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BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON, D.C. 20266-0001
POSTAL RATE AND FEE CHANGES, 2000
c;i :: ‘~,
Docket
No. R2000-1
INITIAL BRIEF OF RECORDING INDUSTRY
ASSOCIATION
OF AMERICA, INC.
Communications
regarding this document
should be served on
Ian D. Volner
N. Frank Wiggins
Venable. Baetjer, Howard & Civiletti, LLP
1201 New York Avenue, N.W.
Suite 1000
Washington, DC 20005-3917
Dated:
September
13.2000
1 Q: /:;i ‘[IT3
TABLE OF CONTENTS
I.
There is Neither Theoretic nor Factual Justification
For A 180% Increase In the Residual Shape Surcharge
Paid By Standard (A) Regular Mailers.
.
A.
The Proposal To Maintain A Single Surcharge
Across All Standard (A) Subclasses
Is Indefensible
.
B.
The Theoretic And Factual Predicates
Considering Revenue Effects in the
Development of a Surcharge For
Standard (A) Regular Are Compelling
C.
The Postal Service’s Under-Estimation of
Revenue and Mismatch Costs Reinforce
the Conclusion that the Residual Shape
Surcharge Applicable to Standard (A) Regular
Commercial Subclass Must be Significantly Less
Than the 18-Cent Rate Proposed by the Postal Service .
1.
2.
D.
II.
For
B.
C.
10
The Postal Service has UnderEstimated Surcharge Revenues
10
The Mismatch Between the
Measurement of Parcel Costs and
the Measurement of Revenues Precludes
a Measurement of the Cost Differential
Between Parcels and Flats.
. .
11
The Surcharge for Standard (A) Regular
Commercial Mail Should Not Exceed 13-Cents
Before the Barcode Discount.
The Infirmities in the FYI999 Data Concerning the Costs
Of Special Standard (B) Mail Must be Rectified . . .
A.
5
13
14
There is No Dispute That the 1999 Costs of Special
Standard (B) are Wrong
.
14
Mr. Degen’s Proffered Explanation for the Cost
Variance Phenomenon is Not Persuasive.
17
The “Remedy” that Flows from Mr. Degen’s Theory
Of Cause is as Infirm as that Theory; Dr. Elliott’s
Proposal is Much More Sound
.
18
Conclusion.............................................
19
BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON, D.C. 20268-0001
Docket
POSTAL RATE AND FEE CHANGES, 2000
No. R2000-1
INITIAL BRIEF OF RECORDING INDUSTRY
ASSOCIATION
OF AMERICA, INC.
This
importance
(“RIAA”).
Standard
proceeding
raises
to members
two
issues
of the Recording
RIAA members
(B) subclasses
of
particular
and
Industry Association
use both the Standard
fundamental
of America,
(A) Regular
and the Special
to deliver audio and video materials -- compact
tapes and digital video discs -- to audio and video club members
consumers
that order these products.
and other
of the Standard
by 180%. The second arises because the Postal Service has,
by its own admission,
charged the Special Standard
pieces that were actually sent at Standard
very substantially
discs,
The first issue arises because the Postal
Service has proposed to increase the “residual shape surcharge”
(A) rate schedules
Inc.
overstated
(B) category
(A) Regular rates.
the attributable
cost of Special
with costs of
It has, as a result,
Standard
(B) in
FY1999.
RIAA’s position
with respect to these issues, each of which
affects the rates that RIAA members
follows:
pay, may be succinctly
profoundly
summarized
as
1.
The Commission
should recommend
discount for the Standard (A) Regular commercial
13 cents before application
of the proposed
Service has failed to justify its continued
surcharge
applicable
a residual
subclass that does not exceed
pre-barcode
adherence
to all four Standard
shape surcharge
discount.
