USPS-T-38

BEFORE THE

POSTAL RATE COMMISSION

WASHINGTON, DC 20268-0001

  ------------------------------------- ---------------------------------
  [Postal Rate And Fee Changes,         Docket No. R2000--1
  2000]{.smallcaps}                     

  ------------------------------------- ---------------------------------

DIRECT TESTIMONY

OF

ALTAF H. TAUFIQUE

ON BEHALF OF

UNITED STATES POSTAL SERVICE

+--------------------------------+-------------------------------------+
| CONTENTS                       |                                     |
+--------------------------------+-------------------------------------+
| Page                           |                                     |
|                                |                                     |
| CONTENTS                       |                                     |
| ......                         |                                     |
| .............................. |                                     |
| .............................. |                                     |
| .............................I |                                     |
|                                |                                     |
| AUTOBIOGRAPHICAL SKETCH        |                                     |
| .........                      |                                     |
| .............................. |                                     |
| ............................ii |                                     |
|                                |                                     |
| ########                       |                                     |
|                                |                                     |
| I. PURPOSE OF                  |                                     |
| TESTIMONY.............         |                                     |
| .............................. |                                     |
| .............................1 |                                     |
|                                |                                     |
| II\. GUIDE TO TESTIMONY AND    |                                     |
| SUPPORTING                     |                                     |
| DOCUM                          |                                     |
| ENTATION.....................1 |                                     |
|                                |                                     |
| III\. REVIEW OF THE PROPOSAL   |                                     |
| ......                         |                                     |
| .............................. |                                     |
| .............................1 |                                     |
|                                |                                     |
| A.  Current Application of     |                                     |
|     RFRA.............          |                                     |
|     ....................       |                                     |
| .............................. |                                     |
|     ..1                        |                                     |
|                                |                                     |
| B.  Description of Legislative |                                     |
|     Change.                    |                                     |
| .............................. |                                     |
| .............................3 |                                     |
|                                |                                     |
| C.  Rationale for the          |                                     |
|     Legislative                |                                     |
|     Chang                      |                                     |
| e............................. |                                     |
| .........................\...4 |                                     |
|                                |                                     |
| D.  Development of             |                                     |
|     Rates................      |                                     |
| .............................. |                                     |
| .............................4 |                                     |
|                                |                                     |
| E.  Rate Increase              |                                     |
|                                |                                     |
|   \........................... |                                     |
| .............................. |                                     |
| .............................5 |                                     |
|                                |                                     |
| IV\. OUTSIDE COUNTY            |                                     |
| PERIODICALS.                   |                                     |
| .............................. |                                     |
| .............................6 |                                     |
|                                |                                     |
| A. Pound Rates                 |                                     |
| ......................         |                                     |
| .............................. |                                     |
| .............................. |                                     |
| 8                              |                                     |
|                                |                                     |
| B. Dropship                    |                                     |
| Dicounts...............        |                                     |
| .............................. |                                     |
| .............................. |                                     |
| ....9                          |                                     |
|                                |                                     |
| C. Piece Rate                  |                                     |
| Development...........         |                                     |
| .............................. |                                     |
| ............................10 |                                     |
|                                |                                     |
| 1.  Presort                    |                                     |
|                                |                                     |
|    Tiers...................... |                                     |
| .............................. |                                     |
| ............................11 |                                     |
|                                |                                     |
| 2.  Barcode                    |                                     |
|     Discounts..............    |                                     |
| .............................. |                                     |
| ............................12 |                                     |
|                                |                                     |
| ```{=html}                     |                                     |
| <!-- -->                       |                                     |
| ```                            |                                     |
| V.  WITHIN COUNTY              |                                     |
|     PERIODICALS..              |                                     |
| .............................. |                                     |
| ............................12 |                                     |
|                                |                                     |
| VI\. CLASSIFICATION CRITERIA   |                                     |
| ..                             |                                     |
| .............................. |                                     |
| .............................. |                                     |
| .14                            |                                     |
+--------------------------------+-------------------------------------+
|                                |                                     |
+--------------------------------+-------------------------------------+
|                                |                                     |
+--------------------------------+-------------------------------------+
| # **AUTOBIOGRAPHICAL SKETCH**  |                                     |
+--------------------------------+-------------------------------------+
|                                |                                     |
+--------------------------------+-------------------------------------+

My name is Altaf H. Taufique. I currently serve as an economist in the
office of Pricing at the United States Postal Service. Prior to joining
the Postal Service in July 1996, I was employed by the Gulf States
Utilities Company (GSU) in Beaumont, Texas, from 1980 to 1994. At GSU, I
served as an economic analyst in the Corporate Planning department and
was subsequently promoted to Economist, Senior Economist and finally to
the position of Director, Economic Analysis and Forecasting. My
responsibilities at GSU included the preparation of the official energy,
load and short-term revenue forecasts, and the economic forecasts, for
the regions served by the Company.

