The Commission will meet in CLOSED session at 10 a.m. on Thursday, September 9, 2010 to consider Deliberations and Decision in Docket R2010-4, Rate Adjustment due to Extraordinary or Exceptional Circumstances

PRC:

Washington, DC – The Affordable Mail Alliance – a growing coalition of non-profits, Fortune 500 companies, small businesses, major trade associations, consumer groups, and citizens representing the vast majority of the mail sent in the United States – filed comments urging the Postal Regulatory Commission to help rein in the USPS’s excessive costs by denying the proposed rate hike.

“The Post Office needs to reevaluate their approach,” said Jerry Cerasale, Affordable Mail Alliance Spokesperson and Senior Vice President of the Direct Marketing Association. “Instead of trying to keep things afloat with a giant tax on consumers, the USPS should focus on improving management and controlling costs to get out of this mess. To do otherwise is just bad business.”

This is the Alliance’s final legal step before the PRC announces their decision on October 4.

The comments also highlight the Postal Service’s flip-flop on the cause for their request. The USPS previously claimed that such a severe rate increase was needed to alleviate an immediate and unforeseen cash crisis. But at the public hearing held on August 10, a top official admitted that the “crisis” would not prevent them from operating in their current fashion for at least the next year. The Postal Service now claims that the rate increase is needed to prevent a longer-term profit slowdown over the next decade.

“Our comments make the same case that businesses and working families are making all over the country,” said Cerasale. “The Postal Service’s proposed rate hike is unreasonable, unhelpful, and unlawful, and the more than one thousand members of the Alliance are not going to let the Postal Service take advantage of its customers.”

The comments reiterate what the Alliance has argued all along – that the Postal Service has failed to show that it would suffer from its projected losses if it followed “best practices of honest, efficient and economical management,” and has failed to meet the “extraordinary or exceptional” circumstance test of the 2006 Postal Accountability and Enhancement Act. The increase thus should be rejected, especially at this time of economic uncertainty for America.

Senator Susan Collins (R-ME), a key author of the 2006 law, has supported the Alliance’s position. In her statement following the Postal Regulatory Commission hearings, Senator Collins said that the law being cited by the Post Office was intended for use in circumstances such as natural disasters and terrorist attacks. The Post Office’s “failure to sufficiently update its business model,” she said, was not sufficient for special consideration.

Formed in response to the US Postal Service’s July 6th announcement that it would seek to raise rates far beyond those currently allowed by law, the Affordable Mail Alliance grew from a small group of concerned USPS customers to a membership of over a thousand in less than two months. The Alliance has been gaining momentum in the wake of recent Postal Regulatory Commission Hearings, and this most recent action provides a strong argument to the PRC in advance of its coming decision on the issue.

Related link:  Affordable Mail Alliance Document Submitted to PRC

It would be shameful if those who argue for furloughs would have the unintended consequence of advocating against our veterans.

Since enactment of PL 109-435, global and domestic economic conditions have deteriorated sharply. In fact, 2005 was the last year in which the United States Gross
Domestic Product (GDP) exceeded 3%. While the normal business cycle experiences economic waxing and waning, the ongoing financial turmoil is quite different. As of yet,
our country is still languishing in a unrelenting recession. In fact, over the past three years, the Congress and two successive Administrations felt the necessity to take drastic
steps, attempting to stabilize the economy. As illustrated by falling mail volume and revenue decline, the Postal Service is not immunized from these dire economic
circumstances. Furthermore, the statute does not state that the circumstances must be unique to the Postal Service to prompt an exigent rate case.

A number of intervenors have commented that the private-sector institutions were able to ride out the recession through retrenchment, radical structural and pruning labor costs.
For the most part, these private-sector profit-maximizing strategies are unavailable or improper in a governmental public service agency. The Postal mission is to maximize
service to the American public. Moreover, the Postal Service must comply with a series of statutes and regulations (e.g., veterans’ preference, pre-funding retiree health benefits,
fully funding retirement benefits, and the universal service obligation); those who urge the Postal Service to freeze, furlough and fire are exempt from these requirements.
A number of intervenors and commenters have suggested that the Commission should reject the Postal Service’s request, since the federal agency has not exercised such cost-cutting strategies as freeze, furlough and fire. Those who have associated with these views have a total disregard for the impact on the service provided to the American
public, the affect on the postal workforce, and the long-term implications for the future of the Postal Service’s universal service obligation.