The Postal
to a single, one-size
(A) Regular subclasses.
fits-all
The Postal
Service has also improperly
and unfairly ignored revenue effects in its calculation
of the surcharge
to the Standard
applicable
(A) Regular commercial
The Postal Service has further under-estimated
derived from the residual shape surcharge
methodology
subclass.
revenues that are, in fact, being
and it has admitted
that its costing
treats pieces that qualify as flats as if they were parcels and is,
therefore,
unreliable.
Given the analytic
Service’s
presentation,
a 13-cent surcharge
and factual
defects
(before application
in the Postal
of the barcode
discount) will not cause cost burdens to be shifted to other users of the Standard
(A) Regular commercial
2.
rate category.
There is agreement
Special Standard (B) attributable
explanation
remedy.
FYI999
that the Postal Service’s
costs for FYI999
of what caused these anomalies
RIAAs
approach
Special Standard
original
estimate
is infirm. The Postal Service’s
is unconvincing
as is its proposed
to adjusting the Postal Service’s original estimate
(B) costs should be adopted
be reduced accordingly.
2
of
of
and those costs should
I.
There is Neither Theoretic
nor
Increase
in the Residual Shape
Regular Mailers
The residual shape surcharge
the result of the decision
Postal Service’s
justified.’
proposed
residual
surcharge
Regular commercial
A.
applicable
therefore,
by
is self-
analysis of the
in a very substantial
(A)
R97-7
Surcharge
a “single
of the Standard
All
surcharge”
(A) subclass
that this was “only a beginning
at 427 at 75488.
The decision
does not reflect the variation
flats and parcels
Across
by subclass.”
Id.
explicitly
in
cost
The Commission,
urged the Postal Service to explore this issue further with particular
consideration
1
in Docket
between
endorsed
in the surcharge
recommended
it recognized
that the single surcharge
differential
seems to rest upon the
It results
to all residual shaped pieces regardless
“recognizes
stated, the
mail subclass.
in R97-1 the Commission
Decision
not explicitly
the Postal Service has proposed for Standard
in which they might be entered,
step.”
R97-1.
The Proposal
to Maintain
a Single
Standard (A) Subclasses
is Indefensible
Although
IO, 1999 as
misreads the Rate Commission’s
in Docket
of the surcharge
on January
in R97-1 was unqualifiedly
and that the 180% it has proposed
shape
overstatement
Although
shape surcharge
it employed
This view profoundly
residual
was implemented
in Docket R97-1.
belief that the methodology
the Commission
Factual Justification
for a 180%
Surcharge
Paid by Standard
(A)
to the question
of “how
to set shape
differentials
within
the
The Postal Service’s proposed barcode discount should be adopted. But, as we discuss
in this brief. the surcharge and barcode issues must be considered separately.
3
Standard
so.
single
(A) subclasses.”
Id. at 75489.
The only explanation
or uniform
formulated.”
for the Postal Service’s
is “that’s
surcharge
Tr. 10/4107.
“precedent”
The Postal Service simply has not done
the
way
continued
the
adherence
current
to a
surcharge
This explains nothing: It very profoundly
misreads the
(Id.) upon which the witness purported to rely.
There simply is no factual basis in this record to justify the imposition
single, one-size fits-all shape surcharge.
a uniform surcharge
The Commission’s
But the surcharge
calculate whether
of a
decision to tolerate
in Docket R97-1 plainly rested on the premise that, under
then current rates, no parcels in any of the subclasses
cost.
is
is now in effect.
covered their attributable
Mr. Moeller admitted
that he did not
and if so to what extent there is now a “negative
contribution”
for each or any subclass and he did not “have any specific figures” (Tr. 10/4105)
on that subject.
What we do know, and what witness Moeller did not dispute, is
that even under the truncated
Postal Service,
and peculiar costing methodology
it is clear that the cost differential
differs markedly from subclass to subclass.
6.1 and 6.2.
cost differential
For example,
between
USPS-T-27
the Postal Service’s
ECR parcels
between
application
significant
of the same surcharge
differences
at Attachment
this one-size
across four subclasses
in cost differentials
F. Tables
shows that the
and ECR flats is 12-cents
to defend
by the
flats and parcels
own testimony
greater than it is in the Standard (A) Regular commercial
It is simply impossible
employed
per piece
subclass.
fits-all surcharge.