I have testified before the Public Utility Commission of Texas in Austin
and the Federal Energy Regulatory Commission in Washington, D.C. My
testimony defended GSU\'s official energy and load forecasts. I have
testified before the Postal Rate Commission in several other
proceedings. In Docket No. MC96-3, I filed rebuttal testimony that dealt
with the Postal Service's role in the post office box market, and other
issues relating to pricing of post office boxes. In Docket No. MC97-5, I
rebutted a claim of undue harm to Postal Service competitors due to the
proposed packaging service. In Docket No. R97-1, my direct testimony
presented the rate proposals for the Periodicals Regular and Within
County subclasses, and my rebuttal testimony challenged a proposal to
allocate institutional costs based on weighted attributable costs. My
testimony in Docket No. MC99-3 addressed the issue of a rate anomaly
affecting Nonprofit and Classroom Periodicals mailers. My latest
testimony, filed in Docket No. MC2000-1, presented the Postal Service's
proposal for an experimental "Ride-Along" classification for
Periodicals.

I received a Master's Degree in Economics from Central Missouri State
University in Warrensburg, Missouri in 1976, and a Bachelor's degree in
Economics & International Relations from Karachi University in Karachi,
Pakistan. I have also completed thirty-three credit hours of coursework
towards a Ph.D. in Economics at Southern Illinois University. I taught
economics at Chadron State College in Chadron, Nebraska between 1978 and
1980. During my employment at GSU in Texas, I taught courses in
economics at Lamar University in Port Arthur, Texas.

# **I. PURPOSE** **OF** **TESTIMONY**

The purpose of my testimony is to present the proposed rates for
Periodicals. My testimony will be presenting rates for the proposed
Outside County (combined Regular Rate, Nonprofit and Classroom) and the
existing Within County subclasses of Periodicals, in addition to rates
for Science of Agriculture. Rates are developed based on cost data from
various cost witnesses, statutory requirements, and the rate level
requirements developed by witness Mayes (USPS-T-32). The Postal Service
is also proposing classification changes to reflect the formation of an
Outside County subclass, the rewrite of Note 1 to Rate Schedule 421
reflecting the discount provided to proposed Nonprofit and Classroom
rate categories within the Outside County subclass, and the deletion of
the last two sentences of DMCS Section 441[^1]. I am also proposing to
change DMCS Section 430 to clarify that the physical limitation for
other classes of mail also apply to Periodicals mail.

# **II. GUIDE TO TESTIMONY AND SUPPORTING DOCUMENTATION**

My testimony begins with an overview of the proposals and then addresses
the subclasses individually. My Microsoft Excel spreadsheets provide a
guide to replicate the rate proposal presented in this testimony. Hard
copy and electronic versions of these spreadsheets are included in
library reference I-167. These spreadsheets use data from a number of
witnesses identified in my testimony and from library leference I-125
(Billing Determinants). I prepared the Periodicals Billing Determinants
for this library reference.

# **III. REVIEW OF THE PROPOSAL**

## Current Application of RFRA

Currently, the Revenue Foregone Requirement Act (RFRA) requires that the
markup for the Regular subclass be determined independently based on the
factors contained in 39 U.S.C. § 3622 (b). The preferred subclasses,
Nonprofit, Classroom, and Within County, receive one-half of the markup
determined for Regular subclass. One goal of this 'half the Regular
markup' requirement is to keep the preferred rates lower than their
Regular counterparts, while providing some contribution from the
preferred subclasses. This goal was not entirely met by the recommended
rates resulting from Docket No. R97-1, implemented on January 10, 1999.
These rates, in some instances, provided lower postage for preferred
publications when the Regular rate schedule was used, rather than the
preferred schedule. While no Nonprofit or Classroom rate cells were
higher than the corresponding rate cell in the Regular schedule, a
combination of rate cells with certain discounts produced this anomaly.
Only in some instances when Regular rates are combined with some
relatively large Regular discounts, a preferred mailer may pay lower
postage using the Regular schedule rather than the preferred rate
schedule.

This anomaly led to the filing of the Periodicals Classification Change
case (Docket No. MC99-3). The Commission's recommended decision in that
Docket, as implemented by the Postal Service, allows Nonprofit and
Classroom mailers to use the Regular rate schedule for mailing a single
issue, if the postage is cheaper. Also, in that Docket, the Postal
Service expressed its hope that it would propose Nonprofit and Classroom
rates that are uniformly lower than Regular rates in the next omnibus
rate case, Docket No. MC99-3, USPS-T-1, Page 3, lines 16-18. However,
"half the Regular mark-up", will not keep preferred postage below
Regular postage in all instances when the Periodicals markup is low.
Arguably, this circumstance was not envisioned when the RFRA was
contemplated. In the most recent rate proceeding, prior to the enactment
of RFRA, markups for Regular Rate Periodicals ranged from 23 to 25
percent (See Docket No. R97-1, PRC Op., Vol. 2, Appendix G, Schedule 3,
page 32 of 33), providing a buffer between the Regular and preferred
rate schedules. Subsequently, the circumstances changed substantially.
The Postal Service in this Docket is proposing a low mark-up of 1.4
percent to mitigate the impact Periodicals' costs which have increased
at a higher rate than most other mail classes. See USPS-T-32, Exhibit
USPS-32B, p. 1. Cost trends and the subsequent relatively low markup for
Periodicals as a whole will keep the rate anomaly issue alive, unless a
change is made in the provisions of RFRA.

