BEFORE THE

POSTAL RATE COMMISSION

WASHINGTON, D.C. 20268-0001

Postal Rate and Fee Changes, 2000 ) Docket No. R2000-1

ANSWERS OF THE OFFICE OF THE CONSUMER ADVOCATE

TO INTERROGATORIES OF UNITED STATES POSTAL SERVICE

WITNESS: GAIL WILLETTE (USPS/OCA-T7-1-20)

(JUNE 15, 2000)

The Office of the Consumer Advocate hereby submits the answers of Gail
Willette to interrogatories of United States Postal Service, dated June
1, 2000. Each interrogatory is stated verbatim and is followed by the
response. Interrogatory USPS/OCS-T7-7(a) has been redirected to witness
Gerarden.

Respectfully submitted,

TED P. GERARDEN

Director

> Office of the Consumer Advocate
>
> Shelley S. Dreifuss

Attorney

1333 H St. NW

Washington, DC 20268-0001

\(202\) 789-6830; Fax (202) 789-6819

USPS/OCA-T7-1. On page 6 line 5 of your testimony you assert that, \"CEM
provides an opportunity to slow the diversion of mail...\" Have you
conducted any studies, market research, or do you have any quantitative
or qualitative evidence which indicates that First-Class single-piece
mailers would be less likely to use electronic alternatives if CEM were
implemented? If so, please provide those data. If not, on what do you
base your assertion?

RESPONSE TO USPS/OCA-T7-1:

While I have conducted no formal studies, I would point out that I have
discussed this with many people over the years and found that many, if
not all, of them would welcome a discount for bill payments. Whenever
the price of First-Class Mail is increased, some volume is lost. If the
Postal Service wishes to retain this volume, a discount would seem the
best way to do so.

USPS/OCA-T7-2. In your testimony, on page 9, at line 7, you state that
\"CRM envelopes will be transformed into CEM mail with only one minor
alteration - the addition of a CEM indicator on the envelope informing
consumers that they may use a discounted CEM stamp.\"

\(a\) Please fully describe or provide samples of your proposed
\"amended\" CRM envelope designs referenced in your testimony (on page
13, lines 7-11) for each of the following reply envelope styles:

\(i\) Windowless envelopes that contain both a preprinted address and
barcode on the envelope itself;

\(ii\) Window envelopes where the barcode is printed on the envelope but
the address is printed on the insert;

\(iii\) Window envelopes where both the address and barcode are printed
on the insert.

\(b\) Please fully describe or provide samples of your proposed
long-term CEM envelope designs for each of the following envelope
styles:

\(i\) Windowless envelopes that contain both a preprinted address and
barcode on the envelope itself;

\(ii\) Window envelopes where the barcode is printed on the envelope but
the address is printed on the insert;

\(iii\) Window envelopes where both the address and barcode are printed
on the insert.

\(c\) Did you discuss your CEM proposals with the providers of CRM
envelopes to determine whether they could or would amend CRM envelopes
in the short term or change envelope designs in the long term? Please
provide all correspondence, records, notes, or other documents
pertaining to such communications. If no such communications took place,
please explain why.

(d) Should CEM compliance be mandatory or should envelope providers have
    the option of modifying their envelope designs?

(e) Do you propose that the CEM envelope design be standardized, similar
    to BRM? If not, how will it be possible to develop a CEM design that
    accommodates the wide variety of reply mail envelopes discussed by
    witness Miller in Docket No. R97-1 (Exhibit USPS-RT-17A)?

RESPONSE TO USPS/OCA-T7-2:

\(a\) My testimony at page 13, lines 3-14 suggests a way for the Postal
Service and businesses to make the transition to CEM by amending
envelopes for use by CEM mailers. There appears to be no reason why the
location of the barcode and address would affect any transition. Each of
the three envelopes you describe would need an indicator on the
envelope, if the Postal Service chose to inform consumers in that
manner.

