**[Testimony]{.smallcaps}**

[of the]{.smallcaps}

**National Association of Presort Mailers**

[Before the]{.smallcaps}

**[President\'s Commission]{.smallcaps}**

[on the]{.smallcaps}

**[United States Postal Service]{.smallcaps}**

**[February 12, 2003]{.smallcaps}**

**[Testimony]{.smallcaps}**

[of]{.smallcaps}

**[Joel T. Thomas]{.smallcaps}**

**[Executive Director]{.smallcaps}**

[on behalf of the]{.smallcaps}

**[National Association of Presort Mailers]{.smallcaps}**

[Before the]{.smallcaps}

**[President\'s Commission on the United State Postal
Service]{.smallcaps}**

**[February 12, 2003]{.smallcaps}**

Formally established in June of 1984, the National Association of
Presort Mailers (\"NAPM\") is a trade association of firms concerned
with postal worksharing programs, especially discounts for presorted and
automated First-Class mail. The members of the NAPM constitute a clear
majority of independent presort companies (often referred to as
\"bureaus\") as well as many companies that presort their own mail. The
NAPM\'s members process the overwhelming majority of the pre-sorted
First-Class mail and a significant volume of pre-sorted Standard Mail.

The primary purpose of the NAPM is to:

1.  Represent the interests of all presort mailers.

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1.  Improve communications with the US Postal Service.

2.  Promote professional and ethical business practices among members.

3.  Develop and improve USPS worksharing programs to produce cost saving
    and service benefits to presort mailers and the USPS.

Member firms currently operate in all ten postal areas and,
collectively, process over 100 million pieces of mail daily in over 100
cities or about 30 billion pieces of First-Class Mail annually.

**Governmental Function/Universal Service**

The Postal Service should remain a governmental entity dedicate to
providing \"universal service\" at fair and reasonable rates. Since
\"universal service\" is antithetical to profit maximizing, this is a
major and sufficient, but my no means the only, reason for the Postal
Service to remain a government agency. While the Postal Service should
remain a government agency, it is abundantly clear that it can and
should through an expansion of worksharing programs, greatly reduce its
workforce and capital requirements while increasing overall efficiency
and reducing postage costs paid by all mailers.

While we support the concept of \"universal service,\" the absence of
any definition of this critical term poses a serious problem. The postal
monopoly over First-Class mail has been and continues to be predicated
of the obligation of the Postal Service to provide \"universal
service.\" The excessive surcharge (mark up over \"attributable costs\")
paid by First-Class mail is justified by the need to cover the cost of
\"universal service.\" In order to determine the appropriate markup on
First-Class, and we believe other classes of mail as well, the concept
of \"universal service\" must be defined. In short, one of the first
things the Commission should do is to define the nature and extent of
the Postal Service\'s \"universal service\" obligation. In doing so the
Commission must recognize that some method of covering the costs of
\"universal service\" must be provided. It must also recognize that
excessively surcharging First-Class mail may no longer be a viable
method of funding the cost of \"universal service.\"

In a Power Point presentation entitled \"BRIEFING for the PRESIDENT\'S
COMMISSION on the UNITED STATES POSTAL SERVICE\" dated January 8, 2003,
the Postal Service suggested that the Postal Reorganization Act of 1970
requires it to provide \"universal service\" and that that requires it
to provide: \"Access and delivery to virtually everyone, everywhere,
everyday.\" This is simply not true. The Postal Reorganization Act of
1970 does not use the term \"universal service,\" much less define it.
Nor does the law require the USPS to provide access and delivery to
virtually everyone, everywhere, everyday. All the law requires is that
the USPS provide \"prompt, reliable, and efficient services to patrons
in all areas and ... render postal service to all communities.\" The law
simply does not require daily service to everyone, everywhere, everyday.

