**STATEMENT OF AMERICAN BUSINESS MEDIA**

**TO THE**

**PRESIDENT'S COMMISSION**

**ON THE UNITED STATES POSTAL SERVICE**

The business-to-business press is the lifeblood of America's economy,
and the United States Postal Service is the lifeblood of the
business-to-business press. American Business Media is the association
for business-to-business media, and its membership includes most and the
best of the nation's business press.

**EXECUTIVE SUMMARY**

American Business Media members spend about \$300 million annually to
mail their 1,300 publications across the country. They rely on the
Postal Service for nearly all delivery, and the 50% Periodicals rate
increase since 1990 has had a severe impact on the health of the
industry.

Many parties will contend that a change in the way postal rates are set
is essential, but the present system, despite being cumbersome, is not
the cause of the Postal Service's problems, and discarding it will not
provide a cure. Although some added flexibility for competitive products
may be reasonable, it should be noted that the Postal Service has just
begun to take advantage of the flexibility in the present system. A
strong Postal Rate Commission must be maintained if all ratepayers are
to be protected and if the Postal Service's letter mail monopoly is to
continue, which it should.

To get to the heart of the matter, the Commission must tackle the
difficult issues, something that Congress's failed attempts at enacting
postal reform legislation did not do. The Commission must examine the
labor/management relationship and, if the facts so justify, be prepared
to recommend that area wage differentials be introduced and to recommend
termination of the present system of binding arbitration (without
introducing a right to strike). The Commission should take a fresh look
at the concept of "universal service" to determine whether in a time of
declining volumes we can afford six-day delivery to every address and
front-door delivery to most of them. The Commission should do what it
can to assure that Congress does not impede the Postal Service's
admirable attempt to model its network and make the changes in plant and
work force necessary to improve efficiency. And the Commission should
give the Postal Service's management the tools it needs to manage, from
a professional staff for the Governors to elimination of the executive
salary cap.

**STATEMENT OF AMERICAN BUSINESS MEDIA**

**[Introduction]{.underline}**

American Business Media welcomes the opportunity to provide its views on
effective changes to improve the Postal Service. To state a remedy one
must first know the problem. In American Business Media's view the
problem is that costs are too high and cannot be controlled by a
management, no matter how dedicated, that cannot freely size the
physical and labor infrastructure to match declining volumes and changes
in its market. The present workforce and the number of facilities are
far in excess of that needed to operate the Postal Service efficiently,
and Postal Service management is micro-managed and rendered impotent by
political forces when it desires to close or consolidate facilities.

Many changes will be suggested by others, such as the elimination of the
Postal Rate Commission's authority to set rates for this monopolist, or
to require rates that precisely mirror costs while ignoring important
public policies. Unfortunately, none of these changes would address the
root causes of problems facing the Postal Service.

We will attempt to provide meaningful suggestions for change that, if
implemented, will help right the Postal Service's course and protect an
American economy that is and will remain dependent upon an efficient
postal system. In doing so, we will no doubt wound some sacred cows and
may be accused of rushing into territory where angels fear to tread. But
to complete the aphorism, the fools, or at the least people fooling
themselves, are those that avoid the controversial issues.

**[American Business Media]{.underline}**

American Business Media's more than one hundred publishing members
produce---and mail---approximately 1,300 leading business and
professional publications, spending about \$300 million annually on
Periodicals postage alone. Some of its member publications, such as
McGraw-Hill's *Aviation Week & Space Technology,* VNU Business Media's
*Adweek,* CMP Media's *Information Week,* Reed Business Information's
*Daily Variety,* PennWell Corporation's *Oil & Gas Journal,* and Crain
Communications' *Automotive News,* are relatively well known. Most
others have become well known only within the professions and industries
that they serve by bringing information gathered worldwide to the desks
of the decision makers who drive America's economy.[^1]

Studies performed by and for American Business Media and its members
consistently show that the content of business-to-business publications
is crucial to decision makers at all levels of American commerce. For
example, 88.9 million readers are reached by American Business Media
member business-to-business publications, which serve 181 industries.
Forty-four percent of business-to-business publication readers consult
one daily, and readers identify them as the single most credible source
of business information (ranking these publications higher than the
*Wall Street Journal, Forbes, Fortune, Barrons* and *The Economist*).

It is no overstatement to claim that the health of the nation's business
depends to a significant extent upon the continued distribution of the
information---both editorial and advertising---in these periodicals.
Just as the Postal Service has been given the responsibility to "bind
the nation together," so too do American Business Media member
publications bind together the nation's businesses. The crucial and
unique role that our publications play in assisting American businesses
in the ever more competitive world economy would be jeopardized by a
deteriorating Postal Service.