The
each of which displays
is, on its face, arbitrary and capricious.
The fact that the Postal Service proposes
4
to require mailers of residual shape
pieces to bear only a portion of the measured cost differential
If the proposed
27.5% pass through (USPS-T-35
cost differentials
pre-barcode
surcharge
between
discount)
for commercial
subclass
which it purports
(A) Regular
would
ECR would be 18 cents.
Table 6.1. In short, the l&cent
commercial
at 7) were applied to the actual
parcels and flats by subclass,
for Standard
surcharge
not only conflicts
does not alter this.
the surcharge
(before
be 15 cents
and the
USPS-T-27
at Attachment
proposed for the Standard
with the Commission
to be based, but cannot be reconciled
F,
(A) Regular
“precedent”
on
with the fairness
and
equity criteria of Section 3622(b)(l).
B.
The Theoretic and Factual Predicates for Considering
Revenue
Effects In the Development
of a Surcharge
for Standard
(A)
Regular are Compelling
In the R97-1 case, RIAA, among others, pointed out that the surcharge
is
paid by residual shape piece shippers over and above the rates of the Standard
(A) subclass
parcels
in which the piece is otherwise
entered.
Because,
are heavier than flats within the same subclass,
pay more, under the piece-pound
same subclass.
pieces
flat of the
We argued that the revenues the Postal Service receives from
subject
determining
the amount of the surcharge.
concluded
surchargeable
rate structure, than the comparable
shipments
in the R97-1
on average,
case
to the
parcel
shape
surcharge
The Commission
but did so on very narrow
that, although it “cannot permanently
there is not a sufficient theoretic
should
basis justifying
5
be included
rejected this analysis
grounds:
The
Commission
rule out the use of revenues
its use
in
..
in the instant case.”
Decision in Docket R97-7 at 426,75485.
the R97-1 decision
Accordingly,
was only a “beginning
and again recognizing
step” the Commission
that
specifically
directed the Postal Service to attend, in future filings, to “both the similarities
differences
75489.
between
worksharing
and shaped-based
differentials.”
and
Id. at 427,
The Postal Service has defaulted on this issue as well. RIAA has not.
Witness Glick, on behalf of RNA, demonstrates
“theoretic
basis” for consideration
surcharge
for the Standard (A) Regular commercial
failure to do so improperly
Standard
of the revenue effects in the development
imposes
(A) Regular commercial
worksharing
to isolate
causative
burdens
He shows that the
on mailers who use the
of worksharing
discounts,
It is
the only relevant
is the costs that the Postal Service actual saves as the result of
activities performed
“shape-based
revenue
subclass.
of a
subclass to ship residual shape pieces.
certainly true that in the development
consideration
that there is a compelling
differentials”
a particular
differences
by the mailer.
However,
in the development
of
the purpose of the inquiry is very different: the goal is
cost-causing
characteristic
from
among
between two different subsets of mail.
testifies, the analogy to worksharing
cost savings measurement
cost-
Thus. as Mr. Glick
“is inapposite”:
The more appropriate analogy is to the methods used
by the Commission
to reflect cost (and rate)
differences resulting from shape, among the other
cost-causing characteristics, of different recognizable
types of mail pieces.
One must control for cost
differences caused by a// characteristics
other than
shape.
6
other
Tr. 23/10392
Standard
(emphasis
supplied).
In measuring
the cost difference
(A) flats and parcels “the cost characteristics
between
that must be held equal
include the depth of presort and depth of drop ship as well as weight.”
23/10392.
Witness
Crum did include corrections
cost characteristics.”
weight.
Tr.
“to account for differences
He did not make any adjustments
in
for the differences
in
Tr. 23/10392.