\(b\) The long-term design of CEM envelopes is entirely in the
discretion of the Postal Service. I offered ideas to make the transition
as easy as possible, but in the long term I envision the design details
would be worked out between the Postal Service and mailers, just as the
current design for CRM and other automation compatible envelopes has
been.

\(c\) Since the Postal Service controls the design of CRM envelopes, I
did not feel a need to discuss these issues extensively. Please see my
response to part b, above.

(d) Whether the compliance is mandatory or not, there is very little
    change from a CRM to a CEM envelope. As a practical matter,
    businesses that provide CRM envelopes already have "mandatory"
    requirements in excess of those that would be needed for CEM. If the
    Postal Service makes the modifications voluntary, I would assume
    envelopes without the indicator would not qualify for reduced
    postage.

(e) Please note the correct cite: USPS-RT-17A. While it would be
    desirable to have a standardized envelope for CEM, I do not think it
    is necessary. A wide variety of envelopes exists in the automation
    mailstream. If the wide variety of envelopes described by witness
    Miller at USPS-RT-17A does not share identical processing and
    operational feasibility with QBRM envelopes, then witness Campbell
    is in error. Please see responses to OCA/USPS-T29-1-2.

USPS/OCA-T7-3. On page 10 of your testimony, you discuss the Postal
Service\'s testimony in Docket No. R97-1 concerning the general public
preference for a "one-stamp" system. For purposes of this question,
please refer to the testimony of Postal Service witness Ellard, Docket
No. R97-1, Tr. 35/19076--77 and 19083-84, which addresses the issue of
public preference for a "one-stamp" system vs. a "two-stamp" system.

\(a\) Please identify all market research or surveys performed by or for
the OCA which seeks to ascertain or otherwise indicates whether the
general public prefers one basic First-Class Mail first-ounce stamp or
two differently denominated basic First-Class Mail first-ounce stamps?
Provide all information gathered as a result of such research or
surveys, as well as any analysis of such information.

(b) Please identify all market research performed by or for the OCA
    concerning CEM or any other "two-stamp" basic First-Class Mail rate
    structure. Please provide a copy of all records pertaining to such
    research, whether quantitative or qualitative, formal or informal,
    consumer-oriented or business-oriented.

RESPONSE TO USPS/OCA-T7-3:

\(a\) and (b). The OCA has conducted no research of the type you
describe except to speak informally to members of the public concerning
CEM when the opportunity arises. I would note that the Commission found
witness Ellard's research unpersuasive. See PRC Op. R97-1 at 322-324.

USPS/OCA-T7-4. On page 11 line 14 of your testimony, you state that
\"CEM has been and remains a very simple concept.\" In Docket No. R97-1,
Postal Service witness Miller disagreed with this claim (USPS-RT-17,
pages 4-11).

\(a\) Is it more complicated or less complicated to use one first-ounce
single-piece letter stamp or two first-ounce single-piece letter stamps?

\(b\) Is it more convenient or less convenient to use one first-ounce
single-piece letter stamp or two first-ounce single-piece letters
stamps?

\(c\) Is it possible that consumers and/or business agents could become
confused when having to determine which stamp to use (CEM vs. residual
first-ounce single-piece)?

\(d\) Is it possible that consumers and/or business agents could have to
make additional trips to purchase stamps were CEM to be implemented?

\(e\) Is it possible that consumers and/or business agents could have to
change their preferred method for purchasing stamps if vending machines
and/or consignment outlets could not stock both CEM and the residual
first-ounce single-piece stamps?

\(f\) Assume that a CEM rate of 30 cents is currently in effect and that
there are two basic First-Class Mail stamp rates: 33 cents (for non-CEM)
and 30 cents (for CEM). Also assume that the Commission recommends and
the Governors approve a 1-cent increase in the CEM rate and a 2-cent
increase in the (non-CEM) basic First-Class Mail rate. Please describe
how the mailing public would use non-denominational "make-up" stamps in
conjunction with the remainder of their 30-cent and 33-cent stamps, as
the higher rates were implemented.

