Before The

POSTAL RATE COMMISSION

WASHINGTON, D.C. 20268-0001

Rate and Service Changes to Implement )

Functionally Equivalent Negotiated Service ) Docket No. MC2005-2

Agreement with HSBC North America Holdings Inc. )

OFFICE OF THE CONSUMER ADVOCATE

FURTHER COMMENTS ON THE HSBC NSA

(April 27, 2005)

Presiding Officer's Ruling No. MC2005-2/1[^1] established April 27,
2005, as the date for filing reply briefs. The Office of the Consumer
Advocate (OCA) hereby submits further comments on the HSBC NSA based
upon the response received to interrogatory OCA/USPS-1 in Docket No.
R2005-1. These comments amplify a cautionary note expressed by OCA in
its initial comments.[^2]

OCA/USPS-1 (Docket No. R2005-1) asked the Postal Service to update the
manual and electronic returns unit cost figures used by witness Dauer in
her Appendix A of the instant proceeding. The Postal Service stated that
it had not updated manual or electronic return cost figures for FY 2005
(Year 1 of the HSBC NSA), but that it had done so for FY 2006.

According to part c of the interrogatory response, "the USPS version
Manual Letter Returns Unit Cost for the Test Year (FY 2006) is estimated
at 48.4 cents." In Appendix A of witness Dauer's testimony, she
estimates a cost of 60 cents in Year 2.

According to part f of the interrogatory response, "the USPS version
Electronic Letter Returns Unit Cost for the Test Year (FY 2006) is
estimated at 31.0 cents." In witness Dauer's Docket No. MC2005-2
submission in Appendix A, she estimates a cost of 37 cents in Year 2.

Thus, it appears that both manual and electronic returns unit costs have
declined since witness Crum performed his cost analysis for the Capital
One NSA, Docket No. MC2002-2. Of course, cost changes are no surprise
since the costing information witness Crum relied on were part of the
Postal Service's filing in Docket No. R2001-1 and are now 4 years out of
date.

OCA has substituted the new manual and electronic returns unit cost
figures provided in response to OCA/USPS-1 for those originally
presented in witness Dauer's Appendix A. The results are presented in
Tables 1 through 4 attached to these comments. Substituting the new unit
cost figures reduces the ACS savings that can be achieved by inducing
HSBC to agree to electronic returns for its UAA mail in lieu of manual
returns.

OCA has developed two alternative analyses showing the decrease in total
USPS value resulting from the reduction in ACS savings. OCA has also
calculated two new Commission-style stop loss caps based upon the change
in total USPS value.

Table 1 presents the total USPS value when the new unit cost figures are
applied in Year 1 (2005), and inflated by a factor of 4 percent for the
subsequent two years---the approach used by witness Dauer.[^3] Applying
the new cost figures in Year 1 makes sense, and presents a reasonable
estimate of total USPS value since the HSBC NSA will likely be
implemented late in FY 2005 or early FY 2006. Based upon application of
the new cost figures beginning in Year 1, the total value of the HSBC
NSA to the Postal Service declines from \$6,277,748, as presented by
witness Dauer, to \$5,067,058, as shown in Table 1---a net reduction of
approximately \$1.21 million. Moreover, as a consequence of applying the
new cost figures, a new Commission-style stop loss cap should also be
calculated. Table 2, prepared by OCA, shows a new stop loss cap of
\$7,174,572, a reduction of approximately \$1.75 million from the stop
loss cap of \$8,919,559 developed by witness Dauer.

Table 3 presents the total USPS value of the HSBC NSA when the new cost
figures are applied in Year 2 (2006) and inflated for the subsequent and
final year of the agreement. The total value of the HSBC NSA declines to
\$5,369,402, for a net reduction of \$908,346. Similarly, the new stop
loss cap would be reduced by approximately \$1.58 million to
\$7,340,321, as shown in Table 4.

