Postal Rate Commission
Submitted 12/21/2006 3:26 pm
Filing ID: 55469
Accepted 12/21/2006
BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON, D.C. 20268-0001
POSTAL RATE AND FEE CHANGES
Docket No. R2006-1
Initial Brief Of
Major Mailers Association
On Issues Regarding First Class Presort Rates
Michael W. Hall
35396 Millville Road
Middleburg, Virginia 20117
Counsel For
Major Mailers Association
Dated: Middleburg, Virginia
December 21, 2006
TABLE OF CONTENTS
Page
MMA’s Operations And Interests In This Proceeding...................................................... 2
Executive Summary ........................................................................................................ 4
Statement Of The Case ....................................................................................... 5
Argument.............................................................................................................. 9
I.
The Commission Should Recommend The Postal Service’s Delinking
Proposals ........................................................................................................... 11
II.
Changes In The Market For Workshared Mail Cast Serious Doubt On The
Continuing Validity Of The Basic Assumptions Underpinning The Existing
Ratemaking Formula Based On Cost Avoidance ............................................... 19
III.
In Adopting the Concept of Delinking, The Commission Should Implement
MMA’s Adjustments to the Postal Service’s Workshared Cost Savings
Analysis.............................................................................................................. 21
IV.
There Is Ample Record Support For The Postal Service’s Proposed
Workshare Discounts Even If the Commission Chooses to Rely on its
Traditional Workshare Cost Savings Methods ................................................... 24
A. Choosing An Appropriate Benchmark For Measuring Processing Cost
Savings Due To Worksharing ....................................................................... 25
B. Attributable Cost Methodology...................................................................... 30
C. Classification of Cost Pools .......................................................................... 31
D. Recognition of Model Flaws.......................................................................... 33
E. Reconciling Model Costs to Actual CRA Costs............................................ 38
F. Delivery Cost Savings................................................................................... 43
V.
The Flawed Presort Discount Proposals Put Forth By APWU And OCA
Should Be Rejected ........................................................................................... 47
VI.
IOCS Redesign .................................................................................................. 55
VII.
First Class Additional Ounce Rates.................................................................... 57
VIII.
High Volume Presort Mail Rates – A Lost Opportunity....................................... 58
IX.
Findings and Conclusions .................................................................................. 61
Appendix I. CRA Cost Pool Classifications .................................................................. 64
i
TABLE OF CONTENTS (continued)
TABLE OF AUTHORITIES
Page
Postal Rate and Fee Changes, 1983, Docket No. R84-1, Opinion and
Recommended Decision, issued September 7, 1984 ....................................... 26, 27, 28
Postal Rate and Fee Changes, 1987, Docket No. R87-1, Opinion and
Recommended Decision, issued March 4, 1988........................................................... 27
Postal Rate and Fee Changes, 1990, Docket No. R90-1, Opinion and
Recommended Decision, issued January 4, 1991 ........................................................ 26
Postal Rate and Fee Changes, 1994, Docket No. R94-1, Opinion and
Recommended Decision, issued March 4, 1988........................................................... 47
Mail Classification Schedule, 1995-Classification Reform I, Docket No.
MC95-I, Opinion and Recommended Decision, issued January 26, 1996 ........ 27, 28, 47
Postal Rate and Fee Changes, 1997, Docket No. R97-1, Opinion and
Recommended Decision, issued March 4, 1988........................................................... 30
Postal Rate and Fee Changes, 2000, Docket No. R2000-1, Opinion and
Recommended Decision, issued November 13, 2000 .................................................. 30
Rules Of Practice And Procedure, Docket No. RM97-1, Order No. 1176, issued
May 27, 1997 ................................................................................................................ 54
ii
TABLE OF CONTENTS (continued)
LIST OF TABLES
Page
Table 1
Table 2
Table 3
Table 4
Table 5
Table 6
Table 7
Table 8
Table 9
Table 10
Table 11
Table 12
Table 13
Table 14
Table 15
Table 16
Table 17
Comparison Of Current and USPS Proposed First Class Discounts
(Cents) ......................................................................................................... 5
Comparison Of First Class Workshare Discount Proposals (Cents) ............ 9
First-Class Volumes Since 1995 (Volumes in Millions) .............................. 16
Comparison Of Bill Payment Methods ....................................................... 17
Comparison of MMA and USPS Incremental Percent Passthroughs
Under Delinking (Cents)............................................................................. 22
Summary of USPS Proposed Workshared Discounts, MMA Derived
Unit Cost Savings and the Resulting Percent Passthroughs (Cents) ......... 25
Historical Benchmarks Used to Derived Workshared Cost Savings........... 26
Comparison of USPS Model-Derived and CRA-Derived Unit
Processing Costs (PRC Cost Methodology, Cents) ................................... 35
Analysis of Model-Derived Unit Costs With and Without RBCS
Processing (Cents)..................................................................................... 37
Comparison of Test Year Automation and Nonautomation Mail
Processing Unit Costs (Cents) ................................................................... 39
Comparison of Selected USPS and MMA Model-Derived and
Adjusted Model Unit Costs (Cents) ............................................................ 41
Comparison of Selected APWU and MMA Model-Derived and
Adjusted Model Unit Costs (Cents) ............................................................ 42
Probabilities for Automation Processing Through Delivery For
Automation Letters ..................................................................................... 44
Comparisons Of First Class Workshare Discount Proposals (Cents)......... 47
Comparison Of Current First Class Workshare Discounts To
Discounts Proposed By OCA And APWU (Cents) ..................................... 48
APWU Mail Processing Unit Cost Savings Using the Postal Service
Cost Pool Classifications and the Commission’s Attributable Cost
Methodology (Cents).................................................................................. 53
Comparison of Mail Processing Attributable Costs (PRC Attributable
Cost Methodology, Cents).......................................................................... 55
iii
BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON, D.C. 20268-0001
Postal Rate And Fee Changes
Docket No. R2006-1
Initial Brief Of Major Mailers Association
On Issues Regarding First Class Presort Rates
Major Mailers Association (MMA) hereby submits its initial brief on issues
relating to the rates for First Class presort mail. MMA is also submitting a
separate initial brief dealing with issues regarding selected Special Services.
For the reasons set out herein, the Commission should recommend the
discounts and resulting rates proposed by the Postal Service for First Class
presort mail. The discounts and rates proposed by the Postal Service are part of
the Service’s innovative proposal to “delink” the rates for First Class presort
letters from the rates applicable to First Class single piece letters. MMA supports
the Postal Service’s delinking proposal for several reasons, including:
first and foremost, delinking will result in fair and equitable rates, not
just for First Class presort letters but also for single piece letters;
notwithstanding its name, delinking will preserve the existing
relationship between single piece and presort letter rates for the
foreseeable future;
delinking offers the Commission and affected mailers a welcome
opportunity to mute the intense controversy that has been the
unfortunate hallmark of the existing cost savings methodology,
especially reliance on use of the Bulk Metered Mail benchmark.
Even if the Commission ultimately decides that it cannot recommend rates
based on delinking in this proceeding, there still is more than ample record
evidence that the specific presort discounts and rates proposed by the Postal
Service are fully justified under a more traditional cost savings analysis. In fact,
the testimony of MMA witness Richard E. Bentley demonstrates that the Postal
Service’s proposed discounts will result in passthroughs ranging from 57% to
82% of the applicable cost savings, far below the 100% flow through standard.
1
MMA’s Operations And Interests In This Proceeding
The record in this case includes the testimony of witnesses for two MMA
member companies – David Gorham on behalf of CSG Systems, Inc (CSG
Systems) and Mary P. McCormack on behalf of Verizon. The operations of these
companies are typical of other MMA members.
MMA members are among the very largest mailers of bulk First Class
workshared mail. In order to prepare consistently high volume mailings, MMA
members have made, and continue to make, significant investments in cutting
edge software, including sophisticated address correction programs, computer
systems and mail handling equipment. Like Verizon and CSG Systems, MMA
members typically have invested hundreds of millions of dollars in facilities,
equipment, and ongoing employee training to establish, maintain, and improve
their high volume mailing operation. See Tr. 38/13162-163, 13188-189, 13190191. As a result, these mailers produce the highest quality, most accurate mail
pieces in the industry. MMA members also work closely with the Postal Service
to test and adopt new postal service programs such as PostalOne!, which is
designed to reduce postal costs by streamlining the mail acceptance process and
routing high volume mailings to the least cost transportation mode, all with the
aid of advanced electronic communications that eliminate cumbersome,
expensive paper-based processes. Tr. 38/13189-190. Finally, several MMA
members have made very significant investments in time and money to have
their facilities and personnel certified under the Postal Service’s Mail Piece Total
Quality Management (MPTQM) program and related programs1 that assure their
operations are as efficient as possible for the benefit of the Postal Service.
Many MMA members such as Verizon use First Class workshare mail
primarily to send service bills and account statements to their own customers.
For them, mailing is not their core business, but simply a tool they use to
exchange information with, and receive payments from, their customers. Mailers
1
MMA members are also very involved in the design of mail pieces that must meet very
stringent requirements dictated by the Postal Service’s Mail piece Quality Control Program.
Indeed, so knowledgeable are some MMA representatives that they instruct Postal Service
personnel on the applicable mail piece design requirements.
2
such as Verizon have also developed electronic bill presentment and payment
options and related systems and policies to afford their customers additional
choices, increase customer satisfaction, and to control postage costs. Tr.
38/13162, fn 2.
Other MMA members, such as CSG Systems, perform mailing services
where that function is outsourced by their clients. Although mailing traditionally
was the core business of these firms, this is changing rapidly. To continue
providing valuable services for their clients, these firms increasingly have evolved
by designing and offering electronic delivery of account statements and online bill
presentation and payment options for their clients. As Mr. Gorham testified (Tr.
38/13190-191 (emphasis added),
[M]ost of our clients expect and require CSG to provide them with
alternative electronic bill presentment and payment solutions.
Accordingly, in 1999, CSG began offering its clients the Electronic
Bill Presentment and Payment (EBPP) service. EBPP is a natural
outgrowth of greater customer acceptance of electronic alternatives
to paper mail, including the Internet and email. At the end of the
day, CSG cannot remain wedded to paper mail bill presentment
and payment. In the last analysis, CSG’s clients are in the business
of providing customers with choices and delivering the highest level
of customer satisfaction as part of the core broadband and satellite
services they offer. CSG is in the business of facilitating the
customer care choices of its clients and insuring wherever possible
that its clients are satisfied. As such, CSG’s use of the Postal
Service and available electronic alternatives reflects the choices
that are made by its clients and the customers they serve.
All MMA members want the same basic things from the Postal Service:
efficient, reliable, and timely delivery of their mail;
postal rates that give them a “fair shake,” by which we mean rates that
recognize and give them adequate credit for all the cost sparing
attributes of their high quality mail pieces and the additional efforts and
expense they incur that benefit the Postal Service and other First Class
mailers; and
assurances that workshared mail rates are designed using rational,
transparent and consistent ratemaking policies so that they can plan
and conduct their business affairs with a reasonable degree of
certainty.
3
Lamentably, the process for setting rates applicable to First Class workshared
mail has become increasingly complicated, unnecessarily controversial, and
unpredictable. MMA hopes that the full and open airing of the issues in this
omnibus rate proceeding will help the Commission to put workshared mail
ratemaking on a more positive track.
Executive Summary
1. The Commission should adopt the specific First Class workshare
discounts that the Postal Service has proposed in this proceeding.
Whether measured by the principles of the Postal Service’s innovative
delinking proposal in this case or a more traditional cost savings
approach, substantial record evidence supports adoption of these
discounts. MMA witness Bentley has demonstrated that approval of
the Postal Service’s specific First Class workshare discounts will result
in incremental passthroughs that range from 57% to 85%,2 much lower
than the cost savings he derived.
2. MMA supports the tenets of the Postal Service’s delinking proposal.
Delinking provides the best way forward at a time when leadership is
needed to conserve the valuable financial resource that highly
profitable First Class workshare mail provides to support not just First
Class but all classes of mail. Delinking promises a way of simplifying
the process of setting rates for First Class workshare mail, reducing
the substantial controversy that surrounds the current rate setting
process while at the same time maintaining existing rate relationships.
3. If, contrary to MMA’s recommendation, the Commission ultimately
decides that it cannot recommend rates based on the Postal Service’s
delinking methodology, the record still shows that the specific
discounts proposed by the Postal Service are supported by substantial
evidence. In this regard, MMA witness Bentley demonstrated that, on
2
MMA-T-1 at 9, Table 2. Using MMA’s cost savings methodologies, incremental passthroughs
ranging from 57% (Auto AADC) to 85% (5 Digit) can be compared to USPS passthroughs that
range from 90% (Auto AADC) to 146% (5 Digit).
4
both a total and incremental basis, the passthrough percentages
resulting from approval of the Postal Service’s proposed discounts are
significantly less than 100 percent.3 MMA witness Bentley might
have proposed substantially higher discounts but, to be conservative,
he has recommended the lower discounts proposed by the Postal
Service.
4. The alternative First Class presort discounts proposed by OCA and the
APWU should be rejected. Neither proposal is intended to, or will,
serve the best interests of presort mailers, the Postal Service, or other
users of the postal system. Neither APWU nor OCA subjected their
proposals to a market test. In fact, substantial record evidence shows
that adoption of their proposals would disrupt mutually beneficial rate
relationships that he Commission has fostered since inception of the
workshare mail program.
Statement Of The Case
This proceeding was commenced on May 3, 2006 when the Postal
Service filed for an increase of $4 Billion in revenues. As relevant to the issues
addressed in this brief, the Postal Service proposed an increase in the basic First
Class single piece rate, from 39 to 42 cents and the following modest increases
in the currently effective First Class presort discounts.
Table 1
Comparison Of Current and USPS Proposed First Class Discounts
(Cents)
First Class Workshared
Category
Nonautomation
Auto Mixed AADC
Auto AADC
Auto 3-Digit Letters
Auto 5-Digit Letters
Auto CR Letters
3
Current
Discount
Proposed
Discount
1.9
6.4
7.3
8.2
9.7
10.0
2.0
7.4
8.5
8.9
10.8
10.8
MMA-T-1, p. 11, Table 3.
5
Proposed
Increase
0.1
1.0
1.2
0.7
1.1
0.8
As part of the Postal Service’s case-in-chief, USPS witness Altaf Taufique
presented a new and innovative proposal to “delink” First-Class workshared rates
and discounts from First-Class single piece. USPS-T-32 at 12. The Postal
Service’s delinking proposal consists of two parts. First, workshared discounts
are to be determined by market-based factors as well as the derived relative cost
differences among the various presort levels. Second, the Postal Service intends
to establish a goal of equal unit contributions to institutional costs from First
Class single piece and First Class Presort, in the aggregate.
In support of his delinking proposal, USPS witness Taufique discussed the
shortcomings of the very controversial current method of setting First Class
Presort discounts based on cost savings measured from the Bulk Metered Mail
(BMM) “benchmark.” More specifically, Mr. Taufique pointed out that BMM no
longer represented the type of letters that were most likely to convert to First
Class Presort or the type of letters to which Presort letters would revert if presort
discounts were reduced or eliminated. See, Tr. 16/4932-3, 4937, 4939, 4946-7,
5039; Tr. 38/13346-49, 13372-73.
USPS witnesses Thress (USPS-T-7) and Bernstein (USPS-T-8) also
submitted testimony that reviewed First Class mail volume trends and highlighted
the inroads that alternative, electronic billing and payment solutions, made
possible by rapid acceptance of the Internet and email, have made into the
Postal Service’s dominant position in this market.
Before hearings on the Postal Service’s case-in-chief began, the
Commission issued Notice Of Inquiry No. 3.4 In NOI No. 3 (at 2), the
Commission observed that the Postal Service’s delinking proposal “is a
significant departure from the rationale used to justify First-Class Mail
worksharing discounts since their inception” and invited interested parties to
submit comments and testimony addressing several issues identified in NOI
4
Notice Of Inquiry No. 3, issued July 26, 2006 (NOI No. 3). On July 21, 2006, the Commission
had issued Notice Of Inquiry No. 2 that requested comments related to rate design for Standard
Mail.
