Before the

**POSTAL RATE COMMISSION**

**WASHINGTON, DC 20268-0001**

:

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

[:]{.underline}

**STAMPS.COM'S ANSWERS TO THE USPS INTERROGATORIES**

**DIRECTED TO FRANK HESELTON (USPS/STAMPS.COM-T1-1- 12)**

Stamps.com hereby submits the answers of Frank R. Heselton to the
interrogatories submitted by the U.S. Postal Service, USPS/Stamps.com -
T1 - 1 - 12, dated June 8, 2000. Each interrogatory is stated verbatim
and is followed by the response.

Respectfully submitted,

##  David P. Hendel

Wickwire Gavin, PC

8100 Boone Blvd., Suite 700

> Vienna, VA 22182-2642
>
> Tel.: (703) 790-8750

Dated: June 22, 2000

**USPS/STAMPS.COM-T1-1**

On page 9 lines 10-12 you state \"the appropriate benchmark to measure
cost avoided by IBIP-prepared letters is handwritten single-piece
letters.\" On page 10 lines 11-13 you state \"\[o\]ver a third of
customer letters would have been prepared with handwritten addresses had
IBIP not been available.\"

\(a\) Please state the data source and provide copies of all supporting
data and/or documentation related to the statement that \"over a third\"
of customer letters would have been prepared with handwritten addresses.

\(b\) Given that only \"over a third\" of customers' letters would have
been prepared with handwritten addresses, please explain why a
handwritten mail piece is the appropriate benchmark for the measured
cost avoidance.

## RESPONSE

\(a\) Please see my response to Interrogatory of Douglas F. Carlson,
DFC/STAMPS.COM-T1-2 (a).

\(b\) As indicated in the testimony of Stamps.com's witness Kuhr,
Stamps.com has implemented IBIP under the parameters specified in the
*Performance Criteria for Information-Based Indicia and Security
Architecture for Open IBI Evidencing Systems*, or PCIBI-O. (See
Stamps.com-T-2 at 5 and 6). The PCIBI-O requires a mail piece formatted
for automation compatibility. This includes an indicium, FIM placement
for automation or a FIM substitute for labels, appropriate address area,
and delivery point POSTNET barcode (Ibid. at 14 to 19).

Also required is an address verified and corrected against a CASS
certified address base (Ibid. at 21 and 22). These requirements are
bundled together; each one must be met to produce a piece of mail
prepared and addressed to IBIP requirements. The appropriate benchmark
mail piece for measuring the cost avoided by an IBIP mail piece is one
that does not contain [any]{.underline} of the required IBIP features. A
handwritten envelope does not contain any of the requirements specified
for IBIP. It is, therefore, the benchmark against which to measure the
cost avoided by an IBIP prepared and addressed piece.

The selection of the benchmark is not defined by how mail is being
prepared currently. It is defined, rather, by how the mailpiece would be
prepared in the absence of all the preparation requirements, taken
together, that must be met to obtain the proposed discount.

A handwritten piece not only is the appropriate benchmark for
determining the cost avoided by an IBIP prepared and addressed piece,
but also is the benchmark USPS has determined is appropriate for the
cost avoidance for a QBRM piece. A QBRM piece must meet the same
preparation requirements as an IBIP prepared and addressed piece. The
example is consistent with the Commission's acceptance of a handwritten
benchmark for QBRM in Docket No. R97-1 with the position of Postal
Service witness Campbell in this Docket. Thus, USPS applies the
handwritten mail benchmark for QBRM even though it is highly unlikely
that any of this mail would have had handwritten addresses if there were
no QBRM discount. If there were no QBRM discount, such mailer-provided
courtesy reply envelopes would still contain printed addresses, and very
likely would contain 9-digit ZIP Codes and POSTNET barcodes.
Nonetheless, USPS correctly continues to apply handwritten mail as the
appropriate benchmark for determining cost savings for QBRM.

**USPS/STAMPS.COM-T1-2**

On page 10 lines 10 and 11 you state "individuals, small offices, and
home offices (SOHOs) are customers for IBIP mail preparation, and
addressing".

\(a\) What is the basis for this statement?

\(b\) Are there customers for IBIP mail preparation and addressing other
than individuals, small offices and home offices? If so, please list and
describe them.

\(c\) Please provide any demographic data (e.g., geographic region of
the country, revenue/income level, types of business/occupation, etc.)
of actual customers for IBIP mail preparation and addressing based on
these categories.

**RESPONSE:**

\(a\) See the testimony of Raymond Boggs, E-Stamp
Corporation/Stamps.com-T-1.

