REBUTTAL COMMENTS
OF
THE ASSOCIATION FOR POSTAL COMMERCE
THE DIRECT MARKETING ASSOCIATION
MAIL ORDER ASSOCIATION OF AMERICA
NATIONAL ASSOCIATION OF PRESORT MAILERS
NATIONAL POSTAL POLICY COUNCIL
THE PARCEL SHIPPERS ASSOCIATION
Before
THE PRESIDENTIAL COMMISSION ON THE UNITED STATES POSTAL
SERVICE
March 13, 2003
The purpose of these comments is to place in perspective
several of the assertions contained in the testimony of
William Burrus, President of the American Postal workers Union
(APWU) and the supporting statement submitted by Kathryn Kobe,
of Joel Popkin and Company.
The Executive summary of the APWU testimony begins by taking
issue with the widely held view that the 32-year old business
and regulatory model under which the United States Postal
Service (USPS) operates is in need of change. It "is NOT
BROKEN," and " is far healthier than many large corporations"
claims the APWU. In the context of a triage setting, such
conclusions and comparisons would require a physician to
ignore vital signs and treat only the terminally ill. Then, a
mere two pages into its written submission, the APWU offers a
seemingly inconsistent assessment of the outlook in noting
that while "not yet broken [the USPS] does need to apply good
business principles." On this latter point we agree. The
USPS does need to apply good business practices. Moreover, to
the extent that the current business model poses an impediment
to doing so, it must be changed before the allegedly "not yet
broken" USPS is terminal.
The APWU pronouncement that the patient is well relies heavily
on the conclusion that mail volume has grown rather than
declined. As evidence, it provides a graph, at page 4,
depicting the growth in First-Class Mail volume over the past
30 years. Oddly, the very evidence of health--growth in mail
volume which is confined almost entirely to the introduction
of discounts for worked-shared mail--calls into question other
significant aspects of the APWU testimony as relates to
work-sharing discounts. In addition, given its reliance on
volume growth as the measure of institutional health, we are
mystified by the APWU's suggestion that the USPS withdraw from
a growth area--the package delivery business.
Any doubts that may remain about the APWU's arguments that the
Postal Service is healthy are thoroughly and systematically
rebutted in the January 2003 report of the General Accounting
Office (GAO) entitled "Major Management Challenges and Program
Risks, US Postal Service." Among the many concerns raised by
the GAO is "that growth in First Class Mail and Standard Mail
has been, on average, declining since the 1980s. Declines in
volume growth for these two classes are particularly important
because the Service relies on them for approximately
three-fourths of its annual revenue." GAO-03-118 at 5.
On the matter of work-sharing discounts, the APWU asserts that
they are too large. One section of the APWU testimony is
entitled "Gives Discounts Beyond Costs Saved" and focuses on
this allegation. There, APWU asserts, "The Postal Service asks
for the ability to give discounts to attract new customers.
Yet, it already gives discounts to large mailers equal to
about 25 % of the price that individuals and small businesses
pay for first class postage. It is especially troubling that
these discounts exceed the costs that the Postal Service saves
in its systems and that these discounts are for mail that has
no alternative delivery service. The current rate setting
mechanism forces single piece users to subsidize large mailers
and presort bureaus. This causes the Postal Service to lose
contribution of each piece that switches to excessively
discounted raters. As more mail takes advantage of these
excessive discounts and switches to a presort category, this
hurts profitability even more."
The statement is wonderful rhetoric, but it is factually
incorrect in numerous important aspects. As is shown below,
single piece users do not subsidize large mailers and presort
bureaus, the Service does not lose contribution on each piece
of workshared mail, discounts for workshared mail do not
exceed the costs avoided, and much of the workshared mail does
have alternatives. Moreover, absent the introduction of a
range of work-sharing incentives for all classes of mail,
there is little question but that both the quality of service
and financial condition of the USPS would be far worse. In
1999, alone, work-sharing enabled the UPSP to avoid some $15.3
billion in costs, according to a paper prepared by the staff
of the Postal Rate Commission.
Work-Shared Mail Does Not Receive a Subsidy
Testifying in Docket No, R97-1, Dr. John Panzer (USDPS-T-11 at
8) described the test to determine whether a service was being
subsidized:
The test accepted by economists to determine whether or not
any service (or group of services) is receiving a subsidy is
The Incremental Cost Test. The revenues collected from any
service (or group of services) must be at least as large as
the additional (or incremental) cost of adding that service
(or group of services) to the enterprise's other offerings.
This test is a very intuitive fairness standard. For if a
service's revenues do not cover the additional costs the
enterprise incurs in providing it, the users of that service
are receiving a subsidy from the enterprise's other customers.
