NDMS-TBEFORE THE
POSTAL RATE COMMISSION
WASHINGTON
D.C. 202680001
POSTAL
RATES AND FEE CHANGES,
Docket No. R97-1
1997 )
Direct Testimony
of
DR. JOHN HALDI
Concerning
THE FIRST-CLASS
NONSTANDARD
SURCHARGE
on Behalf of
NASHUA PHOTO INC., DISTRICT PHOTO INC.,
MYSTIC COLOR LAB, AND SEATTLE FILMWORKS,
INC.
William J. Olson
John S. Miles
Alan wall
John F. Callender, Jr.
WILLIAM
J. OLSON, P.C.
8180 Greensboro Dr., Suite 1079
McLean, Virginia
22102-3823
(703) 356-5070
Counsel for Nashua Photo Inc.,
District Photo Inc.,
Mystic Color Lab, and
Seattle FilmWorks, Inc.
December
30, 1997
1
NDMS-T-
1
BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON
D.C. 202680001
POSTAL
RATES AND FEE CHANGES,
1997
Direct Testimony
Docket No. R97-1
of
DR. JOHN HALDI
Concerning
THE FIRST-CLASS
NONSTANDARD
SURCHARGE
on Behalf of
NASHUA PHOTO INC., DISTRICT PHOTO INC.,
MYSTIC COLOR LAB, AND SEATTLE FILMWORKS,
INC
William J. Olson
John S. Miles
Alan WoII
John F. &Render,
Jr.
WILLIAM
J. OLSON, P.C.
8180 Greensboro Dr., Suite 10170
McLean, Virginia 22102-3823
(703) 356-5070
Counsel for Nashua Photo Inc.,
District Photo Inc.,
Mystic Color Lab, and
Seattle FilmWorks, Inc.
December
30, 1997
CONTENTS
Page
AUTOBIOGRAPHICAL
I.
II.
III.
IV.
V.
VI.
VII.
VIII.
PURPOSE
SKETCH
OFTESTIMONY..
INTERVENORS’
MAILING
IN THE FIRST-CLASS
. 1
.......... . ..
....
. ..
.
.
.
.
PRACTICES AND 1NTE:REST
NONSTANDARD
SURCHARGE
4
THE BASIS FOR THE NONSTANDARD
SURCHARGE
NEEDS
.... . . .. ....
...
TO BE RE-EXAMINED
NONSTANDARD
AREMINIMAL
FIRST-CLASS
VOLUMES AND REVENUES
. . . . . . .._.........__...............
3
8
17
COST DATA SUPPORTING
THE FIRST-CLASS
NONSTANDARD
SURCHARGE
ARE NOT CREDIBLE
23
FIRST-CLASS
FLATS AND PARCELS ARE PROFITABLE
PRODUCTS
. . . . .._.....__............__.__....___
31
THE DE-AVERAGING
OF RATES FOR SINGLE PIECE
FIRST-CLASS
MAIL HAS NO CONSISTENT,
PRINCIPLED
BASIS . . . . . . .
.
..
36
CONCLUSIONS
APPENDIX
AND RECOMMENDATIONS
. . ..__...........................................
. ..
.
. . 44
48
1
AUTOBIOGRAPHICAL
2
My name is John Hahh.
I am President
3
economic and management
4
New York, New York 10019. My consulting
5
variety
6
including
7
consulting
of areas for government,
testimony
Inc., an
firm with offices at 680 Fifth Avenue,
experience
business and private
In 1952, I received a Bachelor
with a major in mathematics
9
respectively,
11
of HaIdi Associates,
has covered a wide
organizations,
before Congress and state legislatures.
8
10
SKETCH
of Arts degree from Emory University,
and a minor in economics.
In 1957 and 1959,
I received an M.A. and a Ph.D. in economics from Stanford
University.
From 1958 to 1965, I was assistant
12
University
13
the Program
14
responsible
15
Budgeting
16
government.
17
Planning,
18
establishing
19
O’Brien.
20
the initial
Graduate
School of Business.
Evaluation
implementation
(PPB) system in all non-defense
United
of Budget.
While there, I was
of the Planning-Programingagencies of the federal
1966 I also served as Acting Director,
Stated Post Office Department.
the Office of Planning
I established
at the Stanford
In 1966 and 1967, I was Chief of
Staff, U.S. Bureau
for overseeing
During
professor
an initial
I was responsible
under Postmaster
research program,
staff.
1
Office of
for
General Lawrence
and screened and hired
1
I have written
numerous
articles,
published
consulting
studies,
and co-
2
authored
3
Value of Output
4
Analysis of Public Output (1970); a book, Postal Monopoly: An Assessment of
5
the Private Express Statutes, published
6
for Public Policy Research
7
Delivery,”
8
and an article,
9
Areas,” in Managing
10
one book.
Included
among those publications
of the Post Office Department,”
are au article,
which appeared
by the American
(1974); an article, “Measuring
“The
in The
Enterprise
Institute
Performance
in Mail
in Regulation and the Nature of Postal Delivery Services (1992);
“Cost and Returns
from Delivery
to Sparsely
Settled Rural
Change in the Postal and Delivery Industries (1997;
with L. Merewitz).
11
I have testified
12
Docket Nos. MC96-3,
13
MC78-2
and R77-1.
as a witness before the Postal Rate Commission
MC95-1,
in
R94-1, SS91-1, R90-1, SS86-1, R84-1, R80-1,
I also submitted
comments
2
in Docket No RM91-1.
1
I.
2
The purpose
PURPOSE
of this testimony
is to present
the First-Class
4
the past two decades have accepted the nonstandard
5
scrutiny.
6
Commission
7
not because they are unimportant,
8
neither
9
the time and resources required
A number
of important
surcharge
concerns raised initiaIly
in Docket No. R78-1 have lain dormant
the surcharge
The initial
nonstandard
13
handled
14
Postal Service’s proposed
15
the surcharge
over
without
by the Postal Rate
for nearly
20 years -
or have ever been resolved, but because
group of mailers
has invested
to examine either the assumptions
or the methodology
decision to de-average
12
review of
A series of rate cases conducted
the Postal Service nor any organized
undergirding
11
surcharge.
a compreheusive
3
10
nonstandard
OF TESTIMONY
used to estimate
costs.
rates and adopt a surcharge
for
pieces is now over 20 years old. Mail subject to tihe surcharge
very differently
in 1997 than it was in the 1970s. In view of the
45 percent increase in the surcharge,
should be revisited
16
AdditionaUy,
17
have a significance
18
matter
in its entirety.
issues raised by the First-Class
nonstandard
that extends beyond this particular
deserves to be considered
the issue of
surcharge
rate category.
afresh and anew by the Commission.
3
The
is
1
2
II.
INTERVENORS’
MAILING
PRACTICES
THE FIRST-CLASS
NONSTANDARD
This testimony
is presented
Photo Inc. (‘Nashua”),
Lab (“Mystic”),
which does business
and Seattle FilmWorks,
to as “NDMS.“’
developed film and prints
Overview
of the Film
Collectively,
11
as Clark Color Lab, Mystic
Inc. (“Seattle”),
12
approximately
13
remaining
referred
film processor which
Industry
14
regional
15
Photo Film, through
16
on the general public taking
17
to the drop-off location
film processors
account for
of the domestic film processing
of the market
and national
collectively
Color
to its customers.
through-the-mail
94 percent
Nashua
the mail, and uses the Postal Service to return
Processing
6 percent
IN
as York Photo Labs, District
Each firm is a through-the-mail
receives exposed Iilm through
10
on behalf of four interveners:
which does business
Photo Inc. (“District”)
AND INTEREST
SURCHARGE
is divided
(e.g., Eastman
Fuji Trucolor
market.
among a large number
Kodak, through
Inc.) film processing
prints.
of local,
Qualex, Inc., and Fuji
companies
its 61m to a drop-off location
to pick up the finished
The
that rely
and then returning
In some localities,
i Although not an intervener herein, another through-the-mail film processor,
Skrudland Photo Inc., has joined with and supports the position of NDMS.
4
1
competitors
2
as short as one hour.
do on-site developing
and printing,
3
Turn-around
4
mail photofinishing
5
processing
plants
6
warrants.
Their goal is to have finished
7
hours after customers’
8
Nashua,
9
and offer turnaround
time and service are critical
business.
considerations
All four companies
up to 24 hours a day, seven days a week, as demand
fLilm arrives
District,
10
national
film processors
11
Mailing
Practices
Unexposed
in the direct
operate their respective
Mystic,
pictures
back into the mail within
and Seattle compete vigorously
described
of Nashua,
of local, regional
District,
Mystic,
When mailing
in light-proof
placed inside plastic canisters.