\(b\) Yes. Any mailer of single-piece letters and cards, Express Mail,
Priority Mail or parcel post is a potential customer for IBIP mail
preparation and addressing. I anticipate, however, that individual and
small office and home office customers will be particularly interested
in IBIP mail preparation because their smaller mail volumes preclude
meeting minimum piece requirements needed to use pre-sorted rate
categories and make obtaining specialized mail-preparation equipment
uneconomical.

\(c\) Re-directed to witness Lawton. (Objection pending on similar
question.)

**USPS/STAMPS.COM-T1-3**

On page 10 line 17 you state "many of these pieces \[customer letters\]
are likely to be addressed by hand."

\(a\) Please provide any research to support this statement.

\(b\) If no research is available, what is the basis for this
determination?

**RESPONSE:**

\(a\) and (b) See my response to Interrogatory of Douglas F. Carlson
DFC/STAMPS.COM-T-1-2 (a).

**USPS/STAMPS.COM-T1-4**

On page 10 lines 18-23 you state, \"Many of the best-prepared letters
mailed by individuals are courtesy reply pieces. I anticipate that these
will not convert to IBIP letters. Under IBIP preparation and addressing
procedures, one cannot print an indicium without also printing an
address matched to the AMS database. A courtesy reply envelope, however,
is already addressed. Additionally, it is much simpler to place a stamp
on a courtesy envelope than to prepare an envelope through IBIP.\"

\(a\) Did you conduct a study that sought to determine the extent to
which CRM mail volumes could migrate to IBI mail volumes? If so, please
provide all supporting data and/or documentation related to that study.

\(b\) Do you consider simplicity of use to be a key element of your
proposal? Please explain.

\(c\) In terms of the application of the postage itself, assuming a
customer has equal access to postage stamps and PC postage, wouldn\'t it
always be \"simpler\" to use stamps for postage rather than IBI
software/hardware, regardless of the mail piece type? Please explain any
negative response.

**RESPONSE:**

\(a\) I did not consider such a study necessary, for the reasons
presented in my testimony and quoted above in the question. Furthermore,
even if it were possible to print an indicium without printing an
address, I doubt that the holder of a CRM envelope would utilize IBIP
preparation and addressing procedures. To complete preparation of a CRM
envelope, a mailer needs only to stick on a stamp. To complete
preparation of an envelope through IBIP under PCIBI-O, the mailer needs
to access a computer, access the IBIP provider program, enter
information required by the program, insert the envelope in a printer,
and print it out. I doubt very much that most single-piece mailers would
go through those steps, or even some portion of them, to save 4 cents on
postage.

\(b\) No. I consider simplicity of rate administration to be a key
element of Stamps.com's proposal, but not simplicity of use compared to
hand addressing and placing a stamp on an envelope. That said,
preparation and addressing mail through use of IBIP providers is simple
enough to be used by anyone who can send e-mail and surf the Internet.
While simple to use, the address checking and cleansing requirement for
IBI mail can be a strong disincentive toward such use.

\(c\) No. For courtesy reply mail, a self-addressed envelope has already
been provided to the mailer. The only remaining step for the mailer to
take is to apply postage. In this circumstance, it is more convenient to
simply apply a postage stamp rather than produce a new envelope and
postage using the IBIP. For all other outgoing mail, the mailer must
obtain an envelope, obtain the correct address, print the address on the
envelope, and then apply postage. In this circumstance, when mailers
must supply and address their own envelope, it becomes practical and
convenient to use PC Postage for addressing and application of postage.
Also, customers may have an inventory of First Class stamps on-hand for
day-to-day mailing needs, but likely do not have an inventory of postage
needed for other mail, such as packages, Priority Mail, and Express
Mail. The use of PC Postage in these circumstances is thus very
convenient as it saves on a special trip to the post office to obtain
postage for such items.

**USPS/STAMPS.COM-T1-5**

Witness Kuhr (STAMPS.COM-T-2) describes the extensive Beta testing
process that Stamps.com had to undergo in order to qualify as a PC
postage provider. Did you offset your measured cost avoidance by the
Postal Service costs related to this beta testing procedure? If not, why
not.

**RESPONSE:**

My measured cost avoidance is based on attributable cost, which varies
with volume. The cost of Beta testing is an institutional cost. See, for
example, the Postal Service's response to an interrogatory from Douglas
F. Carlson, DFC/USPS-16, at Tr. 6/2636-2637.

**USPS/STAMPS.COM-T1-6**

On pages 13 and 14 of your testimony you describe various address
deficiencies that can occur when a mailer does not apply the appropriate
address to a given mail piece.

\(a\) Please confirm that mail pieces with address deficiencies can
incur additional processing costs. If not confirmed, please explain.