6
No. 3. MMA submitted detailed comments supporting the Postal Service’s
delinking proposal.5
On September 6, 2006, MMA submitted the testimony, exhibits, and
library references of Richard E. Bentley, an independent postal rate consultant
with over 25 years of experience with issues involving the design of First Class
workshare rates.6 In R84-1, Mr. Bentley presented a methodology for estimating
cost differences between processing First-Class single piece and presorted
letters that eventually become the foundation for the Commission’s “Appendix F”
methodology for supporting First-Class presorted discounts. See MMA-T-1,
Attachment 1.
Mr. Bentley’s testimony in this proceeding supports the Postal Service’s
delinking proposal and provides an independent cost analysis in support of the
specific First Class workshare discounts proposed by the Postal Service. Mr.
Bentley also demonstrated that there is ample support for the proposed USPS
discounts if, contrary to MMA’s position, the Commission decides that presort
discounts should be based on a more traditional cost savings methodology. As
discussed below, Mr. Bentley’s very conservative cost savings analysis would
support higher workshare discounts than those proposed by the Postal Service.
Nevertheless, MMA continues to support the specific, lower discounts proposed
by the Postal Service.
APWU witness Kathryn Kobe (APWU-T-1) and OCA witness Pamela
Thompson (OCA-T-4) filed testimony advocating discounts that are substantially
lower than those proposed by the Postal Service. The presentations of these
witnesses both seek to lower First Class workshare discounts in order to
“finance” other proposals.7 Significantly, the lower presort discounts APWU is
5
Comments Of Major Mailers Association In Response To Notice Of Inquiry No. 3, dated
August 17, 2006.
6
Mr. Bentley was employed as a technical analyst by the predecessor of the Postal Rate
Commission’s Office of Consumer Advocate from 1973 to 1979 and presented testimony in
several proceedings.
7
APWU witness Kobe proposed that additional revenues derived from First Class workshare
mailers be used to limit the increase in the first ounce rate for First Class single piece to 41 cents.
APWU-T-1 at 9. OCA witness Thompson proposes lower First Class workshare discounts to pay
for her proposal to implement flat rates First Class letters weighing up to 4 ounces. OCA-T-4 at
6-9, 20.
7
proposing in this case represent the first step of a process that would see even
lower discounts in the next omnibus rate case. APWU-T-1 at 10.
MMA rebuttal witnesses David Gorham and Mary McCormack described
in detail just how difficult it is for First Class workshare mailers to earn discounts.
In order to qualify their mail for discounts, First Class workshare mailers must
meet numerous, increasingly complex and costly eligibility requirements. CSG
Systems and Verizon have invested literally hundreds of millions of dollars each
to establish and maintain facilities and systems that enable each of them to send
out 40+ million high quality workshare letters each month. Ms. McCormack and
Mr. Gorham both testified that the lower discounts proposed by APWU and OCA
would (1) disrupt rate relationships that have remained stable for decades, rate
relationships upon which they predicated investment decisions involving
hundreds of millions of dollars to participate in the worksharing program, (2) send
First Class presort mailers a wholly erroneous signal that their worksharing
efforts are not valuable to the Postal Service and the entire postal system, and
(3) precipitate reactions that likely would drive presort mail out of the postal
system permanently. .As Verizon’s Ms. McCormack testified:
Approval of the discounts proposed by the Postal Service will send
Verizon and other workshare mailers a signal that their efforts are
still valued. Adoption of the discounts proposed by APWU would
send exactly the opposite message, namely that their business is
no longer valued. Any reduction in workshare discounts will have a
negative effect on Verizon’s use of First Class mail and could lead
Verizon to place greater reliance on readily available, less costly
alternative methods for bill presentment and payment.
*
*
*
[I]t has been Verizon’s experience that once a customer views and
pays a bill electronically; the customer does not want to use the
paper mail system. In that event, the Postal Service forfeits not
only the revenue from Verizon’s monthly outgoing invoice but also
the full single piece revenue on the incoming CRM mail piece.
Since Courtesy Reply Mail contains a Postnet barcode and can be
processed by USPS automation, the net revenue loss from such
pieces could be substantial.
Tr. 38/13168-69. At the same time, both Ms. McCormack and Mr. Gorham
were emphatic about the high value they place on the Postal Service’s
8
worksharing program, the helpful relationship they have built with Postal
Service officials and their desire to continue using mail for years to come.
Tr. 38/13169, 13189,
Argument
MMA rebuttal witnesses David Gorham and Mary McCormack reviewed
the three different sets of First Class workshare discounts proposed in this case.
Tr. 38/13168 (Table II), 13198 ((Table I).
Table 2
Comparison Of First Class Workshare Discount Proposals
(Cents)
First Class Workshared
Category
USPS &
MMA
OCA
Auto AADC
7.4
8.5
5.8
7.0
5.9
7.0
4.2
5.4
Auto 3-Digit
8.9
7.5
7.4
5.8
Auto 5-Digit
10.8
8.9
8.9
7.3
Auto Mixed AADC
Sources:
MMA-RT-2, p. 8, Table 1
APWU
(Step 1)
APWU
(Step 2)
MMA-RT-1,
p. 10, Table 2
The discounts and resulting First Class Presort rates proposed by the
Postal Service and supported by MMA are based upon straight forward principles
of fairness that are designed to provide First Class workshare mailers with rates
that are commensurate with the benefits that worksharing provides for the Postal
Service and all mail classes. In contrast, the workshare discounts and resulting
rates proposed by the Office of Consumer Advocate (OCA) and American Postal
Workers Union (APWU) are driven by other agendas. OCA shrinks First Class
workshare discounts in order to finance its proposals for flat rates on heavier
letters; APWU lowers First Class workshare discounts to finance a lower single
piece rate of 41 cents. Moreover, APWU’s workshare discount proposal in this
9
case is merely Step One in a process that would shrink workshare discounts
even further in the future.8
First Class workshared mail already makes a disproportionately large
contribution to recovery of the Postal Service’s instructional costs. For every
$1.00 that the Postal Service spends to process and deliver highly efficient First
Class workshare letters, the Postal Service realizes over $3.00 in revenue. No
other class or subclass of mail is as profitable for the Postal Service. First Class
workshare mail is a powerful financial engine that makes it possible for the Postal
Service to provide extremely cost effective service to First Class single piece and
other classes of mail.
MMA urges the Commission to be extremely careful when evaluating
discount proposals like those of OCA and APWU that will materially change the
current equilibrium. The workshare rates proposed by OCA and APWU are far
too radical to meet the standards of the Postal Reorganization Act. Both the
APWU and OCA proposals represent a break in the mutually beneficial rate
relationship that has existed between First Class single piece and workshared
rates since inception of the workshare mail program. Today, at a time when
First Class single piece volumes are falling and the Postal Service faces serious
competition from alternate electronic delivery systems for statements and
invoices, the Commission needs to adopt enlightened ratemaking policies
designed to retain the highly profitable First Class workshare mail business, and
grow that business if at all possible, not discourage use of workshare mail and
give mailers reasons to leave the postal system.
8
As MMA witness Mary McCormack demonstrated, APWU’s preferred discounts average
approximately 34 percent lower than the discounts that the Postal Service is proposing in this
case. Tr. 38/13168.
10
I.
The Commission Should Recommend The Postal Service’s Delinking
Proposals
At the outset, the Commission should recognize that the Postal Service’s
delinking proposal is not intended to, and will not have the effect of, altering the
existing rate relationships between First Class single piece and presort that the
Commission has nurtured for many years. As MMA witness Bentley testified,
[M]y analysis of the recent historical relationships between the rates
for First Class single piece and Presort mail indicate that First Class
rates based on the Postal Service’s principles of de-linking exhibit a
reasonable degree of stability that is likely to continue for the
foreseeable future.
MMA-T-1 at 2. As Mr. Bentley explained further,
[S]uch a proposal tends to maintain the First-Class single
piece/presort overall rate relationship through a fairly stable
standard that reflects the combined attributes of several rate
categories. In other words, the unit contributions in aggregate from
both First-Class single piece and presort mail will be highly
resistant to small year-to year changes in cost-causing attributes.
Certainly the vast volumes that reach nearly 100 billion pieces will
act to cushion such changes. The unit contributions have been
stable since at least FY 2000 (Tr. 16/4824) and are likely to
remain so for the foreseeable future.
MMA-T-1 at 8 (emphasis added). Accordingly, while the rationale for setting
presort discounts may appear to be different, the Postal Service’s goal of equal
unit contributions to institutional costs will maintain the existing rate relationship
“for the foreseeable future.”
There is no merit to suggestions that delinking portends a fundamental
change from the discounts that result from the “traditional” cost savings
methodology. Indeed, as a further “check” on the reasonableness of the specific
workshared mail discounts resulting from use of the Postal Service’s delinking
methodology, Mr. Bentley also performed a detailed analysis using the
Commission’s traditional methods for evaluating discounts based on derived cost
savings. As described more fully in Section IV, he derived mail processing and
delivery unit costs for each presort category and compared them to the
corresponding unit cost for a nonworkshared “benchmark” mail piece. Based on
11
this analysis, Mr. Bentley concluded “the specific First-Class workshared mail
rates proposed in this case are well supported, regardless of whether the
Commission adopts the de-linking approach as I recommend, or sets
discounts and rates based on a traditional cost savings approach.” MMA-T1 at 2 (emphasis added).
While delinking will not change the established rate relationship between
First Class single piece and presort, adoption of the Postal Service’s innovative
delinking concept will have a very positive impact on the procedures used to
establish presort discounts. Today and for the last several omnibus rate
proceedings, almost every element of the existing cost savings methodology has
been the subject of substantial controversy. Chief among the causes for these
contentious debates is the fact that workshared letter cost savings are measured
from a hypothetical benchmark, Bulk Metered Mail, a type of single piece mail for
which no reliable costs exist because the Postal Service simply has no
information about BMM. Another source of controversy involves the Postal
Service’s reliance upon mail flow models of doubtful accuracy because, among
other things, they rest upon inappropriate, unsubstantiated assumptions about
how efficiently and effectively letters are processed within the Remote Bar Code
System (RBCS). See MMA-T-1 at 4-5, 7, 17-19; Appendix I at 11-14; Appendix II
at 4; Library Reference MMA-LR-3.
Delinking effectively eliminates these major areas of controversy. First, a
major advantage of “delinking” is that there is no need to find an appropriate
benchmark from which cost savings are measured, as well as the controversy
that has surrounded use of Bulk Metered Mail (BMM) as the benchmark. After
reviewing the theoretical and practical problems posed by using BMM as the
benchmark, USPS witness Taufique succinctly and very correctly characterized
the BMM benchmark problem as “intractable”. Tr. 38/13349.
When compared to the traditional cost savings method, the Postal
Service’s new delinking methodology is far simpler and much less dependent
12
upon data of questionable accuracy and reliability. 9 With delinking, the total
revenue requirement has been determined outside of the model and cost savings
analysis, and the models are simply used to derive the cost differences that “deaverage” this total revenue requirement among the four remaining automation
letter categories.
Second, under the delinking methodology, the Postal Service’s theoretical
mail flow cost models play a significantly different, much less crucial role than
they play under the existing cost savings methodology. As Mr. Bentley
explained, under delinking, the mail flow models are used to estimate the
relative cost differences among the various presort levels. This represents a
significant improvement over their traditional cost savings analyses that rely on
the mail flow models to estimate the absolute cost savings between workshared
letters and BMM, the nonworkshared “benchmark” letter category. See MMA-T-1
at 7.
Similarly, the impact of cost pool classification is reduced significantly. No
longer does the Commission have to determine which cost pools are directly
impacted by worksharing and which are not, a decision which is contentious
simply because cost data show that all of the cost pools have lower costs for
workshared letters than they have for the non-workshared benchmark. See
MMA-T-1, Appendix 1, p. 7. Under delinking, it simply does not matter whether a
specific cost pool is impacted by worksharing. The Commission need only
decide which cost pools vary based on the degree of presort. In this regard,
Pitney Bowes witness Larry Buc provides a complete and comprehensive
analysis for each cost pool. See PB-T-2 and Library Reference PB-LR-L-1. See
9
On several occasions, the Postal Service has indicated that the actual CRA unit cost for BMM
is not known. Tr. 4/551. When asked how one could use BMM as the benchmark, USPS witness
Abdirahman simply sidestepped the question by stating he did not use BMM as the benchmark in
this case. Tr. 35/12001. He also refused to compare the model-derived and CRA-derived unit
costs for BMM because of his assertion that the CRA-derived unit cost for BMM unknown. Tr.
4/550-51, Tr. 35/11984. Moreover, even though he testified that BMM and NAMMA costs share
similar cost characteristics, he claims the 2.7-cent understatement in the model-derived adjusted
unit cost can only be explained by the inaccuracy of the CRA unit cost for BMM. The same highly
unlikely explanation is given for the 6.0 cent unit cost difference for the total mail processing unit
cost. Tr. 35/12000, 120003. We cannot help but wonder how Mr. Abdirahman can support
retention of BMM as the appropriate benchmark when he argued, time and time again, that the
BMM unit cost is not known.
13
Appendix I to this brief for the cost pool classifications based on Mr. Buc’s
analyses. MMA witness Bentley relied upon Mr. Buc’s analysis and we urge the
Commission to accept it as well.
The fact that delinking will make ratemaking less controversial is not, by
itself, sufficient reason to embrace this innovative ratemaking method. However,
there are other important considerations that reinforce the choice of delinking.
Delinking is so attractive to MMA members because it offers a straight forward
set of rate setting principles that are easy to understand and translate into
concrete presort discounts and rates. Presort mailers in general and high
volume workshare mailers like MMA members in particular need and deserve a
rate setting process that is far more transparent than the current cost savings
methodology. MMA witnesses McCormack and Gorham explained just how
important rate stability and predictability are to very high volume mailers. Ms.
McCormack stated, “Verizon’s worksharing capabilities rely heavily on capital
investment decisions made far in advance of implementation. Unnecessarily
complex and contentious rate setting procedures make these types of large
investment decisions uncertain and risky.” Tr. 38/13169. Mr. Gorham echoed
Ms. McCormack’s assessment: ‘[b]ecause high volume, quality mailing
operations are so capital intensive, we need to know that First-class rates will be
relatively stable and predictable, as they have been for the past two decades.
Adopting APWU's proposed workshare discounts would disrupt our long term
planning and call into question the wisdom of continuing to participate in the
Postal Service's workshare mail program.” Tr. 38/13194-195.
Delinking provides the reliability, transparency, stability and predictability
that First Class workshare mailers need. As USPS witness Taufique testified
(Tr. 38/13349):
[T]he Postal Service’s de-linking proposal for First-class Mail,
relying on data from the CRA, offers a viable and practical
alternative to continued reliance on the bulk metered benchmark. In
addition to reflecting the market trend, the Postal Service’s
approach will have a number of benefits. It is a methodology that is
reproducible from one rate case to the next, easily verifiable, and
transparent. It has the advantage of relying on a robust and well-
14
established data source, the Cost and Revenue Analysis (CRA).
Finally, it has the potential to reduce much of the dissension that
has characterized worksharing discussions in the past.
Another reason for adopting delinking is that the presort market is now
fully mature. In fact, growth in presort mail volume, long a powerful financial
“engine” that helped control costs and rate increases for all mail classes has
slowed significantly. Today, the mature presort mail market is at a crossroads. If
the Postal Service and Commission encourage and continue to support presort
mail, this highly profitable mail can continue to be a positive force for the postal
system for the foreseeable future. However, if the Commission adopts shortsighted polices, like the parochial policies that APWU and OCA advocating, the
Commission will hasten conversion of presort mail to electronic alternatives.
When the Commission first adopted a 1-cent presort discount, there were
approximately 1.8 billion qualifying pieces, representing less than 0.5% of all First
Class letter mail. USPS-T-8 at 43 (Table 3, First Class Letters). As discounts
grew over the next two decades, the volumes of First Class presorted mail grew
dramatically. By FY 1995, when the Postal Service began the mail
reclassification process in MC95-1, First Class workshared mail had reached
37.4 billion pieces, over 41% of all First Class letters. During this same time
period, First Class single piece letter volumes grew from 49.9 billion to almost 56
billion pieces (1993), a growth rate that pales by comparison with the growth rate
of the workshare letter market. See, USPS-T-7 at 43-44
As Table 3 shows, in the years that followed, First Class workshared mail
volume continued to grow, even as the volumes of First Class single piece mail
stalled and then declined rapidly, reaching 43.4 billion pieces in 2005. By FY
2004, First Class workshared letters eclipsed single piece and by FY 2005 made
up over 53% of total First Class letters.
