Statement.html

The press package distributed earlier contains the summary and selected excerpts from the Commission's Opinion and Recommended Decision for R2000-1, copies of the charts we have in the front of the room, plus some additional background material. Our Decision was transmitted to the Governors of the Postal Service and the Postmaster General a short while ago and has been posted on the Commission's web site, www.prc.gov.

We are very proud of our web site, which last year received one of 22 Government Technology Leadership awards. This year the site is even more comprehensive, as we added several new features, including programs that enable you to word-search not only today's Decision, but every rate and classification opinion dating back to the Commission's first-issued case in 1971.

The law that established the US Postal Service in 1970 provides that the Postal Service may, from time to time, request that the Postal Rate Commission recommend "rates and fees [that] shall provide sufficient revenue so that the total estimated income-to the Postal Service will equal as nearly as practicable the total estimated costs of the Postal Service."

In my almost seven years at the helm of the PRC, if I have learned nothing else, I've learned that each case presents a new challenge. In this case the challenge lay in evaluating the Service's request for additional funds over and above its expected operating expenses/needs.

Last January the Postal Service proposed an array of rate increases designed to generate an additional $2.8 billion in revenue. This request is neither the largest nor the smallest amount of money sought in a rate case. What is unusual about this request is that roughly $1.7 billion of these dollars (or 60 percent) is for a contingency, a cushion, a hedge against the unknown - to cover unforeseen events. Another quarter billion plus dollars (some $250 million) are to pay down operating debt accrued in past years. You can do the math on how much of the $2.8 billion the Service thought it needed to cover increases in operating costs. I make the amount to be a little more than $800 million.

In most instances parties who intervene in a rate case focus almost exclusively on the justification the Postal Service presents for increasing rates for a particular type of mail. In the R2000-1 case, mailers did not ignore rate issues. However, many of them - representing a significant portion of the total mail volume, touching every class of mail - sponsored evidence challenging the need for a cushion so substantially above and beyond the Postal Service's own best estimate of future increases in the cost of collecting, processing and delivering the mail.

In presenting these estimates of its future needs, the Postal Service used financial and operational data from fiscal year 1998 as a benchmark. Unfortunately, by the time the Service filed its request, fiscal year 1999 had already come and gone.

The Commission and the parties agreed early in the process that if more recent data, reflecting actual events and requiring a shorter forecasting timeframe could be utilized, recommended rates would be more representative and fair.

At the request of the PRC, the Postal Service completed an update of its original cost projections. This updating process was no simple task. I commend the Service for undertaking and finishing the task in a timely manner. Doing so enabled the parties to the case to reassess their concerns in the context of the more recent data. The Service's effort in this instance was consistent with the generally high level of cooperation we received during litigation of the R2000-1 case.

To give you a flavor of the impact of this updating effort, which allowed the Commission to use more recent information than was in the Service's initial package, let's look at a few of the changes:

But the update was not one-sided, only adding new costs. The Postal Service also presented additional revenue and costing-cutting initiatives, such as the billion-dollar-a-year "break though productivity plan" announced by the Postmaster General this past spring. Unfortunately for those who pay the bills - the mailing public - when it came to holding down rate increases, the Postal Service was only willing to commit to saving slightly more than one half the highly publicized, promised amount.

The one item that did not change materially in the Postal Service update was the $1.7 billion rainy day contingency cushion to cover unforeseen expenses. The $1.7 billion remained, despite the fact that the updated data also shortened the time line used to forecast future events.

Please understand, the law that the PRC operates under states that the Postal Service may include a "reasonable provision for contingencies" when calculating its revenue needs. As one might suspect, the parties arguing that a $1.7 billion contingency was unreasonable before the update, felt even more strongly about this matter after the update. In their view new data and a shorter time frame for prognosticating were grounds for a much smaller contingency than $1.7 billion. They argued that a cushion of this size was unreasonable and unjustified.

The evidence presented by the parties on the contingency issue was determinative. Consequently, while my colleagues and I, by and large, took into account the net cost changes presented by the Postal Service in its update, along with many adjustments proposed by the other parties to the case, we recommend a $1 billion contingency and conclude that it more than meets the reasonableness standard of the law.