\(b\) Please confirm that individual mailers should take responsibility
to ensure that their mailing lists and addresses are current and
up-to-date. If not confirmed, please explain who the responsible party
should be.

\(c\) If a mailer were responsible for ensuring that a mail piece
address is correct and up-to-date, please explain why a discount, or
portion of a discount, should be based on the costs associated with a
mailer simply performing a task that is obviously its responsibility.

\(d\) Please confirm that some of the \"address deficiencies\" you
describe (e.g., missing street directionals) can be corrected by postal
automation equipment, such as the Remote Bar Code System (RBCS). If not
confirmed, please explain.

\(e\) Please confirm that any costs related to address deficiencies that
have been corrected by postal automation equipment would already be
included in the measured cost avoidance of 2.99 cents as described on
page 8 of your testimony. If not confirmed, please explain.

\(f\) Please confirm that you did not perform an \"exact piece
comparison\" for address deficiency related costs (i.e., you did not
compare the address deficiency related costs for a mail piece before it
converted to PC postage to those same costs for the same mail piece
after it converted to PC postage). If not confirmed, please explain.

**RESPONSE:**

\(a\) Confirmed.

\(b\) Confirmed. But as a practical matter, many individual mailers do
not do this, and the Postal Service does not require it of them.

\(c\) First, as a practical matter, many individual mailers do not take
responsibility for ensuring that their mailing lists and addresses are
current and up to date. Thus, a discount is appropriate to provide an
incentive for these mailers to take such action, which also reduces USPS
processing and delivery costs. Second, many single-piece mailers do not
have the tools needed to ensure that their mailing lists and addresses
are current and up to date, or it would be uneconomical for such users
to acquire and use such tools. Under these circumstances, a discount
that encourages them to use IBIP technology in preparing correct
addresses is justified. A discount would help offset the greater effort
that is required to produce current and accurate addresses. It also is
advantageous to the Postal Service, because it results in lower USPS
processing and delivery costs. The Postal Service's own Address
Deficiency Study (ADS) indicates that incorrect addressing by users is a
substantial problem that USPS faces. The ADS states that, "many people
simply do not know their correct, full, standardized address." ADS at 11
(USPS-LR-I-192/R2000-1 at 11). If people do not know their own correct
address, they cannot provide it to those sending them mail, which
contributes to difficulty in preparing correct addresses.

\(d\) Confirmed. The RBCS, however, cannot correct an address deficiency
when there are multiple possible choices for address correction.

\(e\) Confirmed. I have not included such cost avoidance in my
calculation of the cost avoided by use of IBIP to address letters and
cards.

\(f\) It was not necessary. Additionally, performing the kind of study
the question suggests may not be practical.

**USPS/STAMPS.COM-T1-7**

Please confirm that your proposal would result in a revenue loss that
would have to be recovered in order for the Postal Service to meet its
revenue requirement target. If not confirmed, please explain.

\(a\) Please quantify the revenue loss associated with the Stamps.com
proposal.

\(b\) Please explain how this revenue loss should be recovered.

**RESPONSE:**

Not confirmed. I anticipate that lower revenue received by the Postal
Service as a result of a 4 cent discount for IBIP prepared and addressed
mail will be more than offset by IBIP's lower processing and delivery
cost, leaving a net revenue gain.

Letters that otherwise would have been handwritten will avoid at least
4.13 cents in cost per piece from IBIP preparation and addressing, 2.99
cents per piece from preparation, and 1.14 cents per piece from
addressing. Since over one-third of IBIP prepared and addressed letters
otherwise would have been handwritten, at least one-third of IBIP
letters will avoid cost that will more than offset the reduced revenue
associated with such pieces.

The remaining letters, those with machine-prepared addresses, already
would avoid some preparation cost relative to that for handwritten
letters. Machine-addressed letters can be read and barcoded with an
eleven digit barcode more easily than handwritten-addressed letters. The
cost avoided through this easier processing already is reflected in the
Postal Service's mail processing cost. To the extent that these letters
otherwise would have received a discount that reflected their easier
processing, the effect of this avoided cost already is reflected in
revenue, and no further cost avoidance is necessary to offset it. See
the example in my response to USPS/STAMPS.COM-T-1-1.

Conservatively, I assume that no IBIP prepared and addressed letters
that otherwise would have been machine addressed would have received a
discount. Any processing cost that would have been avoided by these
letters because of their machine addressing, therefore, already is
reflected in the Service's processing cost. Additional cost avoidance is
required to offset this amount.