In view of this, we think the Postal Service has artificially and
improperly restricted the range of options available to it under
existing law. We do not suggest, as the Postal Service itself has, that
it limit delivery to everyone to five days a week. However, providing
six-day service to the overwhelming majority of postal patrons does not
mean that it must provide six-day service to \"virtually everyone.\" We
believe that the Postal Service should on an ongoing basis identify
those patrons who constitute the one percent of its patrons who are the
most expensive for it to service and devise some reasonable means to
reduce the excessive costs imposed by these few customers. The Postal
Service should not discriminate against anyone. However, spending many
times as much to service one patron as another is simply form of
discrimination, albeit discrimination for, instead of against, some
patrons. Why should the Postal Service favor some customers over others?
It shouldn\'t! So, what the Postal Service needs to do is take steps to
reign in the high costs of servicing a very, very small portion of the
American public. In some cases it may be fair and reasonable to delivery
mail five days a week or even three days a week instead of six days a
week. In other cases it may be reasonable to have an associate or
contract post offices open only five a week or three days a week instead
of six or are open only four hours a day instead of eight or ten.

The threat of ending \"universal service\" has been used historically to
frighten the Congress and/or American public into supporting a Postal
Service that costs more than is necessary by suggesting that ending
\"universal service\" would mean that large areas of the country,
especially rural areas and sometimes center cities, would be cut off and
left without any service. There are no data we are aware of that would
support the contention that rural service or center city service is
unduly expensive. Nor are we are suggesting that the Postal Service
suddenly cut of anyone from any service. What we are suggesting is that
it take a hard look at the one percent of the \"customers\" in each
District that are the most expensive to serve and see if there isn\'t
some way to provide an adequate, albeit reduced and less costly, level
of service to these patrons. Indeed, we think the review should proceed
on a Postal Service District by Postal Service District basis to ensure
that no one area of the country bears the brunt of any reduction in
service.

\"Universal service\" is not all or nothing. Nothing requires one model
to fit all. The Postal Service should consider negotiating service
agreements with its hardest and most costly to service patrons. Perhaps
some of these patrons would agree to three day a week service if they
were allowed to send a certain number of pieces of mail\--perhaps ten
letters per pickup\--for free or at some reduced rate. If it costs the
Postal Service \$10 per day to service a particular customer, giving the
customer \$11.10 in free mail per week wouldn\'t be a bad deal. The
Postal Service would save \$18.90 per week even if the customer sent ten
letters at every pickup for free. If the USPS were to find just 1000
delivery points where customers would accept this deal it would save
\$982,000 a year. 1000 delivery points is such a small percentage
(7.6923 x 10^-6^, I believe) of all USPS delivery points that I am not
sure how to express it, but I think it is 7.69 one hundred thousands of
one percent of the Postal Services delivery points. If the Postal
Service found ten thousand customers who would agree to something that
would reduce the cost of service by \$20 per week, it could save \$10.4
million per year. If the USPS could reduce the cost of delivery to only
1% of it 130 million delivery points by \$20 per week it could save more
that \$1 billion dollars per year and that could reduce postage on
First-Class Mail by a penny a piece.

The loss of six-day delivery to one percent of the delivery points in
the United States will not disrupt the mailing industry or the USPS.
What amazes us is the USPS\'s apparent devotion to the notion that on
the last day before it goes out of business as a result of over pricing
mail delivery, it will still be delivering to everyone, everywhere,
everyday.

The provision of \"universal service,\" or something like it, raises
another issue however; and that is who should pay for it. At present,
First-Class mail is expected to pay for \"universal service\" via the
markup on First-Class Mail. This is based upon the notion that the
delivery of First-Class Mail is a monopoly that can \"properly\" be
exploited for provide for an essential public service. But there\'s a
problem, a serious problem. The delivery of First-Class Mail is no
longer a monopoly! There are electronic alternatives. Thus, the issue of
who pay is not so simple. If, as seems to be the case, the price of
single piece mail is driving such mail out of the USPS, then something
has to be done other than continue driving out more and more of the mail
that is supposed to pay the cost of \"universal service\" while holding
the \"universal service\" obligation constant. This is the death spiral
that has long been predicted in which each rate increase drives out more
mail with the result that each rate increase reduces, instead of
increases, revenue.