The intervenors seem to overlook the huge decline in postal employment over the past decade. The agency has shed more than 164,000 positions and this represents an almost
21% decline since fiscal year 2000. The Commission should recognize that “Reductions-in-Force”, within the federal government, are subject to various statutes, which among
other safeguards, protecting former members of the U.S. Armed Forces. It would be shameful if those who argue for furloughs would have the unintended consequence of
advocating against our veterans.

Unlike private sector companies that have undergone recession-necessitated retrenchments and initiated sizeable layoffs, the Postal Service provides a vital and
constitutionally mandated public service. Moreover, profit-driven entities, by their very nature, may be dismissive of the public-service aspect of their mission, if they have one at all. For the Postal Service, however, public service is its raison d’être; and, any action that undermines its core mission needs to be considered unfavorably.

NAPUS is concerned that the recently announced hiring freeze is undermining the capability of front-line postal managers and their employees to deliver quality services to
the mailing public. This compounds a major problem that is being experienced throughout the country, a concerted strategy to close statutorily protected Post Offices
through the abuse of the Post Office suspension process. (Last year, the Commission initiated an investigation of this abuse – PI2010-1.) In response to POIR-4, in the present
docket, the Postal Service disclosed that, beginning in fiscal year 2010, the agency estimates that 3,248 Post Offices will be without a Postmaster; the number of Postmaster
vacancies almost doubled over the past year. Additionally, in fiscal year 2010, 12% of all Post Offices would be without a Postmaster and foreshadows Postal efforts to suspend
(aka to close) those Post Offices.

Commission denial of the requested rate adjustment, in NAPUS’ view, would compel the Postal Service to wield its cost-cutting axe against service provided to American citizens,
small businesses and rural America. These are the prime constituency for which the universal service obligation was established.

NAPUS suggests that the Commission consider degradation of postal service standards (e.g., delivery standards, postal window hours, customer service, etc.) in its assessment of
the exigent rate request. To do otherwise, would force the Postal Service into noncompliance, which would only come to light when the Commission issues its ACR for
2011.

NAPUS urges the Commission to approve the Postal Service rate increase, which is necessitated by “extraordinary and exceptional circumstances.” We believe that the
current economic conditions are of such magnitude that the request is justified and that the Postal Service has striven to reduce costs, including cuts that Postmasters continue to
believe are harmful to customer service. Rejection of the Postal Service request will result in a cascade of service reductions that will utterly destroy our Postal Service.

read full document submitted to Postal Regulatory Commission

The AMA argues that the price-cap regulatory system established by the Postal
Accountability and Enhancement Act (“PAEA”) will be “dead” if the Commission interprets the
exigency clause in 39 U.S.C. §3622(d)(1)(E) to apply to the circumstances currently facing the
United States Postal Service (“USPS”). See AMA Comment at 5. Senator Collins echoes that
position, asserting “unequivocally” that the PAEA “does not provide for an exigent rate case”
under the circumstances set forth in USPS’s request.

These comments misconstrue Congress’ intent when it allowed USPS to seek an
exigent rate increase under “extraordinary or exceptional circumstances.” 39 U.S.C.
§3622(d)(1)(E).

Although she now opposes USPS’s exigent rate request, Senator Collins, in an April 6, 2007 letter to the Commission that she co-authored with Senator Carper (see Collins Comment, at Attachment 1), explained that Congress meant the PAEA’s exigency exception to apply to “significant and substantial” declines in mail volume caused by events beyond USPS’s control:

the “extraordinary and exceptional circumstances” referenced in
the language may include terrorist attacks, natural disasters, and
other events that may cause significant and substantial declines in
mail volume or increases in operating costs that the Postal Service
cannot reasonably be expected to adjust to in the normal course of
business.