As Table 3 also shows, however, the First Class workshared market has
undergone fundamental changes in recent years. First, the growth rate of
workshared volumes plunged from 9.8% in 1995 to just 1.6% and 1.7% in FY
1996 and 1997, respectively. Then, following a recovery in 1998-2000, the
15
growth rate plunged again and workshared letter volumes actually declined in
2003 (highlighted in Table 3), apparently the first year-to-year decline in
volumes since First Class workshare discounts were instituted.
Table 3
First-Class Volumes Since 1995
(Volumes in Millions)
Fiscal Year
Single Piece Workshared
Volumes
Volumes
Workshared
Portion
%
Workshared
Increase
%
1995
53,527
37,388
41%
9.8%
1996
53,848
37,998
41%
1.6%
1997
54,504
38,648
41%
1.7%
1998
53,936
40,421
43%
4.6%
1999
53,413
42,685
44%
5.6%
2000
52,370
45,676
47%
7.0%
2001
50,946
47,075
48%
3.1%
2002
49,253
47,658
49%
1.2%
2003
46,558
47,288
50%
-0.8%
2004
45,162
47,334
51%
0.1%
2005
43,376
49,066
53%
3.7%
USPS witness Thress characterizes this recent downward trend for First
Class workshared mail as “much less anticipated” than the steeper downward
trend in First Class single piece letter volumes.10 As he concludes (USPS-T-7 at
46):
Certainly, one of the most significant factors affecting First-Class
Mail volume in recent years is the increasing use of the Internet and
electronic media as alternatives to the Postal Service. E-mail has
emerged as a potent substitute for personal letters, bills can be
paid online, and some consumers are beginning to receive bills and
statements through the Internet rather than through the mail.
10
USPS-T-7 at 45. As Mr. Thress also testified, “the growth rate of First-Class workshared
letters volume fell sharply, from 4.68 percent in 2002Q1 to 1.34 percent in 2002Q2 to 0.25
percent in 2002Q3. From there, First-Class workshared letters volume declined over the same
period the previous year for four straight quarters from 2002Q4 through 2003Q3 and in six of
eight quarters overall through 2004Q3.” Id. at 46. Regarding a 3.7% return to growth in GFY
2005, Mr. Thress states, “[w]hile positive, even this growth, which occurred in the absence of
Postal rate increases and in the face of a fairly strong economy, was less than the growth which
First-Class workshared letters experienced in the late 1990s.” Id.
16
Understanding the emergence of the Internet and its role vis-à-vis
the mail is critical, therefore, in understanding First-Class Mail
volume, both today and in the future.
USPS witness Bernstein elaborated on the reasons for the decline in First Class
mail (USPS-T-8 at 3):
First-Class Mail volumes peaked at 103,526 million pieces in 2000
and remained essentially the same at 103,520 million pieces in
2001. In 2005, volume was 98,071 million pieces, a 5.3 percent
decline from the level four years earlier. Since 1970, there had
never before been a four-year period in which First-Class Mail
volumes declined, until these past few years.
Several hypotheses have been put forward to account for this
recent decline in First-Class Mail volumes, but the most reasonable
explanation is that volumes have been adversely affected by a
variety of technological changes that have created alternatives to
the use of First-Class Mail. In fact, electronic diversion – as it is
called -- has been going on for many years and it also explains why
First-Class Mail volume growth slowed during the decade prior to
this recent period of decline
A review of bill payment methods provides further insight into recent trends.
Table 4
Comparison Of Bill Payment Methods
Year
By Mail
In
Person
Auto
Deduction
Online
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
84.00%
84.80%
84.30%
84.50%
85.00%
85.50%
84.40%
84.80%
85.10%
84.40%
79.40%
78.40%
75.00%
73.50%
69.30%
66.60%
13.50%
12.60%
12.80%
11.90%
11.70%
10.60%
10.50%
9.90%
9.50%
9.30%
9.50%
7.50%
8.10%
7.20%
6.50%
6.60%
2.10%
2.20%
2.40%
3.10%
2.90%
3.20%
4.00%
4.00%
4.30%
4.60%
7.30%
7.00%
8.40%
8.90%
9.60%
10.40%
0.10%
0.10%
0.20%
0.10%
0.10%
0.20%
0.40%
0.60%
0.70%
1.00%
2.20%
3.60%
4.30%
6.00%
9.50%
11.10%
Source: Household Diary Study Recruitment Questionnaire
17
Other
Electronic
0.30%
0.40%
0.40%
0.40%
0.40%
0.50%
0.70%
0.70%
0.60%
0.60%
1.60%
3.50%
4.30%
4.30%
5.10%
5.20%
As Table 4 shows, sharp declines in the percentage of payments sent by mail
and paid in person were matched by a phenomenal rise in payments using
alternative electronic “delivery” methods.
These facts and analyses indicate that the First Class workshared market
is now fully mature and that other powerful market forces, such as the rapid rise
in online transactions, are eroding the preeminent position the Postal Service
held for over three decades in the delivery of financial documents (account
statements, bills and payment remittances). These facts respond directly to
Question 1 (a) of NOI No. 3, which asks about the potential for single piece
letters to convert to worksharing. The answer is that, today and for the
foreseeable future, relatively few single piece letters have the potential to convert
to worksharing.
From MMA’s experience, an additional reason for this phenomenon is
that, especially in the last few years, workshared mailers have been able to
upgrade a significant portion of their residual mail pieces that did not qualify for
workshared rates. Reducing the volume of mail that has to be mailed at single
piece rates has been possible due to improvements in software and procedures
that are better able to resolve addresses that formerly did not meet applicable
standards for workshared discounts. Ten years ago, this residual mail
constituted 5% of their workshared mail; today it ranges from under 1% to 2%. In
other words, MMA estimates that approximately 60-80% of these residual mail
pieces have been converted from single piece to worksharing.
In sum, First Class workshared mail is no longer the cash cow it once was
for the Postal Service. Nevertheless, if managed carefully, this workshared mail
can still provide substantial benefits in the form of a much higher institutional cost
contribution (relative to its attributable costs) than First Class single piece or any
other class of mail.11
11
APWU’s and OCA’s recommendations to further increase the First-Class presort cost
coverage, already well above 300%, seems not only counterproductive but patently unfair.
18
The Postal Service’s delinking proposal does not change that relationship.
If anything, it is designed to preserve the valuable contribution that First Class
workshared mail makes to the viability of the postal system over the long term.
II.
Changes In The Market For Workshared Mail Cast Serious Doubt On
The Continuing Validity Of The Basic Assumptions Underpinning
The Existing Ratemaking Formula Based On Cost Avoidance
In NOI No. 3, the Commission asked about the potential for workshared
mail to revert to single piece mail. Between the 1970s and the early part of the
1990s, the answer to this question might have been yes. Since then, answering
this question has become more complicated. Today, at least for the majority of
First Class workshared mail, the answer is a resounding no.
When the workshared discount was initiated and for almost two decades
thereafter, mailers choices were extremely limited. Essentially, the Postal
Service was the only game in town for the vast majority of First Class workshared
mailers.
The advent and amazingly rapid acceptance of the Internet and email
represents a sea change. The Internet and email are very well suited for delivery
of financial statements and for bill presentation and payment, the mainstays of
First Class workshared letters for the Postal Service.12 Some recent projections
show the number of U.S. households banking online to jump from 29.6 million in
2003 to 56 million by 2008, and the percentage of those paying bills online to
increase from 50% in 2003 to 85% in 2008.13
MMA is not predicting the immediate demise of First Class workshared
mail. Indeed, MMA members sincerely hope they can continue and build upon
12
In an effort to provide customers with additional choices, credit card companies have also
created programs that automatically accept payments over the phone. In addition, banks, utilities
and other service companies have, for many years, offered automatic deposit and payment
options as a convenience for their customers and a way to reduce cumbersome and expensive
paper-based transactions.
13
See, Comments Of Major Mailers Association In Response To Notice Of Inquiry No. 3, dated
August 17, 2006 at 10, fn 11. Greater acceptance of the Internet and email and build out of
broadband access increases the use of online alternatives to the mail. As MMA witness
McCormack confirmed, Verizon is in the process of building out a Fiber Optic system called FIOS,
to the home that will greatly increase the capacity of existing broadband connections and enable
Verizon to offer television, phone, and ultra high speed Internet connections. Tr. 38/13181. See
also http://www.verizonfios.com/.
19
the mutually beneficial partnerships they have forged with the Postal Service for
over three decades. See Tr. 38/13193, fn 6. Use of First Class mail for delivery
of financial account statements and bill presentation and payment will continue to
be an important component of workshared mail because MMA members and
many other workshared mailers are involved directly or indirectly in service
businesses where customer choice is key.
While MMA does not expect use of First Class workshared mail to decline
precipitously in the near future, the Postal Service and the Commission both
have it in their power to hasten conversion of transactions now involving
workshared mail to Internet, email, and other electronic-based processes.
Controlling costs is an imperative for MMA members and, we believe, almost all
First Class workshared mailers. Postage is just one cost of doing business.
Nevertheless, for many presort mailers postage is a major cost. As MMA
witness McCormick testified, postage is the single largest expense category
within Verizon’s Finance Operations’ budget. Tr. 38/13162.
Mailers are not interested in why postage costs have increased generally
or the intricacies of postal ratemaking in particular. They are concerned about
what increased worksharing and postage costs mean for their bottom lines. An
even more important consideration is mailers’ perceptions about where postage
costs are likely to go. Even the perception that their postage costs cannot be
controlled will drive mailers’ decisions to seek out, and promote vigorously,
alternatives such as the Internet and email, which offer them greater control over
costs. If such decisions are made, very likely they will be permanent.
Accordingly, unlike decades past, simplistic assumptions about the
potential for workshared mail to revert to single piece simply are not relevant to
informed ratemaking in the electronic age. If the Commission were to reduce or
eliminate discounts, First Class workshared letters would revert to single piece,
but only temporarily. Mailers, particularly very high volume mailers could and
would redouble their efforts to move these types of transactions from the Postal
20
Service to the Internet and other less expensive alternatives. Such an unwise
policy would wreak havoc on the postal system.14
III.
In Adopting the Concept of Delinking, The Commission Should
Implement MMA’s Adjustments to the Postal Service’s Workshared
Cost Savings Analysis
While the Postal Service’s innovative delinking proposal represents a
significant improvement over the “traditional” but highly contentious cost savings
methodology, the delinking method, as implemented by the Postal Service, is not
entirely without controversy. MMA witness Bentley performed a thorough review
of the cost studies that the Postal Service used to support the presort discounts it
derived under delinking. He has corrected some obviously inappropriate
methodological changes incorporated in the USPS studies.
MMA witness Bentley’s corrections to erroneous Postal Service
methodological choices can be summarized as follows:
Use of the PRC attributable costs (instead of the Postal Service’s
attributable costs)
Re-classification of certain nonmodeled unit cost pools as proportional
with respect to presort level (instead of fixed)
Application of separate CRA Proportional Adjustment factors for
Automation and Nonautomation (rather than one factor)
Inclusion of delivery cost savings (rather than assuming no cost
savings exist)
Differences between MMA’s unit workshared cost savings and those of
the Postal Service are shown in Table 5, which appears as Table 2 on page 9 of
MMA-T-1.
14
Initially, reversion of significant volumes to single piece will require the Postal Service to
increase its mail processing capacity. However, once these volumes are diverted permanently
to less costly alternatives, such as the Internet, the Postal Service will be left with excess
capacity.
21
Table 5
Comparison of MMA and USPS Incremental Percent Passthroughs
Under Delinking
(Cents)
First Class
Workshared
Category
USPS
Proposed
Discount
USPS
Proposed
Incremental
Discount
TY 2008
Total
Workshared
Unit Cost*
1.1
0.4
1.9
12.17
10.22
9.53
7.30
1.95
0.70
2.22
57%
58%
85%
1.1
0.4
1.9
6.47
5.32
4.93
3.63
1.15
0.40
1.30
96%
100%
146%
Incremental
Unit Cost
Savings
Incremental
%
Passthrough
MMA
Auto Mixed AADC
Auto AADC
Auto 3-Digit Letters
Auto 5-Digit Letters
7.4
8.5
8.9
10.8
USPS
Auto Mixed AADC
Auto AADC
Auto 3-Digit Letters
Auto 5-Digit Letters
7.4
8.5
8.9
10.8
*Includes mail processing plus delivery for MMA, just mail processing for the Postal Service
Sources: MMA-LR-1, p. 1, USPS-LR-L-48, p. 1
The upper portion of Table 5 shows the incremental unit cost savings and
resulting percentage passthroughs derived by MMA witness Bentley. The lower
portion of Table 5 shows the same information that USPS witness derived using
the Postal Service’s costing approaches. As Table 5 shows, when the Postal
Service’s derived workshared cost savings analysis is corrected for obvious
errors, it is apparent that a far smaller percentage of relevant cost savings are
being passed through to workshare mailers than the Postal Service’s
methodology would seem to indicate. This is precisely why Mr. Bentley spent so
much time and effort correcting the Postal Service presentation to reflect, for
example, use of the Commission’s attributable cost method rather than the
Postal Service method, which the Commission has repeatedly rejected on sound
policy grounds since R97-1 (and should reject in this case as well). Other
obvious errors concern the manner in which the model-derived unit costs are
reconciled to the CRA as well as the inclusion of delivery costs savings where
the Postal Service has reversed, without justification, its decade-long position.
22
These issues are discussed in Section IV, which focuses on cost savings derived
under traditional methods.
The results shown in Table 5 show that under the innovative delinking
approach, the percent passthroughs are always less than 100%. This means
that other classes of mail, including First-Class single piece, will benefit from the
implementation of the workshared discounts proposed by the Postal Service.15
Nevertheless, MMA does and the Commission should recognize that
issues that are absolutely critical to derivation of representative, reliable cost
savings under the traditional approach are less controversial under delinking
precisely. A good example of this phenomenon involves classification of cost
pools. Under USPS witness Abdirahman’s delinking analysis, cost pools are
either modeled and, therefore, deemed proportional, or “fixed.” Since Mr.
Abdirahman readily admits that the “fixed” cost pools could be proportional, there
is much less cause for controversy over which cost pools are proportional to
presort level. Mr. Abdirahman clearly states at Tr. 5/580,
The ‘fixed’ cost pools represent tasks that have not been modeled.
It is possible that some costs within those cost pools vary for mail of
different presort levels, but I have not studied them.
Pitney Bowes witness Buc thoroughly analyzed all cost pools and concluded that
more than 70% of the cost pools not reflected by the models were still affected
proportionally by presorting. MMA-T-1, Appendix I, p. 9, fn 12; PB-LR-1. MMA
urges the Commission to adopt witness Buc’s findings regarding these “nonmodeled” cost pools, and apportion these cost pools to the presort levels on the
same basis as Mr. Abdirahman’s “proportional” cost pools.
In contrast, under a more traditional cost savings methodology, cost pools
are classified as workshared proportional, workshared fixed or nonworksharedrelated. The latter category means that they are completely excluded from the
analyses of cost differences. Such decisions directly determine the potential
magnitude of workshared cost savings because if any cost pool is classified as
nonworkshared-related, such costs are purported to be unaffected by
15
Workshare cost savings are “shared” because neither MMA nor the Postal Service is
proposing to flow through 100 percent of the cost savings to presort mailers in this proceeding.
23
worksharing. This artificially reduces the derived cost savings. The controversy
becomes even more contentious because all of the cost pools in question are
less expensive for workshared mail than nonworkshared mail.