Ideally, isolation of shape as a cost driver in the Standard
would
be accomplished
increment.
by analyzing
(A) subclass
reliable cost data by shape and weight
Since the Postal Service has no such studies, Mr. Glick explains that
the proper approach
in weight
for “correcting
the non-letter
is to use the weight-related
revenue
parcels as a proxy for the weight-related
cost difference
difference
cost difference.”
for differences
between
Tr. 23/10393.
Finally, witness Glick explains why his inclusion of weight-related
effects
is
Commission
entirely
consistent
has traditionally
differential
but yields
differential,
it is not necessary
because
23110393.
the comparison
with
the
employed
a very different
shape-based
differential
revenue
that
the
in the development
of the letter-flat
result:
of the letter-flat
In the case
to isolate for weight-related
involves mail of “approximately
costs or revenues
the same weight,”
However,
The average Standard (A) commercial parcel weighs
2.5 times as much as the average Standard (A)
commercial flat .
having a pound rate as well as
including weight-related cost differences in setting the
residual shape surcharge amounts to double-charging
parcels for weight-related costs.
7
flats and
Tr.
Tr. 23/10393.
In sum, the inclusion of revenue effects (as a proxy for weight-
related cost differences)
procedure
75485.
does not really depart from the Commission’s
for setting shape-based
rate differentials.”
It simply applies that methodology
shape, are cost-causative
differences
Service
Witness
Moeller’s
revenue
cost relationship
lacks explanatory
discount
in a context in which weight as well as
offers
being measured.
no cogent
rebuttal
asserts that the Commission
discount for machinable
Decision in R97-7 at 426,
factors and in which the failure to reflect weight-related
distorts the cost differentials
The Postal
“traditional
because
need not trouble
the Postal Service
pre-barcoded
parcels.
to Mr. Glick’s
itself with the
has proposed
USPS-T-35
analysis.
a 3-cent
at 7-8. This entirely
force because some mailers will pay 18 cents and because the
is based on avoided costs, not shape-related
cost drivers; the notion
that the barcode discount should be viewed as an offset to the surcharge
only to perpetuate
the confusion
savings and the measurement
cost-causative
between the measurement
of cost differentials
of worksharing
cost
resulting from differences
in
characteristics,
The further argument
that it would “not be undesirable
parcels
to make some contribution
equally
misses the mark.
determine
serves
whether,
to institutional
As indicated,
witness
at current rates, Standard
make a negative contribution.
(A)
costs” (USPS T-36 at 7-8)
Moeller made no attempt
(A) Regular
commercial
to
parcels
Thus, there is no sound support for his conclusion
that, at 18 cents, any contribution
made would only be slight.
simply
how much of a contribution
no means
for Standard
of determining
8
In fact, there is
parcels
in the
Standard
(A) commercial
surcharge
would
subclass
be needed
parcels and flats.
of the surcharge
occurred
to achieve
Tr. IO/3935
cost and revenue figures.
now, much
“similar”
less how
coverages
much
on FYI998
in rates and costs that
He has also entirely ignored the differences
in weight-
related costs which Mr. Glick calculated to be 20 cents at current rates.
Regular commercial
that it is “theoretically
make a “higher contribution”
(A)
in view of the implementation
1999, and the other changes
Mr. Moeller himself conceded
of a
for Standard
Mr. Moeller based his conclusions
These are meaningless
in January
in FYI 999.’
make
possible”
Indeed,
that Standard
(A)
than do flats in that subclass.
Tr. 1013935.
In R97-1, the Commission
surcharge
to address
carefully
what was perceived
explained
that it recommended
to be intra-class
cross subsidies.
Decision in R97-7 at 426.
It never said that the purpose of the surcharge
equalize the contributions
of parcels and flats and there is neither statutory
economic
grounds
for this result.
By ignoring weight-related
the purpose
Standard
difference
2
The Commission
of the surcharge.
(A)
Regular
should not perpetuate
In calculating
commercial
the appropriate
subclass,
the
was to
nor
cost differences,
however, the Postal Service overstates the extent of the cross-subsidy
rates, if there is one.
the
at current
this distortion
surcharge
weight-related
of
for the
revenue
between parcels and flats must be taken into account.