14
customers
15
envelope, while others place the cartridge
16
mailing.
When a single cartridge
17
canister,
it usually
18
First-Class
19
package weighs more than one ounce and is therefore
20
two-ounce
21
cartridge
containing
surcharge.
Mail.
exposed film directly
into an
back in the plastic canister
of 35mm film is returned
without
When the plastic canister
Envelopes
cartridges
exposed rolls of fJm, some
weighs less than one ounce and is therefore
First-Class
and
and Seattle
13
nonstandard
with each
above.
rolls of 35mm film are supplied
drop the cartridge
24
at the plant.
other, but they compete even more with the multitude
12
times
the
subject to the
is used, the
subject to the rate for
sent to NDMS that contain
of film and weigh less than one ounce constitute
5
before
a
a signif%cant
1
portion
2
single-piece
3
(perhaps
as much as one-fourth)
First-Class
Mystic
exclusively
5
used when placing
6
returned
7
BRE mail, Mystic
8
including
with specially-designed
directly
an order.
All BREs supplied
by Mystic
plants.
and Seattle thus pay all applicable
nonstandard
and District
and prospects
business reply envelopes
to each firm at their respective
the First-Class
Nashua
nonstandard
parcels that weighed less than one ounce in 1996.
and Seattle supply all their customers
4
9
of the 24.9 million
(“BREs”)
and Seattle are
On all incoming
First-Class
postage,
surcharge.
receive both BREs and reply envelopes with
10
postage prepaid
11
District
12
nonstandard
13
under one ounce, when reply envelopes are prepaid
14
supposed to include
15
32-cent stamps or a 32-cent and 23-cent stamp on the envelope.
16
customers
underpay,
by putting
17
the former
situation,
the Postal Service retains
18
situation,
19
or District
20
to be
by the customer.
pay all applicable
When customers
First-Class
surcharge.
use BREs, Nashua
postage, including
For single rolls of fdm without
the surcharge.
Many customers
and
the First-Class
canisters
which are
by customers,
they are
overpay, by putting
two
Other
only one 32-cent stamp on the envelope.
the overpayment;
the Postal Service collects the nonstandard
surcharge
In
in the latter
from Nashua
as postage due.
In this docket, the Postal Service proposes to increase tbe rate for the
21
first ounce of First-Class
Mail from 32 to 33 cents, or by 3.1 percent.
22
same time, the Postal Service proposes to increase the nonstandard
6
At the
1
surcharge
2
an omnibus
3
45 percent increase is a ten-fold increase over the systemwide
4
can only be described
by 5 cents, from 11 to 16 cents, or by 45 percent.
Ian the context of
rate case that caIls for an overall rate increase of 4.5 percent,
as creating
enormous
a
average and
“rate shock.“’
r The magnitude of this 45 percent increase is exceeded only hy the increases
of up to 55.6 percent proposed by the Postal Service for Standard A parcels, and the
proposed increases for registered mail. Witness Moeller, in his response to
NAA/USPS-T36-4 (Tr. 6/2777), stated: “If DSCF-entered minimum-per-piece 3/5digit residual shape is considered a separate rate category, then the proposed
increase for this category is the highest at 55.6 percent.” The fact that NDMS are
heavy users of both First-Class nonstandard mail and DSCF-entered Standard A
parcels makes the rate shock on these mailers even worse.
1
2
3
4
THE
III.
BASIS FOR THE NONSTANDARD
NEEDS TO BE RE-EXAMINED
The 1973 Decision
to Implement
for a Surcharge
on Nonstandard
5
Shell
6
recommended
7
Airmail
a
following
9
15, 1976).’
classification.
and third-class
surcharge
amount
11
rate request
be established
single piece mail, to be implemented
The Commission
or amounts
also recommended
of any surcharge
made pursuant
Definition
for First-Class,
two years
to 39 USC.
of nonstandard
that “the structure
shall be determined
and
later following
$3622.”
mail.
Nonstandard
13
defined as having
14
(a)
height-to-length
15
(b)
height
exceeding 6.125 inches, or
16
(4
length
exceeding
17
Cd)
thickness
s
the Commission
the date the Opinion and Recommended Decision .was issued (April
10
12
a Shell Classification.
First-Class
Mail
In Docket No. MC73-1,
that a nonstandard
SU’RCHARGE
mailpieces
were
any:
ratio outside
1:1.3 and 1:2.5, inclusive,
11.5 inches, or
exceeding 0.25 inches.
Op. & Rec. Dec., Docket No. MC73-1, pp. 25-29.
8
or
a
1
Within
First-Class
2
letters,
flats, and parcels under one ounce.’
3
whenever
mail in any of these categories
4
revenues
are suf6cient
5
and Airmail,
Machinability
6
Commission
7
maximum
8
procurement.”
9
added).
the surcharge
was applied
to nonstandard
The Commission
noted that
exceeds the first weight
step,
to cover extra costs6
considerations.
determined
Looking
that “mechanization
size be specified for purpose
toward
requires
of machine
the future,
the
that s,ome definition
design
of
and
Op. & Rec. Dec., Docket No. MC73-1, p. 26 (emphasis
The Commission
also noted that “mail that is too small or fhmsy
10
tends to jam the mail processing
11
pieces...can
12
they can be culled from the mailstream,
13
Id., p. 25, n.1. The surcharge
be handled
without
machines
detriment
and damage other mail.’
to machines
or other mail because
but the cost of handling
was intended
Oversize
to encourage
is greater.”
use of standard
size
4 The definition of nonstandard First-Class Mail has not changed; see response
of witness Fronk to NDMSAJSPS-T32-22 (l’r. 4/1503).
’ The Commission has recognized in past dockets that the rate charged for
incremental ounces of First-Class Mail exceeds a reasonable estimate of the
incremental cost caused by additional weight of mail pieces. See, inter alia, 0~1s. &
Rec. Decs., Docket No. R94-1, para. 5030 and Docket No. RSO-1, pars. 658.
6 Of course, the Postal Service has addressed the concern of mailpieces that are
too small by establishing minimum dimensions for mailpieces (0.007” thick, DMM
CO10.1.3) and more particularly, for letters (not less than 3.5” high or 5” long, DMM
CO10.1.2, or not less than 0.009” thick for letters more than 4-114” high or 6’ long, or
both, DMM C810.2.l.c.(2)). Failure to meet these minimum standards makes the
mailpiece nonmailable.
The Postal Service has also addressed concerns of
flimsiness by establishing minimum standards for packaging (DMM COlO.Z.0) and
containers (DMM CO10.3.0).
9
1
mailpieces,
2
revenues.
3
Establishment
4
and was expected to reduce postal costs and/or increase postal
of Rates
Initial
rate.
for the Surcharge7
In Docket No. R78-1 (Opinion &Recommended
5
on a Surcharge for Nonstandard Mail),
6
Service proposal
7
recommending
9
to establish
a nonstandard
a nonstandard
surcharge
Subsequent
8
updated
the Commission
rates.
surcharge
Decision
rejected a Postal
of 13 cents, instead
of 7 cents.
Since Docket No. R78-1, the Postal Service has
the study that purports
to provide the cost basis for the nonstandard
10
surcharge.
11
single piece rate of 11 cents. In Docket No. R87-1, a reduced surcharge
12
cents per piece was implemented
13
The Nonstandard
14
A series of incremental
Advances
Surcharge
in automation
15
represents
16
Mail.
17
review of the general rationale
18
undertaken.
an early de-averaging
Since the surcharge
increases have resulted
for presorted
Needs
Critical
First-Class
of 5
Mail.
Reexamination
and mechanization.
of rates within
i.n the current
The surcharge
single piece First-Class
was first imposed, however,
a comprehensive
and the basis for the surcharge
has not been
There are good reasons to do so. For example, new sorting
’ Throughout this testimony, references to “the surcharge” should be
interpreted to refer only to the existing surcharge on nonstandard First-Class Mail.
10
1
machines,
2
R78-1 Opinion and Recommended Decision (and some perhaps
3
advanced
than any contemplated
4
deployed,
without
5
or how nonstandard
of the type which the Commission
by the Commission),
any corresponding
mailpieces
anticipated
have been widely
are processed on them.
The latest equipment
for processing
7
Facer Cancel.er System (“AFCS”);
8
read typed addresses, print barcodes and sort letters;
9
sorters (“RCSs”), including
letters includes
optical character
readers
the Advanced
(“OCRs”) that
a variety
some that can sort mail to a carrier’s
10
sequence; and remote video equipment
11
read on an OCR. Whether
12
processed efficiently
for encoding letters
nonstandard
on currently
of barcode
walk
that cannot be
pieces, such as square letters,
installed
equipment
The Postal Service has not submitted
mailpieces.
even more
study by the Postal Service of whether
6
13
in its Docket No.
