs, which share none of these characteristics, are mailed separately. See Postal Service Brief at VI-32-33.
[5885] Section 3683 provides a statutory classification for, inter alia, books. As a practical matter, although the Commission's rates for Media Mail reflect full ECSI value, the rate structure mandated by that section may make it a less attractive alternative to book mailers. See AAP Reply Brief at 6, fn.1. A possible regulatory solution might be separate rate categories for books and catalogs. Indeed, in Docket No. R90-1, the Commission recommended a separate rate category be established for BPM catalogs. PRC Op. R90-1, para. 6510. The Governors rejected the proposed classification change. Decision of the Governors, R90-1 (January 22, 1991) at 4-5. At a minimum, the Commission encourages the Postal Service to study the distinct cost characteristics of books and catalogs mailed as BPM.
[5886] AAP also cites criterion 2, value of mail service actually provided, as warranting a reduced coverage. AAP notes that "[t]he lower the own-price elasticity, the higher the value of service." AAP Brief at 9. Citing witness Mayes' testimony, AAP states that BPM has an own-price elasticity of -0.392, which is lower than several subclasses, e.g., Priority Mail, Standard Mail (A) Regular, and Parcel Post. Ibid., citing USPS-T-32 at 5. Similarly, citing the FY 1999 own-price elasticity or -0.280, AAP argues that if FY 1999 data are used, the revised own-price elasticity should be used to further reduce the cost coverage applied to BPM. Id. at 29. AAP's interpretation is contrary to Commission precedent. See Postal Service Brief at VI-31. Relatively higher economic value of service is a factor that, for mail not subject to the Postal Service's monopoly, may justify a somewhat higher cost coverage. On the other hand, the nonpreferential nature of the service received by BPM is indicative of a lower value of service and, consistent with Commission practice, is reflected in a lower cost coverage for BPM.
[5887] The Commission has also carefully considered criterion 4, effect of rate increases on the public, mailers, and alternate delivery carriers. The increase, while above the system average, must be measured against the more than 40 percent increase in BPM unit costs from the base year in Docket No. R97-1 to the base year in this proceeding. In that light, the Commission's response to criterion 4 is evident. No testimony has been offered attempting to quantify any adverse effect of the proposed increase on users. The Commission recognizes that rate increases have a negative impact on volumes, but such generalizations cannot support the extraordinary relief sought by AAP and MOAA. The BPM rates recommended in this case will significantly reduce the relative contribution to institutional costs by BPM as a means of ameliorating the impact of the rate increase. In fact, absent the size of the current increase, a larger relative contribution would seem warranted. In addition, the revised rate structure affords opportunities for mailers to reduce costs, either through their own efforts or by using a consolidator. No competitor has complained about the proposed BPM rates. Similarly, no participant has raised criterion 5 concerns regarding BPM.
[5888] As noted above, adoption of the destination entry discounts gives appropriate recognition to criterion 6, degree of mail preparation. While this adds a level of complexity to the rate schedule, the "bulk" rate categories are well understood by industry. In addition, a single piece rate remains available for individuals. In sum, the recommended rates balance all the statutory factors, and are fair and equitable.
[5889] The Postal Service proposes material changes to the BPM rate design, including implementing destination entry discounts, and eliminating the minimum weight threshold and the local zone.17 Aside from these changes, however, the Postal Service proposes, essentially, to maintain the status quo. As discussed below, the Commission recommends that these rate design proposals be implemented. Details concerning rate levels are addressed below.
[5890] Witness Kiefer develops preliminary Single-Piece and Basic Presort per piece and per pound charges as described in section b, above. See also USPS-T-37 at 35-36. Witness Crum estimates carrier route presort savings at 7.7 cents per piece. USPS-T-27, Attachment G. Witness Kiefer proposes a Carrier Route Presort discount of 7.7 cents off the Basic Presort per piece rate. The proposed rates for these rate categories follow the same rate design methodology as used in previous dockets. The rate design is unopposed on the record and accepted by the Commission. The Commission's attributable costs and cost coverage cause the recommended rates to differ from the Postal Service's proposed rates.
[5891] The Postal Service's rate design for the proposed destination entry (dropship) discounts contain both per piece and per pound rate elements. The per piece element reflects the mail processing cost savings associated with entry mail at destinating facilities. This mail avoids all processing activities at origin facilities. The cost savings associated with DBMC mail are estimated by witness Crum in the following manner. First, outgoing BMC costs avoided by DBMC parcels are estimated and added to the non-BMC outgoing costs. Next, the volume deposited upstream of the DBMC is derived through use of the Bound Printed Matter Mail Characteristics Study (BPM study) results. Finally, the unit cost savings associated with these pieces is calculated. Witness Crum estimates the unit cost savings for DBMC relative to origin entered mail at 38 cents. Witness Crum uses mailflow models to estimate the mail processing savings for DSCF and DDU mail pieces. The DSCF savings relative to DBMC are 14.9 cents, while the DDU savings relative to DSCF are 12.7 cents. The Postal Service's proposed per piece rates for DBMC, DSCF, and DDU reflect passthroughs of 16, 47, and 45 percent, respectively.