\(g\) Is it possible that some non-CEM reply envelopes that contain
remittances could be delayed because consumers and/or business agents
would apply the CEM stamp in error and the mail piece would be isolated
as \"postage due\" by a postal employee?

\(h\) Please confirm that CEM would require that major mailers modify
their envelope designs in order for the mail piece to qualify for the
discount. If not confirmed, please explain.

\(i\) If all mailers do not modify their CRM envelopes to CEM envelopes,
please confirm that the current CRM mail stream would be separated into
two separate mail streams, CRM and CEM. If you do not confirm, please
explain.

\(j\) Please confirm that the current configuration of Postal Service
cancellation machines could not distinguish between the CEM stamp and
the residual first-ounce single-piece stamp. If you do not confirm,
please explain.

\(k\) Please confirm that the only way incorrect postage payment related
to the new CEM stamp could be detected is if a postal employee visually
identified the problem and manually dealt with it. If you do not
confirm, please explain.

RESPONSE TO USPS/OCA-T7-4:

\(a\) This is a tradeoff for consumers to determine for themselves. It
may be slightly more complicated to choose between two stamps instead of
just one. However, no one is compelled to use two stamps and some
consumers would accept the additional complication in order to save
money.

\(b\) See my response to part (a) of this interrogatory. If this is a
great inconvenience, I would expect consumers simply to use the
full-price stamp. Also please see Docket No. R97-1, Tr. 21/10740-41.

(c) Many things are possible. I think it would be much more likely that
    businesses would become confused with their array of offerings than
    would consumers faced with two stamps.

(d) Please see my response to parts (a) and (b) of this interrogatory.
    As the public understands the concept after the education efforts of
    the Postal Service, it would seem unlikely. In any event, consumers
    should have the opportunity to make this decision for themselves.

(e) Please see my response to parts (a) and (b) of this interrogatory. I
    see no reason why vending machines and consignment outlets should
    not sell both types of stamps. If this is perceived as a problem, a
    booklet containing both types of stamps could be offered.

(f) CEM has been proposed as a discount from the First Class rate. While
    I cannot speculate on what the Commission or the Governors might do
    in the future, I would note that a similar situation could arise
    with any of the First-Class Mail discounts.

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(g) It is possible.

(h) Yes. However, as with other business mail, the Postal Service would
    control the modifications. Please see my response to
    USPS/OCA-T7-2 (d) and (e), above.

(i) Not confirmed. For processing purposes, CRM and CEM should be
    indistinguishable.

(j) Confirmed.

(k) While I cannot confirm this statement, it has been my understanding
    that visual identification of the problem is the method by which any
    incorrect postage is detected. Please see also Docket No. R97-1,
    Tr.19C/9046-47 where the Postal Service states that facer/canceller
    machines are programmed to kick out mail with no postage and mail
    with only nonphosphorous stamps. The response goes on to state that
    any mailpiece which has at least ten cents in postage, but less than
    sufficient postage, will only be identified as short paid by an
    employee.

USPS/OCA-T7-5. On page 12, lines 17-18 of your testimony you state that,
\"printing costs for new CEM envelopes should be the same or
substantially the same as currently exist.\" Did you conduct any
research and/or collect any data to substantiate this claim? If so,
please provide all research and/or data. If not, on what do you base
your claim?

RESPONSE TO USPS/OCA-T7-5:

Please see Docket No. R97-1, Tr. 21/10691 and 10750. The OCA has
conducted no subsequent research.

USPS/OCA-T7-6. On page 14 of your testimony you discuss the revenue loss
associated with the CEM discount. Please state where you think the funds
that offset this revenue loss should come from in order for the Postal
Service to meet its revenue requirement.

RESPONSE TO USPS/OCA-T7-6:

The OCA has proposed that the contingency amount be reduced. Please see
OCA-T-2 and OCA-T-3. Keep in mind it is very unlikely that all of the 10
billion pieces I identified as potential CEM pieces would convert in the
beginning. Rather, like other new services, I would expect the volume to
increase gradually.