14
of nonstandard
15
Christmas
16
nonstandard
17
had them mailed to me from various locations
18
Of these, nine were received’
can be
clearly needs review.
any evidence as to the processing
As an experiment,
cards whose envelopes measured
I personally
;purchased
10
exactly 5” square (clearly
with a 1.0 aspect ratio), placed a 32-cent stamp on each, and
with cancellation
in New York City and Chicago.
and barcode.% which
’ The cards are contained in Library Reference LR-NDMS-I
Nine were to
have been mailed between November 24 and December 2; one was mailed on
December 18. One was never received, but I have been unable to confirm that it
was actually mailed.
(continued...)
11
1
evidenced
2
This was the only envelope which may have offered evidence of
3
malprocessing.
4
this small sample, witness
5
[nonstandard
6
nothing
7
nonstandard
8
capabilities.
9
machine
processing.g
One envelope was torn along the top edge.
(None were marked postage due, either.)
letters]
Daniel cannot be right when she states that “they
would all be manually
else, this small-scale
surcharge
Specihcations
On the basis of
experiment
sorted.“iO
(Emphasis
added.)
If
shows the need to :review the
in terms of existing
automation
and mechanization
for pieces that can be sorted on the FSM 1000 indicate
10
that flats under one ounce (“flimsies”)
11
average weight
are well within
of a flat subject to the First-Class
its limitations.”
nonstanda~rd
surcharge
The
is
‘(...contiued)
The library reference also includes two Christmas card envelopes, received at
my office, which were not part of the experiment, both of which were machine
processed, and neither of which were presented with a request for additional
postage. One card, 5 9116” square, was mailed from Washington, D.C. The other
card, 6 7116” x 6 11116” (an aspect ratio of 1.04) was mailed from Hong Kong.
’ Despite evidence to the contrary, the responses of witness 1Moden to
NDMSUSPS-T4-17-18
(Tr. 1115816-17) indicate that nonstandard pieces are
incompatible with the Advanced Facer Canceler System.
lo Tr. 14/7471,1. 4.
*i LR-H-1,69, p. 1 and Postal Service response to NDMS/USPS-T2G-3, 4 and 10
(Tr. 19-B/8930-31, 8937-38). The last-cited interrogatory states tlhat
“[qhtalitatively, virtually all mail that is within the specifications of the FSM 1000 is
processed successfully.” The preceding statement conflicts with witness Moden’s
response to NDMSAJSPS-T32-18(b) (I’r. 11/5825) which says that, many flats under
one ounce “have difficulty meeting the other machinability requimments such as
rigidity.” Of course, there are no rigidity requirements for First-Class flats other
than for those entered at the automation rate.
12
0.8 ouncesl*
Even flats under one-tenth
specifications
for the FSM 1000 used in the 1992 Albany,
production
model FSM 1000 currently
FY 1997, and an additional
can process flats weighing
Au known
weight
standard
speci6cations
a
five typical
flat-sized
9
and Kinko’s
of one ounce fell within
Nrew York test. The
being deployed (100 were deployed in
240 are scheduled
for deployment
in FY 1998)”
0.32 ounces.
size flat envelopes appear to be well within
of the production
envelopes available
Copies in McLean,
the
FSM 1000. By way of experiment,
Virginia
for sale at Office Depot, Staples,
were purchased.
10
Bowes Model A500 digital
11
empty envelopes were weighed,
12
weighed
13
and weights
14
Envelope
15
Quality
16
WestvLo
17
DuPont
Tyvek
9” x 12”
18
Manila
Clasp
9” x 12”
19
Catalog Mailer
‘*
the
U~sing a Pitney
scale, which rounds to tenths of an ounce, the
and no standard
off-the-shelf
less than the FSM 1000’s 0.32 ounce minimum.
for the five envelopes appear in the following
envelope
The measurements
c!hart:
Measurements
Park Tyvek
9.5” x 12.5”
Grip-Seal
9” x 12”
6.5” x 9.5”
Response of Postal Service to NDMSKJSPS-ST43-lG(c)
I3 Response of witness Moden to DMAAJSPS-T4-89
13
(Tr. 19-B/8897).
Q’r. 1 l/5759).
1
(These envelopes
2
Yet within
are filed as LR-NDMS-2.)
the context of the nonstandard
3
amdyses have been conducted
4
the ongoing mechanization
5
nonstandard
6
specifications.
7
the FSM 881 and the FSM 1000 for nonstandard
8
that the malprocessed
9
conducted.i6
flats.i4
program
on the definition
the effect of
of First-Class
In fact, the FSM 88 1 has no stated minimum
tested malprocess
pieces were Ihmsies.i6
The questions
letters
of whether
existing
and whether
automation
mechanized
11
flimsies
12
Postal Service has stated that “New Design Flat Sorting
Moreover,
rates for both
No study of fhmsies was ever
handle
examination.
weight
pieces, no evidence exists
10
need careful
no studies or
by the Postal Service concerning
Also, while there are various
nonstandard
surcharge,
equipment
equipment
technology
can
can handle
is :not static:
the
Ma,chines are
i* See Postal Service response to NDMSAJSPST32.28
(Tr. 19.B/895G). The
question of what can and cannot be handled on Postal Service mail processing
equipment needs to be revisited periodically. Apart from incremental improvements
in existing automated equipment, the opportunity to adapt entirely new
technologies also exists. The introduction of robots is spreading rapidly in industries
that have a high proportion of labor-intensive handling tasks involving odd-shaped
workpieces (e.g., the automobile industry), preparing the ground for robots in postal
processing, where no reason exists to anticipate a new order of difficulties.
i6 See Postal Service response to NDMSAJSPS-T2G-4(c) (Tr. :19-B/8931). See
also Tr. 18/8239,11.8-12.
i6 See Postal Service response to NDMSRJSPS-T2G-4(d) (Tr. 19-B/8931). See
also Tr. 18/8239, 1. 17, and Postal Service response to NDMSKSF’S-T32-9 (‘Tr.
1417406).
14
1
planned
for deployment
2
handled
by the FSM 1000, which can handle mailpieces
3
Incentives
by the end of FY 1999.“17 Even some parcels can be
to mailers.
It is generally
understood
4
signals to consumers.
5
signal that can be viewed as some sort of incentive.
6
In this context, the surcharge
In order for the surcharge
to constitute
7
must first know that the surcharge
exists.
8
that the Postal Service makes little
effort -
9
publicize
as thick as 1.25”.
that prices send
may give mailers
an effective sigmd, mailers
In this regard,
it is worth noting
and no special effort -to
the existence of the surcharge, l8 and it has no documentation
10
evidencing
11
The Postal Service does not even sell an 1 l-cent stamp (the current
12
of the surcharge).”
13
a
underpayment
or overpayment
of the nonstanda:rd
surcharge.lg
amount
To the extent that the general public is aware of the s,urcharge, the
14
incentive
15
convert their mailpieces
i’
effects are unclear.
Parcel mailers,
for example,
to a flat or letter shape.
And witness
cannot
Fronk denies
See response of witness Moden to NDMSILTSPS-T4-19 (Tr. 1115818-19).
‘* Responses of Postal Service to NDMSKJSPS-T32-43
OCA/USPS-T32-8 qr. 19-D/9333).
l9 Response of Postal Service to OCWUSPS-T32-15
”
generally
(Tr. 1,9-B/8965) and
(Tr. 19-D/9340).
Response of witness Fronk to OCAILTSPS-T32-47 (Tr. 4/1659-GO).
15
1
any intent
2
shape to pieces of standard
3
Inconsistency
to create an incentive
that would convert pieces of nonstandard
shape.‘l
of principles.
More generally,
4
applied principles
5
past 20 years to support
6
rates, either by discounts
7
nonstandard
one-ounce-or-less
mailpieces
8
arbitrariness
and unfairness.
” In contrast
9
attempts
to justify
-based
either on cost or volume continued
de-averaging
or surcharges.
this surcharge
costs for First-Class
12
to continue
13
concern for the lack of cost-based justification.
”
of
affects less than 1 percent of
11
the huge disproportion
given
to the Postal Service’s labored
First-Class
as an integral
of single piece First-Class
leaves the impression
-which
pieces weighing
have emerged over the
The special attention
10
Mail -
no consistently-
between
rates and attributable
more than one ounce has been allowed
part of the rate structure,
Response of witness Fronk to NDMSIUSPS-T32-25
with no apparent
(Tr. 4/1~504-05).
” To the extent the Postal Service has any consistently applied “principle,” it
would appear to be “take the money and run.” In terms of rate design, this
translates into the (i) abolition of discounts, and (ii) preservation iand expansion of
surcharges.