[5892] Transportation costs are developed for the dropship categories in a manner similar to Parcel Post. For DBMC, the total transportation cost is first divided into long-distance, intermediate, and local portions. Long-distance is further separated into zone and non-zone related. These costs are then allocated to categories and zones and per pound costs are developed. DSCF and DDU transportation costs are not zoned. See USPS-T-27 at 16, Attachment K.
[5893] Two parties, AAP and MOAA, address the discount proposals. AAP witness Siwek opposes the destination discounts, advocates a single discount for destination entry mail, and contends that the BPM study is flawed. Tr. 30/14575 et seq. See also AAP Brief at 14 et seq. On brief, AAP argues that the volumes reported by the BPM study are unreliable. AAP Brief at 16-17. In addition, it asserts that the study contains methodological errors, e.g., measurement error in the strata weights and use of an unsound method of "bootstrapping" sample results. Id. at 17; see also Tr. 30/14578.
[5894] In response to witness Siwek's criticisms, the Postal Service submitted the testimony of witness Degen. Tr. 38/17340-48. The crux of his testimony is that while Siwek's criticisms may be technically valid they are invalid from a practical standpoint. Degen contends that witness Siwek's criticisms imply use of a simple random sample rather than the stratified sample used. He claims that doing so would result in unusable data and unacceptably large standard errors. According to witness Degen, stratification is warranted when the population is composed of facilities that vary in size, the principal variables being measured are closely related to the size of the facility, and a good measure of size is available for developing the strata. Degen contends that presorted BPM satisfies all of these conditions. Given the concentration of BPM in a small number of postal facilities, Degen asserts that a simple random sample would "have the Postal Service making inferences about dropshipping based on a sample that contained few, if any dropshippers." Id. at 17343. Degen takes issue with each of Siwek's criticisms, contending, among other things, that the measurement error in stratum 4 is insignificant, that collapsing strata is a common practice, and that a small bias in the standard errors is preferable to no standard error. Id. at 17344-7; see also Postal Service Brief at VII-121-126.
[5895] On brief, AAP denies that witness Siwek's criticisms imply abandoning the stratified sample in favor of a random sample, stating that witness Siwek's testimony was "severely mischaracterize[d]." AAP Brief at 18. It claims that witness Siwek sought to identify problems and improve the estimation procedure. In its reply brief, the Postal Service argues that AAP fails to demonstrate that the flaws it identifies have a material impact. Postal Service Reply Brief at VI-106-10.
[5896] While witness Siwek's criticisms may have some technical "bark," they do not posses sufficient practical "bite" to invalidate the survey. As the Postal Service notes, AAP has not demonstrated that its criticisms materially affect the study results so as to preclude their use for purposes of estimating cost savings. Accordingly, the Commission finds the survey results to be acceptable for estimating dropship cost savings. Nonetheless, in recognition of issues raised by AAP and because these rate categories are new to BPM, the Commission, to be conservative, has not passed through the full cost savings. This ameliorates any concern about the efficacy of the survey. In the next rate proceeding, actual data will be available for analysis and the rates adjusted accordingly.18
[5897] AAP opposes the implementation of the dropship categories, arguing that the discounts be phased in over time starting with DBMC. AAP Brief at 22. To that end, witness Siwek proposes a DBMC discount for which all mail entered at DBMC, DSCF, and DDU would be eligible. In support, AAP claims that phasing is consistent with the way dropship discounts were introduced in Parcel Post.
[5898] On brief, the Postal Service argues that the circumstances behind the Parcel Post discounts are different from the ones facing BPM in this docket. The Postal Service identifies several distinctions, including insufficient data to support a full range of Parcel Post dropship options, the existence of the parcel consolidation industry, and that some BPM mail is already entered deep into the system. Postal Service Brief at VII-128-129. The Service also asserts that "witness Siwek's notion of phasing benefits a limited interest group at the expense of the rest of Bound Printed Matter (and non-BPM) mailers. Id. at VII-128.
[5899] AAP's arguments are not compelling. The comparison with Parcel Post is misplaced for the reasons suggested by the Postal Service. Moreover, destination entry discounts are common, better reflect costs, and are consistent with criterion 6. Furthermore, mailers' endorsement of the proposal evidences demand for the service. In sum, there is no valid reason to defer implementation of these rate categories as suggested by AAP. Accordingly, the Commission recommends that the DMCS be amended to include the proposed destination entry rate categories. The Commission's recommended per piece discounts for DBMC, DSCF, and DDU are 13, 28, and 34 cents, respectively.