USPS/OCA-T7-7. On page 18 lines 13-14 of your testimony you state that
CEM will \"more closely align rates with costs for household mailers.\"

\(a\) Is more closely aligning rates with costs for letters and cards
generated \[sic\] household mailers a goal of the OCA?

\(b\) Please confirm that implementation of a separate, higher rate for
hand-addressed letter mail pieces would more closely align rates with
costs for household mailers? If not confirmed, please explain.

RESPONSE TO USPS/OCA-T7-7:

\(a\) Redirected to witness Gerarden.

\(b\) This is a complex issue. The obvious answer is yes; however,
"closely aligning rates with costs" is not the only goal of the Postal
Reorganization Act. Please see also the response of witness Campbell to
KE/USPS-T29-16(b) where he points out that the cost of processing
handwritten mail has dropped significantly.

USPS/OCA-T7-8. On page 20 lines 1-2 of your testimony you state, \"I
would observe that the Commission dismissed such operational objections
to CEM in Docket No. MC95-1, as well it should here.\" Please
specifically list each \"operational objection\" to which you are
referring and explicitly state why it should be ignored.

RESPONSE TO USPS/OCA-T7-8:

Please see the discussion of CEM in PRC Op. MC95-1 beginning at V-24 and
continuing through V-37.

USPS/OCA-T7-9. On page 21 lines 6-7 you claim that \"simplicity of
structure will be maintained with the establishment of CEM...\" Please
explain how this criterion is satisfied, given that CEM would result in
two first-ounce single-piece letter stamps rather than one first-ounce
single-piece letter stamp.

RESPONSE TO USPS/OCA-T7-9:

The CEM rate would be the same as the QBRM rate. Proposing a separate
rate for CEM would have caused the rate structure to be slightly more
complicated. The simplest rate structure would consist of only one rate.
This is true for all mail.

USPS/OCA-T7-10. On page 22 lines 1-2 you state that CEM \"has evolved
over a period of years.\" Please explain how your Docket No. R2000-1 CEM
proposal has "evolved" in relation to your Docket No. R97-1 proposal.

RESPONSE TO USPS/OCA-T7-10:

There are fewer differences between my R97-1 proposal and my current
proposal than there are between my current proposal and earlier
proposals. If you review the Appendix to my testimony and the Commission
Opinions, the evolution of this proposal becomes more clear. The focus
of CEM has shifted more to CRM as time has passed and we have been able
to assess information on the volume of FIM-tagged mail. Operational
objections have been addressed and the Commission is satisfied that the
revenue impact of CEM is not unduly large. Please see PRC Op. R97-1 at
322-327.

USPS/OCA-T7-11. On page 15 line 1 you state, \"Underpayment of postage
does not appear to be a problem for the Postal Service...\" Please refer
to the response to OCA/USPS-106, Attachment 4 of 15. In GFY 1999, 239
million single-piece letters were underpaid by 1-cent. It is likely that
these underpayments were due to the application of a 32-cent stamp
[after]{.underline} the first-ounce single-piece letter rate was
increased to 33 cents.

\(a\) Do you consider the underpayment of postage for 239 million
single-piece letters to be a problem? If your response is no, please
explain.

\(b\) Assume that consumers and/or businesses did not intentionally
underpay the postage and/or they were confused about the actual rate at
the time the letters were mailed. Is it possible that the implementation
of CEM could lead to the same results? If your response is no, please
explain your answer. If your response is yes, wouldn\'t this problem be
permanent in nature (compared to the temporary situation that occurs
during new rates implementation) due to the fact that the public would
be faced with two first-ounce single-piece letter rates?

RESPONSE TO USPS/OCA-T7-11:

\(a\) The underpayment of postage by one cent on 239 million
single-piece letters amounts to \$2,390,000. Clearly this does not
represent a significant impact on Postal Service finances.

