PRESIDENT'S COMMISSION ON THE
UNITED STATES POSTAL SERVICE
REPLY COMMENTS OF THE ASSOCIATION FOR POSTAL COMMERCE
March 13, 2003
REPLY COMMENTS OF THE ASSOCIATION FOR POSTAL COMMERCE
With differences in degree and of emphasis, there is widespread
agreement in principle among diverse mailer interests concerning the
appropriate solution to many of the central issues being addressed by
the Commission. In these Reply Comments, the Association for Postal
Commerce ("PostCom") briefly summarizes the points upon which it can
be fairly said that consensus of the mailing industry exists.
However, the positions taken by the American Postal Workers Union
("APWU") and by the Newspaper Association of America ("NAA") on two
key issues enhancement of the private sector-Postal Service
partnership and ratemaking reform are in diametric opposition to
the consensus views. The comments of these two organizations warrant
reply.
The topics upon which it can fairly be said there is consensus,
leaving aside the position staked out by APWU and NAA, are these:
* The system of regulation of prices and postal products is not
merely outmoded, it is unworkable. The breakeven constraint is
artificial and should be removed. The Postal Service needs greater
flexibility in pricing its services to meet users' needs; and,
therefore, rates should be structured to fully reflect unbundled
network elements keyed to activity-based costing in order to fully
reflect the economic welfare benefits of work sharing and negotiated
service arrangements.
* The Postal Service must remain a public enterprise charged
with the provision of universal affordable service. A limited
statutory monopoly (or reserve area) should be preserved, but the
current patchwork of unreviewable exceptions and interpretations of
the monopoly statute should be eliminated.
* Access to the mail box should remain closed, but within
sufficiently flexible and clear standards to permit re-examination as
market and other conditions change.
* The purpose, role and composition of the Board of Governors
need reformulation. The constraints upon management compensation
must be removed, subject to limitations that insure that management
is rewarded only for success and is sanctioned for failure.
A. APWU's Economist's Treatment of Worksharing Is Unsound.
The APWU submitted to the Commission a statement by Kathryn Kobe,
Chief Economist at Joel Popkin & Co., Inc., which starts from the
unarguable premise that the Postal Service cannot afford a discount
structure that "overcompensates mailers for worksharing activities"
but then proceeds to extract from this premise conclusions that are
in error.
Ms. Kobe says the Commission should keep "two factors" in mind in
evaluating worksharing arrangements, the first of which is that "the
contribution to the institutional costs of the Postal Service
obtained from a work shared piece of mail should be the same as it
would be if no worksharing were involved." In other words, per piece
mark-ups must be exactly equal for work shared and non-work shared
mail. The notion that equal mark-ups promote proper worksharing
price signals is absolutely invalid:
* First, the theory impliedly endorses Cost of Service
ratemaking under the 1970 Act with its highly artificial breakeven
constraint and its controversial allocation of presumptively "fixed"
costs on the basis of social judgments.[1] In any event, despite
occasional pronouncements by the Rate Commission that may seemingly
endorse it, the equal mark-up theory has never been applied by that
Commission either before or after the advent of worksharing.
Moreover, modern incentive ratemaking as Professor Sappington
pointed out regards "contribution" as the product of rates and not
as an independent input to the rate formula.
* Second, the equal mark-up theory presumes the cost accounting
systems used by the Postal Service and the Rate Commission accurately
measure costs, and that the worksharing incentives reflect all costs
that are avoided as a result of worksharing. Both of these premises
are false, as we and others have abundantly demonstrated.
* Third, Ms. Kobe points out that some worksharing occurred
before discounts were introduced. In fact, some uncompensated
worksharing occurs now. It does not follow that mailers will
undertake worksharing efforts regardless of price signals. The
Postal Service's volume of both workshared and non-workshared mail is
profoundly affected by the depths of worksharing incentives. The
twenty-year history of worksharing its successes and its failures
demonstrate the truth of this proposition.
The second "factor" Ms. Kobe would have this Commission regard as
paramount to the worksharing issue is equally misguided. She asserts
that the Postal Service should "consider what level of mail volume
will ensure the most efficient use of its investment in automation or
transportation equipment." This claim must be rejected because it
focuses singularly on the Postal Service's investment. It thereby
begs two threshold issues. First, the Postal Service should not be
making investments in equipment or facilities when the private sector
has already done so, or can do so more efficiently than the Postal
Service. Second, assuming that the Postal Service investment is
prudent, the costs that mailers incur to enable the Postal Service to
make use of these investments cannot be ignored.
The goal of worksharing, as the cornerstone of the private
sector/Postal Service partnership, should not be solely to justify
Postal Service investments in automation or transportation equipment.
Rather, it should be to find the lowest combined private
sector-Postal Service cost of delivering mail. It is the combined
private sector Postal Service cost that drives or constrains mail
volume. When, as is very often the case, a mail processing or
transportation function can be performed more efficiently in the
private sector, the Postal Service should simply refrain from,
minimize or reduce investments in that function as applicable.