If is also important to recognize that the potential issues that arise under
the Postal Service’s delinking proposal are fewer than those which must be
addressed under the current cost savings approach. Using the theoretical mail
flow models to quantify relative cost differences among the presort categories is
far less controversial than using the models to quantify the absolute cost
difference between workshared and non-workshared mail. Choosing an
appropriate benchmark mail piece for purposes of defining “non-workshared
mail” simply is not an issue under delinking while it is a critical and highly
controversial issue under the traditional methodology.
Finally, MMA urges the Commission to continue to include delivery cost
savings in any derivation of delivery cost savings. Under delinking, the impact of
delivery cost savings is significantly diminished compared to measuring cost
savings from a non-workshared, controversial benchmark.16 When measuring
the cost savings simply due to the degree of presortation, the cost savings
analysis reflects only the very small differences in the DPS percentages (DPS %)
among the presort categories, too small to be controversial, 17
For these reasons, the Commission should support its decision
recommending the Postal Service’s delinking proposal with the costs savings
provided by MMA.
IV.
There Is Ample Record Support For The Postal Service’s Proposed
Workshare Discounts Even If the Commission Chooses to Rely on its
Traditional Workshare Cost Savings Methods
In contrast to the relatively simple, straight forward and transparent
process of setting workshare discounts under the Postal Service’s delinking
methodology, the “traditional” method of determining discounts based on cost
16
In the past, the delivery cost benchmark has always been a workshared category, such as
Nonautomation or NAMMA letters. MMA maintains that in order to isolate workshared cost
savings, the benchmark should not also be a workshared category.
17
Incremental cost savings among the Automation presort categories range from just 0.08 to
0.24 cents. See MMA-T-1, p. 16, Table 6.
24
savings measured from a nonworkshared “benchmark” involves highly
controversial judgments on more ratemaking elements and increasingly tenuous
assumptions regarding a purely hypothetical benchmark. Nevertheless, as
demonstrated below, employing “traditional” methods of deriving workshare cost
savings will still produce results that support the First Class workshare discounts
proposed by the Postal Service.
Table 6 below shows the percent passthroughs using the discounts
proposed by the Postal Service and the cost savings derived by MMA witness
Bentley using traditional methods. As with delinking, all of the percent
passthroughs are below 100%, meaning the Postal Service (and other mailers)
benefit from the First-Class workshared program.
Table 6
Summary of USPS Proposed Workshared Discounts, MMA Derived Unit
Cost Savings and the Resulting Percent Passthroughs
(Cents)
First Class
Workshared Category
USPS
Proposed
Discount
MMA
Derived
Unit Cost
Savings
Total %
Passthrough
2.0
7.4
8.5
8.9
10.8
10.8
2.9
8.5
10.5
11.1
13.4
13.4
70%
87%
81%
80%
81%
81%
Nonautomation
Auto Mixed AADC
Auto AADC
Auto 3-Digit Letters
Auto 5-Digit Letters
Auto CR Letters
USPS
Proposed
Incremental
Discount
2.0
5.4
1.1
0.4
1.9
1.9
MMA Derived
Incremental
Unit Cost
Savings
2.9
5.6
1.9
0.7
2.2
2.2
Incremental %
Passthrough
70%
96%
57%
58%
85%
85%
Source: MMA-T-1, p. 11
The following sections explain how the traditional cost savings approach was
implemented by MMA witness Bentley.
A.
Choosing An Appropriate Benchmark For Measuring Processing
Cost Savings Due To Worksharing
The choice of an appropriate benchmark from which to measure
workshared mail processing cost savings is of pivotal importance simply
because it has more impact on the derived magnitude of mail processing cost
savings than any other input parameter. It also remains the most controversial
aspect of the cost savings methodology.
25
Table 7 provides a short history of the benchmarks the Commission has
utilized to measure workshare cost savings.
Table 7
Historical Benchmarks Used to Derived Workshared Cost Savings
Docket
No.
Benchmark Utilized
R84-1
R87-1
R90-1
R94-1
MC95-1
R97-1
R2000-1
Avg Nonpresorted Letters
Avg Nonpresorted Letters
Avg Nonpresorted Letters
Not Applicable
Avg Nonpresorted letter
Bulk Metered Mail
Bulk Metered Mail
When the Commission first utilized a quantitative cost savings approach, it
utilized what came to be known as the “Appendix F” methodology. The
Appendix F methodology relied on the mail processing costs for average single
piece letters. Bulk Metered Mail (BMM), the latest benchmark, was not even
suggested until MC95-1, the reclassification case in which the Commission
rejected a Postal Service proposal to price First Class workshared letters as a
separate subclass. At that point, as worksharing first began its metamorphosis
from presorting to automation (i.e., presorting plus prebarcoding), the
Commission apparently felt a need to be more conservative in its evaluation of
price incentives. The Commission’s suggestion that BMM be employed as the
new benchmark represented a marked change from earlier cases in which the
Commission took a more expansive view of pricing incentives. For example, in
Docket No. R84-1, the Commission stated, “[w]e are now prepared to accept
reasonable assumptions in the direction of finding more, rather than fewer,
cost differences. See PRC Op. R84-1 at 366. In Docket No. R90-1, the
Commission chose not to be “conservative” in evaluating discounts in order to
“enhance the Service’s automation program.” See PRC Op. R90-1 at V-20.
In its MC95-1 decision, the Commission did an about face, noting “…the
single-piece most likely to convert to the automation categories is limited to the
26
bulk metered mail component.”18 Thus was the concept of BMM born. BMM was
formally adopted by the Postal Service in R97-1, when it was not a significant
issue. See Tr. 21/7850. In R2000-1, the Commission ruled in favor of the Postal
Service’s use of BMM over the strenuous objections of MMA and other First
Class workshare mailers. Since the R2001-1 and R2005-1 proceedings resulted
in nonprecedential settlements, this case represents the most recent opportunity
for the Commission to revisit this contentious issue.
It is interesting to note that almost a decade earlier, MMA witness Bentley
addressed the subject of “single-piece most likely to convert” to the presort
category. He referred to the presort discount (there was only one 3/5 digit
presort discount at the time) and testified:
As the discount increased over time, and the new category
matured, presorted volumes began to increase steadily, indicating
that the discount attracted new volumes and more pieces to
migrate from the nonpresorted category. The cost savings from
these pieces have also increased. This is because with the
passage of time, the unit attributable costs of the migrating letters,
prior to migration, will tend to increase, moving closer and closer to
the unit cost of nonpresorted letters.
As such, I have determined that the unit cost of migrating letters,
before migration, is not static and has increased over time. (R87-1,
CPUM/ARF-T-1, p. 15)
In MC95-1, the Commission also made the very same observation based on the
record from R84-1. It stated:
This more liberal standard [than “clearly capturable” cost
avoidance] better reflects the impact of a discount on a mature
category such as presort First-Class Mail. As a mature workshare
category whose volumes have stabilized, additional [First--Class
presort] volume is considered less likely to come from low-cost
nonpresort mail that requires few changes to convert, and more
likely to come either from average-cost nonpresort mail that
requires more extensive change in order to convert, or from new
mail. PRC Op. R84-1, para. 5138.
18
PRC Op. MC95-1 at IV-136
27
PRC Op. MC95-1 at IV-102, fn 37. In R84-1, the Commission had also noted,
“[T]he presort bureaus have extended their markets to some smaller volume
users whose mail probably showed a wider variety of cost characteristics prior to
conversions.” (PRC Op. R84-1 at. 364)
The obvious question that comes to mind is, when will Presorted letters
become a “mature” category? We contend that after almost 25 years of
explosive growth and 5 years of little or no growth, there can be no doubt that
First-Class Presorted letters have reached maturity. As such, there is no longer
a steady migration of single piece to workshared letters but instead a substitution
for single piece letters for workshared letters. A simple example of this
substitution is found at Tr. 20/7129-30, and Tr. 38/13417-18 where 12 average
single piece letters disappeared from the mailstream but were replaced by 12
average workshared letters.
The Postal Service apparently is convinced that the concept of a steady
stream of BMM letters converting to Presort simply is not realistic. USPS witness
Taufique testified that his position was that if one were to measure cost savings,
the most appropriate benchmark would be average single piece. Tr. 16/4932-3,
4937, 4939, 4946-7, 5039.19
19
In rebuttal testimony USPS witness Abdirahman appeared to contradict this testimony of
USPS pricing witness Taufique claiming that BMM is the “only” alternative to use as the
benchmark if the Commission rejects delinking. Tr. 35/11968. There is no merit to his position
on this topic. First, during cross examination by counsel for Pitney Bowes, he clarified that the
“whole point“ of his “position” was that BMM has already been litigated - “that’s all I was saying.
That was my whole point.” Tr. 35/12052. Second, Mr. Abdirahman claims that the BMM
benchmark issue has already been litigated relied on the Commission’s statement from R2000-1
that BMM is the most likely type of single piece letters to shift to presorted. When Mr.
Abdirahman was asked if the apparent maturation of the presort rate category may have
overtaken that six-year old point of view, Mr. Abdirahman would not give an expert opinion. In
fact, he quite properly handed the question off to Mr. Taufique, the USPS pricing witness who
had already indicated that BMM was not the most likely type of letter to shift to presort. Tr.
35/12005-06. Subsequently, Mr. Abdirahman was asked if would defer to witness Taufique on
the issue whether BMM was still the appropriate benchmark. He answered, “the benchmark
[question] has shifted from me to Altaf Taufique, Witness Taufique.” Tr. 35/12052.
Finally, Mr. Abdirahman’s claim (Tr. 35/11952) that BMM should be used because it has
been litigated in three cases is wrong and misleading. First, using BMM as the benchmark was
not litigated in MC95-1. The Commission merely suggested that the Postal Service consider
using BMM as the benchmark. MC95-1 PRC Opinion at IV-136. No party objected to using BMM
when it was first introduced in R97-1. In R2000-1, MMA and other parties strenuously but
unsuccessfully objected to the use of BMM as the benchmark. The following two cases, R2001-1
and R2005-1, were both settled so, by definition, the issue was not “litigated” in those cases.
28
There are other reasons why BMM is not a realistic, reliable benchmark. It
has become more and more apparent that the CRA cost estimate for BMM is
simply not reliable enough to base rates for almost 50 billion pieces of
workshared mail. The Postal Service has already given up on the idea of
deriving an accurate unit cost for processing BMM. USPS witness Abdirahman
claims that “the actual costs of BMM were not known” and “[t]he proxy…does not
reflect ‘actual’ BMM letters cost.” Tr. 4/551. A USPS institutional answer
candidly admits in relevant part, “we do not know the actual BMM costs.” Tr.
18C/6279.20
In fact, MMA witness Bentley has indicated that MML might actually
understate the unit costs associated with BMM because some portion of MML is
prebarcoded and has pre-approved, reliable addresses. MMA-T-1, Appendix I,
p. 4, fn. 4. He argues convincingly that the most reasonable benchmark is
average single piece, which provides a more accurate measurement of the cost
of processing letters that are workshared versus letters that are not workshared.
Nevertheless, to be conservative and because data is readily available, Mr.
Bentley used MML as the appropriate benchmark for purposes of this case.
Down the road, it probably will not matter much because the mail processing
costs for single piece letters and MML are converging and will exhibit little or no
differences within a few more years. That difference has decreased by almost
two-thirds, from 1.85 to 71 cents in just six years. See MMA-T-1, Appendix I, p.
6-7. And the reason for this phenomenon is the significant cost savings
20
APWU witness Kobe has no more confidence in her BMM unit cost than the Postal Service
does. She states, “[w]e do not know precisely what the actual worksharing-related costs of BMM
letters are since we base it on the CRA for all metered letters and make adjustments to the CRA
costs to come closer to an approximation for BMM letters.” Tr. 20/7088 On another occasion
she reiterated, that “[t[he BMM letters cost is determined from the CRA costs for a much more
aggregated pool of letters and probably reflects more costs than would be attributable to just
BMM letters. “ While she adjusts the CRA costs of MML to remove the impact of cancellation, we
are at a loss at to what other costs could be included for MML but not for BMM. Nevertheless,
she completely ignores costs incurred by BMM but not MML, for example, CRM letters that are
metered and bypass RBCS processing altogether because they are prebarcoded and have a FIM
mark that removes them from the RBCS barcoding process.
29
attributable to single piece Courtesy Reply Mail letters that are required to be
prebarcoded.21
For the foregoing reasons, the Commission should allow BMM to quietly
fade away and use MML as the benchmark for this case.
B.
Attributable Cost Methodology
Prior to R97-1, Postal Service rate case filings generally reflected the
accepted principle that costs vary 100 percent with changes in volume.
Beginning in R97-1, however, the Postal Service predicated its rate filings on the
notion that costs do not vary 100 percent with volume. Despite the fact that the
Commission has rejected the Postal Service’s position on at least two
occasions,22 the Postal Service again based the proposed R2006-1 rates on its
preferred attributable cost methodology.
MMA continues to support the Commission’s policy on attributable cost
methodology for several reasons. First, the Postal Service’s methodology
artificially reduces the total amount of costs that are attributable, thus making it
far easier for the Postal Service to use subjective measures for assigning
institutional cost responsibility among classes of mail. Adoption of the Postal
Service’s methodology will result in additional institutional cost burdens for First
Class, which already pays about 60% of all institutional costs.
Second, MMA believes that the Postal Service’s theory that costs are lessthan-100% variable provides artificial and not-necessarily attainable productivity
increases. For example, the actual productivity for hand counting letters -- 2,869
pieces per hour -- is increased, under the Postal Service’s theory, by 15% to
3,375. It is questionable whether such efficiencies can possibly be attained. See
USPS witness Bozzo’s general, nonresponsive answer to MMA/USPS-T2218(B), Tr. 10/2507. Moreover, such “marginal” productivities serve to reduce
measured cost savings when workshared letters bypass sortation operations.
21
The Commission must not forget that workshared mailers are required to provide low-cost,
prebarcoded letters along with their outgoing bills, if a return envelope is provided. This
requirement obviously reduces single piece costs and the measurement of derived cost savings.
In this regard, worksharing requirements continue to adversely impact the amount of discounts
that the Postal Service offers.
22
See PRC Op. R97-1 at 126; PRC Op. R2000-1 at 85.
30
The Postal Service’s case-in-chief presented no persuasive new reasons
or changed circumstances that would warrant reconsideration of this issue.
Accordingly, the Commission should continue to base rates on the wellestablished policy that labor costs vary directly with changes in volume.
C.
Classification of Cost Pools
Another significant issue that impacts the level of derived workshared cost
savings concerns the classification of cost pools and their relationship to
worksharing. As MMA witness Bentley testified, the Postal Service first
attempted to classify cost pools as either proportional or fixed with respect to
worksharing in R97-1. The fixed and proportional labels simply meant that costs
that varied with worksharing were “proportional” while “fixed” costs did not vary
with the degree of presorting. MMA-T-1, Appendix I, p. 7.
Starting in R2000-1, the Postal Service began eliminating cost pools,
claiming without supporting evidence that certain cost pools should not be
impacted by worksharing.23 While MMA and other parties strongly objected to
excluding any of these cost pools, the Commission eliminated certain cost pools
but kept other cost pools in the cost savings analysis.
MMA’s position is that all of the cost pools should remain in the
worksharing cost savings analysis for three very important reasons. First, the
cost pool data loses accuracy as sampling errors become more prevalent the
further costs are broken down into their individual components. Therefore, it
stands to reason the total cost of all cost pools is much more accurate than
individual cost pool amounts.
Second, the evidence indicates that the cost pools that the Postal Service
would prefer to exclude from the cost savings analysis always exhibit lower costs
for workshared letters than for nonworkshared letters. See MMA-T-1, Appendix
23
The Postal Service’s unsupported elimination of cost pools reduced derived workshared cost
savings in R2000-1, R2001-1 and R2005-1 by 1.30 cents, .75 cents and .76 cents, respectively.
See MMA-T-1, App. I at 9, fn 11.