## Description of the Legislative Change 

The Postal Service anticipates legislative change that would combine two
of the preferred subclasses (Nonprofit and Classroom) with Regular
subclass for ratemaking purposes, with one set of rates. The preferred
nature of Nonprofit and Classroom subclasses would be recognized with a
bottom-line discount of 5 percent on total postage, excluding the
postage for advertising pounds. Advertising pounds are excluded in order
to be consistent with the provisions of RFRA which provide for the same
advertising rates for Regular and preferred Periodicals. The subclass as
a whole (combined Regular, Nonprofit, and Classroom) will cover its
costs and provide contribution deemed reasonable for Periodicals based
on the pricing criteria. This combination, and resultant two subclasses
instead of four, could simplify, consolidate and provide stability to
Periodicals volume and cost estimates. For ratemaking purposes, data for
the Regular, Nonprofit, and Classroom subclasses would be combined for
the new 'Outside County' subclass. Within County would still remain an
independent subclass and the current RFRA provisions would be used to
propose the Within County rate schedule.

## C. Rationale for the Legislative Change {#c.-rationale-for-the-legislative-change .unnumbered}

Given the potential of relatively low Periodicals markups in the near
future, this legislative change is the only certain way to avoid rate
anomalies in the current rate case as well as future proceedings. By
definition, postage for Nonprofit and Classroom publications would be
lower than equivalent Regular publications. This is appropriate because
Nonprofit and Classroom are preferred classifications. Also, Nonprofit
and Classroom mail is not believed to have different cost causing
characteristics compared to Regular mail of the same profile.

The statistical systems that are used to estimate cost data for the
various subclasses will become even more reliable if the Regular,
Nonprofit and Classroom subclasses are combined into a single larger
subclass. Both the volume and cost for the Outside County subclass
should attain greater stability as a result of this combination.

## Development of Rates 

Outside County rates were developed for this filing by combining the
existing subclasses of Regular, Nonprofit and Classroom. Since GFY98
billing determinants did not reflect the 3/5 split recommended in R97-1,
PQ3 for FY99 was used to estimate the volume under the new structure for
each of the existing subclasses before the billing determinants were
combined. Volume variable costs for the three existing subclasses were
also added up for rate development purposes. The contingency and mark-up
were applied to the combined cost.

## E. Rate Increase {#e.-rate-increase .unnumbered}

The overall rate increase for Periodicals is approximately 12.6 percent.
The average revenue per piece increases from 21.5 cents to 24.2 cents
for the overall Periodicals class including Within County. Within County
average revenue per piece increases from 8.7 cents to 9.5 cents, an
increase of approximately 8.5 percent. The Outside County Periodicals
average revenue per piece increases from 22.7 cents to 25.6 cents, an
increase of approximately 12.7 percent. This above-average overall
increase is a result of an above average increase in volume variable
costs during the current rate cycle. Table 1 provides the details of the
rate increase while Table 2 depicts the before and after rates cost
coverage for the two subclasses.