Despite the rapid growth of electronic communication, hard copy is still
and will for a long time be the best way to distribute the information
contained in the business press. Unlike some of the best known consumer
magazines with circulation in the millions, many of which are sold at
newsstands and supermarkets and which at one time flirted with
alternate, non-postal delivery to readers' homes, American Business
Media member publications, with an average circulation of about 60,000,
rely almost exclusively on the Postal Service for delivery. We are thus
alarmed at the prospect of a Postal Service with declining volumes,
increasing rates and unreliable service.

Because of the importance of postal rates and service to the business
press, American Business Media was a leading participant in the
deliberations that led to the 1967 appointment of the President's
Commission on Postal Organization (better known as the Kappel
Commission). American Business Media has participated in every rate case
before the Postal Rate Commission since the passage of the Postal
Reorganization Act in 1970, the law that resulted from the work and
report of the Kappell Commission, and its representatives serve on a
variety of joint Postal Service/industry workgroups and committees.
Throughout its history, American Business Media has promoted a strong,
nationwide postal service and has sought to protect the interests of the
smaller circulation periodicals that are representative of its
membership.

Despite American Business Media's vigilance, and despite what we are
confident were the good intentions of postal officials, rapidly
increasing postage rates in the past decade have damaged the business
press. Combined with a slumping economy and severe reductions in
advertising budgets, as has occurred in the past couple of years, the
damage becomes severe. The following table shows the frequency and
magnitude of the postal rate increases that have been imposed on
American Business Media members since 1990:

**Postage Cost Increases for a**

**"Typical" 60,000 Circulation Business Monthly**

**1991-2002**

+--------------+-------------+------------+-------------+-------------+
| **Postal     | **Effective | **         | **          | Annual      |
| Rate**       | Date**      | Percentage | Resulting** | Postage for |
|              |             | Increase** |             | "Typical"   |
| **Case**     | **Of        |            | **Postage   | Monthly     |
|              | Increase**  |            | Per Piece** |             |
+--------------+-------------+------------+-------------+-------------+
| Docket       | 2/3/1991    | 22%        | 26¢         | \$187,200   |
| R-90-1       |             |            |             |             |
+--------------+-------------+------------+-------------+-------------+
| Docket R94-1 | 1/1/1995    | 14%        | 29.5¢       | \$212,400   |
+--------------+-------------+------------+-------------+-------------+
| Docket R97-1 | 1/10/1999   | 5%         | 31¢         | \$223,200   |
+--------------+-------------+------------+-------------+-------------+
| Docket       | 1/7/2001    | 9.9%       | 34¢         | \$244,800   |
| R2000-1      |             |            |             |             |
+--------------+-------------+------------+-------------+-------------+
| Docket       | 7/1/2001    | 2.6%       | 35¢         | \$252,000   |
| R2000-1      |             |            |             |             |
| Modification |             |            |             |             |
+--------------+-------------+------------+-------------+-------------+
| Docket       | 6/30/2002   | 10%        | 38.5¢       | \$277,200   |
| R2001-1      |             |            |             |             |
+--------------+-------------+------------+-------------+-------------+

The annual increase of \$90,000 for a single publication shown above
would expand to \$390,000 for a weekly. Increases of this magnitude must
not be permitted to continue.

Like many of those who will be competing for the Commission's attention,
American Business Media has a perspective that is in some ways unique.
We believe that we can best serve the Commission by concentrating on
those of our views that may not be widely shared, leaving it to the
Commission to create an amalgam from the comments of all of the parties.
We will, however, touch briefly on each of the six broad categories of
issues listed in the Executive order of December 11, 2002 that created
the Commission and its charter. We will begin with the issue to which we
will direct most of our attention: Postal Service flexibility to change
prices.

**[Specific comments and proposals]{.underline}**

Our comments on the six sets of issues enumerated in the Executive Order
are set forth below (and for ease of reference are numbered as they were
in that Order).

**(2) [The flexibility that the Postal Service should have to change
prices, control costs, and adjust service in response to financial,
competitive, or market pressures]{.underline}.**

**American Business Media's Recommendation**: *The current ratemaking
process works reasonably well, and the Postal Rate Commission's role and
powers should be augmented. The Postal Rate Commission should be the
final arbiter on rates and should be given subpoena power.*

American Business Media's positions in support of the present system and
in favor of a stronger Postal Rate Commission are likely to be markedly
different from those of most of the major mail organizations that
represent primarily the highest volume mailers. What's more, we suspect
that our largely favorable views on the adequacy of the present
ratemaking system may be inconsistent with the preliminary views of at
least some members of this Commission. We submit that: (1) the Postal
Service should not be given significantly enhanced ability to change
rates unilaterally, (2) despite its flaws and the potential for
improvement, the present rate-setting system, with its checks and
balances, is better than any alternative that has been proposed, and (3)
the Postal Rate Commission's role and powers should be enlarged.