[5900] MOAA witness Prescott argues that the passthrough for the DDU discount is too low. He proposes a passthrough of 50 percent. His proposal results in a per piece discount of 33.1 cents and a per pound discount of 4.4 cents. On brief, the Postal Service indicates that its interest in increasing the passthrough is trumped by its concern over the potential increase in other rates. Postal Service Brief at VII-132-133. The Commission agrees that a higher passthrough is warranted. It recommends a per piece DDU discount of 34 cents which reflects a passthrough of approximately 50 percent. The Commission's recommended per pound element is the same as the Postal Service's, 3 cents, and reflects the Commission's desire to maintain a logical zone differential structure.
[5901] As noted above, the current discount for barcoding is $0.03 per piece. Witness Kiefer proposes to maintain this discount based on an analysis by witness Eggleston, who modeled the cost of the only mailhandling operation, the parcel sorting machine, affected by the presence of a barcode. USPS-T-26 at 10. Her estimated test year per piece cost savings is 2.9 cents. Id. at Attachment B. Witness Kiefer proposes to round the discount to $0.03 per piece. The Postal Service's proposal is unopposed and, accordingly, the Commission recommends it be implemented.
[5902] As discussed above, the Postal Service cites changed operations as the basis for eliminating the local zone. Although no participant opposes this proposal, the Commission has some reservation about its elimination. Specifically, the DDU rate category recommended in this proceeding provides bulk mailers a surrogate for the local zone that is not available to single piece mailers. The Postal Service, however, indicates that the local rate is no longer compensatory given its changed processing and transportation networks. USPS-T-37 at 33. As a consequence, and given the lack of opposition to the proposal, the Commission recommends elimination of the local zone.
[5903] Witness Kiefer proposes to eliminate the one pound weight minimum for BPM. Id. at 34, revised March 14, 2000. Doing so, he suggests, will accommodate mailers wishing to mail BPM weighing less than one pound. Ibid. A separate rate for BPM weighing less than 16 ounces is not proposed. Instead, each piece weighing less than one pound "will be treated as if it weighed one pound exactly." Ibid.
[5904] The proposal, which is unopposed, has two apparent benefits. First, mailers benefit through the availability of an additional mailing option. Second, elimination of the minimum weight for BPM and Parcel Post simplifies the Package Services classification, and may, particularly if demand for the service materializes, provide an impetus for further refinement of the parcel classifications. Accordingly, the Commission recommends the proposal be implemented.
[5905] Currently, the rates for BPM are designed in half-pound increments up to five pounds. For purposes of this proceeding, the proposed rate for mail weighing less than one pound is satisfactory. In the next proceeding, however, the Postal Service should address whether a separate rate for such mail is warranted.
[5906] The Commission recommends that BPM rates be increased, on average, by 17.6 percent. Several factors influence this recommendation. First, this increase is driven, in large part, by the substantially higher costs reported for the subclass. In the two years between the base year in Docket No. R97-1, and the base year in this proceeding, BPM unit costs increased by more than 40 percent. Tr. 13/5300. When contrasted with this substantial cost increase, the rates recommended by the Commission significantly mitigate the potential adverse impact of the Postal Service's operating experience. The increase may, as MOAA implies, be attributable to the changing character of the subclass. MOAA Brief at 24-25. The record is unclear on this point. However, neither AAP nor MOAA has demonstrated that the BPM costs reported by the Postal Service are inaccurate.
[5907] The Commission recommends adoption of the rate structure proposed by the Postal Service, albeit at different rate levels. The new rate structure recognizes mailer preparation activities (criterion 6) and affords a means to mitigate the size of the increase, while better aligning rates with costs.
[5908] Media Mail is a statutorily derived, content-restricted classification. See 39 U.S.C. § 3683(a). Items eligible to be mailed at Media rates include books, 16-millimeter or narrower width film, printed music and test materials, sound recordings, playscripts, and manuscripts. See proposed DMCS § 523.1. Media rates are required to be uniform for mail of the same weight and may not vary with distance.
[5909] Media Mail has a relatively simple rate structure, consisting of three rate blocks: first pound, 2-7 pounds, and 8-70 pounds. As noted below, Library Mail shares this three-tiered rate structure. Rate categories include single piece, Level A Presort (5-digit), and Level B Presort (BMC). The current Media rates are as follows: first pound: single piece $1.13, Presort A (5-digit) $0.64, and Presort B (BMC) $0.95; 2-7 pounds: $0.45 per pound; and 8-70 pounds: $0.28 per pound. In addition, properly prepared, machinable single piece and Level B presort rate Media Mail are eligible for a barcode discount, currently $.03 per piece.