These letters will avoid a per piece cost of 1.14 cents from IBIP
addressing. I conclude they also avoid about one-third of the cost
avoided by handwritten letters in RBCS and outgoing processing. That
leaves about another 2 cents per piece of cost avoidance needed to
offset the proposed 4 cents per piece IBIP discount for letters that
otherwise would have been addressed by machine. The 2 cents per piece
will come from the following sources.

In my testimony, I estimate that, at the very least, several tenths of a
cent per piece in delivery cost will be avoided by IBIP addressed
pieces. I did not include this amount in calculating the proposed
discount. It is available, therefore, to provide part of the needed 2
cents cost avoidance. Since the portion of the cost avoidance related to
hand-addressed letters is not needed as a reserve for that category, it
can be applied toward the avoidance needed for machine-addressed
letters. This provides about 0.5 cents per piece of the needed 2.0 cents
per piece.

Dr. Haldi indicates that metered and PC postage (IBIP) mail avoid at
least 1 cent per piece in transaction cost (see testimony of Dr. John
Haldi, PB-T-2). This avoidance, like that for delivery cost, can be
applied toward that needed for machine-addressed letters. This provides
1.5 cents per piece, which adds to the 0.5 cent per piece delivery cost
avoidance to achieve the 2.0 cents per piece cost avoidance needed to
make the proposed discount for IBIP prepared and addressed letters
revenue neutral.

Additionally, in developing the cost avoided by IBIP addressed letters,
I judgmentally reduced the estimated mail processing cost by one-third
to produce a very conservative estimate of 1.14 cents per piece. This
cost avoidance probably is greater than the amount underlying the
proposed discount for IBIP addressing, providing cost avoidance in
excess of the needed 2.0 cents per piece. Furthermore, in developing the
proposed discount for IBIP preparation and addressing when labels are
used, I conservatively pass through only 70 percent of their avoided
cost to the discount. This is more allowance than needed for possible
errors in applying labels to envelopes. I would have passed through more
avoided cost to the discount, but that would have resulted in a
fractional rate, which I think is undesirable in rates used by the
general public. This provides further cost avoidance in excess of the
needed 2.0 cents per piece for machine-printed mail.

\(a\) -- (b) Any revenue loss will be more than offset by costs avoided.
See my answer above.

**USPS/STAMPS.COM-T1-8**

On page 23 lines 11 through 15 you state "no novel or untested
processing equipment or operations are required to capture the savings.
This contrasts with many workshare opportunities in the past, which had
to be accomplished through substantial adjustments in postal processing
and transportation operations."

\(a\) What is your basis for determining that the savings could be
achieved by the Postal Service without substantial adjustments in postal
processing and transportation operations?

\(b\) Please explain in detail the basis for your belief that these
savings will be achieved, given the current Postal Service letter mail
processing environment?

**RESPONSE:**

\(a\) See my testimony at page 9, lines 6 through 23, and page 10, lines
1 through 7. IBIP prepared and addressed letters meet exactly the same
automation compatibility and other standards met by QBRM. Both IBIP and
QBRM letters enter the mailstream as individual pieces. Since the Postal
Service has been processing QBRM and its predecessor category for years,
I conclude that it can process IBIP letters without substantial changes
in its processing and transportation operations.

\(b\) In this proceeding, the Postal Service supports continuation of
the QBRM discount established in Docket No. R97-1, based on costs
avoided in mail processing by QBRM preparation to automation standards.
See testimony of witness Fronk, USPS-T-33, page 41, lines 17 through 22,
and page 42, lines 1 through 16. I do not believe the Postal Service
would propose to continue a discount based on estimated avoided cost if
it could not, in fact, actually avoid that cost. Since IBIP prepared
letters avoid the same processing cost avoided by QBRM, the Postal
Service should be able to achieve the same cost avoidance for this
category that it does for QBRM.

**USPS/STAMPS.COM-T1-9**

On page 26 lines 9-12 you state, \"As witnesses Fronk and Campbell
speculate, a mailer could place material in an IBIP prepared and
addressed envelope that is too heavy for the postage printed. But any
mailer - whether using stamps or meter strips - could theoretically make
this same error.\" On page 27 lines 3-7 you also state \"Witnesses Fronk
and Campbell also speculate that mailers may \'push their printer
cartridges a bit too far,\' producing envelopes too difficult for postal
automated equipment to handle. Once again, to the extent such problems
could possibly occur, there is no showing it occurs more frequently with
IBIP users than other mailers.\"

\(a\) Please confirm that if either of these situations were to occur,
an IBIP user would be receiving a discount (were the Stamps.com proposal
approved), while a mailer that used stamps or meter strips would not be
receiving a discount. If not confirmed, please explain.