The time has come for the cost of \"universal service\" to be shared
more evenly. We are not asking now that each piece of mail regardless of
class make the same\--i.e., an equal\--contribution to USPS overhead.
However, the time has come to begin at the least to reduce the USPS\'s
dependence on First-Class Mail. Instead of increasing, as it has over
the last twenty years, the portion of overhead costs borne by
First-Class Mail, the portion of USPS overhead borne by First-Class Mail
must begin to decline. Other classes of mail must begin paying a fairer
share of these costs.

Since the assigned and attributable costs of First-Class Mail are
greater than those for other classes of mail, an \"equal\" increase of
say 10% is a much greater increase for First-Class Mail that for other
classes of mail. In short, what the USPS often refers to as \"equal\"
increases are not in fact equal.

**Worksharing**

The Commission first needs to understand that the overwhelming majority
of the worksharing discounts offered by the USPS flow through to the
mailers whose postage costs are thereby reduced. The Commission also
needs to understand that without the substantial reductions in cost
provided by worksharing discounts over the last twenty years,
First-Class Mail volume would be much lower than it is.

The primary interest and concern of the NAPM is, of course, worksharing.
The concept of worksharing has recently been attacked as a subsidy to
large mailers. Nothing could be further from the truth.

First, worksharing discounts (reduced postage rates) are not and are not
properly comparable to volume discounts. Mailers obtain lower postage
rates (\"discounts\") **only** when they perform the work the Postal
Service would otherwise have to do. Doing work that a vendor in the
private sector would otherwise have to do is not required to get volume
discounts. What the Postal Service offers are not discounts; they are
trades. Mailers do work the Postal Service would otherwise have to do in
exchange for lower postage rates. The lower rates aren\'t a "freebie,"
they\'re not volume discounts, they\'re not giveaways, and they\'re not
subsidies; they\'re earned! Any comparison to volume discounts commonly
used in business is inappropriate. Since reduced postage is not a volume
discount, comparing it to volume discounts is comparing apples to
oranges.

Second, while general economic trends influence postal volume, such
patterns do not exist in isolation. Postal policies cannot ignore the
growing diversion of mail to the Internet, the increased use of
electronic bill paying, or the common-sense notions of supply and
demand. Without worksharing, higher postage costs will increasingly
force mailers to seek less expensive alternatives that may induce a
death spiral that could destroy the US Postal Service.

Third, the Postal Service saves much more per piece of reduced rate
(workshared) mail than the discounts it provides. The exact amount saved
depends upon the amount of work done by the mailer. The discount for
simply sorting mail is not 9 cents as some have asserted, but 1.8 cents!
The lowest rate for workshared First-Class mail is 27.5 cents, but that
is for barcoded mail sorted to the carrier route. Only a very small
portion of the mail, one half of one percent (0.5%), qualifies for the
27.5 cent rate for First-Class carrier route mail.

An independent study showed (1) that reduced rates save the Postal
Service billions of dollars each year even [after the rate reductions
are factored in]{.underline} and (2) that ending worksharing would
greatly increase postal expenses. Four economists employed by the
independent Postal Rate Commission \-- Robert Cohen, William Ferguson,
John Waller, and Spyros Xenakis --- reported that "in 1999, the total
cost savings from all worksharing activities was \$15.3 billion." They
estimate that if worksharing were ended the Postal Service would have to
add 187,000 employees \--a 22-percent increase. Why would it make sense
to expand the capacity of the Postal Service to process a declining mail
volume that today is much more efficiently processed by the private
sector? Where would the Postal Service obtain the increased revenues and
volume it would need if worksharing ends?

Moreover, a much less radical version of this argument was presented to
the Postal Rate Commission in R2001-1 and **rejected** by it as recently
as last winter. **These experts were not wrong**. Worksharing saves the
Postal Service money and reduces the rates paid by other mailers. Ending
it would cost the Postal Service and Postal customers money.