Mr. Moeller speculates that the FY1999 cost differential between Standard (A) Regular
commercial parcels and flats might be greater than it was in FY1998 because less costly
parcels might have been properly entered as flats. Tr. 46-D/21494. This conjecture fails
on two grounds: it ignores the fact that these pieces were treated as parcels for costing
purposes (see discussion infra at Part C.2); and it also ignores the fact that any cost
increase in parcel costs may have been weight, not shape, related.
9
The Postal
Service’s
Under-Estimation
of Revenues
and
Mismatch of Costs Reinforce the Conclusion
that the Residual
Shape
Surcharge
Applicable
to Standard
(A) Regular
Commercial
Subclass Must be Significantly
Less Than the 18Cent Rate Proposed by the Postal Service
C.
The Postal
Revenues
1.
Under
the
recommended
DMCS
language
by the Commission
subject to the surcharge
Service recognized
(Tr. 10/4049)
has
the
Postal
in the last case, Standard
DMCS 321.25.
Surcharge
Service
(A) subclass
and
mail is
as a parcel” or, alternatively,
In its implementation,
if it
the Postal
that certain pieces -- those between .75 and 1.25 inches thick
-- are “flat-shaped”
and are not always “prepared
as a parcel.”
It
quite correctly, that by the terms of the DMCS provision, these pieces
are not surchargeable.
that some adjustment
In this case, and equally correct, witness Moeller realized
to his surcharge
to reflect these non-surchargeable
revenue estimate would have to be made
parcels.
Having absolutely
number of parcels that were not surchargeable
dated implementation
estimate
Under-Estimated
proposed
if it is either “prepared
is “not letter or flat-shaped.”
concluded,
Service
of revenue
of the surcharge
reduction
would meet the dimensions
WP 1 at 14.
expected
USPS-T-35,
Tr. 10/4070.
revenues
no data as to the
in the Base Year -- which pre-
-- Mr. Moeller simply made a judgmental
by arguing that 25% of the “ostensibly
of and otherwise
be prepared
He carried fonvard
as flats.
this judgmental
into the before and after rates analysis
parcels”
USPS-T-35,
reduction
of
in the Test Year.
WP 1 at 14-15.
In the event,
actual
FY1999
data shows
residual shape volume were not surchargeable.
10
that nowhere
near 25% of
The witness conceded
that the
estimates
on which its revenue calculations
are based understate
that the Postal Service actually derived (at the IO-cent surcharge)
the revenues
by $17.8 or
$24.6 milliotx3 Tr. 48/22488.
The Postal Service’s claim that actual FYI 999 data should have no effect
on the proper level of the surcharge
subclass
cannot be credited.
for the Standard
Plainly, the Commission
Postal Service to pocket this money.
(A) Regular
commercial
cannot simply allow the
Nor is it appropriate
for the Commission
to
apply these found revenues against base rates for Standard (A) Regular mail: the
revenues
are directly derivable
They should, therefore,
of the surcharge.
be taken into account in determining
Because
these found revenues
from pieces that are subject to the surcharge.
in its proposed
level of the surcharge
commercial
subclass.
The Mismatch
Measurement
Differential
some
of Revenues
developing
surcharge,
applicable
to measure
his revenue
Virtually
Precludes
3
to the Standard
the volume
estimates,
that his cost estimate
overstated
(A) Regular
of Parcel Costs and the
a Measurement
of the Cost
Although witness Moeller at least made
of pieces
witness
that are surchargeable
Crum,
analysis -- upon which witness Moeller’s testimony
conceded
it has definitionally
Between the Measurement
Between Parcels and Flats.
attempt
level
the Postal Service has not, and refuses, to reflect
the proper
2.
the appropriate
who
supplied
in
the costing
purports to be based -- freely
simply ignored pieces that are flat-shaped
and
The difference between these two calculations turns upon whether the hybrid year
percentage of non-letters paying the surcharge or the percentage of non-letters paying
the surcharge in that portion of FYI999 during the surcharge was in effect used. For
purposes of this argument. the difference is not material.
