***Comment to the President's Commission on the United States Postal
Service***

The following comments are limited to...

USPS flexibility to change prices, control costs, and adjust service in
response to financial, competitive or market pressure.

and

The most appropriate governance and oversight structure for the USPS.

The Elks, a patriotic fraternal order of men and women (IRS 501(c) (8)),
use Nonprofit Periodical and Nonprofit Standard Mail to share news and
raise charitable funds among 1 million+ members. Our annual postage is
over \$5 million.

The purpose of my comments is (1) to express frustration with the
current rate setting process. There is no other place to express these
remarks except among mailers and our associations---The USPS will not
entertain them, the Postal Rate Commission (PRC) has no authority to do
so, and Congress directs these issues to their subordinate ratemaking
Commission, the PRC. (2) To propose the President's Commission
recommends bolstering the PRC's authority, to include the authority to
recommend (back) to the USPS Board of Governors (BOG) expanded options,
not just limited review of rate proposals filed by the BOG. Further, the
BOG's authority to override the PRC should be rescinded, to be replaced
by a process of appeal to the Congress.

Comments herein are my own opinions and do not necessarily reflect
position of the organization as a whole. Any criticism is directed to
the institutions cited, not any individual or individuals. I have always
found employees of the United States Postal Service in particular to be
professional, helpful, extremely knowledgeable and competent.

With the goal of adjusting rates equitably among mail classes, the
current rate making method is reasonable overall, but flawed. Our
postage suffers consistent above-average increases. For example, our
Nonprofit Periodicals postage increased 12.4% in June 2001 compared to
10% for commercial (Regular) Periodicals and 8.6% overall in the R2001-1
rate settlement, in spite of our automation compatibility and
drop-shipping/co-mailing.

The cornerstone of USPS revenue is First Class mail, with it's coverage
of attributable (variable) costs, and significant coverage of USPS
institutional (fixed) costs. Although nonprofit subsidies were phased
out with stepped increases by 1998, Nonprofit Standard Mail and
Nonprofit Periodicals contribute little to institutional cost coverage.
This relationship adds to the complexity of rate cases.

Our postage was once low and remains a good value, but double digit
increases, over \$150,000 every two years will [soon]{.underline} bring
[our]{.underline} continued viability into question. First Class volume
reductions both distort and accelerate our increases.

Periodicals (Nonprofit and Regular) and Nonprofit Standard Mail enjoy
postal discounts based on public policy[^1] in addition to discounts
based on work sharing and destination entry. Public policy discounts are
directly associated with lower institutional cost coverage. Periodicals
and Nonprofit Mail pay their own way, but First Class, Standard Mail,
etc., pay the overhead. The combination of public policy and work
sharing discounts distort the calculus of rate proposals. Two examples:
First, a rate anomaly caused a sub-group of Nonprofit Periodicals to pay
more than comparable commercial magazines. Second, the Nonprofit
Standard Mail Enhanced Carrier Route (ECR) rate based on the legal cost
method was pegged to increase over 40%, with no reasonable explanation.
Both problems were eventually "fixed" by legislation that linked the
nonprofit discount to the "regular" Periodical and Standard Mail rate
schedules. This proved to me that public policy discounts (related to
low institutional cost coverage) allow or encourage inflated proposals
by the USPS. These may pass PRC scrutiny because the USPS "owns" all the
data. The psychology at work is to assess "catch-up" rates to
Periodicals mailers, who "should not complain as long as a (or any)
discount remains available." It seems reasonable any double digit rate
increase above the average should pass the sniff test, whatever amount
of supportive cost data is filed. Rate case testimony supported by the
"legal cost models and measures" alone do not always convince me they
are accurate. As mentioned, we discovered several proposals filed with
cost-based blinders that required legislation to fix.

I have no delusion that our rates should hold constant while others
increase---under the current or any other USPS funding method---while
labor costs, economic pressure and service alternatives chip away at the
financial health of the USPS. Year after year, however, the Periodicals
rate increase is larger than average. Periodicals account for less than
5% of mail volume and revenue, which adds to the irony.

I would be satisfied with rates increased in fixed proportion to cover a
shortfall. I am perturbed our associations have to defend against rate
case testimony attempting to find fault with mailers or their suppliers.
A recent example of this is "bundle breakage" as a root cause of
Periodicals postage increases. I imagine bundle breakage contributed
only 10% (?) (pick a number) to the Periodicals increase.

When nonprofit rates were pegged to the regular mail class it was like a
resting point in a long journey. After years of argument, finally an
admission the "legal formulas" do not always accurately measure cost.
Our work is not done. Periodicals, both Regular (commercial) and
Nonprofit react alike to current pressure, so any degradation to
discounts for the dissemination of information for the public good
affects Nonprofit Periodicals as well. The additional
[Nonprofit]{.underline} Periodical discount is now locked at (only) 5%
of the non-advertising portion of Regular Periodicals. In February 1999,
when the nonprofit periodical anomaly was discovered, the differential
was 10%. There is no good answer as to why the subsequent rate case and
related legislation did not propose 10%. Had the rate problem been
discovered any later, the discount would have been hardly worth
calculating. The Nonprofit Periodicals classification would have ended.

Congress delegates rate authority to the Postal Rate Commission (PRC).
In rate cases, the PRC has limited authority except to evaluate and
re-craft assumptions filed by the USPS Board of Governors (BOG). BOG
rate proposals are voluminous yet not always transparent. I'm always
amused by press releases announcing PRC "rate recommendations" to the
BOG, because the relationship is like a teacher returning an essay---a
few corrected words, a few comments in the margin, assignment over (this
is a gross exaggeration, of course). The PRC has no choice. And if the
BOG doesn't agree with their grade, they have the power to ignore the
PRC "recommendation." This happened a few years ago. Rates were
increased by the BOG with no on-the-record support as requested by the
PRC.

Summary:

I propose the President's Commission recommends bolstering the PRC's
authority, to include the authority to expand their recommends to the
USPS Board of Governors (BOG) beyond current "legal" cost measures, to
any reasonable logic or measure they might apply. (This authority should
only start upon receipt of an Omnibus rate filing by the BOG). In
addition, the PRC should have authority to order analysis by the USPS
relevant to any expanded proposal. Further, the BOG's authority to
override the PRC should be rescinded and replaced by an appeal to the
Congress.

Thank you for this opportunity.

Sincerely,

![](media/image1.wmf)

Phil Claiborne

Circulation Director

> Ph: 773-755-4910
>
> Fax: 773-755-4911
>
> Email: philc@elks.org

[^1]: Public policy discounts in these examples are Periodicals
    discounts for the dissemination of information for the good of the
    public, and nonprofit discounts (Periodicals and Nonprofit Standard)
    acknowledging the societal benefit of charitable organizations,
    especially the relief provided to government services.