31
I, p. 7. As Mr. Bentley’s Workpaper MMA-WP-1 shows, this relationship has held
true since at least 1998.24
Postal Service witnesses have preferred to simply disregard Mr. Bentley’s
careful analysis of factual information. During R2005-1, the last case in which
the Postal Service proposed to eliminate cost pools from the cost savings
analysis, USPS witness Abdirahman was asked to explain why the costs in what
the Postal Service claimed were nonworkshared-related cost pools were always
lower for workshared mail than for mail that was not workshared. Below is the
exact question and answer: (R2005-1, Tr. 4/1038)
MMA/USPS-T21-62
Please refer to your response to MMA/USPS-T21-31B where you
were asked to explain why in the last three cases the unit costs for
“BMM (single piece metered mail)” for the following cost pools are
always higher than the unit costs for workshare letters:
1. FSM/1000
2. SPBS OTH
3. MANF
4. MANP
5. 1OPTRANS
6. 1SCAN
7. BUSREPLY
8. REGISTRY
9. REWRAP
10. 1EEQMT
11. INTL ISC
12. Non MODS MANF
13. Non MODS MISC
14. Non MODS REGISTRY
You failed to answer the original interrogatory claiming that the
Postal Service does not actually have costs for BMM letters at the
cost pool level, even though you use single piece metered mail
24
Mr. Bentley illustrated this point with the REWRAP cost pool costs. The REWRAP cost pool
measures costs to repair letters that become damaged during automated processing. The
Postal Service has classified these costs as “fixed” with respect to presort level and merely
assumed that they are unrelated to worksharing.
The USPS position is patently unreasonable. The probability that a piece of mail will be
damaged increases with the number of times it must be handled during processing. Therefore, it
seems logical that workshared letters that do not receive individual processing until further
“downstream” than single piece letters should incur lower REWRAP costs. Moreover, the facts
support Mr. Bentley’s conclusion on this score. See MMA-T-1, App I at 7-8, Table 2.
32
costs as a proxy for BMM. Please answer the original question with
respect to the costs of single piece metered mail letters, the costs
of BMM letters, or however you prefer to characterize the costs.
Response:
I do not know.
The evidence in this case convincingly refutes the Postal Service’s
speculative claims that amounts to “such costs are not impacted by worksharing
because we say they are not.” Pitney Bowes witness Larry Buc has conducted a
thorough review of the costs pools. His analysis, which MMA witness Bentley
adopted, should be relied upon by the Commission. See PB-T-2 and Library
Reference PB-LR-1.
Finally, there is no harm in leaving the cost pools in the analysis. If the
costs are not affected by worksharing, as the Postal Service claims, the costs will
be similar and would have no impact on the derived unit cost savings.
The bottom line is that the only relevant difference between the letters
passing through each of these cost pools is that one letter is workshared while
the other is not. Therefore, the only reasonable explanation is that worksharing
lowers the costs within what the Postal Service can only speculate are
“nonworkshare-related” cost pools.
For the foregoing reasons, the Commission should adopt MMA’s and
Pitney Bowes’ position regarding the classification of cost pools. All cost pools
should be included in the analysis of cost savings so that the computed cost
differences between workshared letters and its nonworkshared benchmark can
reflect all relevant cost differences between workshared and non-workshared
letters.
D.
Recognition of Model Flaws
A new issue has surfaced for the first time that concerns the CRA costs for
Automation and Nonautomation letters. Since the Postal Service has provided
convincing evidence that the CRA-reported costs for these categories are
33
problematic (USPS-T-22, pages 5-6),25 Postal Service witness Abdirahman has
utilized the mail flow models to “de-average” the combined costs for Automation
and Nonautomation letters (Presorted).26 In doing so, he has ignored a
substantial flaw that MMA has pointed out and proven with respect to the models’
disparate results depending upon whether letters are nonprebarcoded or
prebarcoded. Consequently, the Postal Service’s (as well as APWU’s) method
for de-averaging Presorted letter costs is entirely defective, providing results that
are inaccurate, unreasonable and illogical.
The problem that USPS witness Abdirahman fails to consider is that the
models have a design flaw that was first pointed out by MMA witness Bentley five
years ago. In his R2001-1 surrebuttal testimony, Mr. Bentley provided
substantial proof that the Postal Service’s mail flow models (1) understate costs
when letters are nonprebarcoded and (2) overstate costs when letters are
prebarcoded. See R2001-1, KE-ST-1 pages 7 - 17. MMA witness Bentley
identified the obvious culprit causing this problem -- the Remote Bar Code
System (RBCS) operation, which simulates the cost of applying barcodes to
nonprebarcoded letters. This simulation was far too efficient, leading to
significant, unexplained differences between the model-derived unit costs and
the benchmark CRA unit cost. 27 Simply stated, the model historically cannot
account for a large segment of actual costs there were incurred. In this case,
the BMM or MML28 model-derived unit cost (5.18) is 2.93 cents lower than the
CRA-derived unit costs (8.11), a difference that has been simply ignored by the
25
USPS witness Abdirahman referred to this problem in R2005-1, but effectively waited until
this case to actually address the issue. All witnesses, except for OCA witness Thompson, seem
to agree that this problem needs to be addressed; Ms. Thompson inexplicably adopts the CRA’s
separately reported costs for Automation and Nonautomation costs without reservation or
explanation.
26
OCA witness Thompson’s failure to recognize or even understand this issue should give the
Commission sufficient reason to reject outright the OCA’s proposed workshared discounts,
without which, the OCA cannot fund its heavy weight First Class rate structure changes.
27
Additional testimony by USPS witness Abdirahman supports this contention. His mail flow
models use average accept rates for all operations. Yet, in reality, he confirmed that “upstream”
operations, such as those in the RBCS, exhibit higher reject rates than “downstream” operations.
This explains, at least in part, why the model simulation of the RBCS understates the number of
letters rejected by automation, resulting in an understatement of costs. See. USPS-RT-7, p. 7
and Tr. 35/12021-22.
28
According to USPS witness Abdirahman, the mail flow models for BMM and MML are
identical. Tr. 4/656. Therefore, this discussion applies to either BMM or MML.
34
Postal Service in its evaluation of Nonautomation unit costs. Response to
MMA/USPS-T22-32, Tr. 18C/6278-79; Response to USPS/MMA-T1-6, Tr.
21/7860.
To support his conclusion, Mr. Bentley reviewed a historical comparison of
mail flow model-derived unit costs versus CRA-derived unit costs. In every
instance, the model-derived unit costs were lower than the CRA-derived unit
costs when the letters under review required RBCS processing. For
prebarcoded letters that bypassed the RBCS, the opposite results were apparent
– the model-derived unit costs were always higher than the CRA-derived unit
costs. Thus, Mr. Bentley concluded, it was obvious that the mail flow cost model
simulations for the nonprebarcoded letters requiring RBCS processing were too
low. Table 8 below summarizes the historical CRA Proportional factors that
support Mr. Bentley’s conclusion. Tr. 35/11994.
Table 8
Comparison of USPS Model-Derived and CRA-Derived
Unit Processing Costs
(PRC Cost Methodology, Cents)
(1)
(2)
(3)
Bulk Metered Mail
Docket No.
CRA
Cost
Model
Cost
Prop
Factor
(1)/(2)
R2000-1 (1998)
R2000-1 (1999)
R2001-1
R2005-1
R2006-1
7.88
7.83
7.75
7.75
8.11
6.31
6.43
5.48
5.24
5.18
1.25
1.22
1.41
1.48
1.56
(4)
(5)
(6)
(7)
Automation Letters
Model %
UnderEstimate
((2)(1))/(1)
CRA
Cost
Model
Cost
Prop
Factor
(5)/(6)
-20%
-18%
-29%
-32%
-36%
2.79
2.84
2.42
2.27
2.53
3.38
3.43
3.42
3.10
3.02
0.83
0.83
0.71
0.73
0.84
(8)
Model %
OverEstimate
((6)(5))/(5)
Source
21%
21%
41%
36%
19%
USPS-LR-I-147
USPS-LR-I-478
USPS-LR-J-84
USPS-LR-K-110
USPS-LR-L-141
As Table 8 demonstrates, the unit costs derived by the mail flow models for
nonprebarcoded BMM have always been significantly lower than its CRAderived counterpart.29 On the other hand, the unit costs derived by the mail flow
models for prebarcoded Automation letters have always been significantly higher
29
While USPS witness Abdirahman claims that such a comparison is inappropriate because
BMM unit costs are unknown and “over-stated” (Tr. 35/11984), his argument is moot. He has
also testified that the BMM model and a model for metered mail letters (MML) would be identical.
(Tr. 4/656) Therefore, a comparison of the model-derived MML unit cost to the CRA-derived
MML unit cost yields the same results shown in Table 8.
35
than its CRA-derived counterpart. There can be no doubt that the models exhibit
a consistent and reliable bias that impacts the results depending upon whether a
letter requires or can bypass the RBCS.
Moreover, MMA witness Bentley did not stop at these apparent results. In
an attempt to understand why the models behaved the way they did, he
experimented with specific models to further prove that the problem could be tied
to mail processing within the models’ simulation of the RBCS. To support his
hypothesis, he changed the entry point within three of the models to see how
such changes would impact the model results.30 This analysis proves that the
models simulation of RBCS costs generate unrealistically and extremely low
costs. Therefore, specific steps are necessary in order to ensure that the modelderived unit costs can properly be reconciled to the CRA…steps which neither
the Postal Service or APWU chose to take.
Table 9 below shows the results of changing the entry points for three
categories of letters. For example, BMM normally enters the mailstream in the
outgoing ISS (Out ISS), which is the first operation within the RBCS that attempts
to read an address to facilitate barcoding. If the initial operation is changed to
the outgoing automation primary (Out Prim Auto), then the underlying
assumption is that the letters are prebarcoded and able to bypass the entire
RBCS. Under this situation, the unit cost should certainly go down. As shown in
Table 9, the model’s inability to accurately simulate RBCS processing derives a
higher, not lower, unit cost. Certainly, the Postal Service cannot process a
nonprebarcoded letter at less cost than a prebarcoded letter, all other factors
being equal.
30
In his rebuttal testimony, USPS witness Abdirahman’s completely ignored the model’s
improbable results if certain routine assumptions were made to the type of mail being considered
in the models. Instead, Mr. Abdirahman obviously misunderstood Mr. Bentley’s position with
regard to the RBCS. He chided Mr. Bentley for somehow concluding that the RBCS program is
“not working the way it was supposed to.” Tr. 35/11979
36
Table 9
Analysis of Model-Derived Unit Costs With and Without RBCS Processing
(Cents)
Model
ModelDerived
Computed
Unit Cost
BMM No Prebarcodes
BMM With Prebarcoding
NonAuto Mach MAADC-AADC No Prebarcodes
NonAuto Mach MAADC-AADC With Prebarcodes
MAADC No Prebarcodes, No Presort
MAADC With Prebarcodes
5.183
5.420
5.193
5.432
5.193
5.163
Change In Unit
Cost Due to
Prebarcoding
0.238
0.239
(0.031)
Source: MMA-T-1, Appendix I, p. 12
The other two examples, presented by MMA witness Bentley and shown
in Table 9, are just as convincing. Nonautomation Machinable Mixed AADC and
AADC letters normally are not prebarcoded and enter the mailstream just as
BMM letters do -- in the Out ISS. If these letters were hypothetically
prebarcoded, the entry point would be changed to the Out Prim Auto, and then
the costs should go down. Instead, according to the models, the costs go up.
The final example concerns prebarcoded Automation letters presorted to
the Mixed AADC level. These letters normally enter the Outgoing Secondary
Automation operation (Out Sec Auto). If these letters were assumed to be
nonpresorted and nonprebarcoded, then they would enter the mailstream in the
Out ISS. When such a change is implemented, the model-derived costs should
certainly go up. Instead, because the RBCS costs are understated within the
model, they remain virtually the same.
Based on these comparisons, there can be no doubt that the Postal
Service mail flow models are biased depending upon whether or not letters
require RBCS processing. Model-derived costs are low for nonprebarcoded
letters (requiring RBCS processing) and high for prebarcoded letters. And there
can be no doubt that because the Postal Service’s models erroneously show that
the Postal Service can spray on a barcode and process a letter at less cost than
if the letter is prebarcoded by the mailer, the models must understate the RBCS
37
processing cost. Therefore, any method that attempts to tie the model results to
actual CRA must take this flaw into account. As seen in the next section, only
MMA’s application of the CRA Proportional Adjustment factors correctly reflects
this predisposition exhibited by the models.31
E.
Reconciling Model Costs to Actual CRA Costs
Since R2001-1 the Postal Service has made no structural changes to the
models to address the flaws discussed in the previous section. Tr. 4/588.
Consequently, the Postal Service errs in its de-averaging of the CRA Presorted
costs by failing to take into account the fact that the models behave differently
based on whether letters are prebarcoded (such as Automation letters) or letters
are nonprebarcoded (such as Nonautomation letters). More specifically, USPS
witness Abdirahman should have used two separate CRA Proportional
Adjustment factors when reconciling his model-derived unit costs to the CRA.
His decision to use the same CRA Proportional Adjustment factor for both
Automation letters and Nonautomation fails to account for the models’
unmistakable propensity to (1) understate costs for letters (such as
Nonautomation) that require RBCS processing and (2) overstate costs for
Automation letters that bypass the RBCS.
At the outset, it should be noted that prior to this case, the Postal Service
has always incorporated three possible comparisons between model-derived and
CRA-derived unit costs to accurately reconcile the model-derived costs to actual
CRA costs. Since CRA unit costs have been available for MML, Automation
letters and Nonautomation, three (and only three) possible CRA Proportional
Adjustment factors have been incorporated.32 However, because the Postal
31
The tendency of the mail flow models to understate the cost of processing unbarcoded single
piece letters in the RBCS is a flaw that can be corrected by proper application of the CRA
Proportional Adjustment factors to reconcile the models’ theoretical results to actual CRA costs.
However, because the Postal Service (and APWU) do not acknowledge the problem, their
application of the CRA Proportional Adjustment factors fails to achieve that goal. As illustrated in
Table 11, infra, their adjusted model-derived unit cost results are clearly indefensible.
32
For example, in R2000-1, the Postal Service used the Nonautomation Proportional
Adjustment factor to reconcile the model-derived unit cost for handwritten addressed letters. This
was subsequently changed to the BMM Proportional Adjustment factor by the Postal Service in
R2001-1, R2005-1 and in this case. The Automation Proportional Adjustment factor was used to
reconcile model-derive Automation unit costs by presort level in all case prior the R2006-1.
38
Service has lost confidence in the CRA’s ability to accurately report separate
Automation and Nonautomation costs, there are now only two possible means for
reconciling costs between the models and the CRA: (1) BMM and (2)
Automation and Nonautomation letters combined (what the Postal Service calls
“Presort” letters. While the Postal Service still utilizes the BMM Proportional
Adjustment factor to reconcile its model-derived hand-addressed letter unit costs,
it ignores the relationship exhibited by that Proportional Adjustment factor when it
comes to incorporating the Presorted Proportional Adjustment factor. This error
is so obvious that it seems inconceivable that the Postal Service continues to
support such unreasonable results.
The ultimate problem unrecognized by the Postal Service is that the CRAderived unit cost for MML, the proxy for BMM, is 56% higher than the Service’s
model-derived unit cost. That means that the Service’s mail flow model does not
account for almost 3 full cents worth of costs that are incurred and reported by
the CRA. The model unit costs for similar types of letters, such as
Nonautomation Machinable Mixed AADC (NAMMA) letters and Nonautomation
letters that also require processing within the RBCS should be off by a similar
magnitude.
Table 10 shows the combined CRA unit cost for Automation and
Nonautomation letters as well as the de-averaged unit costs derived by MMA and
the Postal Service.