\(b\) It is clear from the response to OCA/USPS-106 that postage is more
often overpaid than underpaid. Some confusion could be expected in the
beginning of implementing CEM. This is true with any new service and for
new rates as your question points out.

USPS/OCA-T7-12. On page 15 line 2 you state, \"consumers appear to err
on the conservative side when applying postage.\" On lines 4-5 of that
same page you further state, \"It also seems likely that some consumers
will not want to keep two denominations of stamps handy.\"

\(a\) Based on this latter comment, isn\'t it possible that some
consumers do not \"err\" at all but intentionally overpay postage
because they prefer using only one stamp (e.g., if a mail piece weighed
two ounces they would apply two 33-cent stamps, rather than one 33-cent
stamp and one 22-cent stamp)?

\(b\) Doesn\'t this repeated overpayment of postage seem to suggest that
convenience is more important to many single-piece letter mailers than
price? If your response is no, please explain.

\(c\) If convenience [were]{.underline} demonstrated to be more
important to consumers than price, what benefit would a new CEM rate
offer to the general public?

RESPONSE TO USPS/OCA-T7-12:

\(a\) and (b) That certainly may be true for some consumers, but I would
hesitate to generalize to all consumers. In any event, consumers are in
a better position than the Postal Service to make this decision.

(c) I do not believe that it can be demonstrated that all or even many
    consumers make the choice your question implies at all price levels.
    If it can be demonstrated that consumers simply do not care how much
    a First-Class stamp costs, then the volume of CEM would probably be
    far below the 10 billion pieces I estimated as potential.
    Consequently the revenue impact would be much smaller.

USPS/OCA-T7-13. Have you conducted any \"benchmarking\" studies to
determine if postal competitors and/or foreign postal administrations
have a mail classification similar to CEM? If so, please provide all
supporting documentation from that study.

RESPONSE TO USPS/OCA-T7-13:

I have conducted no "benchmarking" studies as you define them.

USPS/OCA-T7-14. Figure 1 (OCA-T-7 at page 6) indicates that household's
share of First-Class Mail declined from 21.3 percent to 16.3 percent
between 1987 and 1997.

(a) Please confirm that the response to OCA/USPS-T33-2 presented the
    volumes associated with these percentages -- 16.8 billion pieces in
    1987 and 16.2 billion pieces in 1997, or a decline of 0.6 billion
    pieces. If you are unable to confirm, please explain.

    \(b\) How many of these 0.6 billion pieces were bill payments?
    Please explain.

    \(c\) What evidence do you have that this decline represents bill
    payments as opposed to a decline in personal correspondence and the
    use of greeting cards?

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(d) If the decline in household use of First-Class Mail is due primarily
    to declines in personal correspondence and greeting cards, how will
    that affect the ability of a CEM rate to forestall diversion?

RESPONSE TO USPS/OCA-T7-14:

\(a\) I can confirm that these figures are presented in OCA/USPS-T33-2.
My focus was on the 14.9 billion piece volume for 1998. Please see the
response to OCA/USPS-T33-1(a), where witness Fronk states (concerning
the 14.9 billion pieces) "I agree that this calculation results in a
reasonable approximation of the volume of First-Class Mail generated by
households in 1998."

\(b\) and (c) There does not appear to have been a decline in bill
payments during the 1987 to 1997 period. However, the decline in bill
payments between 1997 and 1998 appears to have been 400 million pieces.

\(d\) If no decline occurs in CRM, I would expect CEM to have a smaller
impact. Whether CEM can and will forestall diversion is an empirical
question.

USPS/OCA-T7-15. Please refer to page 7 of your testimony, where it
states that "CEM is less complicated to administer than a program in
which creditors and other business correspondents provide postage paid
envelopes for customers." Does this statement refer to Business Reply
Mail as well as Prepaid Reply Mail? Please explain.

RESPONSE TO USPS/OCA-T7-15:

Yes. The accounting function associated with BRM would seem to make it
more complicated to administer.