11
are not prepared
itself, these
as parcels.
pieces
Despite the fact that, by the terms of the DMCS
are not surchargeable
they were nonetheless
treated
as
parcels for purposes of the surcharge costing analysis:
“Probably the best way to answer that is that there
has been - there never has been -- a change in the
costing systems over what is considered a parcel.
Anything exceeding .75 inches is a parcel
Q: Regardless
of how it is prepared?
A: Regardless
of how it is prepared
Q: And that was true in FY1999?
A: Yes.
Tr. 8/3518; see a/so, Tr. 8/3433.
Indeed, the witness stated explicitly that
“if I were to use 1999 data, the existing regulations for
the flat automation rate could cause uncertainty in my
present cost study methodology for the .75 inch to
1.25 inch thick qualifying pieces regarding what is a
parcel and what is a flat.
Tr. 8/3433.
In short, the definition
revenue estimation
of surchargeable
for volume
and
purposes exclude pieces that meet the definition of a flat (are
less than 1.25 inches thick) and are prepared
purposes,
pieces
as flats.
However,
for costing
the DMCS provision (which plainly holds that these pieces should not
be surchargeable)
is ignored and these pieces are treated -as if they were subject
to the surcharge.
It is very difficult to know what to make of this mismatch
and cost estimations.
between
revenue
It is certainly clear that the Postal Service’s cost collection
12
methodology
invalidates
recommended
the surcharge
representations,
a central
premise
in the first place.
the Commission
upon
which
the
Commission
Relying on the Postal Service’s
stated that
pieces prepared as parcels will be handled as
parcels, with the associated cost of parcels, not the
cost of letters or flats
. similarly, the IOCS
definitions of shape are clear for costing purposes.
Decision
in Docket R97-1 at 424, fl5481.
half true: Pieces
prepared
as parcels
It turns out that this equation
are being handled
as and costed
parcels; but pieces that meet the definition of a flat and are prepared
also being treated
as parcels “for costing
purposes.”
himself
stated
no way to know
forthrightly
mismatch
between
methodology
there
the operation
is simply
the Commission
And, as witness
what
of cost differentials.
to be very chary before recommending
application
surcharge
proposed
to the Standard
difficult for the Commission
precisely
effect this
costing
a 180% increase
in the
subclass.
The Surcharge
for Standard
(A) Regular
Commercial
Should Not Exceed IJ-Cents Before the Barcode Discount
While there is no question that the proposed
discount)
Crum
This should compel
residual shape surcharge for the Standard (A) Regular commercial
D.
by the
(A) commercial
Given the collapse
Service
must
with appropriate
for the Standard
be rejected
analytic
(A) commercial
of the Postal Service’s
13
Mail
18-cent (before pre-barcode
subclass, it will be considerably
to try to determine,
at what level the surcharge
should be set.
Postal
as
as flats are
of the DMCS and the Postal Service’s
has on the measurement
is only
in
more
rigor,
class
cost measurement
systems
in application
conviction,
to surchargeable
that the surcharge
pieces,
it can be argued,
with some
for this subclass should be retained at the current
IO-cent rate and that the 3-cent per piece barcode discount should be applicable
to that surcharge.
At the upper boundary,
insists upon a uniform surcharge
barcode discount)
15 cents.
the range.
This yields a surcharge
Postal Service
surcharge
Regular
and probable permissible
to roughly split the difference
discount would apply.
surcharge
across all subclasses,
the surcharge
(before
barcode
between the upper and lower ends of
of 13 cents against which the pre-barcode
it cannot
discount
unfairly or improperly
commercial
as a legal matter, for the
Certainly, given the methodological
has committed,
before
wrongly
should not exceed that proposed for the two ECR subclasses,
It is not uncommon,
Commission
and even if the Commission
subclass
and factual errors the
be heard to complain
Nor would
is unreasonable.
burden other rate categories
-- rate categories
that a lbcent
such
in the Standard
a
(A)
that are, in fact, used by RIAA
members themselves.