Table 10
Comparison of Test Year
Automation and Nonautomation Mail Processing Unit Costs
(Cents)
First-Class
Presort
Category
Nonautomation
Automation
Combined
Source:
CRA
24.53
4.22
5.00
USPS-LRL-147
39
USPS
7.17
4.92
5.00
USPS-LRL-110
MMA
13.10
4.70
5.00
MMA-LR1
As is obvious, the Postal Service’s failure to adjust for the fact that its mail
flow models significantly understate the unit cost of letters that must be
processed through the RBCS costs results in a severe understatement of
Nonautomation letter costs as well as a smaller but still significant overstatement
of the unit cost of Automation letters. To obtain its final adjusted model-derived
unit costs, the Postal Service applied the same CRA Proportional Adjustment
factor of 1.013 to each model’s result. Thus, the Postal Service’s methodology
did not care whether or not letters were processed by the RBCS -- each
individual model-derived unit cost was increased by the same 1.3% to “reconcile”
the result to the CRA. This uniform adjustment for prebarcoded Automation
letters and nonprebarcoded Nonautomation letters completely contradicts the
known fact that the models behave differently depending upon whether or not the
letters are processed within the RBCS. Therefore, the end result obtained by the
Postal Service is simply wrong.33
Realizing that the Postal Service mail flow models understate costs for
nonprebarcoded letters that incur RBCS and overstate costs for prebarcoded
letters, MMA witness Bentley preserved this relationship by applying two
separate CRA Proportional Adjustment factors. Because the CRA unit cost for
metered mail letters was 56 percent higher than the model-derived unit cost, Mr.
Bentley applied that same percentage CRA Proportional Adjustment Factor to
the model-derived unit cost of Nonautomation letters. Then, using the Postal
Service’s combined CRA unit cost for all “Presort” letters, he “backed out” the
33
APWU witness Kobe’s worksharing analysis suffers from the exact same infirmity. Her
uniform CRA Proportional Adjustment factor is .937, which means that she reduced each modelderived unit cost by the same percentage - 6.3%. It makes no sense to reduce the modelderived unit costs for Nonautomation letters, when at the same time, Ms. Kobe’s analysis
indicates that for BMM, the CRA unit cost is 56% higher than the model-derived unit cost. There
simply is no reasonable explanation for this contradiction and her end results shown in Table 12
are as just as illogical as the Postal Service’s results.
40
costs associated with Automation letters. This produced an Automation CRA
Proportional Adjustment factor of 0.93, which is in line with past experience.34
Mr. Bentley’s final test of reasonableness compared the results produced
by MMA’s two separate Proportional Adjustment factors methodology with the
results produced by the Postal Service’s combine CRA Proportional Adjustment
factor method.35 Table 11 (Tr. 35/11995) compares the adjusted unit costs for
three nonprebarcoded letter categories - BMM, Nonautomation Machinable
Mixed AADC (NAMMA) and NonAutomation (NonAuto) - and one prebarcoded
letter category - Automation Mixed AADC (Auto MAADC).
Both the Postal Service and MMA start with identical model-derived unit
costs. But note what happens after application of the CRA Proportional
Adjustment factors.
Table 11
Comparison of Selected USPS and MMA
Model-Derived and Adjusted Model Unit Costs
(Cents)
Model Unit Cost
First-Class
Letter Category
BMM
NAMMA
NonAuto
Auto MAADC
Sources:
Adjusted Model Unit Cost
RBCS
Processing?
USPS
MMA
USPS
MMA
Yes
Yes
Yes
No
5.18
5.19
5.17
5.16
5.18
5.19
5.17
5.16
8.11
5.42
5.40
5.39
8.11
8.12
8.09
4.81
USPS-LR-L-141
USPS-LR-L-110
34
MMA-LR-1
USPS-LR-L-141
MMA-LR-1
USPS-LR-L-110
USPS witness Abdirahman’s claim (Tr. 35/11965) that Mr. Bentley’s application of two
separate CRA Proportional Adjustment Factors as “tortuous” and “unsupported” is disingenuous
and misleading. He claims Mr. Bentley’s analysis should be rejected because (1) it has never
been presented before, (2) it assumes that the RBCS understates costs and (3) the modeled
costs should be tied to a single CRA unit cost for presorted letters. USPS-RT-7 at 18. All three
reasons are absolutely baseless, especially the third one, which is precisely, what Mr. Bentley
did.
35 In order to make a comparison of “apples to apples” between MMA and the Postal Service,
the Postal Service’s results using the Commission’s attributable cost method are presented here.
41
As shown in Table 11, the model unit costs for all four categories are
virtually identical. However, after the CRA Proportional Adjustment factors are
applied, the Postal Service’s unit costs inch up (by 1.3%) for three of the
categories, while the adjusted unit cost for BMM goes up by 56%. It seems
terribly illogical that the BMM model-derived cost adjusts upward by 56% while
NAMMA and NonAutomation, which are very similar, do not. On the other
hand, according to the Postal Service, Auto MAADC letters also inch up by the
same 1.3%. It is patently impossible that prebarcoded Auto MAADC letters cost
virtually the same to process as nonprebarcoded NAMMA and NonAuto letters.
MMA’s results are far more credible. After application of the appropriate
CRA Proportional Adjustment factors (56%), the three similar nonprebarcoded
categories, BMM, NAMMA and NonAuto letters all cost about the same to
process. However, the Auto MAADC letter unit cost decreases to well below the
unit costs shown for the other three categories. MMA’s results are perfectly
logical since Auto MAADC letters are both prebarcoded and presorted and,
therefore, should cost considerably less to process than any of the three other
letter categories.
APWU witness Kobe followed exactly the same CRA Proportional
Adjustment factor procedure as USPS witness Abdirahman. As Table 12 shows,
her results are just as unreasonable as the Postal Service’s results.
Table 12
Comparison of Selected APWU and MMA
Model-Derived and Adjusted Model Unit Costs
(Cents)
Model Unit Cost
First-Class
Letter Category
Adjusted Model Unit Cost
RBCS
Processing?
APWU
MMA
APWU
MMA
BMM
Yes
5.18
5.18
9.58
8.11
NAMMA
Yes
5.19
5.19
5.72
8.12
NonAuto
Yes
5.17
5.17
5.66
8.09
Auto MAADC
No
5.16
5.16
5.82
4.81
MMA-X-2
MMA-LR-1
Sources:
42
MMA-X-2
MMA-LR-1
On a final note, MMA urges the Commission to require the Postal Service
to focus on its models’ simulation of the RBCS. It has been five years since we
illustrated the understatement of RBCS costs whereby the models illogically
derive lower processing costs for nonprebarcoded letters than for comparable
prebarcoded letters. Since USPS witness Abdirahman has already admitted that
the models incorporate understated reject rates for upstream operations such as
those within the RBCS (Tr. 35/12021-22), it should not be that difficult to make
structural changes to the models that increase RBCS processing costs and
reduce downstream processing costs. This would make the model-derived unit
costs more closely aligned with the CRA as well as provide much more
reasonable and logical results.
F.
Delivery Cost Savings
In a very strange about face, the Postal Service backed away from its 10year old consistent position that the degree of worksharing favorably impacts
delivery costs.36
Not only does this position make little sense, the Postal
Service has provided absolutely no evidence to support its contention that the
Commission should likewise change its position with regard to the relationship
between worksharing and delivery costs. The Postal Service’s view should be
categorically rejected because the Service has failed to meet its burden of proof.
The Postal Service’s position, espoused by witnesses Kelley and McClery,
are actually contradicted by USPS witness Abdirahman. For example, as
recently as R2005-1, barely a year ago, USPS witness Kelley’s position was that
delivery costs, particularly in-office delivery costs, varied with the degree to which
mail could be delivery point sequenced (DPSed). In this case, he simply
assumes that all Automation letters -- regardless of presort level -- exhibit the
same DPS percentage (DPS %). Such a decision is based on “discussions with
rate design personnel” who indicated to him that they did not need delivery costs
broken down by presort level. As a result, he made the decision to combine all
presort levels into one Automation delivery unit cost. Tr. 12/3346 (Response to
36
MMA notes that even APWU and OCA did not accept the Postal Service’s position on
delivery cost savings.
43
MMA/USPS-T30-1). Mr. Kelley’s assumption does not constitute evidence and
certainly not form the basis for reversing its decade long position on this issue.
USPS witness Abdirahman, on the other hand, projects theoretical DPS
%’s from his mail flow models. If Mr. Kelley now assumes that the DPS %s are
the same for all presort levels, then one would expect Mr. Abdirahman to modify
his models to reflect this assumption. However, he failed to do so, thereby
directly contradicting Mr. Kelley. The different DPS %s derived in Mr.
Abdirahman’s mail flow models clearly indicate that the greater the degree of
presorting the lower delivery costs are. Moreover, the models also predict that
the percentage of letters processed by automation prior to delivery also differ by
presort level.
Table 13
Probabilities for Automation Processing Through Delivery
For Automation Letters
Automation
Rate Category
Model-Derived
DPS %
Automation
Probability
MAADC
AADC
3-Digit
5-Digit
80.07%
82.54%
83.65%
86.60%
88.4%
91.1%
92.4%
95.6%
Source: MMA-LR-1 at 2, Tr. 4/592
But there is more evidence to prove the Postal Service’s new position on
delivery costs savings is wrong. First, logic supports the Postal Service’s
previous position concerning the beneficial cost sparing relationship between
presort level and DPS %. The deeper the presort level, the less likely that mail
will be rejected by automation equipment and the more likely that letters will be
DPSed. Even the Postal Service could not disagree with this logic. Mr.
Abdirahman conceded, “I can confirm that the probability that a letter may
ultimately be rejected by automation equipment may be higher for a letters sorted
to MAADC than a letter sorted to 5-digits.” See Tr. 4/558. USPS witness
McClery also echoed these sentiments when he stated (Tr. 11/2851):
I presume that Mixed AADC Automation letters could require more
manual processing than 5-digit Automation letters due to the fact
44
that the Mixed AADC letters likely require multiple automated piece
handlings prior to being DPSed unlike 5-digit Automation letters.
Whenever a piece is sorted on automation, there is a chance that it
will be damaged or otherwise rejected and subsequently diverted to
a manual operation. Thus, the more handlings on automation, the
more opportunities for damage requiring subsequent manual
processing.
For these reasons, the Commission should adopt MMA’s position on
including delivery cost differences in the cost savings analysis. Mr. Bentley
derived separate DPS %s by presort category from the mail flow models and
then reconciled these figures to the average DPS % for all Automation letters
combined, as obtained from the delivery data systems. Nothing on the record is
more sensible than his approach.
The Postal Service would have the Commission believe that its models
are fine for estimating costs, but that the DPS %s derived from those models,
reflected by the costs, are not “meaningful”. In his rebuttal testimony, Mr.
Abdirahman states (Tr. 35/11954-995):
While the letter cost models are adequate for estimating mail
processing unit costs by rate category, they are not likely to be an
effective tool for estimating DPS percentages by rate category.
Hence, the disaggregated DPS percentages by presort category
are not meaningful and should not be used to determine cost
differences by presort level for letters.
There is no logic or factual support for Mr. Abdirahman’s position on this issue. .
First, it makes no sense to accept the costs without reservation when the
attributes reflected by those costs, i.e., the amount of letters that can be
processed by automation, are used to derive those costs. Second, and just as
important, the DPS %s derived by the models, particularly for Automation letters,
are very accurate. USPS witness Kelley confirmed as much when he performed
an analysis that concluded that the model-derived DPS %s and those obtained
from his delivery data sources were “very similar”. See Tr. 12/3363 (Response to
MMA/USPS-T30-14).
Moreover, MMA witness Bentley performed a similar analysis when he
reconciled the model-derived DPS %s to Mr. Kelley’s independent delivery data.
45
Mr. Bentley’s analysis showed that the Automation letter DPS %s were off by
less than 1%. See Library Reference MMA-LR-1, p. 2. The Nonautomation
DPS % derived by the models was high by 6.5%, but this is to be expected since
it is readily apparent that the models’ simulation of the RBCS overstates the
amount of letters that are able to be processed by automation, resulting in an
understatement of costs.
Assuming the Commission includes delivery cost savings as part of
workshared savings, as the Postal Service and Commission have done in the
past, the only additional issue is the appropriate benchmark from which to
measure the cost savings. Just as with mail processing, the delivery cost
benchmark has also been controversial. In R97-1 and R2000-1, the Commission
adopted the Postal Service’s recommendation to use Nonautomation letters as
the benchmark. In R2001-1 and R2005-1, the Postal Service switched to
NAMMA letters, a move that significantly reduced the derived cost savings. In
this case, APWU uses Nonautomation and OCA uses NAMMA.
Since R2001-1, MMA has steadfastly maintained that it is inappropriate to
employ any kind of workshared letter category to measure workshared cost
savings. After all, it seems impossible to isolate a specific cost driver between
two categories if both are workshared. We believe the appropriate benchmark
should be single piece metered mail letters, the same benchmark used to
measure mail processing cost savings. However, because the data indicated
that MML letters cost more than the average for all Single Piece letters, MMA
witness Bentley used the latter in order to be conservative in estimating delivery
cost savings due to worksharing.
USPS delivery cost data show that after collection costs are removed,
Presorted letters cost, on average, 3.77 cents less to deliver than Single Piece
letters. This is a very significant savings and one that workshared mailers
certainly should be given credit for. However, not all workshared letters incur
such savings, because only 89.6% of the letters are actually delivered.
Therefore, this average, when spread over all originating pieces, computes to
3.38 cents per piece. (.896 x 3.77 = 3.38) Thus, Mr. Bentley’s workshared cost
46
analysis relies on these savings as part of his overall savings. To pretend that
such savings do not result from worksharing would be a travesty.
V.
The Flawed Presort Discount Proposals Put Forth By APWU And
OCA Should Be Rejected
At the beginning of this brief, we included a table showing the three
competing sets of First Class presort discounts proposed in this proceeding. We
insert that table again here to focus attention on the fact that the discounts
proposed by OCA and APWU represent a distinct break with the rate
relationships that the Postal Service and Commission have fostered over many
years.
Table 14
Comparisons Of First Class Workshare Discount Proposals
(Cents)
First Class Workshared
Category
USPS &
MMA
OCA
Auto Mixed AADC
7.4
5.8
5.9
4.2
Auto AADC
8.5
7.0
7.0
5.4
Auto 3-Digit
8.9
7.5
7.4
5.8
Auto 5-Digit
10.8
8.9
8.9
7.3
Sources:
MMA-RT-2, p. 8, Table 1
APWU
(Step 1)
APWU
(Step 2)
MMA-RT-1,
p. 10, Table 2
Instead of the modest increases in discounts proposed by the Postal Service and
supported by MMA, OCA and APWU propose significantly reduced discounts.
Indeed, as Table 15 illustrates, OCA and APWU are actually proposing to roll
back the currently effective discounts. Moreover, in Step 2 of APWU’s “strategy,”
the discounts would be rolled back to levels not seen for over a decade, since the
R94-1 and MC95-1 timeframe.37
37
The PRC recommended discounts (from a single piece rate of 32 cents) for basic, 3-digit and
5-digit prebarcoded letters were 4.6, 5.6 and 6.2 cents, respectively, in R94-1; and 5.9, 6.6 and
8.2 cents, respectfully in MC95-1. See PRC Op. R94-1 at V-20; PRC Op. MC95-1 at V-22.
APWU’s proposed step 2 discounts in this proceeding are about midway between the discounts
recommended by the Commission more than a decade ago.
47
Table 15
Comparison Of Current First Class Workshare Discounts
To Discounts Proposed By OCA And APWU
(Cents)
First Class Workshared
Category
Current
Discounts
OCA
Auto AADC
6.4
7.3
5.8
7.0
5.9
7.0
4.2
5.4
Auto 3-Digit
8.2
7.5
7.4
5.8
Auto 5-Digit
9.7
8.9
8.9
7.3
Auto Mixed AADC
Sources:
APWU
(Step 1)
MMA-RT-2, p. 8, Table 1
APWU
(Step 2)
MMA-RT-1,
p. 10, Table 2
The proposals of OCA and APWU are patently irresponsible, moving the
discount levels backwards to those that existed more than a decade ago. They
are also technically flawed.
OCA’s proposed First Class presort discounts are an outgrowth of OCA’s
proposal to introduce a single rate applicable to First Class letters weighing up to
4 ounces. Since implementation of OCA’s rates would immediately eliminate the
additional ounce revenues that the Service currently receives from heavier
letters, OCA needed a source of financing for its proposal.
The record shows that First Class workshare mailers would be conscripted
to provide the financing for OCA’s proposal. If, contrary to commonsense, one
could actually believe that there would be minimal disruptions in response to the
OCA’s proposed rate increases for presort mail and that the OCA’s projected
volumes would actually materialize, the OCA’s workshared rates would generate
an additional $754 million. Since OCA’s single rate for heavier letters would also
apply to heavier workshared letters, the net increase to presort mailers is
“reduced” from $754 million to just over half a billion dollars. ($754 million – $254
million = $500 million) See Tr. 38/13404-05 (Revised response to MMA/OCAT4-4).