We begin with an admission. American Business Media, like the others who
will comment, agrees that the present system, in which the Postal
Service takes months to prepare a rate request and the Postal Rate
Commission consumes up to (and usually close to) ten more months to
issue a decision, is cumbersome, time-consuming and expensive for both
the Postal Service and the other participants. In fact, with apologies
to Winston Churchill,[^2] American Business Media believes that it is
the worst way to set postal rates . . . except for all of the other ways
that have been tried and suggested from time to time.

Many of the recent proposals to give the Postal Service greater
flexibility were developed as part of the failed effort at creating an
acceptable postal reform bill in the past few Congresses. Our analysis
showed that, while these proposals might have benefited some interests,
they would in all likelihood have produced crippling rate increases for
our small segment of the publishing industry and others. These proposals
did nothing to respond to electronic diversion and the loss of revenue.
They appeared to be little more than a power grab by the Postal Service,
cheered on by those large, favored mailers that believed that they would
be the beneficiaries of any new rate arrangement. These proposals did
not deal adequately with what Undersecretary Fisher described as the
"delicate balance" between pricing flexibility and monopoly power.

American Business Media's concern that greater flexibility for the
Postal Service means higher rates for its members has not developed in a
vacuum. Rather, it is based on history. The smaller circulation
periodicals of the type published by American Business Media members
have long been targeted by proposed USPS changes in periodical rate
design. For example, on more than one occasion in recent years, the
Postal Service has attempted to eliminate the flat, unzoned editorial
rate. This rate feature has been the bedrock of periodical rates since
the founding of the Republic and has given readers throughout the nation
equal access to information. Each time, American Business Media has
opposed that change, and each time the Postal Rate Commission has said
"no."

But that and other unsuccessful efforts by the Postal Service to tilt
its rates in favor of mass-circulation magazines pale in comparison to
its 1995 "reclassification" request. In that case, which that was
allegedly revenue neutral, the Postal Service proposed a bifurcation of
periodicals such that a few hundred of the largest would enjoy
double-digit rate *decreases*, while twenty thousand or so publications
would suffer *increases* of up to 20% and more. Again, American Business
Media had the opportunity to present evidence and policy argument
opposing this massive change, and again the Postal Rate Commission said
"no."

It is beyond dispute that, but for manner in which the Postal Rate
Commission exercised its authority, the rates faced by American Business
Media periodicals and thousands of others would be much, much
higher---so high, in fact, that existing trade publications would have
folded and, at least as importantly, start-up trade publications devoted
to start-up industries may never have been launched. Now, in the name of
efficiency and responsiveness to market conditions, it will no doubt be
suggested by some that we give up the protections that have been
essential to our survival in exchange for alleged responsiveness to
threats that are unrelated and incipient, at best, and for a limited
system of constraints on the ability of a monopolist to set its own
rates. We are not convinced that the trade is a good one.

Because it may well be presented to the Commission as a starting point,
at least, we believe that it would be appropriate to address briefly the
price cap approach that was a prominent part of the various postal
reform bills considered by the House. This scheme attempted to craft the
necessary pricing constraints for "non-competitive" services by imposing
a CPI-based price cap and a rate band within which individual prices for
individual products must fall.

In various reform bills, this band would have applied only at the class
and subclass level. Therefore, the Postal Service's "revenue neutral"
classification proposal in 1995, which would have raised rates for
American Business Media members by about 20%, would have been permitted,
since the overall revenues from the subclass---Regular Rate
Periodicals---would not have changed. In other iterations, the band
would have applied to each of the individual rate cells that make up the
rates for each product,[^3] which would have paralyzed the Postal
Service and prevented necessary changes in rates to reflect new work
sharing initiatives or substantial shifts in costs, such as from the
introduction of a new generation of sorting machines.

Shortly before the Congressional effort ended, the Postal Service
proposed a set of constraints on its ratemaking authority that was
significantly less restrictive than anything that had previously been
seen. While the prior efforts to craft a solution to the perceived
problem were troubling, the Postal Service's proposal was frightening.
We suggest that the problem in both approaches is in large part
systemic.

Ideally, the rate setter, as for any regulated monopoly, should be an
entity that has no stake in the business and is inherently trustworthy.
That entity should have substantial discretion to consider costs and
other factors in order to establish rates that are fair and equitable.
That is the present system. In all of the proposals that were before
Congress, rate setting authority would be transferred to the Postal
Service---a powerful monopoly that, experience has shown, has not always
been interested in setting rates fairly for mailers with small or
moderate volumes.