+---------+----------+---------+-----------+-----------+------+-----+
| ######  |          |         |           |           |      |     |
|         |          |         |           |           |      |     |
| ######  |          |         |           |           |      |     |
|         |          |         |           |           |      |     |
| ######  |          |         |           |           |      |     |
|         |          |         |           |           |      |     |
| #####   |          |         |           |           |      |     |
| # Table |          |         |           |           |      |     |
|  1- TES |          |         |           |           |      |     |
| T YEAR  |          |         |           |           |      |     |
| COMPARI |          |         |           |           |      |     |
| SON, BE |          |         |           |           |      |     |
| FORE AN |          |         |           |           |      |     |
| D AFTER |          |         |           |           |      |     |
|  RATES  |          |         |           |           |      |     |
+---------+----------+---------+-----------+-----------+------+-----+
|         |          |         |           |           |      |     |
+---------+----------+---------+-----------+-----------+------+-----+
|         | **TYBR   | **TYBR  | **TYBR    | **TYBR    | **TY |     |
|         | R        | Fee**   | Total**   | Pieces**  | BR** |     |
|         | evenue** |         |           |           |      |     |
+---------+----------+---------+-----------+-----------+------+-----+
|         |          |         |           |           | **   |     |
|         |          |         |           |           | Rev. |     |
|         |          |         |           |           | /Pie |     |
|         |          |         |           |           | ce** |     |
+---------+----------+---------+-----------+-----------+------+-----+
|         |          |         |           |           |      |     |
+---------+----------+---------+-----------+-----------+------+-----+
| **      | \$       | \$      | \$        | 9,55      | 0    |     |
| Outside | 2,147    | 18,     | 2,16      | 6,551,134 | .227 |     |
| C       | ,799,120 | 618,000 | 6,417,120 |           |      |     |
| ounty** |          |         |           |           |      |     |
+---------+----------+---------+-----------+-----------+------+-----+
|         |          |         |           |           |      |     |
+---------+----------+---------+-----------+-----------+------+-----+
| *       | \$       | \$      | \$        | 87        | 0    |     |
| *Within | 74       | 1,      | 7         | 2,194,000 | .087 |     |
| C       | ,589,123 | 692,000 | 6,281,123 |           |      |     |
| ounty** |          |         |           |           |      |     |
+---------+----------+---------+-----------+-----------+------+-----+
|         |          |         |           |           |      |     |
+---------+----------+---------+-----------+-----------+------+-----+
| **      | \$       | \$      | \$        | \$        | 0    |     |
| Total** | 2,222    | 20,     | 2,24      | 10,42     | .215 |     |
|         | ,388,243 | 310,000 | 2,698,243 | 8,745,134 |      |     |
+---------+----------+---------+-----------+-----------+------+-----+
|         |          |         |           |           |      |     |
+---------+----------+---------+-----------+-----------+------+-----+
|         | **TYAR   | **TYAR  | **TYAR    | **TYAR    | **TY | **  |
|         | Rev      | Fee**   | Total**   | Pieces**  | AR** | Per |
|         | enue\*** |         |           |           |      | cen |
|         |          |         |           |           |      | t** |
+---------+----------+---------+-----------+-----------+------+-----+
|         |          |         |           |           | **   | *   |
|         |          |         |           |           | Rev. | *Ch |
|         |          |         |           |           | /Pie | ang |
|         |          |         |           |           | ce** | e** |
+---------+----------+---------+-----------+-----------+------+-----+
|         |          |         |           |           |      |     |
+---------+----------+---------+-----------+-----------+------+-----+
| **      | \$       | \$      | \$        | 9,45      | 0    | 12  |
| Outside | 2,397    | 19,     | 2,41      | 9,105,146 | .256 | .7% |
| C       | ,074,923 | 852,000 | 6,926,923 |           |      |     |
| ounty** |          |         |           |           |      |     |
+---------+----------+---------+-----------+-----------+------+-----+
|         |          |         |           |           |      |     |
+---------+----------+---------+-----------+-----------+------+-----+
| *       | \$       | \$      | \$        | 86        | 0    | 8   |
| *Within | 80       | 1,      | 8         | 2,060,572 | .095 | .6% |
| C       | ,038,312 | 809,000 | 1,847,312 |           |      |     |
| ounty** |          |         |           |           |      |     |
+---------+----------+---------+-----------+-----------+------+-----+
|         |          |         |           |           |      |     |
+---------+----------+---------+-----------+-----------+------+-----+
| **      | \$       | \$      | \$        | \$        | 0    | 12  |
| Total** | 2,477    | 21,     | 2,49      | 10,32     | .242 | .6% |
|         | ,113,235 | 661,000 | 8,774,235 | 1,165,719 |      |     |
+---------+----------+---------+-----------+-----------+------+-----+
|         |          |         |           |           |      |     |
+---------+----------+---------+-----------+-----------+------+-----+
| -       |          |         |           |           |      |     |
|    **No |          |         |           |           |      |     |
| nprofit |          |         |           |           |      |     |
|     and |          |         |           |           |      |     |
|     Cl  |          |         |           |           |      |     |
| assroom |          |         |           |           |      |     |
|     R   |          |         |           |           |      |     |
| evenues |          |         |           |           |      |     |
|         |          |         |           |           |      |     |
|   after |          |         |           |           |      |     |
|     5%  |          |         |           |           |      |     |
|     dis |          |         |           |           |      |     |
| count** |          |         |           |           |      |     |
|         |          |         |           |           |      |     |
| -   **  |          |         |           |           |      |     |
| Source: |          |         |           |           |      |     |
|     U   |          |         |           |           |      |     |
| SPS-LR- |          |         |           |           |      |     |
| I-167** |          |         |           |           |      |     |
+---------+----------+---------+-----------+-----------+------+-----+

Table 2

  ------------------ ----------------- --------------- -------------------
  **BEFORE AND AFTER                                   
  RATES COST                                           
  COVERAGE**                                           

                                                       

                     **TYBR REVENUE**  **TYBR COST**   **COST COVERAGE**

                     **PER PIECE**     **PER PIECE**   

                                                       

  **OUTSIDE COUNTY** 0.227             0.253           89.68%

                                                       

  **WITHIN COUNTY**  0.087             0.094           92.77%

                                                       