Further, while the costs capital and otherwise that the private
sector incurs in meeting worksharing requirements cannot enter into
the ratemaking process, they surely should not be ignored in Postal
Service's investment decisions and, more particularly, in the
establishment of mail preparation and service standards. The Postal
Service should not as it too often does now force mailers to fit
their activities into the Postal Service's operational preferences
and unilateral investment decisions. Ms. Kobe's emphasis on
preserving gross revenues and justifying Postal Service investment
elides these considerations and thereby prevents full realization of
the benefits that worksharing offers.
Thus, the question is not whether mailers should be or are
"overcompensated" through the private sector-Postal Service
partnership. The question is whether the artificial and arbitrary
shackles in partnering advocated by Ms. Kobe promote overall consumer
welfare. Plainly, they do not. For similar reasons, the Commission
should not accept the false dichotomy, suggested by APWU, that
worksharing comes down to the sacrifice of "small" mailers for the
benefit of "large" ones. What this ignores is that both large and
small mailers engage in worksharing; but both large and small mailers
have significant quantities of mail that because of inadequate
price signals and artificial eligibility restrictions do not
qualify for worksharing incentives. If Postal Service investment
decisions and mail preparation rules reflected the lowest combined
costs, economically rational rates for both large and small mailers
would be realized. It is maximization of aggregate welfare through
rates that promote and maintain mail volume that should be the
benchmark for assessing the value of worksharing to all stakeholders,
including labor.
B. The NAA's Opposition to Pricing Flexibility Is Insupportable.
We confine our reply to that part of the NAA's comments to this
Commission in which it states that the Postal Service has, through
its pricing determinations, "distorted" advertising markets through
its asserted preference for "large direct mailers" and, therefore,
should be denied rate flexibility including the power to enter into
customized or negotiated rate agreements.[2]
There are three factual problems with NAA's opposition to increased
rate flexibility. First, its assertion that the Postal Service
(presumably with the connivance of the Rate Commission) has
"distorted" advertising markets for a particular product
(freestanding inserts) by establishing low rates for "bulk mail" is
without factual foundation. NAA does not, because it cannot, assert
that the rates of its competitors involve impermissible cross
subsidies. Indeed, if institutional cost coverages are to be a
guide, the direct mailers with whom NAA members compete make one of
the largest contributions to institutional cost within the system.
Second, NAA overlooks the fact that one of the rate categories that
has emerged from the worksharing program the High Density rate is
specifically tailored for, and is used extensively by, newspapers for
the delivery of non-subscriber copies of issues containing
freestanding inserts. Finally, NAA makes no mention of the fact that
according to data submitted to the Rate Commission the
introduction of worksharing initiatives (and the attempts to align
rates with activity-based costs) have had little or no appreciable
effect on the market share for freestanding inserts that the NAA
membership enjoys.
NAA never spells out exactly how it believes the ratemaking system
should be reformed in order to better protect its parochial interest.
It does state that the Postal Service should provide service in
competition with the private sector only when there would otherwise
be a "market failure." But NAA stops well short of claiming that the
Postal Service should therefore exit the delivery of advertising mail
or even advertising mail consisting of freestanding interests.
Indeed, NAA cannot make that argument because it would require the
Postal Service to discontinue carriage of newspapers containing free
standing inserts as well as the mail of the "large direct mailers" of
whom NAA complains. It is, therefore, difficult to escape the
conclusion that what NAA wants out of the ratemaking process is a
system that protects its highly selective and parochial interest in
the advertising market for freestanding inserts without regard to any
other consideration.
Neither PostCom nor any of the other commenting parties who have
urged reformation of the ratemaking standards seeks complete
deregulation of postage rates. We recognize that so long as the
Postal Service maintains a statutory monopoly over essential
facilities as it must, for the foreseeable future, to maintain
universal service there needs to be a system of checks and balances
to guard against excessive profit taking and monopoly abuse,
including predatory pricing. A valid purpose of rate regulation is
to curb against monopoly abuse. However, ratemaking is not now and
it should never be designed to force the Postal Service to inflate
rates or to deny mailers worksharing initiatives in order to permit
an unregulated competitor to maximize its profits in a parallel
marketplace. For these reasons, NAA's opposition to increased rate
flexibility in general and to negotiated service arrangements in
particular, simply cannot be credited.
Respectfully submitted,
Association for Postal Commerce
Gene A. Del Polito, President
1901 N. Ft. Myer Drive, Suite 401
Arlington, VA 22209
Ian D. Volner, General Counsel
Venable, Attorneys at Law
1201 New York Avenue, N.W., Suite 1000
Washington, DC 20005
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[1] As we have pointed out in our original comments, content-based
judgmental adjustment of rates has a place only in application to
Periodicals and Books because of the constitutionality protected
educational, scientific, cultural and informational value of these
materials.
[2] We do not respond to other aspects of the NAA comments because
there are aspects of those discussions including what happens when
the Postal Service strays from its core functions with which we do
not fundamentally disagree.