At this point, given the lack of consensus on how the rate-setting
mechanism should be changed even among the most ardent advocates of
postal reform, it is appropriate to ask whether the present system is so
unsatisfactory that it must be replaced at all costs, even if that
replacement introduces unknowns and significant risks to at least some
mailers. As stated above, American Business Media submits that it is
not. Although American Business Media joins with its mailing colleagues
in decrying the frequency and magnitude of recent postal rate increases,
they were caused by out-of-control increases in postal costs and, more
recently, by declining volumes, not the rate-setting method Congress
created in 1970 and that has been in place ever since. In fact, were it
not for the time-consuming proceedings to which the Postal Service must
submit in order to raise rates, it is quite possible that there would
have been reduced incentives to control costs as a natural consequence
of an increased ease in obtaining additional revenues. In other words,
if it had been easier to raise rates for the past thirty-one years,
there is a reasonable likelihood that costs and therefore rates would
have been even higher.

Further evidence that the present rate-setting mechanism, for all its
apparent flaws, has done a serviceable job and is not a significant
impediment to fiscally sound operations was presented to you in the
Postal Service's January 8^th^ presentation. It showed that, since 1972,
when the present rate making system was implemented, through 2002, the
Postal Service has been able to recover in revenues 99.5% of its costs.
The statutory break-even mandate could hardly have been better
served.[^4]

Others will assert that, despite its effectiveness, the present system
consumes too much time and too many resources. These critics, who often
compare the Postal Service's rate flexibility with the rate freedom of
companies in the private sector, miss the point. The typically
referenced private sector companies are not regulated, and they have
neither been given nor have they developed a monopoly over a service of
vital importance to all Americans.

It would be more apt to examine the ways in which rates are generally
set for private sector, *monopoly* providers of essential services. Such
a comparison reveals that there is nothing unusual or inappropriate with
postal rate setting under present law. Cost-of-service ratemaking is
alive and well.

For example, under the Federal Power Act, the Federal Energy Regulatory
Commission (FERC) regulates the wholesale rates charged by electric
utilities.[^5] Much like the Postal Service under the Postal
Reorganization Act, a utility seeking a rate increase must prepare and
file reams of data that display not only its costs broken down in minute
detail for an historic test year but also a projection of such costs for
a future test year.

When filing for FERC approval, the utility must propose an effective
date that is at least two months into the future, and FERC then has and
frequently exercises the authority to "suspend" the effectiveness of a
rate increase for another five months. Thus, the ten-month maximum delay
between Postal Service filing and a Postal Rate Commission order is not
out of line with the seven-month delay faced by electric utilities.[^6]
Moreover, if the utility's rates are challenged and set for hearing, it
typically takes years, not months, for the case to be resolved, first
with an initial decision by an administrative law judge and then a
decision (and usually another decision on rehearing) by the agency. From
the end of the seven-month period until final agency action, the
utility's rate increase is collected subject to refund, so that refunds
are paid to customers if the agency does not grant an increase as large
as that requested.

To be sure, even though electric systems' monopoly services (such as
transmission) remain fully regulated in this manner, there has been
movement in recent years toward allowing utilities to sell power and
energy at market-based rates, not cost-based rates subject to
before-the-fact FERC scrutiny. However, and this is crucial, FERC gives
its permission to a utility to sell its non-monopoly products at what
are essentially unregulated rates only when the agency has concluded
that the utility has no market power and that a robust competitive
market provides complete protection to consumers. Recent experience in
California's electricity market shows what can happen when essential
services are sold at "market prices" in the absence of a robust market
to protect consumers from excessive pricing.

We present this analogy to electric utilities not to suggest that the
FERC model should replace the Postal Rate Commission model but to
demonstrate that the Postal Rate Commission model has a rational
foundation. American Business Media is not opposed to change. What we
are opposed to is any view that the present rate-setting system must be
replaced by something totally different, even if we are far from certain
what the implications of that new system will be for mailers and the
nation. The ills of the Postal Service have not been caused by the way
that rates are now set and will not be cured by scrapping that system.

Nevertheless, incremental improvements are possible. For example,
American Business Media believes that one reason for delay in Postal
Rate Commission cases is the failure of the Postal Service to produce
data, at least in the form preferred by the Commission and of greatest
value to the participants. Therefore, American Business Media submits
that this Commission should recommend that that the Postal Rate
Commission be given subpoena power. With this power, a power that is
routinely given to regulatory authorities, the Postal Rate Commission
and the parties will be able to obtain the data they need in a form that
is useful. As a result, rate cases will be less complicated and quite
likely shorter.

In addition, this Commission should recommend elimination of the present
legal authority of the Postal Service Governors to reject and modify a
decision of the Postal Rate Commission, as it did in 2001, leading to
two rate increases within six months. Instead, the decision of the
Postal Rate Commission should be final, bringing certainty to the
process and eliminating weeks or even months from the delay between
filing and implementation.