16
1
2
3
4
Iv.
Nonstandard
Volume
Volume.
estimated
6
percent,
7
other 57 million
9
and Revenue
in 1996
The 1996 volume of nonstandard
5
8
NONSTANDARD
FIRST-CLASS
VOLUMES
AND REVENUES
ARE MINIMAL
to be 383 million
pieces.”
First-Class
The vast majority,
Mail was
326 million,
consists of single piece mail sent by the general mailing
pieces were mailed
Revenues.
approximately
10
nonstandard
11
estimates
12
surcharge.
The nonstandard
$35 million
at presort rates.
surcharge
pieces accounted
l’bis number
and carrier
for just under $3 million.
that only 90.4 percent of nonstandard
may be very optimistic
public.
The
See Table 1
was estimated
in 1996, of which presort
or 85
to have raised
route
The Postal Service
single piece mail pays the
based on my sample mailing
c3 See response of Postal Service to NDMSIUSPS-T32-29 fir. 1417415).
However, responses of Postal Service to NDMSAJSPS-2 (Tr. 1417371-72) and
NDMSRJSPS-T32-47 (Tr. 19-B/8970-72) provided dramatically different estimates of
nonstandard parcels and flats, respectively, as well as compliance factors. The
volume of nonstandard First-Class Mail is so small that the Postal Service
apparently does not have reliable data. The Postal Service concedes that the lack of
quality data may arise from the fact that many clerks do not recognize a
nonstandard piece when they see one. Such inconsistency or inability to identify
nonstandard pieces may also explain how the share of nonstandard letter volume
dropped from 58 percent to 19 percent in the Postal Service’s analysis. See Tr.
14/7429,11. 14-18. See also Tr. 14/7467, II. 8-9: “If data collectors aren’t recognizing
letter pieces as nonstandard, I have no way of knowing that,” Indeed, if data
collectors do not recognize nonstandard pieces, clerks are not likely to either, and
most nonstandard mail could be expected to be processed along w~ith other FirstClass Mail at no additional cost.
17
1
of 10 pieces where none paid the surcharge,
2
data collecting
personnel
and the fact that even trained
do not recognize these pieces.24
” The issue of enforcement was addressed when the surcharge was first
imposed in Docket No. R78-1. The Commission decided that enforcement was not
feasible in a cost-effective manner. Enforcement costs estimated at. $13 million were
expected to generate only $4.3 million in additional revenues; thus, spending on
enforcement was not deemed to be an exercise in “prudent management.”
18
1
2
Table 1
3
4
5
Volume and Estimated Revenue
From Nonstandard First-Class Mail
BY 1996
6
--___- ___-___Volume (millions) _____________
s’
9
Lettersmm
(1)
(2)
(3)
10
11
12
13
Single Piece
62.7
Compliance Factor
Net revenue from
single piece surcharge
230.0
24.9
14
15
Presort
Canter Route
9.1
Ll3AQez
16
17
18
19
TOTAL
73.6
20
21
22
23
Note:
24
Nonstandard
25
Source:
m
(4)
Estimated
Revenue
u!!J)
Surcharae
(5)
(‘3
$0.7 1
325.6
$35,816
234!3
$32,370
30.4
2.1
49.6
a!2
282.4
27.2
383.2
0.05
0.05
2,480
-.-a!
$35,250
Columns 1-4 and compliance factor from NDMWJSPS-T32-29
(Tr. 14/7415).
Nonletters ceased to be eligible for Carrier Route rates during BY 1996,
following implementation of the rate and classification changes of Docket No.
MC95-1 on July 1, 1996.
Volume
Single
piece
26
nonstandard
27
First-Class
28
nonstandard
29
piece revenue.
30
only 0.11 percent
in Perspective
nonstandard
First-Class
mail.
The 326 million
single piece mail represented
pieces of
only 0.60 percent
of all
single piece mail (see Table 2). In 1996, revenues from the
surcharge
represented
For all First-Class
only 0.15 percent
of First-Class
Mail, the $35.3 million
of total revenues of $31.9 billion.
19
single
in revenue was
1
Presort
nonstandard
2
3/5-digit
3
First-Class
4
route
5
Table 2). Within
6
represented
7
presort
mail.
pieces mailed in 1996 constituted
3/5-digit
presort
nonstandard
volume (carrier
presort
of presort
of all carrier
Mail.
introduced.
10
and rates.
11
Class Mail volume (see Table 2). It seems eminently
12
such a substantial
13
the percentage
14
total presort volume contrasts
15
well under
16
route First-Class
These two rate categories
heavy-weight
18
discount
19
First-Class
surcharge
also represent
38.8 and 3.1 percent,
Mail were first
a de-averaging
respectively,
sharply
of total First-
sensible to recognize
as a separate rate category,
tens of billions
of costs
of pieces of mail.
with nonstandard
especially
when
The 42 percent
of
volume, which is
1 percent.
Heavy-weight
17
pieces (see
In Docket No. R77-1, presort
9
and carrier
represents
route
of total revenues.
First-Class
percentage
of all
and carrier
mail, revenues from the nonstandard
categories
They constitute
nonstandard
only 0.14 percent
8
for 3/5-digit
First-Class
route included),
pieces were 0.28 percent
only 0.03 percent
Volume
The 11 million
presort
First-Class
(over two ounces) First-Class
Mail.
Some 300 million
Mail currently
pieces of
receive a presort
of 4.6 cents per piece. Witness Fronk proposes to elimi~nate this
rate category
on grounds
that (i) the volume is not sufficient
20
to
warrant
separate
treatment,
and (ii) simplification
of the rate structure
would be preferable.26
Witness Fro&s
probably
correct.
fractions
of 1 percent
Reorganization
nonstandard
analysis
Separate
of the heavy-weight
discount
rate classes for segments that constitute
of First-Class
Act’s mandate
First-Class
presort
is
small
Mail do not honor the Postal
of simplicity.2”
Mail likewise
The comparable
argues for abandonment
volume of
of that
surcharge.
26 USPS-T-32, p. 25, and Tr. 40624, 1. 15 to 4/1625, 1. 5.
*’ The “simplicity of structure” mandate merits the greatest force when applied
to First-Class single piece mail, which is perhaps the mail product most heavily used
by the least sophisticated mailers.
21
1
2
Table 2
3
Nonstandard Share of First-Class Mail
4
A. BY 1996 VOLUME
Total
Pieces
m
:
s7
9
10
11
Single Piece
3/5Digit Presort
Carrier Route
TOTAL
12
54,150.8
36,213.6
_2.843.6
58.1%
38.8
-Al
325.6
49.6
0.60%
0.14
0.28
93,208.O
100.0%
383.2
0.41%
Total
(m)
Single Piece
3/5-Digit Presort
Carder Route
TOTAL
22
23
24
25
NonStandard
Share
(Dercent)
B. BY 1996 REVENUES
13
14
15
16
17
18
19
20
21
Distribution
(PercenO
NonStandard
(m
Note:
Distribution
&!!xwll)
NonStandard
(m)
NonStandard
Share
(oercent)
$21,194.1
10,050.3
754.9
66.2%
31.4
-a.
$32.4
2.5
24
0.15%
0.03
0.05
$31,999.3
100.0%
$35.3
0.11%
Nonletters ceased to be eligible for Carrier Route rates during BY 1996,
following implementation of the rate and classification changes of Docket No.
MC95-1 on July 1, 1996.
22
1
2
V.
COST DATA SUPPORTING
NONSTANDARD
SURCHARGE
3
4
Postal Rate Commission’s
Critique
of
Foundations
of Nonstandard
Surcharge
5
THE FIRST-CLASS
ARE NOT CREDIBLE
In Docket No. R78-1, which established
6
surcharge
7
assumptions
8
rested (and continues
rates, the Postal Rate Commission
the original
nonstandard
noted that the data and
on which the entire nonstandard
surcharge
rate structure
to rest even today) are:
9
10
11
12
distorted by the inability to exclude costs pertaining
to
First-Class Mail over one ounce which is not subjected to
of n. I
the surcharge.
[Op. & Rec. Dec., p. 26, continuation
from p. 25.1
13
Yet, over the past two decades the Postal Service has undertaken
14
studies to remedy this serious distortion
15
Postal Service has simply updated
16
shortcomings,
17
18
19
20
then
identified
by the Commission.
no
The
the defective data, with ah their
using the flawed
analysis
and
results
again and again as the basis for proposed increases,
including
the
current
one!’
Witness
43, presenting
aided by mailer inattention,
Daniel,
in her late-filed
supplemental
testimony,
the Postal Service’s latest updates of additional
USPS-STmail
” Only some of the defective cost data have been updated on a periodic basis.