                     **TYAR REVENUE**  **TYAR COST**   **COST COVERAGE**

                     **PER PIECE**     **PER PIECE**   

                                                       

  **OUTSIDE COUNTY** 0.256             0.252           101.37%

                                                       

  **WITHIN COUNTY**  0.095             0.094           100.54%
  ------------------ ----------------- --------------- -------------------

-   **Source: USPS-LR-I-167**

# **IV. OUTSIDE COUNTY PERIODICALS** 

The rate design for Outside County Periodicals (Regular, Nonprofit and
Classroom) remains essentially unchanged from the Commission recommended
methodology in Docket No. R97-1. A few exceptions are discussed in this
section. The first and major exception is that the rates are designed
for a combined subclass using combined billing determinants, volume
variable costs and a mark-up that applies to the combined subclass.

The piece-pound split for revenue generation remains 60%-40% as
recommended by the Commission in Docket No. R97-1. Key inputs for
Periodicals' rate design are developed by various Postal Service
witnesses. Volume variable and Segment 14 (Purchased Transportation)
costs for both Test Year Before Rates (TYBR) and Test Year After Rates
(TYAR) were developed by witness Kashani (USPS-T-14), volume forecasts
for both TYBR and TYAR are developed by witnesses Tolley and Thress
(USPS-T-6 and USPS-T-7). Cost coverage is determined by witness Mayes
(USPS-T-32). The contingency of 2.5 percent is described by witness
Tayman (USPS-T-9). Billing Determinants for the subclasses are in
Library Reference I-125. The distance-related transportation cost
proportion was developed by witness Pickett (USPS-T-19). Witness Crum
(USPS-T-27) provides the cost saving estimates for DDU and DSCF
dropshipment. Witnesses Yacobucci (USPS-T-25), Daniel (USPS-T-28) and
Miller (USPS-T-24) provide cost estimates for presort and barcode
discounts. The following table provides the proposed rates for Outside
County Periodicals:

Table 3

+-------+-------------------------------------------+----------+------+
| ####  |                                           |          |      |
| #  OU |                                           |          |      |
| TSIDE |                                           |          |      |
|  COUN |                                           |          |      |
| TY PE |                                           |          |      |
| RIODI |                                           |          |      |
| CALS  |                                           |          |      |
|       |                                           |          |      |
| #     |                                           |          |      |
| ##### |                                           |          |      |
| #  PR |                                           |          |      |
| OPOSE |                                           |          |      |
| D RAT |                                           |          |      |
| E SCH |                                           |          |      |
| EDULE |                                           |          |      |
+-------+-------------------------------------------+----------+------+
|       |                                           |          |      |
+-------+-------------------------------------------+----------+------+
|       |                                           | **Pr     |      |
|       |                                           | oposed** |      |
+-------+-------------------------------------------+----------+------+
|       |                                           | **Rate** |      |
+-------+-------------------------------------------+----------+------+
|       | **Pound Rates**                           |          |      |
+-------+-------------------------------------------+----------+------+
|       | Delivery Unit                             | \$ 0.180 |      |
+-------+-------------------------------------------+----------+------+
|       | SCF                                       | \$ 0.210 |      |
+-------+-------------------------------------------+----------+------+
|       | Zones 1&2                                 | \$ 0.247 |      |
+-------+-------------------------------------------+----------+------+
|       | Zone 3                                    | \$ 0.263 |      |
+-------+-------------------------------------------+----------+------+
|       | Zone 4                                    | \$ 0.302 |      |
+-------+-------------------------------------------+----------+------+
|       | Zone 5                                    | \$ 0.361 |      |
+-------+-------------------------------------------+----------+------+
|       | Zone 6                                    | \$ 0.423 |      |
+-------+-------------------------------------------+----------+------+
|       | Zone 7                                    | \$ 0.499 |      |
+-------+-------------------------------------------+----------+------+
|       | Zone 8                                    | \$ 0.563 |      |
+-------+-------------------------------------------+----------+------+
|       | Nonadvertising                            | \$ 0.186 |      |
+-------+-------------------------------------------+----------+------+
|       | **Science of Agriculture - Pound Rates,   |          |      |
|       | Disc. Cells**                             |          |      |
+-------+-------------------------------------------+----------+------+
|       | SCI. OF AGRICULTURE. DELIVERY OFFICE      | \$ 0.135 |      |
+-------+-------------------------------------------+----------+------+
|       | SCI. OF AGRICULTURE SCF                   | \$ 0.158 |      |
+-------+-------------------------------------------+----------+------+
|       | SCI. OF AGRICULTURE ZONES 1&2             | \$ 0.186 |      |
+-------+-------------------------------------------+----------+------+
|       | **Piece Rates**                           |          |      |
+-------+-------------------------------------------+----------+------+
|       | BASIC NON-AUTOMATION                      | \$ 0.318 |      |
+-------+-------------------------------------------+----------+------+
|       | BASIC AUTOMATION LETTER                   | \$ 0.262 |      |
+-------+-------------------------------------------+----------+------+
|       | BASIC AUTOMATION FLAT                     | \$ 0.286 |      |
+-------+-------------------------------------------+----------+------+
|       | 3-DIGIT NON-AUTOMATION                    | \$ 0.274 |      |
+-------+-------------------------------------------+----------+------+
|       | 3-DIGIT AUTOMATION LETTER                 | \$ 0.229 |      |
+-------+-------------------------------------------+----------+------+
|       | 3-DIGIT AUTOMATION FLAT                   | \$ 0.247 |      |
+-------+-------------------------------------------+----------+------+
|       | 5-DIGIT NON-AUTOMATION                    | \$ 0.222 |      |
+-------+-------------------------------------------+----------+------+
|       | 5-DIGIT AUTOMATION LETTER                 | \$ 0.174 |      |
+-------+-------------------------------------------+----------+------+
|       | 5-DIGIT AUTOMATION FLAT                   | \$ 0.194 |      |
+-------+-------------------------------------------+----------+------+
|       | CARRIER ROUTE BASIC                       | \$ 0.141 |      |
+-------+-------------------------------------------+----------+------+
|       | CARRIER ROUTE HIGH DENSITY                | \$ 0.116 |      |
+-------+-------------------------------------------+----------+------+
|       | CARRIER ROUTE SATURATION                  | \$ 0.098 |      |
+-------+-------------------------------------------+----------+------+
|       | PERCENTAGE EDITORIAL DISCOUNT             | \$       |      |
|       |                                           | (0.066)  |      |
+-------+-------------------------------------------+----------+------+
|       | WKSHARING DISCNT DELIVERY OFFICE ENTRY    | \$       |      |
|       |                                           | (0.021)  |      |
+-------+-------------------------------------------+----------+------+
|       | WKSHARING DISCNT SCF ENTRY                | \$       |      |
|       |                                           | (0.012)  |      |
+-------+-------------------------------------------+----------+------+
|       |                                           |          |      |
+-------+-------------------------------------------+----------+------+
| \*    |                                           |          |      |
| Same  |                                           |          |      |
| rates |                                           |          |      |
| apply |                                           |          |      |
| to    |                                           |          |      |
| all   |                                           |          |      |
| Ou    |                                           |          |      |
| tside |                                           |          |      |
| C     |                                           |          |      |
| ounty |                                           |          |      |
| Pe    |                                           |          |      |
| riodi |                                           |          |      |
| cals. |                                           |          |      |
+-------+-------------------------------------------+----------+------+
| Nonp  |                                           |          |      |
| rofit |                                           |          |      |
| and   |                                           |          |      |
| Clas  |                                           |          |      |
| sroom |                                           |          |      |
| ma    |                                           |          |      |
| ilers |                                           |          |      |
| get a |                                           |          |      |
| 5%    |                                           |          |      |
| dis   |                                           |          |      |
| count |                                           |          |      |
| on    |                                           |          |      |
| all   |                                           |          |      |
| compo |                                           |          |      |
| nents |                                           |          |      |
| of    |                                           |          |      |
|       |                                           |          |      |
| po    |                                           |          |      |
| stage |                                           |          |      |
| e     |                                           |          |      |
| xcept |                                           |          |      |
| a     |                                           |          |      |
| dvert |                                           |          |      |
| ising |                                           |          |      |
| po    |                                           |          |      |
| unds. |                                           |          |      |
+-------+-------------------------------------------+----------+------+

## Pound Rates 

The calculation of pound rates follows the traditional allocation of
distance-related transportation cost (no mark-up included) to Zone 1 & 2
through Zone 8 based on the proportion of pound-miles in each zone.
Non-distance related transportation cost is allocated to all the zoned
advertising pound rates except for the Destination Delivery Unit (DDU)
rate cell, and the residual revenue is derived from all the rate cells.
The editorial pound rate remains at 75 percent of the Zone 1 & 2 rate.
Science of Agriculture DDU, DSCF & Zone 1 & 2 rates are also determined
at 75 percent of corresponding rates for advertising pounds. Witness
Pickett provides the estimate for the percent of transportation cost
that is distance-related. Library Reference I-60, pp. 9-10 . Piece-based
dropship discounts for DDU and DSCF as well as the DDU and DSCF pound
rates are discussed in the next subsection.