OCA had not really studied the heavy-weight letter market, at least insofar
as presorted letters are concerned. For example, in response to the existing rate
structure, First Class workshared mailers have implemented policies to minimize
48
the postage they have to pay and strategies designed to maximize use of that
postage.
MMA member companies and other high volume workshared mailers
take great care to design their bills so that, wherever possible, they can avoid
sending out letters that weigh over one ounce, which triggers payment of the
additional ounce rate. This practice, known as “selective inserting”, has been
used by large mailers for years. 38 See MMA-T-1 at 26. OCA’s proposal, which
offers workshared mailers a lot of something they cannot readily use – the ability
to send letters weighing up to 4 ounces without paying an additional rate –
comes at much too steep a price.
OCA and APWU manifest a cavalier disregard for the likely impact their
proposals will have on presort mailers or the postal system in general. The
record shows that adoption of either rate design would have a significant adverse
impact on workshare mailers and the entire postal system. As MMA witnesses
McCormack and Gorham explained, their high volume mailing operations are
very capital intensive. Verizon and CSG Systems have been willing to make the
initial and ongoing investments to use mail because for many years workshared
rates have been relatively stable and predictable. Adoption of APWU’s or OCA’s
lower discounts would disrupt that longstanding rate relationship. Even more
important than the immediate adverse financial impacts is the negative signal
that it would send to mailers about the wisdom of making long term commitments
to mail. As Mr. Gorham testified:
Mailer perceptions regarding likely future changes in postal rates
and rate relationships are extremely important, perhaps even more
important than short run rate changes. If CSG’s clients perceive
that, within the foreseeable future, the cost to mail monthly
statements through the postal system might become too expensive
relative to electronic alternatives, I believe there will be less interest
in worksharing. This is precisely the type of counter productive
signal that adoption of APWU’s proposed discounts would send to
workshare mailers.
38
As MMA witness Gorham testified, his company, CSG Systems, has developed a special
service that enables his clients “to automatically put one or more inserts into a billing envelope
only when doing so would not exceed the weight that would trigger an additional ounce
charge. Tr. 38/13188.
49
As Ms. McCormack elaborated (MMA-T-1 at 10):
Over the last decade, workshare discounts generally have
increased as postage rates have increased. Maintenance of
existing rate relationships sends mailers the message that their
worksharing efforts are valued. Today, First Class workshared mail
is a significant revenue generator for the Postal Service. MMA
witness Bentley’s testimony indicates that for every dollar that the
Postal Service spends to process and deliver workshared mail,
workshared rates produce more than three dollars of revenue. I
also understand that no other category of mail contributes as much
to institutional costs. This relationship tells me that workshared mail
has a very positive impact on postal finances and helps to maintain
a viable postal system that benefits all mailers, including those in
other classes.
Approval of the discounts proposed by the Postal Service will send
Verizon and other workshare mailers a signal that their efforts are
still valued. Adoption of the discounts proposed by APWU would
send exactly the opposite message, namely that their business is
no longer valued. Any reduction in workshare discounts will have a
negative effect on Verizon’s use of First Class mail and could lead
Verizon to place greater reliance on readily available, less costly
alternative methods for bill presentment and payment.
It also appears that the OCA and APWU proposals were made in a
vacuum. By that, we mean that OCA and APWU lack basic knowledge about or
appreciation for just how hard it is for presort mailers to earn discounts or all the
additional worksharing activities that the very high volume mailers, including
MMA members, routinely perform without any financial recognition in their
discounts. See, e.g., Tr. 20/7223-24, 7227-28, 7231-32. Nevertheless, MMA
witnesses Bentley, McCormack and Gorham explained at length just how hard
they work to earn discounts and how complex and ever changing the Postal
Service’s requirements are. See MMA-T-1 at 22-24; Tr. 38/13163-67, 13188-90.
Moreover, neither OCA nor APWU has adequately studied the likely
volume impact of respective their proposals. Using a straight forward application
of volume projection formulas, which are based on historical relationships that
they propose to significantly disrupt, should not be relied upon. Even USPS
witness Thress indicated that his formulas can only reliably predict volumes for a
reasonable range of prices over which the equations have been derived. Tr.
50
38/13096. We submit that proposed discounts that reverse historic upward
trends, by reducing the workshared discounts by the magnitude suggested by
OCA and APWU, cast serious doubt on the ability of the equations to predict
mailers’ responses. Certainly, the APWU and OCA do not take into account the
likely reactions of MMA members espoused by witnesses Gorham and
McCormick.
There are other obvious flaws in the discounts proposed by OCA and
APWU. First, OCA witness Thompson took as the foundation for her specific
proposals a cost analysis that no party sponsored – Library Reference USPS LRL-141.39 Moreover, Ms. Thompson relied on only the Summary Sheet of LR-141
(Tr. 20/7373-74) and was unable to respond to repeated relevant questions
about the underlying analyses, the foundation material for the summary results
she purported to rely upon. As she testified, “I relied upon USPS-LR-L-141,
revised 8/23/2006, page 1 [the Summary Sheet]. I did not analyze other pages
in that library reference.” Tr. 20/7376. See also Tr. 20/7413-15.
Ms. Thompson’s relied upon a workshared cost analysis that no witness
sponsored, a study that she did not understand and could not answer questions
about. This fact alone constitutes sufficient grounds for rejecting her proposal.
She did not know, nor could she know, about all of the problems and flaws
associated with that methodology, pointed out not only by the Postal Service in
this case, but by other parties, including MMA in the last case.
MMA asked Ms. Thompson several pointed questions about unreasonable
results incorporated into her borrowed workshared cost savings analysis. Tr.
38/13406-16. For example, Ms. Thompson adopted the use of NAMMA letters
as the delivery cost benchmark, as a proxy for BMM letters. She agreed that this
makes sense if, and only if NAMMA letters and BMM letters had similar cost
causing attributes. But, according to her study, the unit processing costs for
NAMMA and BMM letters were 21.57 cents and 11.41 cents, respectively. Tr.
39
The LR-141 study was merely an update of the Postal Service’s workshare cost savings from
R2005-1, a case that was settled. Therefore LR-141 has no precedential significance or value.
Moreover, LR-141 and other Category 5 (Disassociated Materials) library references were
submitted only as institutional responses to POIR No. 5.
51
38/13409. The reason for this very significant unit cost differential is tied to the
CRA’s inability to differentiate between Automation and Nonautomation letters.
Ms. Thompson did not correct for this problem and did not even realize how this
problem directly affected her unit costs upon which she based her proposed
rates for almost 50 billion presorted letters. This is just one of several problems
discussed in the interrogatories which Ms. Thompson could not answer.
Moreover, in an amazing concession, she acknowledged that, under her
proposal the implicit cost coverage for presort letters would increase to an
astoundingly high 338%. Tr. 20/1364. There is absolutely no possible
justification for forcing presort mailers to make such a disproportionate
contribution to recovery of institutional costs.
The analysis upon which APWU’s proposed discounts were based is also
flawed. At the outset, it is important to note that APWU is proposing to set the
basic first ounce rate for First Class letters at 41 cents, one cent lower than the
Postal Service. Of course, APWU “pays” for this proposal by setting workshared
discounts 17-20 percent lower than the discounts proposed by the Postal Service
and supported by MMA. As with OCA, there is no basis to assume that
workshared volumes would necessarily materialize to finance the 1-cent
reduction in the single piece rate.
But there are other problems with Ms. Kobe’s workshared cost savings
methodology as well. A major problem not yet discussed in this brief40 is the
foundation upon which APWU bases its worksharing cost savings.
For
example, APWU’s methodology employs elements from both the Postal Service’s
R2005-1 and R2006-1 cost savings presentations and Ms. Kobe chose to rely on
the Postal Service’s attributable cost methodology. Had APWU used the Postal
Service’s cost pool classifications as well as the Commission’s attributable costs,
doing so would have increased her derived unit cost savings by 1.0 to 1.8 cents,
an increase of between 26 and 31 percent. See Table 16, Columns (5) and (6).
40
As discussed above and illustrated in Table 12, Ms. Kobe’s workshared cost analysis suffers
from the same flaws and problems as the Postal Service’s. The models understated cost
simulation of the RBCS combined with improper application of the CRA Proportional Adjustment
factors leads to unreasonable and illogical results.
52
These fundamental problems with APWU’s derivation of workshared cost savings
certainly call into question the accuracy of the derived unit cost savings simply
because the implementation of small, reasonable changes so drastically impacts
APWU’s ultimate proposed discounts.
Table 16
APWU Mail Processing Unit Cost Savings Using the Postal Service Cost
Pool Classifications and the Commission’s Attributable Cost Methodology
(Cents)
(1)
First-Class
Rate Category
BMM Letters
Nonautomation
Auto MAADC
Auto AADC
Auto 3-Digit
Auto 5-Digit
Sources:
APWU Mail
Processing
Unit Cost
(2)
(3)
(4)
(5)
(6)
APWU Mail
Processing
Unit Cost
Savings
Mail Processing
Unit Cost With
USPS Cost Pool
Classifications/
PRC Costs
Mail Processing
Unit Cost
Savings With
USPS Cost Pool
Classifications/
PRC Costs
Change in
Mail
Processing
Unit Cost
Savings
% Change
in Mail
Processing
Cost
Savings
4.94
4.95
6.27
6.72
8.22
1.02
1.18
1.44
1.53
1.83
26%
31%
30%
30%
29%
9.58
11.41
5.66
5.82
4.76
4.39
3.19
APWU-LR-1
3.92
3.76
4.82
5.19
6.39
Col (1)
6.47
6.46
5.14
4.69
3.19
Tr. 20/7255
Col (3)
(2) - (4)
(5) / (2)
It also appears that APWU’s decision to use the Postal Service’s
attributable costs was based on a misapprehension.41
In several instances,
APWU witness Kobe made methodological choices based on whether they
conformed with Commission policies. Therefore, her use of USPS attributable
costs stands out as a methodological “sore thumb.” Ms. Kobe stated that she
had chosen to use USPS attributable costs, rather than the Commissionapproved cost methodology for non-technical reasons. Her reasoning was as
follows:
41
APWU’s position also appears to be that discounts can be lowered with impunity because, if
presort mailers stop worksharing and must pay the full single piece rate, they will continue to
perform all the beneficial functions that today provide the Postal Service with significant cost
savings. Part of APWU’s thinking seems to be that mailers will perform these functions because
they want to get “better service.” Workshare mailers want to believe the Postal Service’s
perennial promises of “better service” whenever it proposes new complex and expensive changes
to the qualification requirements. However, as MMA witness McCormack testified, Verizon
“seeds” its mail and has found that the Postal Service does not meet applicable service standards
about 50% of the time. Tr. 38/13179-180.
53
Q Why is it then that you didn't use the PRC attributable cost
methodology?
A Because nobody would attest to those numbers being right. I
needed to calculate new numbers and have the Postal Service
say yes these are the right numbers and have Mr. Smith confirm
them. The Postal Service will confirm its own methodology, but
not the PRC's methodology.
Tr. 20/7250. MMA is puzzled about Ms. Kobe’s stated reasons for not employing
the Commission’s cost attribution methodology. Rule 54 of the Commission’s
Rules Of Practice specifically requires the Postal Service to file a PRC
attributable cost version of relevant data. Rule 54 (a) (1) states, in relevant part:
If a request proposes to change the cost attribution principles
applied by the Commission in the most recent general rate
proceeding in which its recommended rates were adopted, the
Postal Service’s request shall include an alternate cost presentation
satisfying paragraph (h) of this section that shows what the effect
on its request would be if it did not propose changes in attribution
principles.
This specific requirement, first adopted in Rules Of Practice And Procedure,
Docket No. RM97-1, Order No. 1176, issued May 27, 1997. As the Commission
stated (Order No. 1176 at 1), “[t]he amendment is to give other participants and
the Commission adequate and timely notice of the impact of the proposals that it
contains in order to facilitate evaluation of those proposals.” In other words, the
amended rule was implemented precisely to facilitate presentations based on the
Commission’s established cost attribution methodology in cases, such as this
one, where the Postal Service proposed a methodological change. The fact that
the Postal Service does not officially “sponsor” the cost analyses based on the
Commission’s established cost attribution method does not make the costs
inaccurate or unusable as Ms. Kobe’s testimony suggests. In fact, MMA and
other parties and the Commission routinely rely on information filed pursuant to
Rule 54 (a) (1).
In any event, Ms. Kobe readily agreed that it would be reasonable for the
Commission to use its longstanding attributable cost methodology. Tr. 20/725051. This concession is significant because, if she had used the Commission’s
54
attributable cost methodology in her analyses, her results would not support Step
1 and Step 2 presort discount proposals she made.
For all these reasons, the First Class workshare discounts proposed by
OCA and APWU are counter productive. They do not take into account the best
interests of the Postal Service or the postal system. With electronic alternatives
a viable and increasingly attractive option, the Commission should not be
recommend workshare discounts that will drive workshare mailers from the
system.
VI.
IOCS Redesign
In reviewing the cost data in this case and making routine comparisons to
BY 2004 costs in R2005-1, MMA witness Bentley discovered that First-Class
presorted letters exhibited much higher cost increases than other classes and
rate categories, as shown in the following table.
Table 17
Comparison of Mail Processing Attributable Costs
(PRC Attributable Cost Methodology, Cents)
PRC Attributable Costs
Letter Rate
Category
FY
2004
FY
2005
Single Piece
Metered Mail Letters
Presorted
Standard Regular
13.35
12.64
4.50
4.52
13.61
12.62
4.77
4.13
Source: USPS-LR-
K-99
L-99
Percent
Increase
2.0%
-0.2%
6.2%
-8.6%
As Table 17 shows, the increase in attributable costs for First-Class Presort
letters is much higher than for First-Class single piece and Metered Mail letters.
MMA spent considerable time and effort trying to get answers from the
Postal Service, with very little success, as MMA witness Bentley reported (MMAT-1 at 21):
After propounding several interrogatories and receiving
contradictory and ambiguous responses, all we know is that the
Postal Service claims that BY 2004 and BY 2005 costs cannot be
compared because, “there was a change to the method used to
55
collect and assign IOCS tallies.” Moreover, the Postal Service is
not willing to admit that the “actual” costs increased or decreased in
the amounts shown in Table [14], and fails to provide any indication
of what the “actual” cost changes are. [Table 14 inserted]
While failing to confirm MMA’s derived cost increases between R2005-1 TY 2006
and R2006-1 TY 2008, the Postal Service claimed that MMA’s computations
were correct and that MMA’s computations were the most accurate available. In
addition, the Postal Service failed to provide its own calculations.42
Nevertheless, Mr. Bentley performed his own analysis and found:
[B]ut for IOCS redesign and assuming no shift from single piece to
workshared letters, attributable costs for First-Class letters would
have been lower by $146 million -- $39 million for single piece and
$107 million for presorted letters. See Exhibit MMA-1A. This factor
alone, which is totally independent of worksharing, nevertheless
serves to reduce derived workshared costs savings simply because
presorted letter costs increase much more (6.2%) in relation to the
benchmark MML costs (-.2%).
See Exhibit MMA-1A. The impact of this irregular and counter intuitive cost
behavior is two-fold. First, all other factors being equal, the higher increase for
Presort letters relative to MML tends to reduce derived cost savings under the
traditional cost savings approach discussed in Section IV above. Second,
increasing costs for Presort by a disproportionate amount artificially reduces the
computed implicit cost coverage compared to previous of years. Both of these
factors concern MMA, particularly because the Postal Service has provided no
adequate explanation or justification for the disproportionate cost shifts.
Significantly, the Postal Service did not even address, much less try to
refute, Mr. Bentley’s analysis. So the record is left with an undisputed showing
that IOCS redesign has a material adverse impact on the derivation of First Class
workshared cost savings that also serves to artificially skew the implicit cost
coverage, one metric the Commission uses to judge the reasonableness of the
workshared rates it recommends.