Until the present docket, the Postal Service made no effort to update data on the
obviously stale volume shares by shape of nonstandard mail, or even disclose that it
was stale in its presentations to the Commission.
23
1
processing
2
following
costs associated with nonstandard
candid
First-Class
pifeces, makes the
admission:
3
4
5
6
7
8
9
10
11
12
13
One limitation
of the analysis presented here is our inability
to determine
the cost differences
of just one-ounce
nonstandard
pieces. The mail flow model presented in
Exhibit USPS-43B can only be used to determine the cost of an
average weight letter. Inputs are not available to determine
costs by specific ounce increments.
Whereas it might be possible
to estimate the average mail processing cost of a one-ounce
letter, flat, or parcel using the methodology presented in USPS
LR-H-106, it is not possible to determine the cost of processing a
one-ounce letter-shaped
nonstandard
piece. WSPS-ST-43, pp.
2-3, emphasis added.]
14
For reasons stated by witness
15
missing
16
represent
17
here is the degree of distortion
18
nonstandard
19
the only available
20
Distortion
21
22
Daniel,
data are replaced by “proxies,”
the variables
for cost estimation
or substitute
for which they stand.
introduced
the
that purport
The key issue to be reviewed
into the cost estimates
of
pieces by the proxies used, which the Postal Service states are
proxies.
of Cost Estimates
by the Proxies
Used
Postal Service data used as proxies to support
surcharge
variables
purposes
are shown in Table 3.
24
the nonstandard
to
Table 3
Cost Data Used to Support the Nonstandard Surcharge
Average Cost (cents)
Average Weight (ounces)
Standard
L!ztms
Proxy
For NonStandard
!dza!2E
Proxy
For NonStandard
El&
Proxy
For NonStandard
11.74
20.54
32.66
74.57
0.5
0.5
3.3
4.3
NonStandard
NonStandard
Flats
NonStandard
.EilE&
0.65
0.00
0.49
Actual Data of Under One-Ounce Mailpieces
10
11
12
13
14
15
16
17
18
19
Average Weight (ounces)
Sources: Exhibit USPS-43A
Response of witness Daniel to NDMSAJSPS-ST43-11 (Tr. 14/7389).
Response of Postal Service to NDMSIUSPS-ST43-16 (Tr. 19-818897).
20
21
Letters.
22
0.65 ounces.”
23
ounces.”
24
letters
The average weight of a First-Class
The average weight
Therefore,
may represent
of the proxy for nonstandard
in terms of one factor, weight,
a reasonably
nonstandard
letter is
letters is 0.5
the average cost for
good proxy.
28 Response of Postal Service to NDMSAJSPS-ST43-16
29 Response of witness Daniel to NDMSKJSPS-ST43-I
25
(Tr. 19-B/8897).
1 rr.
1417389).
1
The proxy fails, however,
2
The proxy for nonstandard
3
is assumed
4
the extent that any nonstandard
5
equipment,
6
letters.
7
that nonstandard
8
Facer Canceler
9
letters is the cost of letters
that all nonstandard
the proxy overstates
As noted previously,
Flats
when the method of processing
letters
letters
are always
is considered.
sorted manually;
i.e., it
sorted manuaIIy.30
To
are in fact sorted on automated
the mail processing
a simple test mailing
cost of nonstandard
ten 5” square cards shows
pieces can be, and in fact are, (i) canceled on the Advanced
System and (ii) sorted on automation
and parcels.
10
proxy is multiples
11
one ounce.‘i
12
were but a smaIl portion
13
support
equipment.
For flats and parcels, the average weight
of the
of the average weight for the subset of pieces of less than
Moreover,
flats and parcels actually
subject to the surcharge
of the flats and parcels studied
the proposed increase in the First-Class
and relied upon to
nonstandard
surcharge.
In
‘a Response of witness Daniel to NDMSILTSPS-ST43-17 (Tr. 14/7394-95); see
ak;o Tr. 14/7456,1. 19. No evidence exists that nonstandard First-Class letters
cannot be processed on automation equipment or that they are all culled from the
automation mail stream. But see Tr. 14/7447,11. 11.17, where witness Daniel
speculated that, given two similar letters, one of which was non&andard, “since
these are both so borderline, both may go through or he pull [sic] both of them...”
and Tr. 14/7487,1. 21 to 14/7488, 1. 2:
Q:
A:
Q:
A:
You know that anything that doesn’t wind up with its tip in the
shaded area will jam an OCR. Is that your testimony?
No sir, just that there’s a greater likelihood that it would.
And what’s your authority for that proposition?
The fact that it was deemed nonmachinable.
‘i The average weights of First-Class single piece flats and parcels are,
respectively, 0.80 ounces and 0.49 ounces. See response of Postal Service to
NDMSKJSPS-ST43-16 (Tr. 19-B/8897).
26
1
1996, only 7.1 percent
of a5 single piece 5ats and 8.0 percent, of all single
2
piece parcels weighed
under one ounce.”
3
Using average weight
First-Class
4
under-one-ounce
5
are wholly
6
unless
7
average weight
8
piece parcels it was 4.3 ounces.
9
than 8 times, respectively,
10
5ats and parcels as proxies for
5at.s and parcels, respectively,
inadequate
one adopts
to represent
the position
is indefensible.
the variables
that
weight
Such proxies
for which they substitute,
has no effect
on cost.
The
in 1996 for single piece 5ats was 3.3 ounces, while for single
Thus the proxies were more than 4 and more
the average weight
of the pieces that they purport
to represent.33
Even more significantly,
11
the additional
cost of handling
5at or parcel is almost wholly
unrelated
an under-one-
12
ounce nonstandard
13
handling
14
readily
15
the distribution
16
and 11 ounces changes; (ii) such changes in handling
costs of the proxy would
” Response of Postal Service to NDMS/USPS-T32-8(d)
(‘l’r. 19-B/8951).
and (e) (revised g/30/97)
the proxy (i.e., an average weight 5at or parcel).
seen because:
(i) the proxy’s handling
and average weight
to the cost of
This can be
cost would change whenever
of parcels or 5ats weighing
between
2
” For presort flats and parcels, the averages are 2.50 and 1.5 1 ounces,
respectively. Response of Postal Service to NDMSAJSPS-T32-8@) (Tr. 19-B/8951).
For carrier route flats, the average is 1.54 ounces, as calculated from the
Attachment to response of Postal Service to NDMSRTSPS-T32-47 (Tr. 19-B/8972);
there are too few carrier route parcels to calculate a meaningful average for them.
The overall weighted averages for all flats and parcels are 3.22 and 4.25 ounces,
respectively, as calculated from the Attachment to response of Postal Service to
NDMSILTSPS-T32-47.
27
1
not correlate
with or re5ect any changes in the cost of handling
2
that weigh under one ounce; and (iii) average parcel costs are further
3
distorted
4
live chicks) that are quite expensive
5
the proxy, and are never found in the population
6
Accordingly,
7
the proxies and the variables
8
based on these proxies is totally
9
existing
by the presence of certain
no functional
First-Class
critique
odd shapes (e.g., rolls) and contents
relationship
to handle,
of one-ounce-or-less
exists between
inadequate
surcharge,
10
The Commission’s
11
introduced
into the process of rate making
12
pertaining
to First-Class
13
incontrovertible
14
valid even though,
15
testimony,34
the handling
to stand.
to support
‘*
parcels.
costs of
the Fostal Service’s
let alone the proposed increase.
in Docket No. R78-1 concerning
“by the inability
Mail over one ounce” remains
the distortions
to exclude costs
as applicable
and
today as it was almost 20 years ago. The above conclusion
as mentioned
regarding
by witness
Daniel in her supplemental
Docket No. R90-1:
USPS-ST-43, p. 3, 11. 10.16.
26
of
The analysis
the Commission was satisfied with the Nonstandard
surcharge
Library Reference presented in Docket No. R90-1 upon which
the analysis in this docket [No. R97-l] is based. In its Opinion
and Recommended Decision, the Commission noted: “‘It is
satisfying to observe that in this case the Service has provided
solid information
on the comparative costs of standard and
nonstandard
First-Class pieces.”
16
17
18
19
20
21
22
(e.g.,
are found in the population
for which they purport
nonstandard
mailpieces
is
1
The preceding
quotation
may re5ect the lack of scrutiny
2
surcharge
3
context of the Commission’s
4
Docket
5
addressed
6
Nos. R84-1, R94-1, or R97-1 -as
7
Daniel.
8
inexplicably
9
identical
by any intervenor
own earlier
was precisely
commented
distortion
No. R78-1.a’
11
Can Better
Data
that
14
needs to be addressed.