On the other hand, if the revenues from all services (or
groups of services) are at least as large as their incremental
costs, then no user or group of users is burdened by their
provision. Indeed, in that case, the provision of each
service (or group of services) reduces the amount of revenues
which must be collected from the remaining services in order
for the enterprise to break even. And, the rate schedule is
free from cross-subsidy.
The USPS Cost and Revenue Analysis (CRA) for FY 2001 shows
that First-Class Presort Letters have an incremental cost of
$4.966 billion and contribute revenue of $13.224 billion. In
Standard Mail, Enhanced Carrier Route has an incremental cost
of $2.260 billion and contributes revenues of $4.980 billion
and Standard A Regular has an incremental cost of $8.085
billion and contributes revenues of $10.630 billion. Thus,
under the incremental cost test, there are no subsidies in
these large volume sub-classes of mail.
Work-Shared Mail Makes the Same Contribution Per Piece as
Non-Work Shared Mail
We do not believe that unit contribution is or ought to be the
relevant measure of a "fair" rate schedule nor that an equal
markup is the proper measure of whether a discount is
appropriate. In any event, the CRA also shows that per piece
(unit) contributions are as high for work shared mail as they
are for non-workshared mail. The unit contribution for
First-Class Presort Letters is $.179 while it is $.178 for
Single-Piece letters. And while in Standard Mail, there are
no single piece mailers and all mail is work-shared to some
degree, Enhanced Carrier Route (ECR) mail, which is the most
work-shared mail, makes a unit contribution of $.084 while
Regular contributes $.050 per piece.
Discounts in Work-Shared Mail Do Not Generally Exceed USPS
Cost-Savings
Because the In-Office Cost System (IOCS) does not track costs
at a rate category level, the Postal Service uses engineering
models to estimate the costs avoided by workshared mail.
Discounts are then based on the cost savings. In Standard
Mail, it is true that some discounts are more than the costs
the models shows the mail avoids, but in other cases, the
discounts are substantially less than the avoided costs. And
testimony in rate cases has shown that where the discounts are
higher than the estimated avoided costs, the Postal Service
has underestimated the avoided costs. (Direct Testimony of
Sander A. Glick ; PostCom, et. Al.-T-1,R2000-1, pages 9-19.
For First-Class Mail, the FY 2001 CRA shows a marginal unit
cost of $.243 for Single-Piece Letters mail and $.101 for
Presorted Letters. Thus, Presorted letters cost $.142 less
than Single-Piece letters, a cost difference that far exceeds
any of the worksharing discounts. Although some of this cost
difference may be due to factors other than the worksharing
that was specifically measured (see the last section of this
statement), the fact remains that the discounts are less, not
more, than the cost difference.
There are Alternatives to the Postal Service for Some Work
Shared Mail
It is na‹ve to assert that there are no alternatives for
work-shared mail. Standard Mail is advertising mail, and
other media compete with the Postal Service for this
advertising. Newspaper inserts compete vigorously with
Enhanced Carrier Route mail and newspapers intervene in rate
cases to increase the rates for ECR. Standard mailers
constantly and increasingly explore the use of other media
like the internet and also test the use of smaller
advertisements in the mail. As more and more people receive
bills, proxy statements, and bank statements on-line, the
alternatives to a major portion of mail becomes clearer and
clearer. Reducing or eliminating existing worksharing
incentives for this mail will necessarily render the
electronic alternative increasingly attractive. And finally,
the portion of First-Class Mail that is advertising and
solicitations, could easily shift to Standard Mail. It is
important to understand that a price elasticity of less than
one is not the same as no alternatives.
Mailers Perform Work, Frequently Mandated, that is not
Compensated in Work Sharing Discounts
It is also important to note that mailers perform a
substantial amount of work and thus incur substantial costs
that are not reflected in worksharing
discounts in order to qualify for these discounts. All mailers
who receive
discounts must perform list hygiene, periodically checking
their mailing
lists against USPS-licensed software to ensure that addresses
bear correct
delivery point barcodes. In contrast, single piece mailers are
not required
to check the codibility of the address to which they are
mailing.
Mailers who receive discounts must also enter their mail at
locations determined by the Postal Service and most must spend
their own money to get it to this entry point. And while there
are discounts for destination-entered Standard Mail and drop
ship discounts for Periodicals, origin-entered Standard Mail
and Presorted First-Class Mail must be entered at a location
designated by the Postal Service and cannot earn drop ship
discounts. In contrast, single piece mailers may enter their
mail in a collection box or at a window of their choice.
Finally, mailers who receive discounts must prepare their mail
for entry in a manner specified by the Postal Service.
Work-shared letter shaped mail, for example, must be faced and
trayed (with 150 pieces at a minimum generally required for
each tray) and the trays labeled according to Postal Service
requirements. And there are also requirements for workshared
flats. In contrast single piece mailers simply put mail into
collection boxes or hand it to window service clerks.