[5910] Postal Service witness Kiefer proposes to increase Media rates, on average, by 4.9 percent, yielding a cost coverage of 112.5 percent. USPS-T-37 at 1. Witness Kiefer develops his proposed Media rates in two stages. He begins by assigning volume variable costs to the subclass on a per piece and per pound basis. Preliminary per pound charges are developed by allocating all transportation costs, plus a two-cent per pound add-on for weight-related non-transportation costs, to the total postage pounds. He divides these weight-related costs by total postage pounds, and then marks up these unit costs by a cost coverage markup factor. See Id. at 9 and Kiefer workpaper WP-SS-10. The remaining costs are similarly marked up, added to revenue leakage, and allocated on a per piece basis. To develop Presort A (5-digit) and B (BMC) first pound rates, witness Kiefer relies on witness Eggleston's estimated cost savings for Media Mail. USPS-T-37 at 9-10. His proposed barcode discount also relies on witness Eggleston's estimated cost savings. Id. at 10.
[5911] Witness Kiefer's preliminary rates produce sharp increases in the first pound rate, ranging from 24 percent for the single piece rate to more than 60 percent for the Presort A rate. Preliminary rates in the remaining tiers are below existing rates, by 47 percent in the 2-7 pound rate, and by 14 percent in the 8-70 pound rate. Id. at 10-11. As a mitigation measure, witness Kiefer lowers the first pound rate substantially, while increasing the rates for the remaining blocks, particularly the 2-7 pound rate. Id. at 10; see also Kiefer workpaper WP-SS-11.
[5912] Actual FY 1999 costs presented by Witness Patelunas reported a 44.5 percent increase in Media mail costs, as compared to BY 1998 levels. Comparing BY 1998 and FY 1999, the Postal Service stated that mail processing costs of Media Mail had increased 43.6 percent under the Postal Service's methodology ($80.9 million to $116.2 million). Tr. 48/22458. In response to questions from the bench concerning the reasons for the increase, the Postal Service provided an institutional response stating that "[t]he increase is due primarily to an increase in [Media Mail] direct tallies." Tr. 46-C/21048.
[5913] The Commission found the Postal Service's responses failed to explain adequately the causes for the increase in Media Mail cost from FY 1998 to FY 1999. Thus, to develop the record more fully, the Commission directed the Postal Service to provide a witness capable of addressing the issue. Order No. 1300 (August 18, 2000). In response, the Postal Service submitted the testimony of witness Degen. See Tr. 45/20051-60.
[5914] The Presiding Officer also requested more detail about the increase, first, in P.O. Information Request No. 20, which explored methodological reasons for the increase, and second, in P.O. Information Request No. 21, which inquired about the impact of an FY 1999 change in endorsement requirements for Special Standard Mail. The Postal Service provided responses to these requests. See Tr. 46-D/21458, and 21147.
[5915] Witness Degen testified that "the increase in [Media Mail] unit costs is broadly distributed across offices, pay periods, facility types, and cost pools, indicating improved identification or increased costs for which I have no specific explanation at this time." Tr. 45/20052. That review identifies a group of tallies for which there may have been some confusion on the part of data collectors causing them to erroneously record certain Standard Mail (A) Regular as Media Mail. Id. at 20053, 20061. Beyond those tallies, however, the review revealed "no other anomalies in the Special Standard direct tallies." Id. at 20061. Witness Degen proposes, assuming that the Commission adopts FY 99 costs, that the suspect tallies for Media Mail FY 1999 be reassigned, thereby reducing mail processing costs to $101.7 million. Id. at 20053 and 20060. The IOCS data reported in USPS-LR-I-493 reflect this adjustment. Postal Service Brief at VII-134. On brief, the Postal Service notes that this adjustment would mitigate, but not eliminate, the reported increase in FY 1999 costs for Media Mail. Ibid.
[5916] Recording Industry of America (RIAA) witness Elliott argues, inter alia, that the FY 1999 increase in Media Mail processing costs is neither supported by historical trends nor adequately explained by the Postal Service. See Tr. 41/18029-37. In examining the cause of the 44 percent increase in processing costs between FY 1998 and FY 1999, witness Elliott first compares Media Mail's pieces, pounds, and cubic feet for FY 1998 and FY 1999, concluding that the overall composition of Media Mail remained relatively stable. Id. at 18030-31. He notes that the data indicate an increase in presort volumes, which should cause a decrease in processing costs. Next, based on the Postal Service's FY 1998 data, he argues that "it is possible to derive a 95 percent confidence interval for mail processing costs for [Media Mail] that ranges from a low of $71,150,000 to a high of $90,582,000." Id. at 18031 (footnote omitted). Given the relatively stable composition of Media Mail, he concludes that the failure of the FY 1999 cost estimates to fall within the 95 percent confidence interval for the BY 1998 estimate suggests either erroneous figures or that the costs had changed significantly. To test this hypothesis, he examined mail processing costs from FY 1994 to FY 1999, adjusted for inflation and for different costing methods over time. Based on this analysis, witness Elliott concludes that the FY 1999 cost figure is anomalous.