15
require
on target
favorably,
from
and was never
submitted
in Docket
the Commission
subject
itself
to the same
criticized
in Docket
Soon?
of obtaining
an under-one-ounce
This likelihood
a major reorganization
were
the Commission
cost of handling
above
we5 as Docket No. R90-1, cited by witness
As a final note, the likelihood
the additional
cited
No. R90-1, on which
Be Expected
13
critique,
Postal Service cost revisions
The data in Docket
10
12
in that docket, and must be viewed in the
No. R78-1, which
in subsequent
given the
the data required
nonstandard
appears minimal,
to specify
mail piece
because it would
of, as well as supplementation
to, existing
” Moreover, in 1990 only the flawed cost data were updated. Other data on the
proportion of nonstandard letters, flats and parcels were taken from a report in the
early seventies, using data possibly predating creation of the Postal Service, and by
1990 they were already stale and out of date. See USPS-ST-43, r~. 2,ll. 12-13.
29
1
Postal Service data collection
2
collect any information
The required
3
systems and procedures.
about nonstandard
The IIOCS does not
pieces of First-Class
change may not be beyond the realm of possibility,
4
would certainly
5
credible
be hard to justify
6
Reluctance
7
the existing
8
would entail,
together
9
nonstandard
surcharge
simply for the purpose
of the Postal Service to undertake
situation
data to support
11
they likely
is understandable
with limited
within
the First-Class
to become available
but it
of c,onstructing
cost-based rates for less than 1 percent of First-Class
10
MaiL3’
Mail volume.37
a major cost study to remedy
in light of the expense such a study
importance
of the First-Class
the overall rate structure.
nonstandard
surcharge
Thus, credible
do not exist, nor are
any time in the foreseeable
s6 Response of Postal Service to NDMSAJSPS-T32-48
cost
rr.
future.
19-B/8973)
ST If the Postal Service wants to achieve First-Class rates that are more costbased, it should study the broader issue of the relationship between cost and weight
for all First-Class Mail.
30
1
2
FIRST-CLASS
FLATS AND PARCE:LS
ARE PROFITABLE
PRODUCTS
VI.
In light of the severe problems
costs incurred
preceding
10
nonstandard
First-Class
groups, are profitable
adequate
contribution
First-Class
letters
Available
Data
products
flats an.d parcels, taken
that make more than an
to covering Postal Service costs -
as .do, of course,
taken as a group.
on Flats
and Parcels
As the Postal Service candidly
11
the cost of handling
12
The only available
13
Although
14
can be used, in conjunction
15
to compare revenues
16
comparison
First-Class
admits, no reliable
estimate
data are average
costs for all 5ats and all parcels.
the data tb,at are available
with other data provided
by the Postal Service,38
and cost for all single piece 5ats and parcels.
is instructive
exists for
5ats and parcels that weigh under one ounce.
the desired cost data are not available,
‘s Attachment
19-B/8972).
the actual
Mail, discussed in the
section, it is worth noting that First-Class
as individual
9
by handling
associated with determining
Such a
(see Table 4).
to response of Postal Service to NDMSILTSPS-T32-47 (Tr.
31
Z&
SZ
PZ
EZ
zz
IZ
oz
61
‘L-V alqel ‘xipuaddv
:amos
81
LT
91
%L‘OS 1
%S’SSZ
OP’O$
Es’O$
SOS’GPP
SJSODhan!lap pue 6u!ssa3oJd I!~IJJ40 aBeJan
a3a!d&Io!)nq!quozi a6eJaAv
(000) alunw
PSE’llC’P
(000) ~4503Jaw0 01 uowqwo3
098’98E’zs
926’8ES’C
SEL’SES$
Sla3JEd
(z)
(000) qso:, haA!pp pue 6UpSazOJd I!eUJ :SSal
~:ooo) anuahay
P8L’SZG’E$
swd
(1)
01
6
8
L
9661 AE
(a6JetpJnS 6u!pnlaxa)
sauJnlo/\ put, qsos 6U!SSa3OJdI!eyy ‘SanUaAa#
sla3Jed pue gel3 ma!d e16u~ ssel3-w!j
P awl
T
01
pa%n?yoJaAo @soti
-Jau\eaq
a.w
01 a[qeogdde
~03 ple3 (hua~sysuoo
‘(sIaa.md PUB s.Ia’J$aI 0’~ se na.M se) 61~~ r@!aM
93~~
a$er aouno-ezlxa
aql cc! u0F)Bnpa.I Scrrpuodsazzor,
II! paZlwaAt?-ap
8
arom are
L
JI ‘saysnrF[f
9
lalc) aIqyssod bur! ~IatUOspUEtq
s
F$sod
aq$ salqeua
xad gg’g$ 07 $uapATnba
uaq
‘paseq-)soa
aq 01 aw s~eu !@!aM-v$Q
JO JunooX? uo .I~XI! dmu !J! 1~9~ SSOI (UaAordun
dnooaJ 03 aauras
E
se r[aM se) bJ!nba pus ssau-j
leq~ salsr JO $!nsmd
s?elJ no sa3uno EQxa .I03 aaj aql ‘punod
e qz~~q.%‘33UnO
~uoglppe
rad sJua3 gz ‘JV
,;za~~aI SSEI~-~SXIJ aoa!cI a@+
-p.lEpKE$S
‘@!aM
a%E.IaAE
6
m-2IO3 ‘bIaAT)oadsar
‘a?iEKIAO:,
pm!
P
E
‘pa?6
Z
UO~nq~$UOo
1
PE
y!elap
~03 1-v
alqE&
‘xypuaddv
aas
zp
‘SN~N bq pah!aaaJ slaxedjo
@!ati a&Jam ‘391 %u!s-eaz3m
STwmmn?3 a[qesodsp 30 am aq~ II! q$~o.y) ‘a+uaS [E?sod aql, ~03 a[qelgo.zd
al!nb 61.wa13 am qa!ym ‘amno auo spaaaxa @!aM asoym sIaaxed SSEI~-JSJI~
.JOmqwnu
~eym~sqns E uosaaj pus a%e~sod[[B bEdpus aA!aDaJ q3EaSKyaN
II
pems aql uo a%I?3qXnS
E
l%I!SSaSSV '~uama8Euem~uapturdjo
spunoti
LI
91
ST
PI
aqem
$E~J
s$mpordaIqe$goxd
q'$oqa.rs s~acmdpus
s~e~'uo~sn~~uo:,~~~
Cl
ZI
II
01
6
8
L
9
9
P
c
,,*)naaaad
191 S!~SOCJhraAF[ap pue Fhyssazordpe-mjo
a%araAo:,
segment of mailpieces
charging
heavier
whose revenue is low in comparison
an additional
$3.68 per pound (pro-rated
pieces which undergo
characteristics,
simply underscores
segments of these profitable
Broader
whether
These broader
on a per-ounce
mail processing
the arbitrariness
groups without
issues of fairness
key role in considering
surcharge.
similar
of de-averaging
a compelling
the First-Class
issues of de-averaging
section of this testimony.
35
basis) for
and ha,ve similar
and equity in de-averaging
to continue
to costs, while
cost
tiny
operational
need.
‘decisions play a
nonstandard
are discussed in the next
1
2
3
THE DE-AVERAGING
OF RATES FOR SINGLE
PIECE
VII.
FIRST-CLASS
MAIL HAS NO CONSISTENT,
PRINCIPLED
BASIS
Need for Guiding
4
Cost-driven
Principles
de-averaging
5
subsegment
6
the average processing
7
creation
8
based rates can justify
9
may be.
10
can be applied to distinguish
of mail whose average processing
of additional
any
cost differs significantly
cost of the segment as a whole, supporting
rate categories.
from
the
Of course, the quest for more cost-
any and all de-averaging,
The key issue is: under what conditions
however
wise or foolish it
should rate categories
built into the rate structure?
be
11
created and such de-averaging
12
First-Class
13
genie” is out of the bottle in First-Class,
14
the nonstandard
15
.
What are the criteria
16
17
.
Should there be separate rates (or a surcharge)
Class 5ats and parcels?
18
19
20
.
Should there be separate rates (or a surcharge) for handaddressed pieces, or for pieces that are not automationcompatible?
21
22
23
24
.
Should there be a separate rate or discount for l.ocal mail that is
deposited in the ‘local mail” slot of a post office and receives
final delivery to an addressee from the post office where it is
deposited?
Mail should not be undertaken
surcharge
lightly.
legitimate
De-averaging
Once the “de-averaging
issues directly
related
to
arise. A few examples follow.
for de-averaging?
36
for all First-
6
.
Should a discount
fully automatable?
.
Should there be a discount for metered mail?
.
Should there be a discount for single piece “clean” mail, whether
metered or stamped?