\(b\) Do you feel that mailers receiving discounts should be held to a
higher mail preparation standard than mailers not receiving discounts?
Please explain any negative response.

**RESPONSE:**

\(a\) Confirmed, but the IBI mailpiece would contain a cleansed address;
a verified, current, and accurate POSTNET barcode; and a FIM code. I am
also not aware of any study showing that either of these theoretical
problems would occur frequently enough to impact the proposed discount.

\(b\) No. Mailers should prepare their mailings to comply with all the
requirements associated with the rate category for which their mail is
paid. This applies equally to all mailers, regardless of whether or not
they receive discounts. A mailer not receiving a discount has the same
responsibility to mail at rates correct for the weight being mailed as
does a mailer receiving a discount.

**USPS/STAMPS.COM-T1-10**

On page 31 lines 8 through 13 you state "given the possibility of error
in applying address labels, I make an additional allowance for
uncertainties by proposing a per piece workshare discount of 3 cents for
IBIP prepared and addressed letters when the indicium and address are
printed on labels to be placed on the envelope."

\(a\) Please list and describe the types of possible errors in applying
labels on envelopes that led you to make such an allowance?

\(b\) What type of labels do you propose for use with IBIP postage
placed on an envelope?

\(c\) Is a FIM D required when the IBIP postage is applied to a label?

\(d\) How will the Postal Service's processing equipment recognize IBIP
postage when it is applied to a label placed on an envelope?

**RESPONSE:**

\(a\) In making an allowance for the possibility of error in applying
address labels, I have in mind errors in positioning labels in the
correct location and alignment, and in applying them so that they
properly adhere to and remain in place.

\(b\) I do not propose any particular type of label. Label
specifications are determined by the Postal Service so their operating
needs can be met. Currently, the Postal Service requires that IBI users
print labels on special florescent-striped labels.

\(c\) No. The label contains fluorescent marks that permit it to be
detected by USPS processing equipment.

\(d\) USPS's processing equipment detects the florescent marking on the
label..

**USPS/STAMPS.COM-T1-11**

On page 40 lines 11 and 12 you state "IBIP procedures guide the user
through this process, requiring the user to indicate the size of
envelope or to specify type of label."

\(a\) What is meant by "IBIP procedures"?

\(b\) Are these procedures part of the Postal Service requirements or
particular PC Postage product attributes?

**RESPONSE:**

\(a\) I mean the IBIP implementing program, such as the Stamps.com's
client interface described in the testimony of witness Kuhr,
STAMPS.COM-T-2.

\(b\) See my answer to (a), above.

**USPS/STAMPS.COM-T1-12**

In this docket, a \"CEM\" discount for courtesy reply mail has been
proposed by witness Willette (OCA-T-7), a \"P\" rate discount has been
proposed by witness Clifton (ABA&NAPM-T-1), and a meter mail discount
has been proposed by witness Haldi (PB-T-2).

\(a\) In your opinion, is it possible for all four of these single-piece
discount proposals to be implemented? Please explain any affirmative
response.

\(b\) If your response to (a) was negative in any way, please explain
why the Stamps.com proposal should be given special consideration over
the other single-piece proposals. Include a discussion of \"fairness and
equity.\"

\(c\) If both the Stamps.com and the \"P\" rate discounts were approved
and implemented, a mailer could take advantage of both discounts. How
would you envision the proposed Stamps.com discount fitting in with the
\"P\" rate discount were both to be approved?

**RESPONSE:**

\(a\) Yes, but only one discount could be applied to a single piece of
mail.

\(b\) I do not contend that Stamps.com's proposal be given special
consideration over other single-piece discount proposals. The proposal,
and any others, should be evaluated on their merits in accord with the
requirements of the Postal Reorganization Act. In requesting a
discussion on "fairness and equity," I assume you mean with regard to
"special consideration." Since I do not propose such consideration, I do
not think an issue of its fairness and equity is raised.

#### (c) I do not see how a mailer could take advantage of both discounts on the same mailpiece as they are proposed. As currently proposed, an IBIP prepared and addressed letter could not also have a "P" stamp affixed. 

#### 

#### **DECLARATION**

I, Frank R. Heselton, declare under penalty of perjury that the answers
to interrogatories USPS/Stamps.com -- T1 -- 1 -- 12 of the U.S. Postal
Service are true and correct, to the best of my knowledge, information,
and belief.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Frank R. Heselton

Dated: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

### 

### CERTIFICATE OF SERVICE

I hereby certify that I have this \_\_\_\_ day of
\_\_\_\_\_\_\_\_\_\_\_\_\_ 2000, served the foregoing document in
accordance with the Commission's Rules of Practice.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

> David P. Hendel