[5917] Witness Elliott also discounts the Postal Service's explanation of the FY 1999 cost increase, contending, essentially, that it is nothing more than speculation. In addition, he argues that if the change in endorsement requirements caused an increase in IOCS tallies, logically, a concomitant volume increase should have been observed in the DPRW. Citing the modest increase in FY 1999 Media Mail volumes, he contends that the changed endorsement requirements do not explain the increase in IOCS tallies. Id. at 18035. In lieu of the FY 1999 cost estimate, witness Elliott provides an alternative estimate based on BY 1998 costs in 1999 dollars. Id. at 18037.
[5918] On brief, RIAA characterizes witness Degen's explanation as unpersuasive, reiterating witness Elliott's conclusion that the change in endorsement requirements fails to explain why Media Mail volumes were not similarly affected. RIAA Brief at 17-18. In addition, RIAA disputes witness Degen's claim that notice of the change in endorsement requirements, which are not mandatory until January 2001, was widely publicized. Id. at 17.
[5919] In this proceeding, the estimated FY 1999 mailhandling costs for Media Mail have increased substantially. The Postal Service's examination of the cost increase, which it characterized as broadly distributed across offices, pay periods, office, and MODS operation pools, did not eliminate either improved identification or increased costs as the possible cause of the increase. See Tr. 45/20052, 20062, and Postal Service Reply Brief at IV-61. The Postal Service did, however, suggest that a portion of the increase may be due to erroneous IOCS entries. See id. at 20053 and 20061. That analysis, while perhaps not as dispositive as the Commission would prefer, rests on the implicit premise, not contradicted on this record, that the Postal Service's cost estimation systems are fundamentally sound.
[5920] Witness Elliott's contention that improved identification should have caused a concomitant increase in Media Mail volumes has surface appeal. However, processing costs reflect data collected in the IOCS system, while volumes are measured by the RPW system. Misidentifying IOCS tallies should have no impact on RPW data. The Commission cannot lightly dismiss the presumption that the IOCS system is accurately sampling, and that costs have increased. Acceptance of witness Elliott's alternative proposal would require us to conclude, at least implicitly, that the Postal Service's cost estimation systems are unreliable. The record will not support such a finding. As the Postal Service observes, there is no reason to ignore Media Mail's actual FY 1999 costs, simply because relative to FY 1998 they exhibit an increase. See Postal Service Reply Brief at IV-61. Moreover, the Postal Service's adjustment to the IOCS tallies serves, at least in part, to reduce the abnormal size of the cost increase.
[5921] The Commission recommends an average increase of 6.3 percent in Media Mail rates. While above the system average, it is largely a product of increased costs. The Commission's reliance on the costs is consistent with its recommendation in the last rate proceeding. In Docket No. R97-1, based on the estimated costs reported for Media Mail, the Commission recommended that Media rates be reduced, on average, by 9.6 percent. In that proceeding, the Postal Service proposed a slight decrease in Media Mail rates. The Commission's larger decrease was based on lower Media Mail attributable cost levels. PRC Op. R97-1, para. 5748. While of course preferring results demonstrating declining costs, the Commission has not, in either docket, accepted the Postal Service's estimates uncritically. Furthermore, considering the decrease in Media Mail rates which became effective in January 1999, and assuming rates in this proceeding will be effective for at least two years, Media rates remain, on average, below their Docket No. R94-1 levels.20
[5922] The Commission's cost coverage for Media Mail is 102 percent, which, while substantially below the system average, satisfies Section 3622(b) criteria. As required by criterion 3, the recommended rates cover attributable costs and make a modest contribution to institutional costs. Historically, Media Mail's below average cost coverage derives principally from three factors. See, e.g., PRC Op. R97-1, para. 5754 and PRC Op. R94-1, para. 5370. The record in this proceeding provides no reason to vary from the historical practice. First and foremost, since Media Mail is a content-restricted subclass available for mailing educational and informational materials, the Commission is particularly mindful of its educational, cultural, scientific, and informational value to the recipient. The Commission's cost coverage reflects consideration of that ECSI value. Second, Media Mail is perceived to have a relatively low value of service, indicative of its nonpreferential processing and transportation. Third, criterion 5, available alternate means, is also a consideration. While business mailers may have options, including using BPM, alternatives for individual users are more limited. See USPS-T-32 at 46.