The letter cited “terrorist attacks” as an example of an event whose impact on
mail volume could qualify under the statute as an exigent circumstance. See id. In her comment,
Senator Collins now explicitly embraces the idea that “the terrorist attacks of September 11,
2001, or the anthrax attacks later that year could serve as the basis for an exigent rate case.”
Collins Comment at 3; see also id. at Attachment 4, at 11 (S. Rep. 108-318 (2004)) (citing
September 11, 2001 and anthrax attacks as examples of exigencies).

The AMA and Senator Collins argue that the PAEA’s exigency clause must be
read narrowly and only to apply to unforeseen events. See AMA Comment at 12-16; Collins
Comment at 3. Even if that were correct, the current circumstances would still apply. That the
business cycle will ordinarily produce crests and troughs may be foreseeable, but no one could
have foreseen the economic tsunami now known as the “Great Recession” and the carnage it
would leave in its wake: a contraction of the GDP in 2008-2009 of nearly 4%, a drop in private
employment of 7.3%, and a fall in real investment spending of 35.7%; the closure of 228 banks
since January 2008; and the majority of the American workforce in the 30 months preceding July
2010 having faced unemployment, experienced a cut in pay or a reduction in hours, or been
forced into part-time status. See July 6, 2010 Statement of Joseph Corbett in Docket No. R2010-
4, at 14.3 That this was no ordinary recession is evidence by Congress having appointed a
special commission to investigate its causes. And while some argue that the mail-volume loss
was aggravated by a long-term migration of communications to the internet, there is no dispute
that the bulk of the loss was due to the macroeconomic nightmare.

In any event, the claim that the PAEA’s exigency clause only applies in the
narrowest of circumstances and only to unexpected events is wrong, and based on a misreading
of the statute’s text and legislative history. In the original Senate bill, introduced in March 2005,
the exigency exception would only have applied to “unexpected and extraordinary
circumstances.” S. 662, 109th Cong. §3622(d)(1)(D) (2005) (emphasis added). But the statute as
enacted in December 2006 lacks the requirement that the exigent circumstances be
“unexpected.” See 39 U.S.C. §3622(d)(1)(E). Congress not only dropped the unforeseeability
requirement, but also broadened the exigency clause by replacing the restrictive conjunctive
language, marked by the word “and,” with the disjunctive phrase “either … or.” Id. (PAEA
referring to “either extraordinary or exceptional circumstances”) (emphasis added).
3 In fact, recent revisions to Commerce Department data show that the recession, with a 4.1%
drop in GDP, was worse than originally thought. See “A Deeper Hole,” The Economist (Aug. 7,
2010), at 28 (confirming that recession was “the worst of the post-war years”).

The April 2005 congressional testimony quoted by Senator Collins that the
exigency clause establishes a “‘very high bar,’” Collins Comment at 2-3 (quoting testimony in
Attachment 5, at 2) is thus inapt, as it expressly refers to the Senate bill that never became law.
See Collins Comment, Attachment 5, at 2. The April 2004 testimony she quotes that exigent
circumstances must be “‘unexpected’” came even earlier in the legislative process and was thus
even further removed from the actual statutory language. See id. at 3 (quoting testimony in
Attachment 6, at 20).

The Commission itself has made clear that exigencies under the PAEA can be
either foreseen or unforeseen. In its original proposed rules on exigent rate cases, the
Commission would have required USPS, when filing for an exigent rate increase, to justify why
“the circumstance giving rise to the request was neither foreseeable nor avoidable by reasonable
prior action.” Order Proposing Regulations to Establish a System of Ratemaking, Docket No.
RM2007-1 (Aug. 15, 2007), at Proposed Rule 3100.61(a)(7) (emphasis added). But the
Commission changed this language after receiving comments that the assumption behind the
proposed rule — that exigent circumstances must be unforeseen — was inconsistent with the
statutory language. The rule as promulgated by the Commission now only requires USPS to
provide an “analysis of the circumstances giving rise to the request, which should, if applicable,
include a discussion of whether the circumstances were foreseeable or could have been avoided
by reasonable prior action.” Commission Rule 3010.61(a)(7) (emphasis added).