USPS/OCA-T7-16. Please identify all market research conducted by or for
the OCA concerning the ability or desire of retail businesses which sell
postage stamps to the public (through consignment arrangements with the
Postal Service) to offer two differently denominated basic First-Class
Mail stamps to their customers seeking to purchase postage stamps?
Please provide a copy of all records relating to such research.

RESPONSE TO USPS/OCA-T7-16:

The OCA has conducted no formal research on this subject. Also please
see my response to USPS/OCA-T7-4(e) above.

USPS/OCA-T7-17. Please identify all market research conducted by or for
the OCA concerning the nature of any operational or logistical
challenges which might be encountered by utility companies or other
entities that stock large volumes of reply envelopes (to send to
customers) in switching from their current envelope stock to CEM
envelopes? Please provide a copy of all records relating to such
research.

RESPONSE TO USPS/OCA-T7-17:

The OCA has conducted no formal research on this subject. The Commission
has considered and rejected such "challenges" as a reason for rejecting
CEM. PRC Op. MC95-1 at V-34-35.

USPS/OCA-T7-18. On page 20 of your testimony you state, "Automatic debit
and computer payment systems are still in their infancy, and many
question their reliability; we are still largely a society which needs
or desires a paper record of transactions, which payment by mail
facilitates." Please confirm that your testimony in Docket No. R97-1
(OCA-T-400, page 24 at lines 7-9), filed in December 1997, approximately
2½ years ago, includes the exact same sentence.

RESPONSE TO USPS/OCA-T7-18:

Confirmed. The statement is still true. As these systems mature and gain
acceptance, more transactions mail will disappear from the First-Class
mailstream. Please see my testimony at page 1 and USPS-LR-I-179.

USPS/OCA-T7-19. In your Docket No. R2000-1 testimony, you discuss other
issues impacting a consumer's choice of bill payment method: security
(page 7); convenience (page 16); and trust (page 18).

\(a\) What specific role do you think price plays in this choice of
method? Please explain the basis for your opinion.

\(b\) What evidence do you have that a discount of 3 cents will have any
material impact on a consumer's choice of bill payment method?

RESPONSE TO USPS/OCA-T7-19:

\(a\) The point that I was making in the discussion you cite is that
some consumers might stay with the Postal Service as their method of
bill payment because of these factors, particularly if a discount is
offered. I have not quantified the exact role of price and these other
factors in the determination of how consumers will pay bills during the
test year and later.

(b) While I do not have empirical evidence that a three cent discount
    will alter a consumer's choice of payment, there is reason to
    believe that consumers will react positively to a reduction in
    price, just as they do in grocery stores and on the internet.

USPS/OCA-T7-20. On pages 14-15 of your testimony, you indicate that your
CEM proposal could involve a revenue reduction of \$300 million.

\(a\) How would you propose that the Postal Service recover this lost
revenue?

\(b\) If the Postal Service needed to recover this revenue reduction,
plus the additional costs associated with CEM implementation, from other
rates paid by postal customers, how would this affect your assessment of
the consumer benefits of CEM?

RESPONSE TO USPS/OCA-T7-20:

\(a\) Please see my response to USPS/OCA-T7-6 above.

(b) I have not analyzed alternative methods of offsetting the revenue
    lost as a result of the CEM discount. I would point out that the
    \$300 million represents 0.43 percent of the Postal Service's
    proposed TYAR revenue of approximately \$69 billion.

DECLARATION

I, Gail Willette, declare under penalty of perjury that the answers to
interrogatories USPS/OCA-T7-1-20 of the United States Postal Service are
true and correct, to the best of my knowledge, information and belief.

Executed \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

[\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_]{.underline}

CERTIFICATE OF SERVICE

I hereby certify that I have this date served the foregoing document
upon all participants of record in this proceeding in accordance with
section 12 of the rules of practice.

JENNIE D. WALLACE

Washington, DC 20268-0001

June 15, 2000