[5923] The recently enacted legislation providing a preference for Library Mail also affects the Commission's cost coverage considerations. Pursuant to the PL 106-384, Media rates are based on the combined attributable costs of Media Mail and Library Mail. This causes Media Mail costs to increase above a stand-alone level, and, as a result, justifies further moderation of the cost coverage. Standing alone, the test year after rates unit cost of Library Mail is $1.84 compared to $1.61 for Media Mail, or, in percentage terms, approximately 14 percent greater than Media Mail. Library Mail is a relatively small subclass. Nonetheless, absorbing increases of this nature may be perceived as imposing an unfair burden on users of Media Mail. To allay this concern, the Commission has reduced its cost coverage in recognition of this unusual situation.
[5924] Under the circumstances, the 6.3 percent rate increase, although somewhat above the system average, is reasonable. There is no evidence suggesting that the users will be unfairly burdened. Nor is there evidence indicating any concern by any competitor. The rate structure is relatively simple, while providing mailers with worksharing incentives. In sum, the Commission finds, based on a careful consideration of all the applicable criteria, that its recommended Media rates are fair and equitable.
[5925] Neither the Postal Service nor any participant proposed any change in the current rate design. The recommended rates are designed in a manner similar to that used by witness Kiefer, which, in turn, is the design long used by the Commission. See USPS-T-37 at 9. The Commission's attributable costs and cost coverage cause the recommended rates to differ from the Postal Service's proposed rates.
[5926] The recommended Media rates are as follows: first pound: single piece $1.30, Presort A (5-digit) $0.70, and Presort B (BMC) $1.00, 2-7 pounds: $0.45 per pound; and 8-70 pounds: $0.42 per pound. The first pound rate for Presort Level A represents a discount of $0.42 per piece, while the discount for Presort Level B represents a discount of $0.12 per piece. These discounts are based on witness Eggleston's analysis, adjusted to reflect the Commission's costing approach. The recommended barcode discount is $0.03 per piece for properly prepared single piece and Presort Level B Media Mail. Like the barcode discount for all the Package Service classes, this discount is based on witness Eggleston's estimated unit cost savings, adjusted to reflect the Commission's costing methodology. The Commission also recommends that the annual presort mailing fee be increased to $125.
[5927] Library Mail is a creature of statute. First, it is a preferred subclass. Recently enacted legislation, PL 106-384, provides that Library rates be set, as nearly as practicable, five percent lower than the corresponding Media Mail rates.21 As discussed above, the Media rates are based on the combined costs of Media Mail and Library Mail. Second, pursuant to section 3626 of the Act, eligibility to mail at Library rates is restricted by content and use. For example, certain matter, e.g., books, printed matter, bound volumes of academic theses, sound recordings, museum materials, specimens, and teaching aids, may only be sent between eligible institutions or organizations, such as schools, colleges or universities, and public libraries, museums and herbaria, and various nonprofit organizations or associations. See DMCS proposed § 524.13; see also DMM §§ 630.5.3 and 5.4. The nonprofit organizations include, e.g., religious, educational, scientific, or charitable institutions, and labor, veterans' or fraternal organizations. Library Mail may also be utilized to mail items between such organizations and their members, readers, or borrowers.
[5928] In addition, certain matter, e.g., 16 millimeter or narrower film, sound recordings, museum materials, specimens, and scientific or mathematical kits, may only be sent to or from certain institutions or organizations, e.g., schools, colleges, universities, public libraries, and museums and to or from various nonprofit organizations or associations. See DMCS proposed § 524.14; see also DMM § 630.5.4. Finally, Library rates are required to be uniform for mail of the same weight and may not vary with distance. 39 U.S.C. § 3683(a).
[5929] In Docket No. R97-1, the unit costs of Library Mail were significantly higher than those for Special Standard Mail, precluding a markup for Library Mail consistent with RFRA while maintaining Library rates below those of Special Standard.22 Initially, as an interim measure, the Commission recommended, in lieu of discrete Library Mail rates, that all matter eligible to be mailed as Library Mail be mailable as Special Standard Mail. PRC Op. No. R97-1, paras. 5743-45. Concerned about the continued viability of Library Mail as a separate subclass, the Governors requested the Commission to reconsider that recommendation, suggesting that the Library Mail rate schedule reflect the lowest rates for which such mail was eligible. Acceding to this suggestion, the Commission recommended Library Mail rates, set forth in a separate rate schedule, equal to those of Special Standard. Opinion and Further Recommended Decision, Docket No. R97-1, September 24, 1998, at 14-17.