Finally, the AMA devotes much of its comment to arguing that current
circumstances cannot qualify as an exigency because, it claims, USPS’s private-sector
competitors weathered the economic storm while USPS, burdened by purportedly above-market
labor costs and other inefficiencies, has floundered.

This argument ignores the fact that, unlike USPS, its private-sector competitors have no
universal service obligation nor do they bear the unique burden of having to pre-fund retiree
health benefits.4 Moreover, AMA’s argument is based on highly contested assertions that raise
issues that are beyond the scope of the instant rate proceeding and unsupported by anything in
the evidentiary record in this case. For example, AMA’s assertion that USPS pays wages above
wages paid for comparable work in the private-sector, see AMA Comment at 30-31, raises
complex legal and economic issues regarding the meaning and application of the comparability
standard in the Postal Reorganization Act (“PRA”). See 39 U.S.C. §1003 (a) (providing for
postal compensation and benefits “on a standard of comparability to the compensation and
benefits paid for comparable levels of work in the private sector of the economy”). NALC and
its economic experts have argued elsewhere that proper application of the comparability standard
requires comparing letter carrier pay to the pay of employees in large, comparable firms such as
employees of other parcel delivery enterprises — not, as others have argued, to the pay of all
employees throughout the private-sector. In any event, the legislative history makes clear that
the comparability standard leaves ample room for differences over how it is to be interpreted and
applied and that such differences are to be worked out in collective bargaining between USPS
and the postal unions or, failing that, in interest arbitration.5 That comparability is beyond the
For a discussion regarding the impact on USPS of the obligation to pre-fund retiree health
benefits, see Frank Clemente and Tom Kiley, “Congressional Mandates Account For Most Of
Postal Service’s Recent Losses,” Economic Policy Institute, Briefing Paper #268 (June 2010).
5 See, e.g., Post Office Reorganization: Hearings on Various Proposals to Reform the Postal
Establishment Before the House Comm. On Post Office and Civil Service, 91st Cong., 1st Sess.
221 (Postmaster General testifying that “there is a wide variety of difference as to what
comparability might mean” and “that has to be bargained between the parties”); 39 U.S.C.
§1207(c) (providing for interest arbitration in the event that collective bargaining fails to produce
an agreement). Under the PRA, the compensation of bargaining unit postal employees is to be
determined through collective bargaining between USPS and the postal unions in accordance
with the applicable principles of the National Labor Relations Act.

see full NALC reply via PRC

Total Mail Services Volume was up 0.9%, revenue down 1.7%
Total Shipping Services volume was up slightly by .0.4%, revenue down 0.2%
Total Mail volume was down 0.8%, revenue up by 0.1%

First class volume down 3.6%, revenue down 3.7%
Stand Mail volume up by 6.6%, revenue up 4.8%

Total Workhours was down 5.0% (City Carriers 2.9%, Mail Processing, 8.3%, Customer Services 9.7%, Rural Delivery up by 0.6%, Other down 6.4%)

Total Career Employees 586,852, down 2049 employees since June 2010
Total Non-Career Employees 88,220, up 551 employees since June 2010

see full report via PRC

The truth is that until the PRC, the Board of Governors or Congress are willing to
truly look at how those measurements are constructed, reported and managed
they will never know the true state of the Postal Service. In the Five Day case
you were given customer survey data that reflected a certain resignation on the
part of the public to a set of equally poor choices. In that case some of the
surveys asked which, given a choice of rate increases or reduction in delivery or
perhaps closure of a local facility, a customer might find preferable. The results
that were publicized clearly showed a preference for reduction in delivery days.
But was that really the choice? You have before you this exigent rate case in
addition to the reduction case. The strategic plan currently publicized by
headquarters includes several parts that are portrayed as essential in total.
Those parts include reduction in delivery, rate increases and rationalization of the
network

In recent years the Voice of the Employee surveys have been used to portray the
mind and sentiment of the work force. Yet when those surveys are administered
managers are told to instruct employees to provide either positive or negative
responses and to avoid neutral responses. Survey behavior and administration is
a well studied field. Encouraging or discouraging particular choices by an
authority figure administering a survey has certainly been shown to influence and
perhaps limit the effectiveness of the results.