We would not oppose carefully crafted and limited changes that would
allow some Postal Service flexibility over rates for truly competitive
services, as long as captive customers are protected from any losses
that such flexibility produces. But we urge you to consider carefully
not destroying the mechanisms that have worked well, especially in those
areas of the Postal Service's business that are a legal or *de fact*o
monopoly, such as Periodicals. In doing so we point out that the Postal
Service has just begun to use the flexibility it has. Notable examples
are the "ride-along" rate for Periodicals introduced as an experimental
rate and now permanent, the "negotiated service agreement" with Capitol
One Services now before the Postal Rate Commission, and the experimental
co-palletization rate for Periodicals that will become effective in
April.

**(3) [The rigidities in cost or service that limit the efficiency of
the postal system]{.underline}.**

**American Business Media's Recommendation:** *The Postal Service should
have greater latitude in sizing its labor force and physical plant. The
Commission should recommend personnel policies that include area wage
differentials, a modified collective bargaining process, and relief from
political pressures in physical plant and workforce decision-making.*

It is beyond dispute that "rigidities" in both cost incurrence and what
are today perceived as the Postal Service's universal service
obligations limit the efficiency of the postal system. In fact, the
Postal Service's rigid and costly labor agreements, and the political
pressures that prevent rational decision-making on plant locations and
functions, make it impossible to respond to decreasing volumes in an
appropriate manner, the way that American Business Media members and
other private sector firms have responded to difficult economic times.

The arbitration system for setting postal bargaining unit wages and
benefits, implemented in 1971 in response to threats of illegal strikes,
has produced a postal system with wages that, at least in many areas of
the country, are greatly in excess of those in the private sector.
Certainly, no one can reasonably deny that the Postal Service would be
more efficient if its workers were treated like most federal workers in
terms of salary and working conditions.

Without a doubt, for example, area wage differentials would produce
significant savings in some areas and, perhaps, a more highly paid and
more effective work force in others. Imposition of area wage
differentials would be relatively straightforward, if controversial, and
we recommend that the Commission study this matter carefully. Replacing
the current system of binding arbitration would be a far more difficult
challenge. Some have suggested that an approach similar to the Railway
Labor Act,[^7] with collective bargaining followed, if necessary, by
mediation, voluntary arbitration, a Presidentially-imposed cooling off
period, emergency boards and then, possibly, a strike presents a
workable framework. American Business Media does not believe that any
system that permits strikes by federal employees is appropriate. Postal
workers are as essential to the nation's economy as air traffic
controllers, and they are federal employees. American Business Media
suggests that if wages and benefits of postal workers are not
established by federal law in the same way that civil service salaries
are established, portions of the Railway Labor Act model might be
appropriate, but with a Presidentially-appointed board to make a binding
determination if mediation and voluntary arbitration have failed. That
board would review the record and would consider the views of the
interests of employees, management and mail users.

Another "rigidity" is the current view that six-day per week delivery to
every address is an essential ingredient of universal service that must
be maintained, irrespective of the cost. There is no doubt that the
Postal Service would be more "efficient" if it cut deliveries to, say,
three per week in high cost, low volume areas, and, in fact, that it
would be more "efficient" if all mail recipients were required to pick
up their mail at the post office or pay a charge for delivery. (The
disappearance of the milkman well demonstrates this phenomenon.) These
issues are some of those that go to the heart of questions about the
scope of the Postal Service's universal service obligation. The
threshold question here, we submit, is the level of inefficiency that
should be tolerated in order for the country to have an acceptable level
of mail service at reasonable cost to all mailers and mail recipients.

Some have suggested, although not for attribution, that cost increases
and decreasing mail pieces per delivery will eventually place enormous
pressure on the Postal Service to cut back deliveries, most likely in
what would be viewed by some as an unduly discriminatory fashion. That
is, high volume business deliveries would continue to be made six (or,
typically, five) days per week, high volume and high density residential
areas would continue to receive six (or perhaps five) deliveries per
week, but low volume, low density (or other high cost-per-piece) areas
would be cut to three or even fewer deliveries per week. The delivery by
mule to a few residents at the bottom of the Grand Canyon is an
oft-cited example of such high-cost deliveries.

American Business Media does not at this time advocate such fundamental
changes in the level of postal services as those identified above,
because we do not know the cost implications or their impact on all
types of mailers and mail recipients. We raise these possibilities to
show that inefficiencies in the provision of a public service might not
always be bad from a public policy standpoint, but it now appears that
less inefficiency and more cost control may be necessary. It is clear
that the Postal Service can no longer rely upon volume growth to sustain
all of the inefficiencies inherent in its system.