[5930] Witness Kiefer's proposed rates decouple Library Mail from Special Standard. Specifically, he proposes that Library Mail rates be set one cent lower than Special Standard in every rate cell. This results in a rate increase of 4.5 percent and reflects a cost coverage of 104.7 percent. Witness Kiefer notes that the proposed increase does not comply with existing law. He indicates, however, that the Postal Service anticipates passage of legislation that would "codify the principles followed in this rate case to develop Library Mail rates when preferred rates cannot be achieved using the cost coverage formula described in RFRA." USPS-T-37 at 23; see also Postal Service Brief at VII-135.
[5931] The American Library Association (ALA) witness Sheketoff expresses concerns that the proposed increase, coupled with cumulative effect of prior increases, could jeopardize various library programs, e.g., interlibrary loan and "Book by Mail." See Tr. 28/13393-97. Witness Sheketoff contends that the Postal Service has long been on notice about the inadequacy of existing cost data for library mail. Consequently, she urges the Commission "to reject claims of increasing costs" absent a demonstration that such costs will be incurred. Id. at 13397. On brief, ALA reiterates these points. ALA Brief at 2-3. In addition, ALA "urges the Commission not to attribute to library rate mail the costs of needless manual or non-automated processing that would have been avoided by economical and efficient levels of investment in automated equipment for processing flats and parcels." Id. at 3-4.
[5932] As discussed above, PL 106-384 amends the Postal Reorganization Act to provide, inter alia, reduced rates for certain preferred subclasses of mail. As a result, rates for Library Mail shall be established by reference to Media Mail rates. Specifically, the Library rate shall be, as nearly as practicable, 5 percent lower than the corresponding Media Mail rate. The Commission's recommended Library Rates are consistent with this provision.23 The recommended rates yield an average increase of 4.9 percent.
1Inter-BMC rates apply to parcels, not eligible for destination entry rates, that originate in the service area of a BMC/ASF or in Alaska, Hawaii, or Puerto Rico and that destinate outside that area.
2Intra-BMC rates apply to Parcel Post originating and destinating (a) in the service area of the same BMC or Associate Service Facility (ASF), (b) in the same state for Alaska and Hawaii, and (c) in the same territory for Puerto Rico.
3Witness Luciani's attempt to forecast FY 1999 DRPW-only estimates based on an extrapolation of the combined BRPW and DRPW data is not convincing. His forecast of FY 1999 DRPW-only quarterly Parcel Post estimates relies on the BRPW/DRPW growth rates from FY 1998 to FY 1999 as applied to FY 1998 DRPW-only estimates. Witness Luciani then substitutes his forecast estimates for the actual FY 1999 BRPW/DRPW estimates used by witness Tolley to derive his forecast test year volumes. The propriety of using the BRPW/DRPW quarterly growth rates in connection with an attempt to forecast DRPW-only estimates has not been demonstrated. In any event, given its conclusion regarding the sufficiency of the BRPW Parcel Post estimates, the Commission finds UPS's DRPW-only estimates are unnecessary.
4PSA complains that inaccurate data in Docket No. R97-1 caused the Commission to recommend higher Parcel Post rates than it otherwise would have. The Commission declines to speculate on what might have been. In every proceeding, however, the Commission's recommendations are based on the underlying record.
5PSA urges the Commission to substitute the average of the trial adjustment factors for FY 1999 PQs 3 and 4 for the interim adjustment factor used by the Postal Service. PSA Brief at 15. The Commission declines to do so.
6Witness Sellick makes a related claim, apparently not pursued by UPS on brief, that disaggregated BRPW data, provided in library reference USPS-LR-I-401, cannot be reconciled with aggregated data, provided in library reference USPS-LR-I-194. Tr. 37/16955. In addition, he cites the existence of certain nonsensical records. Id. at 16956. The assertion that the data cannot be reconciled does not withstand scrutiny. The record demonstrates that the data in LR-I-401 closely replicate the CBCIS extract file used for the BRPW, with revenue matching to 0.000017%, volume to -0.000343%, and weight to 4.1%. Tr. 43/18802-03. While weight does not replicate as well, such data are not as critical (as revenue and volume) in the RPW Report, and, in any event, that discrepancy appears to be due largely to keystroking errors. Id. at 18803. In sum, the discrepancies do not materially affect the Postal Service's permit imprint Parcel Post volume estimates contained in the RPW Report for FY 1998 or FY 1999. Similarly, the data do not support Sellick's assertions concerning the presence of nonsensical records. Tr. 46-B/20652-53; PSA Brief at 12.