The Postal Service states in the Docket No. R2005-1 response that,
"Because it only a subset of the figures used, no assumptions should be
made regarding effects on the NSA as a whole." \[sic\] OCA does not
disagree with that policy. The updated cost figures have not yet been
fully vetted and OCA intends to inquire further into the nature of the
cost reductions. OCA believes that its new calculations do lend further
support to

its view that future NSAs reflect all of the operational and cost
differences that have arisen since the baseline NSA was considered.

> SHELLEY S. DREIFUSS
>
> Director
>
> Office of the Consumer Advocate

1333 H Street, N.W.

Washington, D.C. 20268-0001

\(202\) 789-6837; Fax (202) 789-6819

dreifusss@prc.gov

  ---------------- -- ----------- --------------------- ------------- ------------- ------------- -------------
  **Table 1**                                                                                     

  **USPS Value for                                                                                
  HSBC NSA Based                                                                                  
  Upon New Manual                                                                                 
  and**                                                                                           

  **Electronic                                                                                    
  Returns Unit                                                                                    
  Costs Effective                                                                                 
  Year 1 (2005)**                                                                                 

                                                                                                  

  **HSBC North                                                                                     
  America Holdings                                                                                
  Inc. Model**                                                                                    

  **Negotiated                                                                                     
  Service                                                                                         
  Agreement**                                                                                     

  **Appendix A,                                         **Year 1**    **Year 2**    **Year 3**    **Total**
  page 12**                                                                                       

                                                                                                  

  **ACS Savings**                                                                                 

  \(1\)               Statement                         \$ -          \$ -          \$ -          \$ -
                      Mail                                                                        

  \(2\)               Marketing                         \$ 1,144,970  \$ 1,845,173  \$ 2,342,213  **\$
                      Mail Letter                                                                 5,332,357**

                                                                                                  

  **Contribution                                                                                  
  from New                                                                                        
  Volume**                                                                                        

  \(3\)               Statement                         \$ -          \$ -          \$ -          \$ -
                      Mail                                                                        

  \(4\)               Marketing                         \$ 1,214,459  \$ 1,488,633  \$ 1,458,016  **\$
                      Mail Letter                                                                 4,161,108**

                                                                                                  

  **(5) Total                                           \$ 656,340    \$ 964,968    \$ 1,172,146  **\$
  Exposure**                                                                                      2,793,454**

  **(6) Total                                           \$ 411,268    \$ 592,994    \$ 628,691    **\$
  Incremental                                                                                     1,632,953**
  Discounts**                                                                                     

                                                                                                  

  **(7) Total USPS                                      **\$          **\$          **\$          **\$
  Value**                                               1,291,821**   1,775,846**   1,999,391**   5,067,058**
  ---------------- -- ----------- --------------------- ------------- ------------- ------------- -------------

  -------------- ------------------------------- ------------------ ------------------ ------------------ --------------------
  **Table 2**                                                                                             

  **Stop-Loss                                                                                             
  Cap with New                                                                                            
  Manual and                                                                                              
  Electronic                                                                                              
  Returns Unit                                                                                            
  Costs                                                                                                   
  Effective Year                                                                                          
  1 (2005)**                                                                                              

                                                                                                          

                                                 **[Year            **[Year            **[Year            **[Total
                                                 1]{.underline}**   2]{.underline}**   3]{.underline}**   NSA]{.underline}**

  **A. Effects                                                                                            
  of ACS                                                                                                  
  (Savings                                                                                                
  Estimate)**                                                                                             

                                                                                                          

                 **First-Class Mail Marketing                                                             
                 Letters:**                                                                               

  \(1\)          Before Rates Avg. Cost          0.1350             0.1404             0.1460             

  \(2\)          Avg. Savings from Returns       0.0072             0.0075             0.0078             

  \(3\)          Avg. Savings (Cost) from        \-                 \-                 \-                 
                 Forwards                                                                                 

  \(4\)          Total Avg. Savings from ACS     0.0072             0.0075             0.0078             

  \(5\)          After Rates Avg. Cost           0.1278             0.1329             0.1382             