II.
The Infirmities In The FYI999 Data Concerning
Standard (B) Mail Must Be Rectified
A.
There is No Dispute
(B) Are Wrong
that the 1999 Costs
When the Postal Service first filed its FYI99
data, those data reflected very substantial
the mail processing-related
inquired
into the Postal
The Costs
of Special
of Special
Standard
CRA and billing determinant
increases in the costs, and particularly
costs, of Special Standard (B) mail. The Commission
Service’s
understanding
response was not illuminating:
14
of this phenomena.
The
CHAIRMAN GLEIMAN: The unit costs for Standard
(B) Special mail increased between FY ‘98 and FY ‘99
by 21 percent from $1.30 to $1.56.
Much of this
increase, 17 cents, appears to be related to Cost
Segment 3, clerks and mail handlers.
Can you explain why the Cost Segment 3 costs have
increased so much?
THE WITNESS [MR. PATELUNAS]:
at that. I don’t know.
I haven’t looked
CHAIRMAN GLEIMAN:
Okay, so then you wouldn’t
be able to tell whether there had been a change in
mail characteristics or processing procedures?
THE WITNESS:
Tr. 35/16833.
I don’t know.
The Postal Service
following institutional
subsequently
(on August.7)
responses to these two questions:
There were methodological
changes between fiscal
year 1998 and fiscal year 1999. However, even using
comparable
methodologies
for 1998 and 1999,
Special Standard mail processing costs still increased
(46.3% under the PRC version between base year
1998 and fiscal year 1999, 43.6% under the USPS
version). The increase is due primarily to an increase
in Special Standard direct tallies. A change in the
endorsement
requirements for Special Standard in
fiscal year 1999 may have resulted in improved
identification and contributed to an increase in IOCS
special Standard observations.
In addition, Special
Standard observations could vary due to sampling
error or underlying cost changes
We are not aware of any changes
in mail
characteristics
or processing procedures that would
have contributed to the increase in Special Standard
unit costs, other than the endorsement
change
implemented
in January 1999, mentioned
in the
previous response. (The change was that the special
15
provided
the
Standard Rate marking had to be in the postage area
rather than just anywhere on the piece.)
Response
of United States Postal Service to questions
August 3,200O.
hypothetical
on
Tr. 46-C/21048,21047.
Stuart W. Elliott, testifying
BY1998/FY1999
raised at hearing
cost data
explanations
and
for RIAA, sought to analyze
evaluate
of those
the
data.
the underlying
Postal
Service’s
substantially
Dr. Elliott
performed
a statistical
analysis and found that:
Using this coefficient of variation, it is possible to
derive a 95% confidence interval for mail processing
costs for Special Standard that ranges from a low of
$71 ,I 50,000 to a high of $90.582.000.
Tr. 41/18031
the FY1999
data are substantially
above the high point of this range, Dr. Elliott concluded
that, “the discrepancy
between
variations
(footnote
omitted).
Because
the BY1998 and FY 1999 costs is too large to be caused by sampling
alone.” Id. He then proceeded
two possible explanations
to test what he conceived
for the variation
in the numbers:
of as the only
“that there is either
something
wrong with the figures for one of the two years or that there was a
significant
cost change
between
the two years.”
former is the case and that the problem appears
estimates.”
Id.
He concluded,
“that the
to lie with the FYI999
costs
Tr. 41/18032.
There
was one more step to the testimonial
‘98/FY ‘99 variation
by the PRC,
in mail processing
the Postal
Service
dialogue
costs for Standard
presented
16
a witness
concerning
(B) mail.
BY
As directed
to advance
its best
understanding
of what had caused
the dramatic
change.