The rates paid by worksharing mailers have increased less than rates
paid for single-piece mail (most of which is sent by business) because
workshared mail is partially processed by the private sector while all
single-piece mail is processed solely by the USPS without assistance
from the private sector. In short, the public pays higher rates when
mail is processed solely by the Postal Service. For most business
mailers postage is a cost of doing business that is ultimately borne by
customers\--i.e., the public. So reduced rates for workshared mail,
especially First-Class workshared mail, reduce the postage paid by the
public whose banking fees, credit card fees, insurance costs etc. would
increase if the postage increased. A very small percentage of
First-Class Mail is sent by one individual to another. The vast
majority, over 90 percent, is sent by business to individuals or by
individuals to business. Thus, worksharing discounts for bulk
First-Class Mail primarily, but not exclusively sent by business saves
the public money.

Fifth, the incentives (worksharing discounts) offered by the Postal
Service are not limited to "major mailers" and "business mailers.\"
These rates are equally available to and are used by churches, small
associations, unions, newspapers, and non-profit groups of every size.
Moreover, these postal incentives are available on the same basis in all
markets from big cities to rural communities. The ability of mailers to
take advantage of worksharing is more a function of density than volume.
A small church will 600 members all or who live in the same 5-digit ZIP
Code can take advantage of worksharing discounts more easily than some
one mailing 10,000 or even 100,000 pieces of mail nationwide unless that
mailer commingles its mail with the mail of others through a presort
bureau.

Sixth, the USPS is not paying mailers \$1,500 per hour for applying bar
codes that the USPS could apply itself for only \$30 per hour. A single
postal employee cannot perform the work performed by mailers to earn
reduced postage rates. Processing mail on an MLOCR, the machine used to
apply barcodes to addressed mail, requires more than one employee. At a
minimum, it requires to an operator and two sweepers in addition to the
employees needed to bring mail to and take it away from the machine. To
qualify mail for reduced postage rates, mailers must, among other
things, barcode, sort, tray, sleeve and strap or bundle, sack and
palletize their mail. In addition, only workshared First-Class mail must
ensure that the addresses used are updated periodically. This work by
mailers substantially reduces the cost to the Postal Service to process
this mail, but these savings are not reflected in the discounts.

Automating mail requires more than labor, however. Thus, while the
direct hourly costs of a single postal clerk may be \$30, more than one
clerk is required and there are more steps than simply running the mail
through a single machine. If the Postal Service were to do the work now
done to qualify for the reduced rates, it would have to secure the
equipment, facilities, software, supplies and services necessary to
allow a team of Postal Service employees to perform just one of the
functions mailers have to perform to qualify for reduced postage. In
short the Postal Service would have to spend many millions of dollars
for

-   facility space where the mail would be preprocessed;

-   equipment and supplies needed for billions of pieces of mail;

-   trucks to pick up letters, magazines and parcels that mailers now
    deliver to postal facilities;

-   expensive machinery used to sort and print a barcode on the mail,
    and the added costs of maintaining and repairing that equipment;

-   salaries and benefits of thousands of additional employees to sort
    the letters; and,

-   over \$1 billion in additional mail forwarding costs.

The ultimate point is simply that Worksharing has worked. In an
environment where the volume of virtually all other classes and
categories of mail are down, workshared First-Class Mail is up or even.
However, this steadiness should not be abused. The potential for
electronic diversion is very real. Rather than see how far they can push
mailers of First-Class workshared mail, the USPS should be doing
everything it can to avoid pushing these mailers over the edge into
electronic alternatives, for once that happens getting them back will be
highly unlikely.

**Rate Setting**

There are a number of things that can and should be done to improve the
rate setting process.

**1. Require Use of Consistent Costing Methodology**. The USPS should be
required to file all requests for new rates and fees using pre-approved
costing and cost roll forward methodology\--i.e., the methodology
employed by the PRC in the last rate case plus any changes that may have
been approved in one or more separate costing methodology proceeding(s)
since the last rate case. Much of the time mailers need to meaningfully
participate in the rate making process is needed to try to discern rate
changes caused by changes in the cost data from rate changes resulting
form methodological and/or policy changes. If, as the USPS frequently
claims, it needs to be able to change rates faster, this is the way to
do it. If the USPS were required to use a pre-approved methodology and
change only the numbers in rate cases, rate setting process could be
significantly shortened.