De-Averaging
7
Versus
or reduced rate apply to single pieces that are
Simplification
It is hard to escape the conclusion
8
consistent
in its rate-making
9
inconsistent
principles,
proposals
de-averaging
that the Postal Service is less than
in this docket; it argues either of two
or rate simpl&ation,
10
manner,
so long as the result will increase revenue.
11
(without
justifying)
12
First-Class
nonstandard
13
to simplify
the rate structure
14
given to some 300 million
15
First-Class
continued
de-averaging
surcharge,
witness
by eliminating
pieces of presorted
17
almost the same as the volume of nonstandard
18
five times the volume of nonstandard
a
Thus, while favoring
with a 45 percent increase in the
Fronk simultaneously
proposes
the 4.6 cent perpiece
discount
heavy-weight
(over 2 ounce)
Mail.43
Note that the volume in the presorted
16
in an ad hoc
heavy-weight
presorted
non-presort
rate category is
pieces, and is
pieces (ses Table 1).44
See USPS-T-32, p, 25,l. 2; see also Tr. 4/1624, 1. 15 to 4/1625,1. 5.
44 More exactly, the volume was 344 million pieces, based on the response of
Postal Service to NDMSILTSPS-T32-47 (Tr. 19-B/8970-72).
37
1
Strong exception
must be taken to such practices.
The Postal Service’s
2
rate proposals
3
averaging
4
of a fair and equitable
5
recognize
6
categories
within
7
surcharge
and the discount
8
one rate category should be kept, it should be the presorted
9
discount,
First-Class
surcharge,
12
Cost Drivers
which
If the Commission
averaging
15
cost-drivers
represented
17
transport
18
has been an integral
presort
for elimination
contemplates
means only
heavy-weight
mailers.
Simplicity
of the nonst.andard
public.
continued
by the nonstandard
Within
of structure
for De-Averaging
which may provide
Weight.
If simplicity
applies to the entire mailing
as a Basis
value, and abolish both the
only to sophisticated
argues most strongly
would be to
1 percent of total volume) rate
Mail has limited
at this time.
or de-
“the establishment
A sensible approach
of tiny (under
which is available
11
16
rate schedule.”
that a multiplicity
of structure
14
ad hoc exercises in averaging
5y in the face of 39 U.S.C. Section 3622(b)(l),
10
13
and the resulting
support
surcharge,
for the type of de-
there a.re additional
useful bases for de-averaging:
single piece First-Class
Mail, the cost to process,
and deliver a piece of mail varies widely.
part of the First-Class
38
One cost driver, weight,
rate schedule for as long as
1
anyone can remember.
2
additional
3
For many years, mailers
ounce.‘6
To an important
extent, weight has been considered
4
shape.
5
percentage
of letters falls sharply,
6
increases.
When de-averaging
7
(such as shape, or automatability,
8
schedule,
the role assigned to existing
9
currently
act as a proxy for the newly introduced
10
11
have paid for each
That is, as weight
reexamined
of single piece First-Class
Mail increases,
while the percentage
introduces
as a proxy for
the
of 5ats and parcels
cost drivers other than weight
or “cleanness,”
for example) into the rate
cost drivers,
especially
variable,
any that
need to be
critically.
Automatability.
In recent years, address incompatibility
12
latest generation
of mail processing
13
important
14
on computers)
15
Such letters
16
reason, mail cannot be read on remote barcoding
17
manually
18
barcoding.@
cost driver.
equipment
Hand-addressed
letters
with the
has become an increasingly
(and fancy fonts now available
that cannot be read by today’s OCRs have a higher
must be encoded on remote barcoding
equipment.
equipment,
unit cost.
If, for any
it needs to be
sorted at an even higher cost than letters that receive remote
The cost of sorting letters manually
is based on both standard
46 In colon,ial times, before scales were widely available, it was customary to
charge for each sheet of paper in a letter or packet, rather than charge by weight as
such.
46 See response of witness Moden to NDMSAJSPS-T32-21
39
fir. 1115826) for
(continued...)
1
and nonstandard
2
Postal Service, nonstandard
3
Automatability
letters.
Of all letters that are still sorted manually
letters may represent
is not static.
4
“nonstandard”
5
processing
6
continue
7
fundamental
8
rejected by the Commission)
9
always handled
only a small proportion4’
While the DMM definition
of
may not have changed for many years, the capabilities
technology
have changed dramatically.
to evolve. Advances in automation
premise for the surcharge
manually.
11
the same cost) as standard-sired
12
routinely
13
Flimsies
14
a New Design Flat Sorting
they
could easily undermine
that all nonstandard
As noted previously
nonstandard
Furthermore,
of mail
one
asserted by the Postal. Service (but
- namely,
10
letters may now be routinely
letters.”
lfetters are
in this testimony,
handled
as expeditiously
Also, tlimsies
many
(and at
may be processed
on the FSM 1000 along with other 5ats, all at the same cost.
are clearly within
the specifications
Machine
To sum up, the nonstandard
15
by the
of the existing
FSM 1000, while
is to be deployed in the near future.
surcharge
has been imposed because the
16
mail to which it applies is believed to have a cost that is consi,dered high in
17
relation
both to other mail and to the rate which is charged for such mail in
examples of standard-sized
letters subject to manual processing.
*’ Volumes that are still sorted manually are not known; see response of Postal
Service to NDMSILTSPS-T32-31 (l’r. 19-B/8959).
48 LR-NDMS-1
contains some evidence to this effect.
40
the absence of the surcharge.
But nonstandard
Class Mail with a unit cost purportedly
mean, or benchmark.
further,
5
6
perhaps
De-Averaging
somewhat
Single piece First-Class
much further,
Versus
De-averaging,
pieces are not. the only Firsthigher
(or lower) than the
rates could be ‘de-averaged
on the basis of a variety
of cos#t drivers.
Balkanization
and the quest for cost-based rates, has merit.
7
averaging
on the basis of cost is a hallmark
8
At the same time, however,
9
Service has a statutory
mail that is available
11
used by the general mailing
12
rate structure
13
Section 3622(h).
14
from inspection
15
throughout
the nation,
16
approached
conservatively
17
documented
reasons.“g
on First-Class
to every resident
markets.
Mail; (ii) the one class of
without
restriction
public is First-Class
is one specihc criterion
of First-Class
de-averaging
and that is widely
Mail; and (iii) simplicity
of rate setting
Since the Act also mandates
(a definition
competitive
it should be kept in mind that (i) the Postal
monopoly
10
of highly
De-
enumerated
of
in 39 U.S.C.
that one class of mail sealed
Mail) have rates that are uniform
of First-Class
Mail should be
and should be based on clear and, well-
49 39 U.S.C. #3623(d) requires that there be one class of mail for transmission of
letters sealed against inspection, whose rates shall be uniform throughout the
country. In a layman’s interpretation, uniform rates presumably means, at a
minimum, no transportation differential. Whether it also means that rates should
be uniform with respect to shape, or automatability, or other cost-driving
(continued...)
41
1
The Commission
2
of maintaining
3
volume -
4
Commission
5
justify
6
could open the door to doing so in a seemingly
7
fine-tuning
8
nonstandard
9
known
and one-tenth
for additional
11
Summary
the surcharge,
“hbalkanization”
surcharge
of First-Class
this precedent
of First-Class
arbitrary
of
Mail.
If the
could be used to
Mail.
contrasts
sharply
Moreover,
fashion,
the cost incurred
with the enormous
by additional
ounces (23 cents per ounce, the equivalent
The Commission
it
since any
14
Class Mail.
15
First-Class
Appropriate
disparity
and the creation
principles
of $3.68 per pound).
of rate categories
to guide de-averaging
that is
ounces and the rate
needs to develop some well-articulated
with respect to de-averaging
.
1 percent
of costs and rates that may be achieved by reIian.ce on the
13
16
17
18
well under
of 1 percent of revenue -
were to a&m
to exist between
10
12
any rate category that constitutes
almost limitless
to lthe advisability
should give serious consideration
principles
within
First-
decisions within
Mail might be the following:
De-averaging
of First-Class
undertaken
only when:
Mail segments should be
characteristics is an interesting question. Strictly speaking, the a~nswer requires a
definition or interpretation of “uniform” as it is used in the Act, w’hich is a legal issue
beyond the scope of my testimony. 1 would note, however, that ever since Sir
Rowland Hill introduced the first prepaid postage stamp in England, the mailing
public has employed - and enjoyed - a rate structure based on simplicity and
uniformity.
42
.
a substantial
proportion
be de-averaged;
.
the cost basis for de-averaging
and
.
the result achieved will greatly exceed any increase in
complexity.
43
of the volume or revenue can
is solid
and credible;
1
2
VIII.