Mr. Degen
tacitly
agreed with Dr. Elliott that the difference in reported costs were not, in major part,
due to actual changes in costs. He offered the following substitute explanation:
However, a portion of the anomalous cost increase
was most likely due to some Standard (A) Regular
tallies being recorded as Special Standard, which
may have resulted from the change in marking for
Standard
(A) mail from “Bulk Rate” to “Presort
Standard.”
Mr. Degen’s
Phenomenon
B.
Proffered
Explanation
Is Not Persuasive
The lynchpin of Mr. Degen’s explanation
Standard
(A) endorsement
contributed
For The
Cost
Variance
for the belief that the change
substantially
to the confusion
in
in tallies is
that, though the change would not become mandato’ry until January of 2001, ” .
it became
January
optional
July 14, 1998 and was widely publicized
10, 1999 rate implementation.”
this wide publication,
Tr. 45/20052.
without which his explanation
cited to “Special Postal Bulletin 21984A,
demonstrated
consisted
while
on the
of approximately
stand
11-12-98,
As a demonstration
would
make no sense,
of
he
page 13.” Id. As Mr. Degen
(Tr. 45/20063-65)
six lines of relatively
as part of the
the
wide
publication
small print within a 170-page
special edition of the Postal Bulletin.
Not only
questionable,
is the “widely
publicized”
predicate
but the internal logic of his supposition
pointed out, ”
as an explanation
the change in the endorsement
because
it is. not consistent
17
for Mr. Degen’s
is suspect.
requirements
theory
As Dr. Elliott
is unpersuasive
with the stability
of Special
Standard
volume estimates.”
Special Standard
Tr. 41/18034.
volume increased
‘98 and FY ‘99 yet the mechanism
Cost System”)
volume
is substantially
of Special
System).
Standard
Dr. Elliott shows (Tr. 41118030) that
by a bit less than five percent between
for reporting
identical
Postal Service costs (“In-Office
to the procedure
mail (Domestic
Revenue
for estimating
Pieces
and
the
Weight
As Dr. Elliott points out, logic would dictate that if a labeling change led
misestimations
of costs in the IOC System,
misestimations
of volume in the DRPW System.
C.
it should have led to comparable
It did not.
The “Remedy”
That Flows From Mr. Degen’s Theory
Is As Infirm As That Theory; Dr. Elliott’s Proposal
More Sound
Mr. Degen reasons from his theory of misidentification
cure to the variance
Precisely
of Cause
Is Much
that the appropriate
problem is to drop from the IOCS cost count those tallies
that have internal evidence
pieces.
BY
of mistaking
Standard
(A) for Special Standard
because his theory of misidentification
(B)
is infirm, so is the relief
that he proposes
Dr. Elliott takes a different approach.
He concludes that:
If the Commission decides to base its recommended
rates on FY ‘99 update figures, the BY ‘98 mail
processing cost figures should be used instead to
derive an alternate FY ‘99 estimate for Special
Standard.
Tr. 41118037.
He also provides a mechanism
Special Standard
costs of $86,575,000.00
18
for doing this. Id. That results in
or $0.432 per piece. Id.
Dr. Elliott’s
approach
is by far the more sound of the alternatives
before the Commission
and
it should be adopted.
CONCLUSION
The residual shape surcharge
subclass
discount,
for the Standard
(A) Regular
commercial
should be set at not more than 13 cents, before the proposed
In developing
the rates for Special
should make the cost adjustment
Standard
barcode
(B), the Commission
proposed by RIAA.
Respectfully
submitted,
Ian D. Volner
N. Frank Wiggins
Venable, Baetjer, Howard & Civiletti, LLP
1201 New York Avenue, N.W.
Suite 1000
Washington, DC 20005-3917
Counsel for Recording Industry Association
of America, Inc.
19
CERTIFICATE
OF SERVICE
I hereby certify that I have this day served the foregoing
all participants
of record in this proceeding
in accordance
rules of practice.
Ian D. Volner
document
upon
with Section 12 of the