                                                                                                          

  \(6\)          Before Rates Volume             196,842,621        298,877,229        363,314,190        

                                                                                                          

  **(7) Net                                      **1,424,355**      **2,249,185**      **2,843,466**      **6,517,006**
  Contribution                                                                                            
  Gain from ACS                                                                                           
  (Savings)**                                                                                             

                                                                                                          

  **B. Effects                                                                                            
  of Lost                                                                                                 
  Contribution                                                                                            
  (Revenue                                                                                                
  Leakage)**                                                                                              

                                                                                                          

  \(8\)          Before Rates First-Class Volume 679,863,892        817,284,750        919,784,128        

  \(9\)          Volume Threshold for Discounts  615,000,000        725,000,000        810,000,000        

  \(10\)         Before Rates Volume Eligible    64,863,892         92,284,750         109,784,128        
                 for Discounts                                                                            

  \(11\)         Average Discount on \"Exposed\" 0.0220             0.0244             0.0259             
                 Volume                                                                                   

                                                                                                          

  **(12) Total                                   **(1,424,355)**    **(2,249,185)**    **(2,843,466)**    **(6,517,006)**
  Discounts on                                                                                            
  Before Rates                                                                                            
  Volume                                                                                                  
  (Leakage)**                                                                                             

                                                                                                          

  **(13) Net                                     **0**              **0**              **0**              **0**
  Increase in                                                                                             
  Contribution                                                                                            
  (before rates                                                                                           
  volume)**                                                                                               

                                                                                                          

  \(14\)         Savings from ACS at Break-Even  6,517,006          /1                                    
                 Volume                                                                                   

  \(15\)         Pass-through Percentage         100%                                                     

  \(16\)         **Stop-Loss Cap Amount**        **6,517,006**                                            

  \(17\)         Ratio of DFS \"Competitive      1.1009                                                   
                 Cap\" to PRC Cap                                                                         

  \(18\)         Cap with \"Competitive          7,174,572                                                
                 Adjustment\"                                                                             
  -------------- ------------------------------- ------------------ ------------------ ------------------ --------------------

  ---------------- -- -- ------------------ ------------- ------------- ------------- -------------
  **Table 3**                                                                         

  **USPS Value for                                                                    
  HSBC NSA Based                                                                      
  Upon New Manual                                                                     
  and**                                                                               

  **Electronic                                                                        
  Returns Unit                                                                        
  Costs Effective                                                                     
  Year 2 (2006)**                                                                     

                                                                                      

  **HSBC North                                                                         
  America Holdings                                                                    
  Inc. Model**                                                                        

  **Negotiated                                                                         
  Service                                                                             
  Agreement**                                                                         

  **Appendix A,                             **Year 1**    **Year 2**    **Year 3**    **Total**
  page 12**                                                                           

                                                                                      

  **ACS Savings**                                                                     

  \(1\)                  Statement Mail     \$ -          \$ -          \$ -          \$ -

  \(2\)                  Marketing Mail     \$ 1,423,448  \$ 1,774,205  \$ 2,252,128  **\$
                         Letter                                                       5,449,781**

                                                                                      

  **Contribution                                                                      
  from New                                                                            
  Volume**                                                                            

  \(3\)                  Statement Mail     \$ -          \$ -          \$ -          \$ -

  \(4\)                  Marketing Mail     \$ 1,190,845  \$ 1,590,856  \$ 1,564,327  **\$
                         Letter                                                       4,346,028**

                                                                                      

  **(5) Total                               \$ 656,340    \$ 964,968    \$ 1,172,146  **\$
  Exposure**                                                                          2,793,454**

  **(6) Total                               \$ 411,268    \$ 592,994    \$ 628,691    **\$
  Incremental                                                                         1,632,953**
  Discounts**                                                                         

                                                                                      

  **(7) Total USPS                          **\$          **\$          **\$          **\$
  Value**                                   1,546,685**   1,807,100**   2,015,617**   5,369,402**
  ---------------- -- -- ------------------ ------------- ------------- ------------- -------------