CONCLUSIONS
AND
RECOMMENDATIONS
Conclusions
The First-Class
3
nonstandard
surcharge
de-averages
4
percentage
5
at this time opens the door to almost limitless
6
subclass that is widely
7
as evidenced by 39 U.S.C. §3623(d), to enjoy uniform
8
nation.
9
context of $32 billion
10
Mail, both single piece and presort.
de-averaging
Its continuance
within
used by the general public and intended
The additional
revenues provided
the one
by Congress,
rates throughout
by the surcharge,
in total revenues for First-Class
the
seen in the
Mail, o:ffer a classic
of the concept de minimis.
example
11
of First-Class
rates for a trivial
The cost data used to support
12
put, in its effort to justify
13
surcharge,
14
nonstandard
15
absolutely
16
demonstrably
17
valid,
18
over $4 billion
19
First-Class
the surcharge
an additional
$35 million
the Postal Service’s analysis implicitly
letters
are manually
See LR-NDMS-1.
Mail.
Simply
in revenu.e from the
assumes that (i) aU
weight has
The first assumption
is
Of course, if the second assumption
then the Postal Service cannot escape the conclusion
in revenues from the 23-cent rate on additional
Mail without
5awed.
processed and (ii) additional
no effect on the cost of First-Class
false.
are fatally
any cost justification
44
whatsoever.
that it collects
ounces of
Pind if the
is
1
implicit
2
the surcharge
assumption
Primary
is not valid,
is fatally
flawed and should be ignored.
Recommendation
For the foregoing
eliminate
reasons,
the nonstandard
would materially
of revenue
simplify
and, perhaps
Secondary
the First-Class
more importantly,
is urged
Elimination
rate structure
of the surcharge
with negligible
rate structure.
does not wish to eliminate
the surcharge
time, then it is urged to reject any increase in the surcharge
12
Postal Service’s completion
13
surcharge.
14
flats now classified
15
respectively,
16
also address the effect of weight
17
findings
18
combination
at this
pending
Any such study should analyze the extent to which letters
as nonstandard
on automated
the
of a complete review of the basis for the
equipment.
on cost of First-Class
any surcharge
of shape and weight.
and
can be and in fact are being processed,
and mechanized
in this respect against
.
loss
would reduce the arbitrariness
11
19
20
to
Recommendation
If the Commission
10
the Commission
surcharge.
this part of the First-Class
9
then clearly the cost study used to support
The study should
Mail, and review all
based either on shape, or a
‘l’he Postal Service should also:
calculate malprocessing rates and costs, and incorporate
figures into its calculations;
45
such
of
1
2
.
accurately identify
ounce nonstandard
3
4
.
address the inability
mailpieces correctly.
5
Until
such study is complete, the Commission
6
nonstandard
I
surcharge
(i) Specifically
average costs of handling
9
computation.
by the following
to identify
11
nonstandard
First-Class
means:
12
Service’s supporting
13
First-Class
14
(20.54 cents)‘O is arguably
15
nonstandard
16
most nonstandard
17
approach,
18
cents.
reliable
Mail.
calculations,
letters
of the
from any role in the
data to compute the extra cost of
Among the proxies used in the Postal
the difference
between
(11.74 cents) and the cost of a manually
a somewhat
pieces, provided
such
should reduce the
flats and parcels, respectively,
(ii) Use only reasonably
letters
of Postal Service personnel
exclude the deeply flawed proxies consisting
8
10
costs incurred by the average under-oneletter, flat, and parcel; and
reasonable
the average cost of
processed letter
proxy for use with
the Postal Service demonstrates
are indeed processed manually.5’
the extra cost is conservatively
estimated
that all or
Under this
at no more than 8.80
So USPS-ST-43, Exhibit USPS-43A.
61 Of course, the use of this proxy in no way addresses the lack. of consistency in
de-averaging tb,e tiny nonstandard segment while continuing the massive averaging
associated with the one-ounce incremental rate.
46
(iii) Apply a much reduced passthrough,
in
objections
surcharge.
and equity would in any event suggest a comparatively
low passthrough,
differences,
consistent
the justifiability
of 50 percent,
view of the multiple
Fairness
surrounding
preferably
with passthroughs
such as the letter-flat
differential
on other shape-based
applied to Standard
well as the Postal Service’s proposed parcel surcharge,
MaiL6*
computed
With a 50-percent
passthrough,
the nonstandard
at 4.40 cents, which could be rounded
in a surcharge
of the
cost
A Mail, as
also on Standard
surcharge
A
would be
either up or down, resulting
on the order of four to five cents.
‘* In Docket RSO-1, the Commission recommended rates that recognized 50
percent of the letter/flat differential in third-class regular mail (except in basic,
where the passthrough was 62 percent). Op. & Rec. Dec., para. 5941. The
corresponding passthrough was approximately 25 percent in nonp~rofit. Id., para
5943.
In this docket, the Postal Service proposes no recognition of the letter-flat
differential in Basic ECR, while proposing 35 percent passthroughs for the other
ECR density tiers. USPS-T-36, p. 27.
47
1
APPENDIX
This appendix
consists of two tables, similar
using volume data by one-ounce increments,
parcels are computed
costs are computed
contribution
computed.
both without
in construction.
estimated
Second, total
total contribution,
per piece, and coverage of mail processing
The tables contained
reve:nues for flats and
and with the surcharge.
from unit cost data. Third,
in this appendix
and ,delivery costs, are
are as follows:
8
9
A-l
First-Class
Single Piece Flats and Parcels
10
A-2
First-Class
3/5 Digit Presort Flats and Parcels
48
First,
Fk&Ckss
1
_
2
_
3
_
FLAT9
F%ces WJ)
292,120 1.290.925
P~aae/pc. (-m
32
55
Revenue (S, wo)
93,479
710,009
Avenge processin
coa”pkce (cents)
Deliiefy mst (cents)
Total cat (S. 0133)
Total contrtbutk” (t. COO)
ccilbibuti
per pkce (Cenb)
coverap 0, MPID mat
643.810
76
656,172
Siwk Pkx Fkk and Parch
easeYw1996
c)ktehmd~bymigMincrsmen(
4
5
6
522.674
101
528.103
358.457
124
444.4S7
249391
147
366.W5
7
179,655
170
305,414
6
137.469
193
285.315
9
11
-
105,646
218
228,200
“ohmle
-
55,967 4.11133
262
146,666
_
PARCELS
36,026
Pieces (Om)
32
Pmtagelpc. (cents)
11.529
Revenue (5. om)
Average Pmceas~
cosupkce (cents)
Deliwry cat (ceaa)
Total coat (5. Wo)
Total contrtb”tkm (S. m0)
Cmtribtii
per ,,km (cents)
coverage 0‘ MP+D cost
2
_
77.273
55
42.500
-
3,925.784
Film
surcharge
-
RWMlM
wii
swcllarge
-
32,133 3.s57.918
32.43
5.00
1,53S,925
2,386,=7
2.418.993
56.64
257.2%
58.03
255.1%
Dkbibuih
1
Rwillmd
s”*rge
3
_
75,825
76
56.988
4
_
56.515
101
57.060
0, pkcea by wighi hcramerll
5
6
7
8
45,204
37.245
31 .w7
27.622
124
147
170
193
58.053
54.750
52,712
53,310
Source 0‘ pieces by weight ,ncremsnt: Attachment to NDMSnJSPS-T3247 (Tr.1ME970-72).
and USPS-2% (wked 1Wti97). respectiiety
Sauce c4 mail PmceMing and &live,y c.,s,: “SW-ST43
9
24.768
216
53.499
10
-20.927
239
50.016
11
1,.290
262
45,m
vduma
449,534
Rwii
SmhargE
-
535,736
74.OS
5.00
355,472
WC,264
40.10
150.7%
Pius
SW
-
3.983
Wiih
S”rcl-arge
-
539.700
184.227
40.96
151.8%
228
3.763
1.527
229.6
3.M8
251
2,t2t
669
252.6
2.195
79,163
322.640
141.188
43.73
269.0%
*
3
-
350
46.6
171
46
M.4
23
2.657
67
1.760
194
68.6
133
Dktlibtiion d pbca by w=&h, imrement 5
6
7
6
_
146
73
136
76
20
90
113
136
159
182
131
82
165
124
38
46
55
28
63
1,
91.6
114.6
137.6
160.6
163.6
44
63
39
10,
20
4
9
10
11
23
205
47
2
206.6
4
10
228
23
15
229.6
34
18
25,
45
33
252.6
63
-
3,642
616
244
4,125
13
63,
257
4.75,
--
2.035
22.26
182.6%
2.292
25.07
193.0%
I hereby certify that I have this day served the foregoing document upon all
participants of record in this proceeding in accordance with Section 12 of the Rules of
Practice.
/
December
30, 1997