There are other major areas to be closely examined, such as rigidities
associated with the size and deployment of the Postal Service's enormous
workforce, especially as volume and automation trends reduce the need
for clerks while the need for carriers continues to increase. Equally
important are rigidities, often political in nature, associated with the
Postal Service's infrastructure. To its credit, the Postal Service has
undertaken the staggering task of modeling its entire network to
determine the optimum number, size, utilization, location and function
of mail processing facilities and to better align its equipment,
personnel and transportation network. It should be commended for this
effort, which, if it results in changes to postal operations, could have
an enormous beneficial impact.

It is no secret, however, that, unlike the "businesses" referenced
frequently by those seeking changes in the way that the Postal Service
prices its products, the Postal Service is unlikely under present
conditions to be permitted to optimize its network. Even the suggestion
of the closing of a small post office with a single employee can bring a
firestorm of protest from Capitol Hill. If Congress believes that the
national interest, as opposed to broad USPS customer interest, requires,
for example, that there be dozens of post offices on Cape Cod and
redundant mail processing plants throughout the country, then Congress,
not ratepayers, should fund these extravagances. Otherwise, Congress
must cease interference with Postal Service decisions.

There are other discrete rigidities that must be examined, both from
their cost-saving perspective and from the perspective of the Postal
Service's universal service obligation. For example, it appears from
observation that the establishment of "cluster box" deliveries in newly
built areas must be a far more efficient way to deliver the mail than
the door-to-door deliveries that are the rule in established suburban
areas. It is American Business Media's understanding that the Postal
Service does not convert delivery areas from the latter to the former.
Although those affected would not be happy with such a change, the
Postal Service should be required to conduct the necessary studies and
implement such conversion where doing so will produce significant
savings. The far greater delivery efficiency that will likely result
could for many years offset, or perhaps more than offset, the growth in
delivery points.

As it examines both rigidities in postal operations and the optimum
level of pricing flexibility, the Commission may have occasion to
examine the nature of Periodicals and Periodicals rates. Because this is
the rate that is of greatest interest to American Business Media
members, it is appropriate that we provide some input.

As the Commission studies the Postal Reorganization Act, it will see
that Congress directed the Postal Service and Postal Rate Commission to
follow the Congressional practice of recognizing in rates the
"educational, cultural, scientific and informational" value of certain
types of mail. 39 U.S.C. § 3622(b)(8). Over the years, the Postal
Service's rate proposals and the Postal Rate Commission's
recommendations implemented this directive by restraining rate increases
and rate levels for Periodicals (as well as other types of mail, such as
books).[^8] In the most recent rate cases, to reflect the fact that the
costs of processing Periodicals seemed without explanation to be
climbing more rapidly than nearly all other costs and to avoid rate
shock, the Postal Service requested and the Commission recommended
increased restraint (along with cost-driven, above-average rate
increases). At this time, the mark-up over "attributable costs," or cost
coverage, paid by Periodical mailers is very small, although that
restraint has not prevented the steep climb in Periodical rates shown in
the chart above.[^9]

The rate relief available under present law is important. Because of
this rate restraint, fewer publications have been driven out of
business, and more information flows. Moreover, given the relatively
small size of the Periodicals class, this result was attainable without
inflicting measurable harm on other mailers.

To demonstrate this latter point, we refer the Commission to the data
published in the Appendices to the Postal Rate Commission's March 22,
2002 Recommended Decision in Docket No. R2001-1, its most recent omnibus
rate decision. As shown there, the \$2.4 billion of costs attributable
to Regular Rate Periodicals are less than 6% of the total attributable
costs and only about 3% of the total domestic revenue requirement of
\$73 billion.[^10]

Examined more closely, these data show that the very low Periodicals
"cost coverage" in the present rates of 101.4% is significantly below
the system-wide cost coverage of 164.8%, although it is closer to the
cost coverages for Bound Printed Matter (124.1%), Media/Library Mail
(109.6%) and Parcel Post (114.1%).[^11] If the present Periodicals rates
were modified to reflect a cost coverage of 125%, the 24% rate increase
would produce additional revenues of about \$585 million, assuming no
loss of volume.[^12] A cost increase of that size would devastate the
already crippled periodicals industry. But just as importantly, applying
this sum gained from Periodicals mailers to reduce other rates would
result in an average rate reduction to other mailers

of less than 1%.[^13] This is undoubtedly one reason why mailers in
other classes have not objected to the low cost coverage for
Periodicals.