## B. Dropship Discounts  {#b.-dropship-discounts .unnumbered}

Witness Crum provides an estimate of non-transportation cost savings
related to DDU and DSCF dropshipment of Periodicals. USPS-T-27, Figure
4, p. 21. The allocation of these non-transportation cost savings to
pounds and pieces is one area where my proposal differs from the R97-1
Commission methodology. Instead of a 50/50 split, the Postal Service is
proposing a 75 percent allocation of these cost savings to piece-related
discounts and only 25 percent to pound- related rate reduction for DDU
and DSCF entry. The Postal Service is interested in providing a
meaningful discount to mailers when they avoid interim postal facilities
and provide their own transportation like the discount recommended by
the Commission in Docket No. MC95-1. PRC Op., MC95-1, Appendix One, Rate
Schedule 421. On the pound side the value of this discount diminishes
because less than half of all the pounds actually pay the zoned
advertising pound rates. The piece discount provides a more efficient
vehicle to provide dropship incentives because the value of the discount
applies to every piece regardless of the proportions of editorial and
advertising contents.

Table 4 shows that this allocation of non-transportation related
dropshipment cost savings brings the dropshipment piece discounts in
line with the level of discounts recommended by the Commission in Docket
No. MC95-1. The percent increase from the existing piece discounts is
high because these discounts were significantly reduced in Docket No.
R97-1.

**Table 4** -- DDU and DSCF Dropship Discounts -- Piece rates

  ----------- ----------- ----------- ----------- ----------- -----------
              MC95-1      R97-1       Percent     Proposed    Percent
              (Cents)     (Cents)     Change      (Cents)     Change

  DDU         2.1         1.3         -38%        2.1         62%

  DSCF        1.1         0.7         -36%        1.2         71%
  ----------- ----------- ----------- ----------- ----------- -----------

The DDU and DSCF advertising pound rates show a significant increase
because of the above-mentioned allocation, as shown in Table 5. Once
again, this follows a significant decline for these cells in Docket No.
R97-1.

**Table 5** -- DDU and DSCF Dropship Pound Rates

  ----------- ----------- ----------- ----------- ----------- -----------
              MC95-1      R97-1       Percent     Proposed    Percent
              (Cents)     (Cents)     Change      (Cents)     Change

  DDU         16.9        15.5        -8.3%       18.0        16.1%

  DSCF        19.0        17.8        -6.3%       21.0        18%
  ----------- ----------- ----------- ----------- ----------- -----------

## Piece Rate Development

The development of piece rates is based on cost studies presented by
witnesses Yacobucci, Daniel, and Miller. Witness Yacobucci provides the
mail processing cost estimates for Periodicals flats. USPS-T-25, Table
II-2, p. 8. The mail processing estimates are combined with delivery
cost estimates for Standard Mail (A) developed by witness Daniel.
USPS-T-28, Table 5, p. 26. The combined costs are used to develop both
presort and automation discounts. The Carrier Route High Density and
Saturation rates are also developed using witness Daniel's estimates
developed for the Standard Mail Regular ECR subclass. *Id.* Table 7, P.
29. Witness Miller's cost estimates for the Standard Mail (A) letters
are used to estimate discounts for automated letters based both on shape
differential and barcode. USPS-T-24, Table 1, p.18.

**1. Presort Tiers**

Both the 3-digit and 5-digit presort rates are based on witness
Yacobucci's mail processing and witness Daniel's delivery cost studies,
using 100 percent passthroughs. USPS-T-25, p. 8, USPS-T-28, p. 26. The
3-digit nonautomation rate increases from 25.3 to 27.4 cents, a 8.3
percent increase, while the 5-digit nonautomation rate goes up from 19.7
to 22.2 cents, a 12.7 percent increase.

Unlike the 3- and 5-digit presorts, which are required, Carrier Route
presort is an option for the mailers. The current discount for Carrier
Route presort as compared to the Basic presort level is 17.2 cents. Cost
study results indicate a lower discount of 15.9 cents, assuming a 100
percent passthrough. This would imply an increase in this cell of
greater than 20 percent. Instead the Carrier Route rate cell was limited
to an increase of approximately 15.4 percent, 2 percent more than the
overall increase of 13.4 percent for the Outside County subclass (prior
to the Nonprofit and Classroom discounts). A passthrough of 112 percent
results from the 14.1 cent rate for this rate cell. Approximately 40
percent of the mail volume of the Outside County subclass is Carrier
Route sorted. The 2 percent limit was designed to mitigate the combined
impact to the customers affected by both increase for Periodicals in
general and Carrier Route pieces in particular.

### Barcode Discounts

Witness Yacobucci presents cost studies that isolate the incremental
benefits of the barcode. His study shows a significant decline in the
value of a barcode compared to current discounts offered by the Postal
Service. USPS-T-25 p. 8. Given the changing environment of flats
processing as described by witness Kingsley (USPS-T-10, pp.10-17), and
the fact that Periodicals in this rate case face a high rate increase, a
restriction similar to the one discussed for Carrier Route is also
observed for automation rates. The Postal Service's desire to mitigate
the impact of measured differences in cost avoidances has resulted in
some rather unconventional passthroughs for automation rate cells.