42
See responses to interrogatories MMA/USPS-T22-2-4 (Tr. 4/529-541) and MMA/USPS-T2228-29 (Tr. 18C/6269-6275), which were followed up by MMA/USPS-14-19 (Tr. 18C/6234-6247),
which were followed up by MMA/USPS-26-27 (Tr. 18C/6262-6265) and MMA/USPS-T22-53 (Tr.
4/603-4; 9/2365-66).
56
MMA has done all that it can to bring the issue to the Commission’s
attention. Aside from keeping these impacts in mind as it assesses the results of
cost savings analysis, the Commission should direct the Postal Service to
provide meaningful answers that it was unwilling to provide to MMA.43
VII.
First Class Additional Ounce Rates
In this case, Postal Service witness Altaf Taufique is recommending that
the price of First Class additional ounces for presort mail be reduced to 15.5
cents. MMA applauds the Postal Service’s proposal and urges the Commission
to adopt it. As MMA witness Bentley testified (MMA-T-1 at 24-25, 26),
The Postal Service’s proposal for reduced additional ounce rates,
particularly for letters, is long overdue. The degressive rate
structure has long recognized that the second and third ounce
requires much less effort to process than the first ounce, and the
Postal Service’s proposed rates reflect this reality more than ever
before. If anything, the Postal Service has not gone far enough in
reducing the additional ounce rates for letters. Nevertheless, I urge
the Commission to accept the Postal Service’s proposal. The
newly proposed additional ounce rates move in a direction that is
entirely consistent with the Commission’s actions and should be
approved.
*
*
*
[T]he lower additional ounce rate for presorted letters is consistent
with the USPS witness O’Hara’s revenue requirement established
for such pieces. Given the exceedingly high implicit cost coverage
for First Class workshared mail, which is still more than 300%, the
lower additional ounce rate is consistent with reaching an overall
First-Class cost coverage that is fair and equitable.
Mr. Bentley also pointed out that lowering the additional ounce rate to 15.5 cents
will have a salutary effect by discouraging a common practice among First Class
mailers of splitting up what could be one mailing into two mailings where part of
the content to be mailed consists of material that can be mailed as Standard
mail. He recounted a recent real life example in which an MMA mailer was faced
with this choice. The content to be mailed weighed less than 3 ounces. Some of
43
USPS explanations for cost shifts focus on Standard letters where the CRA has problems
identifying some standard letters from ECR letters. Tr. 9/2365. Since 96% First-Class letters
include the exact postage paid (See Library Reference USPS-LR-L-87), such an explanation
does not lend itself to a reasonable explanation of why First Class presort costs have increased.
The Postal Service simply sidestepped MMA’s efforts and has not provided a responsive answer.
57
the content had to be mailed at First-Class rates but the remaining portion could
be mailed as either First Class or Standard mail. The volume totaled 1.8 million
pieces. By spending an additional $40,000 in labor and supply charges, the
mailer was able to split each letter up into a First-Class letter weighing under one
ounce and a second Standard letter that paid the minimum rate. The result was
that the Postal Service processed and delivered twice the volume – 3.6
million pieces – and received $400,000 less postage.
Such practices obviously are very inefficient from the Postal Service’s
perspective. They can and should be discouraged by appropriate lowering of the
First Class additional ounce rate for workshared letters. MMA urges to approve
the Postal Service’s first step in this direction.
VIII.
High Volume Presort Mail Rates – A Lost Opportunity
MMA supports the Postal Service’s proposal to give greater recognition to
shape as a cost driver within First Class. At the same time, we believe that the
Postal Service missed a valuable opportunity to recognize that, within the First
Class presort letter category, volume is an important cost driver. MMA witnesses
Bentley (MMA-T-1 at 22-24), McCormack (Tr. 38/13165) and Gorham (Tr.
38/13188-190) have all explained at length the how the economies of scale that
are made possible by a combination of new computer technologies with high
concentrated volume provide important tangible benefits. Mr. Bentley explained
why volume is an important cost driver:
There can be no doubt that the postal costs to service one mailer
who consistently sends out one million letters per day are
considerably lower than to service 1,000 mailers that send 1,000
letters per day. The efficiencies associated with preparing and
handling large volumes versus small volumes of letters are obvious
since volume alone makes it possible for larger mailers to perform
worksharing operations that Postal Service employees must
ordinarily perform for smaller mailings.
MMA-T-1 at 23. He also cataloged all the additional types of valuable
worksharing that very high volume mailers routinely perform for the Postal
Service. Ms. McCormack gave specific examples of how special procedures
58
worked out with the Postal Service saved substantial sums for the Service but do
not provide any monetary compensation for her company, Verizon:
Because Verizon can sort its mail to the finest depth, the USPS is
able to “cross dock” the mail, meaning that the mail can be placed
directly on an outgoing truck when it reaches the Postal Service
plant which saves the Postal Service money since USPS
employees do not have to break down the pallets and resort the
trays onto other pallets or rolling stock. The Postal Service enjoys
even greater cost savings when handling Verizon’s out-of-state
mail. This mail typically avoids all processing at the local postal
facility. For example, full tractor trailer truckloads of Verizon
invoices produced at our Richmond, Virginia facility and destined
for customers located in New Jersey routinely go directly from
Verizon’s plant to New Jersey, thereby bypassing not only the
Postal Service’s local facility but also one or more intermediate
HASPs. The same holds true for Verizon’s Durham, North Carolina
facility where we produce mail destined for customers in the Midwest and the west coast. Trays of mail bound for these
destinations are zip code sorted and palletized by state. Our
employees place these pallets onto USPS trucks headed directly to
the Mid-west and west coast. Despite the additional cost savings
that accrue to the Postal Service, Verizon does not receive any
additional workshare discounts for “cross docking,” presorting entire
trucks by final destination, or palletizing the mail by state in zip
code order.
Current regulations applicable to workshared mailers do not
require tray sorting, pallet sorting or “truck sorting”. In fact,
many of these “extra” operations have been implemented at
the specific request of local postal officials in the past few
years. Accordingly, cost savings enjoyed by the Postal
Service due to these extra steps that Verizon performs are not
specifically reflected in the discounts.
Tr. 38/13165. Ms. McCormack testified that the Postal Service “encourages”
Verizon to perform these additional worksharing tasks by suggesting that Verizon
will receive better service and prompt delivery of its invoice mail. However, using
“seeded” mail to test the Postal Service’s ability to meet applicable delivery
standards has shown Verizon that the Postal Service does not meet delivery
standards about half the time. Tr. 38/13179-180.
MMA witness Gorham told a similar story about the additional worksharing
that his company performs for the Postal Service:
59
To facilitate mail entry, CSG has worked with the Postal Service to
establish a Detached Mail Unit (DMU) at each of our two operating
centers. Having a DMU at CSG’s plants allows the USPS to
conduct mail verification and acceptance on site, rather than the
local Postal Service plant. Accordingly, DMUs and related plant
load arrangements we have put in place make it possible for many
truckloads of mail to bypass the local postal facility entirely, thereby
avoiding time consuming and expensive processing by the Postal
Service.
CSG also employs PostalOne! for transportation management.
The PostalOne! transportation system allows us to schedule, in
advance, the lowest cost transportation for each tray in our
production line while the tray is still being processed in CSG’s
facility. With PostalOne!, the Postal Service has access to data on
the volume and destination of our outgoing workshared mail several
hours in advance. In addition, it allows us to “presort” truckloads of
mail so that every day several truckloads of CSG’s mail can be
routed so as to bypass one or more intermediate hubs or HASPS,
at which cross docking would otherwise have to be performed by
the Postal Service. This practice of loading trucks with mail
destined to the same delivery area is fairly new and has increased
substantially over the past few years as we and the Postal Service
have become more attuned to PostalOne!’s capabilities.
PostalOne! is a good example of the cooperative and mutually
beneficial relationship that exists between high volume mailers
such as CSG and the Postal Service. By leveraging new
technologies and thinking “smart,” the Postal Service and high
volume mailers routinely save significant transportation and related
mail processing costs that the Postal Service must incur when
much lower, less regular, volumes of mail are accepted at a local
postal facility. With the advent of PostalOne! there can be no doubt
that the Postal Service saves transportation costs because of the
manner in which we pack its trucks, compared to just eight years
ago.
Today, very high volume mailers such as CSG Systems and Verizon receive no
specific recognition in discounts for the extra worksharing tasks they perform on
behalf of the Postal Service and other mailers. Instead whatever savings their
highly efficient make possible are spread over all presort mail volumes, allowing
for unjustified, continued cross subsidizations of low volume presort mailers by
high volume mailers.
60
The testimony of MMA witnesses McCormack and Gorham demonstrates
beyond cavil how PostalOne! and other innovative, cooperative agreements
between high volume presort mailers and Postal Service officials allows the
Postal Service to save significant transportation costs. While the Commission
decided not to give any recognition to such savings in the derivation of the
workshared cost savings in MC95-1, MMA submits that changed circumstances
and practices instituted in the last decade should allow the Commission to
reconsider that ruling and take transportation cost savings into account. MMA
urges the Commission to direct the Postal Service to study this issue.
For these reasons, the current First Class workshare rate structure does
not give high volume mailers the credit for the cost savings they earn and
deserve. The Postal Service has not seen fit to study this matter and provide
constructive rate structure changes. Accordingly, the Commission should direct
the Postal Service to study the effects of consistently high workshared letter
volumes and submit appropriate changes to give high volume mailers direct
credit for all the extra worksharing they perform.44
IX.
Findings and Conclusions
Based on the record in this case, MMA requests that the Commission
make the following findings of fact and conclusions of law:
1.
the Postal Service’s proposed discounts for First Class workshared
mail are fair and equitable and supported by substantial evidence.
2.
use of the Postal Service’s delinking methodology results in a
simpler, less controversial method for setting workshared mail rates.
44
In this regard, there can be no question that the Postal Service reduces the need to process
costly undeliverable-as-addressed (UAA) letters because of its requirement that workshared
mailers perform expensive, time-consuming and ever complex move update procedures that
check and re-check the accuracy, reliability, and readability of addresses. APWU witness Kobe
devalues the Postal Service’s obvious cost sparring advantages by claiming that single piece
BMM mailers, that have no such requirements, are also checking their addresses “on a regular
basis.” Tr. 20/7229. Yet she has no means to support this contention simply because so little is
known about BMM mailers. Moreover, workshared mailers -- that spend so much time and
resources to comply with current and future move update regulations -- take offense by Ms.
Kobe’s unsupported conclusion. If BMM mailers “checked” their addresses as Workshared
mailers are required to do, then why would the Postal Service spend so much time and money
enforcing and developing ever-complex move update regulations to begin with? The impact of
complying with move update requirements should also be studied for future inclusion in
workshared cost savings.
61
3.
MMA witness Bentley’s adjustments to the USPS methods for
supporting the First Class workshared discounts under delinking, as
shown in the following table, are reasonable and provide substantial
evidentiary support for the specific First Class workshare discounts
proposed by the Postal Service, (as shown in the table below)
because, inter alia, the percentage passthroughs are all well below
100%.
First Class
Workshared
Category
USPS
Proposed
Discount
USPS
Proposed
Incremental
Discount
TY 2008
Total
Workshared
Unit Cost*
Incremental
Unit Cost
Savings
Incremental
%
Passthrough
7.4
8.5
8.9
10.8
1.1
0.4
1.9
12.17
10.22
9.53
7.30
1.95
0.70
2.22
57%
58%
85%
MMA
Auto Mixed AADC
Auto AADC
Auto 3-Digit Letters
Auto 5-Digit Letters
4.
Application of a more traditional cost savings approach to setting
discounts also supports the specific discounts proposed by the
Postal Service in this case. As shown in the following table, the
derived cost savings justify the discounts, because, inter alia,, all of
the percentage passthroughs are well below 100%.
First Class
Workshared Category
USPS
Proposed
Discount
NonAutomation
Auto Mixed AADC
Auto AADC
Auto 3-Digit Letters
Auto 5-Digit Letters
Auto CR Letters
2.0
7.4
8.5
8.9
10.8
10.8
MMA Derived
Unit Cost
Savings
Total %
Passthrough
2.9
8.5
10.5
11.1
13.4
13.4
70%
87%
81%
80%
81%
81%
USPS
Proposed
Incremental
Discount
2.0
5.4
1.1
0.4
1.9
1.9
MMA Derived
Incremental
Unit Cost
Savings
2.9
5.6
1.9
0.7
2.2
2.2
Incremental %
Passthrough
70%
96%
57%
58%
85%
85%
Source: MMA-LR-1, page 1
5.
IOCS redesign has resulted in significant, disproportionate cost shifts
to First Class workshared mail. The Postal Service has not provided
an adequate explanation for these costs shifts. Accordingly, the
Commission directs the Postal Service to demonstrate in the next
omnibus rate proceeding that these cost shifts are not the result of
inherent bias in the new system for collecting and assigning IOCA
tallies.
6.
The Postal Service’s shape-based rate proposals within First Class
allow rates to better track costs and send proper price signals to
mailers.
62
7.
The Postal Service has not adequately recognized volume as a
primary cost driver in its construction of rates proposed in this case.
The current one-discount-fits-all approach to First Class workshared
mail discounts discriminates against many high volume mailers who
perform additional worksharing that smaller mailers cannot and do
not perform. Workshared rates have not kept up with technological
advancements associated with worksharing. Therefore, the
Commission directs the Postal Service to study the effects of
consistently high volume mailings on all relevant cost savings,
including transportation costs, and consider appropriate de-averaged
workshared discounts in the next omnibus rate proceeding.
8.
The Postal Service’s proposal to lower the additional ounce rate for
First-Class single piece and workshared letters is long overdue and
provides rates that are more shaped based and equitable.
Respectfully submitted,
Major Mailers Association
By:
____________________________
Michael W. Hall
35396 Millville Road
Middleburg, Virginia 20117
540-687-3151
Counsel for
Major Mailers Association
Dated: Middleburg, Virginia
December 21, 2006
63
Appendix I
CRA Cost Pool Classifications
Modeled
Cost Pools
MODS 11
MODS 11
MODS 11
MODS 12
MODS 12
MODS 12
MODS 13
MODS 13
MODS 13
MODS 13
MODS 13
MODS 14
MODS 14
MODS 14
MODS 14
MODS 15
MODS 17
MODS 17
MODS 17
MODS 17
MODS 17
MODS 17
MODS 17
MODS 17
MODS 17
MODS 17
MODS 17
MODS 17
MODS 18
MODS 18
MODS 18
MODS 18
MODS 18
MODS 18
MODS 18
MODS 18
MODS 19
Cost Pool
Abbreviation
Proportional
BCS/
BCS/DBCS
OCR/
FSM 100
FSM/
FSM/1000
MECPARC
SPBS OTH
SPBSPRIO
1SACKS_M
1TRAYSRT
MANF
MANL
MANP
PRIORITY
LD15
1CANCEL
1DISPATCH
1FLATPRP
1MTRPREP
1OPBULK
1OPPREF
1OPTRANS
1PLATFRM
1POUCHNG
1PRESORT
1SACKS_H
1SCAN
BUSREPLY
EXPRESS
MAILGRAM
REGISTRY
REWRAP
1EEQMT
1MISC
ISUPPORT
INTL ISC
Not Modeled
Proportional
To Presort
Level
Fixed to
Presort
Level
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
64
Modeled
Cost Pools
MODS 19
MODS 41
MODS 42
MODS 43
MODS 44
MODS 48
MODS 48
MODS 48
MODS 48
MODS 49
MODS 79
MODS 99
BMCS
BMCS
BMCS
BMCS
BMCS
BMCS
NON MODS
NON MODS
NON MODS
NON MODS
NON MODS
NON MODS
NON MODS
NON MODS
Cost Pool
Abbreviation
Proportional
PMPCS
LD41
LD42
LD43
LD44
LD48 EXP
LD48 OTH
LD_ADM
LD48_SSV
LD49
LD79
1SUPP_F1
NMO
OTHR
PLA
PSM
SPB
SSM
ALLIED
AUTO/MEC
EXPRESS
MANF
MANL
MANP
MISC
REGISTRY
Not Modeled
Proportional
To Presort
Level
Fixed to
Presort
Level
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Total
65