Another important aspect of Periodicals mail that must be taken into
account in any broad redesign of the Postal Service is its variety.
Periodicals come in a range of sizes, thicknesses, paper stock, cover
weight and appearance, although there are dimension and other applicable
restrictions in the Postal Service's regulations. Those regulations
quite properly seek to exclude mail pieces that are very difficult or
costly to handle, but they properly do not seek to over-standardize this
class of mail in order to reduce processing costs to the bare minimum.
Publications develop a bond with their readers, and any attempt to
neuter them by forcing them to look alike will break that bond and be
far more costly to publications than charging them the slightly higher
rates that result from the deployment of more flexible automation
equipment.

**(4) [The ability of the Postal Service, over the long term, to
maintain universal mail delivery at affordable rates and cover its
unfunded liabilities with minimum exposure to the American
taxpayers]{.underline}.**

**ABM's Recommendation:** *The Commission should help define universal
service so that the level of service the USPS is mandated to provide may
be provided at reasonable rates.*

This issue in many ways encompasses all of the others. As discussed
above, any assessment of the Postal Service's ability to provide
universal service at affordable rates requires, first, that universal
service be defined. The term certainly does not mean the same thing to
everyone, and American Business Media at this point has no definition to
offer, because the hard look at both cost savings and customer impact
from possible changes in service levels has not been undertaken. It
should be.

In fact, as we see the Commission's task, one of its primary obligations
is to develop a workable definition of universal service, or at least
the level of such service that the Postal Service ought to provide so
that its rates can be affordable. To establish a service obligation that
precludes reasonable rates would inevitably lead to a death spiral of
still lower volumes and higher rates, so that the goal of affordable
rates would become unreachable. Stated otherwise, the nation does not
need and should not seek a postal system that provides a high level of
service that no one can afford.

As for unfunded liabilities, to the extent that they are properly deemed
to be liabilities of the Postal Service, they must be taken into account
when assessing the affordability of rates and thus the level of service
that is appropriate. As mail users, many members of American Business
Media would undoubtedly prefer to see some of these clear Postal Service
liabilities shifted to the taxpayer if a plausible reason for doing so
could be developed, but such a shift is probably not in the cards for
political and practical reasons.

On the other hand, American Business Media, joins all other mailers in
urging the Commission to add its voice to the chorus of those seeking
Congressional relief from the present, statutorily mandated payment by
the Postal Service into the Civil Service Retirement Fund. That
correction is necessary to avoid an unwarranted and extraordinarily
harmful imposition of an economic burden on the Postal Service. The
Postal Service has stated repeatedly that, without this relief, it will
be forced to raise its rates yet again in 2004; with this unfair burden
lifted, it will be able to avoid the next rate case until "at least"
2006. Mailers, including American Business Media members, desperately
need this respite from rate increases in order to absorb those of recent
years. In addition, a break from rate increases will allow the
Commission's recommendations to be considered and acted upon without the
distraction of and the real harm from yet another rate increase.

(**1) [The role of the Postal Service in the 21^st^ century and
beyond]{.underline}.**

**(5) [The extent to which postal monopoly restrictions continue to
advance the public interest under evolving market conditions, and the
extent to which the Postal Service competes with private sector
services]{.underline}.**

**ABM's Recommendation:** *The USPS should maintain the letter mail
monopoly and concentrate its efforts on areas where its economies of
scale provide value, such as its delivery function.*

We will deal with these two issues together, since we believe them to be
linked.

It is difficult to see well into this century, much less beyond it. With
that caveat, American Business Media expects, or at least hopes, that
the Postal Service will continue to be the dominant deliverer of hard
copy material to American homes. As the recent past has shown, and as
the Postal Service continuously reminds us, the Postal Service must add
1.7 million delivery points each year, so that its ability to match
declining volumes with reduced costs is limited. Unlike many processing
functions, there appear to be very significant economies of scale in the
delivery function, and for that reason it is important to the Postal
Service's financial health and its public service mission that it be in
a position to maximize its pieces per delivery. It should do so even as
it increasingly enables mailers or others to perform processing and
transportation functions when relinquishing this work is cost-effective.
American Business Media therefore concludes that at least for the
foreseeable future the Postal Service's "letter mail" monopoly must
continue but that the Postal Service should be encouraged and free to
shift processing and transportation functions to the private sector when
doing so makes economic sense.

In suggesting the continuation of the letter mail monopoly, American
Business Media is mindful of the unique role of the Postal Service.
Notwithstanding what appears to be the general view that the Postal
Service should act in a "business-like manner," it is not a business. It
is a public service, and it cannot be expected to act in all respects
like a business. Were it a business, competition for all of its products
might be beneficial, but were it a business reacting to competitive
pressures, it would no doubt take such steps as surcharging or even
completely eliminating deliveries in high-cost areas. Recent abandonment
of service and rapidly rising fares in smaller markets by domestic
airlines and United Parcel Service's residential delivery surcharge are
two examples of rational, "business-like" decisions that American
Business Media does not believe the Postal Service should be permitted
or encouraged to make.