The Basic Automation rate for flats is proposed to increase from 24.8
cents to 28.6 cents by utilizing a pass-through of 109 percent. The
3-digit automation rate is currently 21.4 cents, but is proposed to
increase to 24.7 cents. The passthrough in this case is 119 percent. The
5-digit automation rate increases from 16.8 cents to 19.4 cents. In all
of the above cases the percent increases are approximately 15.4 percent,
2 percent above the overall increase of 13.4 percent for the combined
Outside County Periodicals subclass prior to the bottom line discount
for Nonprofit and Classroom mailers.

# **V. WITHIN COUNTY PERIODICALS**

The Within County subclass consists of preferred rate Periodicals mail
addressed for delivery within the county or parish where published and
entered, from either the office of original entry or additional entry. A
Within County publication must also meet one of the following
conditions: either the total paid circulation of the issue must be less
than 10,000 copies, or the number of paid copies of the issue
distributed within the county of publication must be at least one more
than one-half of the total paid circulation of the issue. DMCS § 423.21.

The rates for Within County, like Outside County, Periodicals are
designed to cover volume variable costs and provide a contribution. The
development of Within County rates is based essentially on the same
inputs as Outside County rates. The presort and barcode discounts are
based on the Nonprofit Periodicals mail processing cost savings
developed by witness Yacobucci. USPS-T-25, Table II-3, p.8. Standard
Mail Nonprofit data are utilized from cost studies developed by
witnesses Daniel and Miller for delivery, letters, and finer level of
Carrier Route presorts. USPS-T-28, p. 29, USPS-T-24, Table 1 p. 18. The
workpapers for Within County provide a framework to replicate the
development of these rates. The passthroughs for Within County are by
necessity much smaller than other classes, because the cost study is for
Nonprofit mail. Mitigation of a relatively large increase for
Periodicals also affected the choice of passthroughs for Within County
rate design.

The following table provides the proposed rates for Within County
Periodicals:

Table 6

  ---------------------------------------------------------- ------------
  **PERIODICAL RATES - WITHIN COUNTY**                       

                                                             

                                                             

                                                             Proposed

                                                             Rate

  **Pounds**                                                 

  Delivery Unit                                              \$ 0.118

  SCF                                                        \$ 0.145

  **Pieces**                                                 

  BASIC NON-AUTOMATION                                       \$ 0.099

  BASIC AUTOMATION LETTER                                    \$ 0.049

  BASIC AUTOMATION FLAT                                      \$ 0.072

  3-DIGIT NON-AUTOMATION                                     \$ 0.092

  3-DIGIT AUTOMATION LETTER                                  \$ 0.048

  3-DIGIT AUTOMATION FLAT                                    \$ 0.069

  5-DIGIT NON-AUTOMATION                                     \$ 0.084

  5-DIGIT AUTOMATION LETTER                                  \$ 0.045

  5-DIGIT AUTOMATION FLAT                                    \$ 0.064

  CARRIER ROUTE BASIC                                        \$ 0.048

  CARRIER ROUTE HIGH DENSITY                                 \$ 0.032

  CARRIER ROUTE SATURATION                                   \$ 0.027

  WKSHARING DISCNT DELIVERY OFFICE ENTRY                     \$ (0.005)
  ---------------------------------------------------------- ------------

### VI. CLASSIFICATION CRITERIA

Section 3623(c) of title 39 U.S.C. requires the Commission to make its
decision on establishing a new classification in accordance with the
following factors:

1.  the establishment and maintenance of a fair and equitable
    classification system for all mail;

2.  the relative value to the people of the kinds of mail matter entered
    into the postal system and the desirability and justification for
    special classifications and services of mail;

3.  the importance of providing classifications with extremely high
    degrees of reliability and speed of delivery;

4.  the importance of providing classifications which do not require an
    extremely high degree of reliability and speed of delivery;

5.  the desirability of special classifications from the point of view
    of both the user and of the Postal Service; and

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6.  such other factors as the Commission may deem appropriate;

The classification change leading to the formation of a new Outside
County subclass meets the fairness and equity criterion. Nonprofit and
Classroom rate categories pay the same rates as their Regular
counterpart based on the degree of preparation and transportation
provided by the mailers and receive a discount in recognition of their
preferred status.

The desirability and justification of this type of classification change
became evident with the discovery of a rate anomaly after Docket No.
R97-1, and the expectation that such rate anomalies would persist absent
the combined subclass. The combined subclass also permits more stable
cost data to be used. Thus, the proposed subclass is desirable from the
point of view of both Periodicals mailers and the Postal Service,
fulfilling the requirements of criteria 2 and 5.

The Postal Service does not make a distinction between Regular,
Nonprofit and Classroom Periodicals in terms of the degree of
reliability and speed of delivery. A combined subclass thus brings us
closer to meeting the spirit of both criteria 3 and 4.

[^1]: No change is proposed to Note 11 which was added in Docket No.
    MC99-3 regarding the eligibility of Nonprofit and Classroom mailers
    using Rate Schedule 421 to claim 100 percent editorial content if
    they have 10 percent or less advertising content.