**2. Require Econometric Models to be Filed in Usable Format**. All
econometric models used by any party should be fully interactive and
functional so that PRC and other participants can test all such models
and use them with additional or alternative data, hypotheses and/or
assumptions.

**3. Require Identification of Rule Changes which Shift Costs**. The
USPS should be required to identify and quantify, at the time it submits
any rate request, all Domestic Mail Manual (\"DMM\") changes since the
last rate case if the changes have or will, transfer costs from the USPS
to mailers. An example of this is Move Update. In 1997 the USPS revised
the DMM to require presorted and automated First-Class Mail to use
addresses that have been updated using a USPS approved method of address
updating within 180 days or 6 months of the use of the address. The
Postal Service asserts that this regulatory changes, which is applicable
only to First-Class workshared mail, is saving it \$1.2 billions per
year. Nevertheless, these very substantial savings are not included in
the discounts for workshared First-Class Mail even though workshared
First-Class Mail is the only mail required to comply with Move Update.
(The USPS claims that since these costs are not incurred, their absence
is reflected in calculation of total costs for First-Class Mail. That
may be true but it means that the savings were used to reduce the cost
of all First-Class Mail even though only half of all First-Class Mail,
the workshared half, generated the savings.)

**4. File More Detailed and Frequent Cost Data.** The USPS should be
required to file with the PRC more frequent and more detailed cost data,
well below the CRA level. All cost data utilized by USPS costing
witnesses and all data from special studies should be filed with the
PRC, for posting on the PRC Website at regular intervals or soon after
the data are available.

**5. Eliminate or Reduce Use of Modeled Costs.** The use of modeled
costs should be eliminated to the fullest extent possible so that rates
are based instead upon adequate sampling [at the rate category
level]{.underline}, at least with respect to First-Class.

**6. Maximize the Percentage of Attributed Costs.** The Postal Service
and the PRC with the participation of other interested parties should
explore ways to increase the level of cost attribution well above the
current level, especially in the area of delivery costs, so that the
ratemaking process is based more on accurate and objective cost data.

**7. Compel USPS to Conduct and Produce Needed Studies**. Some method
needs to be developed to require the production of data that only the
Postal Service can generate when such data is, in the judgement of the
PRC, reasonably necessary to the ratemaking process. Under the current
procedures the Postal Service can unilaterally avoid due consideration
of meritorious alternative rate proposals by simply refusing or failing
to generate data necessary to the consideration of such matters. At some
point, if the PRC has requested of the Postal Service information
reasonably deemed by the PRC to be necessary to sound ratemaking, and
the Postal Service has declined to provide such information, the PRC
should be permitted, if not mandated, to draw a negative
inference\--i.e., an inference that the data if collected and produced
would have supported the alternative rate proposal\--and act on that
inference.

**Summary/Conclusion**

The USPS stands on the brink of a precipice. Whether it falls in and
dies or flourishes depends upon the decisions made in the next few
years. The point of this testimony is to note that there is much that
the Postal Service can do under current law to dramatically improve its
chances of survival. The key to the process is to define \"universal
service\" in a way that ensure a appropriatelevel of service to the
overwhelming majority of Americans, but does not impose an
insurmountable burden on First-Class Mail in particular or all mail in
general. This can be done without inappropriate discrimination for or
against any one if we can more away from the one service level must be
available for all and find a way to cover the cost of \"universal
service\" that does not bankrupt the Postal Service via reductions in
mail volume.

On the cost side, it is clear that worksharing has worked and can
continue to work for the Postal Service and the American people by
reducing the size and cost of the USPS while improving service. Through
aggressive worksharing arrangements, the American people can have the
advantage of a government Postal Service with many of the advantages of
lower costs and greater efficiency made possible by competition in the
private sector.