  -------------- ------------------------------ ------------------ ------------------ ------------------ --------------------
  **Table 4**                                                                                            

  **Stop-Loss                                                                                            
  Cap with New                                                                                           
  Manual and                                                                                             
  Electronic                                                                                             
  Returns Unit                                                                                           
  Costs                                                                                                  
  Effective Year                                                                                         
  2 (2006)**                                                                                             

                                                                                                         

                                                **[Year            **[Year            **[Year            **[Total
                                                1]{.underline}**   2]{.underline}**   3]{.underline}**   NSA]{.underline}**

  **A. Effects                                                                                           
  of ACS                                                                                                 
  (Savings                                                                                               
  Estimate)**                                                                                            

                                                                                                         

                 **First-Class Mail Marketing                                                            
                 Letters:**                                                                              

  \(1\)          Before Rates Avg. Cost         0.1382             0.1350             0.1404             

  \(2\)          Avg. Savings from Returns      0.0090             0.0072             0.0075             

  \(3\)          Avg. Savings (Cost) from       \-                 \-                 \-                 
                 Forwards                                                                                

  \(4\)          Total Avg. Savings from ACS    0.0090             0.0072             0.0075             

  \(5\)          After Rates Avg. Cost          0.1293             0.1278             0.1329             

                                                                                                         

  \(6\)          **Before Rates Volume**        196,842,621        298,877,229        363,314,190        

                                                                                                         

  **(7) Net                                     **1,770,784**      **2,162,678**      **2,734,102**      **6,667,564**
  Contribution                                                                                           
  Gain from ACS                                                                                          
  (Savings)**                                                                                            

                                                                                                         

  **B. Effects                                                                                           
  of Lost                                                                                                
  Contribution                                                                                           
  (Revenue                                                                                               
  Leakage)**                                                                                             

                                                                                                         

  \(8\)          Before Rates First-Class       679,863,892        817,284,750        919,784,128        
                 Volume                                                                                  

  \(9\)          Volume Threshold for Discounts 615,000,000        725,000,000        810,000,000        

  \(10\)         Before Rates Volume Eligible   64,863,892         92,284,750         109,784,128        
                 for Discounts                                                                           

  \(11\)         Average Discount on            0.0273             0.0234             0.0249             
                 \"Exposed\" Volume                                                                      

                                                                                                         

  **(12) Total                                  **(1,770,784)**    **(2,162,678)**    **(2,734,102)**    **(6,667,564)**
  Discounts on                                                                                           
  Before Rates                                                                                           
  Volume                                                                                                 
  (Leakage)**                                                                                            

                                                                                                         

  **(13) Net                                    **0**              **0**              **0**              **0**
  Increase in                                                                                            
  Contribution                                                                                           
  (before rates                                                                                          
  volume)**                                                                                              

                                                                                                         

  \(14\)         Savings from ACS at Break-Even 6,667,564          /1                                    
                 Volume                                                                                  

  \(15\)         Pass-through Percentage        100%                                                     

  \(16\)         **Stop-Loss Cap Amount**       **6,667,564**                                            

  \(17\)         Ratio of DFS \"Competitive     1.1009                                                   
                 Cap\" to PRC Cap                                                                        

  \(18\)         Cap with \"Competitive         7,340,321                                                
                 Adjustment\"                                                                            
  -------------- ------------------------------ ------------------ ------------------ ------------------ --------------------

[^1]: "Presiding Officer's Ruling Establishing Procedural Schedule, "
    issued March 29, 2005.

[^2]: "Office of the Consumer Advocate Comments on the HSBC NSA," filed
    one day late, on April 21, 2005, at 3 -4. Presiding Officer's Ruling
    No. MC2005-2/2, "Placing Testimony into Evidence and Closing the
    Record," issued April 25, 2002, permitted consideration of the
    late-filed Comments.

[^3]: USPS-T-1 at 16.