7UPS's argument concerning Form 3605-PR is unclear, since it notes that errors are less likely with that form. UPS Brief at 72-73. Regardless, the Postal Service adequately addresses the issue of "keystroking errors." Postal Service Reply Brief at III-21, fn. 4.
8UPS also contends that the Postal Service has overstated Parcel Post revenues because it projects an increase in OMAS and Alaska revenues while indicating that the volumes will decrease. UPS Brief at 79; see also Tr. 25/11787, and Tr. 38/17242. While this result appears illogical, the point is moot since the Commission's test year revenue estimate for OMAS and Alaska is based on actual revenue in the RPW report.
9Exhibit USPS-32B, revised April 21, 2000, at 1; see also Tr. 11/4559-60 and Exhibit USPS-36K, revised April 17, 2000. In her prepared testimony, witness Mayes supported a cost coverage of 114.1 percent. USPS-T-32 at 40.
10By the same token, the Postal Service, as a governmental agency, may incur costs, e.g., universal service, which disadvantage it compared to competitors.
11Passthroughs also effect BMC, OBMC, and barcode discounts. No participant has opposed the Postal Service's proposals with respect to those discounts. The proposed nonmachinable surcharge also depends on a passthrough.
12Witness Luciani characterizes the markup, which he uses "to back into" his proposed passthrough, as implicit. Tr. 25/11933.
13Due to the intra-BMC rate structure, it was necessary to constrain individual rate cells in zones 3, 4, and 5.
14On April 4, 2000,the Postal Service filed the FY 1999 CRA as USPS-LR-I-275 and the Cost Segments and Components Report as USPS-LR-I-276. It also filed the supporting billing determinants as USPS-LR-I-259 on March 31, 2000.
15The source of AAP's figure is the Household Diary Study. The Postal Service argues that the data reported in the Household Diary Study "does not purport to represent the percentage of books in the [BPM] mail stream as a whole," but only that percentage reported by households. Postal Service Reply Brief at V-33. It notes that for the period 1994-1998, the same data show a range fluctuating between 41.9 percent and 63.7 percent, averaging about 51 percent. The Postal Service also cites witness Mayes' testimony which, based on RPW data, indicates that books comprise about 52 percent of BPM. Ibid.
16MOAA makes a similar comparison. MOAA Brief at 23. Briefly reciting the history of the BPM subclass, MOAA argues that "advertisers should at least be given the benefit of the ECSI value to which the books are entitled." Id. at 25-26. The Commission is sympathetic to MOAA's concerns. Nonetheless, there is no basis on which catalogs (advertisers) merit ECSI consideration. See Tr. 11/4666-68.
17In a minor related change, the Postal Service proposes an annual mailing fee of $125 on BPM destination entry mailers. USPS-T-37 at 34, fn.14, revised March 14, 2000. The Commission recommends adoption of this fee, which, as witness Kiefer notes, also applies to Parcel Post Parcel Select mailers. Ibid.
18In its Reply Brief, AAP argues that the Postal Service has improperly attempted to shift the burden of proof, contending, inter alia, that it failed to supply credible volume estimates. AAP Reply Brief at 1-3. AAP's argument is not persuasive. The Postal Service's BPM proposal is supported by its direct case. The burden of going forward then shifted to AAP as an opponent of the proposal. AAP responded with the testimony of witness Siwek. In response, the Postal Service submitted the rebuttal testimony of witness Degen. Tr. 38/17340 et seq. In considering this record, the Commission concludes that the Postal Service has satisfied its burden. See, e.g., Postal Service Reply Brief at IV-2-4.
19USPS-T-37 at 1. As noted above, the Postal Service proposes to change the name of Special Standard Mail to Media Mail. The Commission recommends that the DMCS be amended with a conforming change.
20As a point of comparison, the Postal Service's proposed Special (Media) rates in Docket No. R97-1 and in this proceeding were developed similarly. In Docket No. R97-1, the Postal Service's Special rate witness eschewed his preliminary rates, which would have caused the first pound rate to increase from $1.24 to 1.54, in order to mitigate rate shock. See PRC Op. R97-1, paras. 5749-50. Witness Kiefer follows the same practice in this proceeding.
21Prior to the passage of PL 106-384, Library rates were based on the Revenue Foregone Reform Act of 1993 (RFRA) under which Library rates were phased upward over a period of six years, ending in FY 1998. 39 U.S.C. § 3626(a). Pursuant to RFRA as of FY 1999, Library Mail is prescribed a markup equal to one-half of that of Special Mail.
22For purposes of this discussion, the term Special Standard shall be used as a matter of convenience notwithstanding the Commission's recommendation to relabel that subclass as Media Mail.
 Postal Rate Commission http://www.prc.gov Voice: (202) 789-6800 Fax: (202) 789-6886 prc-admin@prc.gov |
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