· Second, if the Postal Service's best estimate of its future need for more money to cover expenses associated with the collection, processing and delivery of mail are on target - remember, this is a new, updated estimate that incorporates the impact of more recent actual events and which, by its very nature involves less uncertainty - if this estimate is correct, the Postal Service would still realize a $1 billion surplus on an annualized basis.

If you hear doom and gloom projections about this Recommended Decision not providing the Postal Service with sufficient revenue to breakeven in the current fiscal year, remember this. If rate increases are implemented in January - which the Service has indicated is likely - and the Service's best estimate is on target, the Postal Service should be sitting on a sizable cushion. Put another way, in the absence of the occurrence of unforeseen events costing more than $500 million, the Service should do quite well with the smaller rate increases we recommend.

As you can see on the chart entitled SELECTED RATES USED BY NONBULK MAILERS, the rate for a one-ounce First-Class letter will go up to 34 cents. However, the rates for heavier First-Class mail will not increase. The rate for each ounce above the first ounce is currently 22 cents. That will decline to 21 cents. As a result, the rate for a 2-ounce piece will be 55 cents, the same as it is today. The rate for a 3-ounce piece actually goes down.

This mix of rate changes in First-Class letters and cards reflects the fact that, while we operate under an integer constraint when it comes to the basic stamp rate, the Commission continues to be concerned about the institutional cost burden borne by these monopoly rate payers.

Next, let me ask you to focus on the section of the chart showing changes for Priority Mail. Currently there is a two-pound rate that applies to the vast majority of Priority Mail pieces. The Postal Service proposed that a one-pound rate be established and the Commission approves that request. However, this proposal did lead to a rate design problem.

The Postal Service currently distributes a so-called "flat rate" envelope. Mailers can put as much as they want into a flat rate envelope and send it at the minimum rate, currently the two-pound rate. Because the minimum rate will become the one-pound rate, it could become very confusing if flat rate envelopes are still charged the two-pound rate.

Periodicals have been saddled with substantial rate increases in each of the last two cases because the cost of processing this mail increased dramatically. Following the last rate case the industry and the Postal Service put together a Joint Task Force to find the causes of the sharply increasing costs. The Task Force reviewed multiple Postal Service processing facilities and came up with a dozen or so specific recommendations for restraining costs.

The initial Postal Service request did not take into account the Task Force recommendations. Periodicals Mailers challenged Postal Service cost projections, arguing that the recommendations of the Task Force should be put into effect. The Postal Service has now accepted many of these suggestions. As you can see, the Commission has been able to recommend rate increases for Periodicals that are substantially smaller.

Many of these cost reduction measures identified by the Joint Task Force also will have the effect of restraining the cost increases that led to the proposed Standard Mail rate increases. As you can see, the recommended rates for Standard Mail are also below the rates initially proposed by the Postal Service.

I think a separate explanation is necessary for those five rates marked with an asterisk on the AVERAGE PERCENT RATE CHANGE chart. Each of those categories has traditionally paid low rates in recognition of the preferred status of Nonprofit mailers. As you can see from the left hand column, Nonprofit mailers would have been burdened with exceptionally high increases but for the fact that Congress passed legislation. That legislation not only restrained rate increases in this case, but it established a ratemaking formula for this mail that should moderate future increases.

During the course of this case, there have been a number of instances in which evidence was presented that the Postal Service was not delivering as promised on one or another of its offerings. I believe that all would agree on the importance now and in the future of quality service at an affordable price. Maintaining affordable rates will require considerable discipline on the part of the Postal Service to contain and, where possible, cut costs. Cost cutting need not be associated with a diminution in service. One example of an opportunity for the Postal Service to provide a higher quality service at a lower price and still drive costs out of the system is discussed in a concurring opinion signed by me and my colleagues, Vice Chairman Omas and Commissioner Goldway. We propose that the Service consider extending its computer-based deliver confirmation service to First Class mail as a substitute for the more costly, paper-based certified mail service.