**(6) [The most appropriate governance and oversight structure for the
Postal Service]{.underline}.**

**American Business Media's Recommendation:** *The Postal Service
Governors should be more independent and should have a staff to help
them attain this position. Compensation for the management of the Postal
Service should be on par with that in the private sector*.

American Business Media believes that the Postal Service would benefit
from a Board of Governors with the greater independence that greater
independent knowledge would bring. Whether this result can be brought
about under the present structure must therefore be addressed. We
believe that it can be, but that some changes are necessary. First, it
is important that members of the Board be appointed on the basis of
their business, labor, finance and other relevant experience. Second,
unless the Board is to be turned into a full time Board, which would in
effect transform Board members into managers, they should have a small
but full-time staff to provide independent advice.

Next, to do its job effectively, the Board must have the ability to
attract, retain and provide proper incentives to a management team. With
the present cap on postal salaries at Executive Level 1, we suspect that
all three of these abilities suffer. American Business Media would
certainly not propose, as we do, the opportunity for significant pay
increases for postal management if we did not think that the added
expense would be more than offset by cost savings in a more efficiently
and effectively managed enterprise. When the government becomes involved
in a proprietary activity and seeks career employees to fill key
positions, it should have the flexibility to offer comparable pay for
comparable work. It must have the ability to provide financial
incentives for superior performance. We submit that it cannot do so as
long as its top pay level, presently \$171,900 per year, is tied to
Executive Level I of the federal pay scale.

**CONCLUSION**

We urge the Commission in its deliberations to recognize the continuing
importance of Periodicals mail, as it has been recognized for more than
two centuries. We ask that the Commission take an independent look when
examining the present rate-setting system and that it recommend ways to
give the Postal Service the level of

control over costs that it needs. Most of all, we offer our help
whenever and wherever it is needed. It is of utmost importance to all of
us that the Commission is successful.

+-----------------------------------+-----------------------------------+
| Gordon T. Hughes II               | David R. Straus                   |
|                                   |                                   |
| President and CEO                 | Suite 600                         |
|                                   |                                   |
| American Business Media           | Thompson Coburn LLP               |
|                                   |                                   |
| 675 Third Avenue                  | 1909 K Street NW                  |
|                                   |                                   |
| New York, New York 10017          | Washington, D.C. 20006            |
|                                   |                                   |
| 212-661-6360                      | 202-585-6921                      |
|                                   |                                   |
| g.hughes@abmmail.com              | dstraus@thompsoncoburn.com        |
+-----------------------------------+-----------------------------------+
|                                   |                                   |
+-----------------------------------+-----------------------------------+

February 11, 2003

[^1]: Some titles that may be familiar to a member of this Commission
    include *Asphalt Contractor, Concrete Construction,
    Construction-Specific Engineering, Environmental Protection,
    Furniture Today, GPS Worldwide, Police* and *Satellite Broadband*.

[^2]: "Democracy is the worst form of government except all those other
    forms that have been tried from time to time." Speech in the House
    of Commons, November 11, 1947.

[^3]: Regular Rate Periodicals, for example, are faced with an array of
    eighteen distinct piece rates, depending upon the degree of
    presortation and how far into the postal system they are entered
    into the mail. There are then a non-advertising pound rate and ten
    separate advertising pound rates. Under this proposal, each of these
    individual rate cells would have been subject to the cap and band
    width.

[^4]: This is an imperfect comparison, but the Postal Service also
    showed that, in the years 1942-2001, prior to the implementation of
    the present system that has drawn so much criticism, it recovered
    through rates only 82.6% of its expenses.

[^5]: State regulatory commissions regulate retail rates.

[^6]: For retail rates at the state level, the delay is often even
    longer.

[^7]: 45 U.S.C. §§ 151-88.

[^8]: In fact, Congress's approach was sometimes referred to as
    recognition that "a book is not a brick."

[^9]: One way of looking at relative postal rates is the "cost coverage"
    construct. The "cost coverage" of a particular class or subclass is
    the percentage derived by dividing the total revenues of that class
    or subclass by its attributable costs. Thus, if the revenues are
    \$14 billion and the attributable costs are \$10 billion, the cost
    coverage is 140%.

[^10]: Appendix F, page 7, and Appendix G, page 1.

[^11]: Appendix G, page 1.

[^12]: Attributable costs (outside county) of \$2.477 billion times
    23.6% (which is 25% minus the present mark-up of 1.4%).

[^13]: Derived by dividing \$585 million by the revenue requirement for
    all other classes (total revenue requirement minus international
    revenues and Outside County Periodicals revenues, all shown on
    Appendix G, page 1).