The EXFC measurement system is designed to measure the effectiveness of the
delivery network. All over the country postmasters, supervisors and management
personnel have been detailed to make second trips and extra trips to deliver
missent or misdirected mail. I have personally, at the direction of my manager,
driven less than a foot of mail to an office thirty miles away at a cost of over $100
to avoid the possibility of an EXFC failure. I have gone on missions of even
greater futility, once driving an empty mail tub on a ninety mile round trip in the
middle of the night to satisfy a nonsensical protocol. These are not isolated
experiences, they occur every day all over the country. Under these
circumstances EXFC may become less a measurement of network efficiency
than a demonstration that we can develop extraordinary and wasteful protocols in
search of satisfactory numbers.

What these examples show is that the old aphorism that one measures to
manage can easily become a culture of managing to the measure. I do not cite
these examples to claim corruption or even incompetence. I do think they
demonstrate a management culture that has become a prisoner of a deleterious
institutional groupthink.

If the Postal Service is to successfully face the challenges ahead then it must be
willing to re-evaluate its culture.

Even if the Postal Service is able to resolve the issues surrounding its payments
to Treasury, even if the Postal Service is able to repair and reinvigorate its
management culture and if even if the Postal Service is able to capitalize on
some of its more promising revenue opportunities like providing last mile delivery,
it will still be saddled with a business model that is essentially unsustainable.
Following the current direction will not solve the challenges that confront the
Postal Service. The current recipes for recovery or sustainability still rely on a
bad fit between the promise of the Universal Service Mandate and a business
model that relies on downsizing. It has been argued that perhaps the Postal
Service could enter into some other businesses, that it could find additional or
alternative revenue streams.

In today’s polarized political environment there is virtually no business solution
that will offer the Postal Service sufficient additional revenues to meet future
challenges. Some countries, like Japan, assign basic savings bank capabilities to
the post office. At one time we did too but that isn’t feasible today. Neither would
it be realistic to think we could offer the Postal Service some opportunity to
compete with the private sector in some areas. We already have a rate and
regulatory structure that is far too cumbersome. The reality is that the Postal
Service has done best when it complements rather than competes with the
private sector as the example of recent successes with providing last mile
delivery for UPS and Fed Ex.

It is unlikely that we can downsize the Postal Service and still meet our goals of
universal service without ultimately being placed in a situation of requiring
increasing subsidies or rates. Mail is still an important part of the American
economy, especially for those at the lower end of the economic spectrum and
those in rural areas. Mail will continue to be important but volumes both of first
class and advertising mail will continue to decrease. Bill presentment and
payment will increasingly move to electronic alternatives and direct mailers and
marketers are in the business of selling. Their loyalty is to what works at the
cheapest prices. As data mining allows them to be more selective and mail less
for better response and as electronic and alternate media forms develop, their
businesses strategies and models will shift – one should also not discount the
possibility of do not mail initiatives returning if advertising volumes actually did
increase substantially.

Mail will continue to be important for at least another generation or two but any
model based on volume is bound to fail and if we raise rates and cut service as is
proposed we may accelerate the decline of the Postal Service without providing
for those who will need its services for years to come.

click here for full file

Excerpts:

The Postal Service’s August 2 Response and testimony on August 10-12 also confirm the Postal Service’s failure to show that it would face a cash crisis—or suffer any losses at all—if it adhered to “best practices of honest, efficient, and economical management.” 39 U.S.C. § 3622(d)(1)(E). The Alliance’s July 26 motion summarizes decades of official reports, from the 1968 Kappel Commission to the present, documenting the Postal Service’s inefficiencies and the uneconomic costs that result from them. Specifically:

• The Postal Service maintains an inefficiently large network of undersized and obsolete mail processing facilities. Motion at 21-25.

• The Postal Service has an oversized work force, inflexible work rules, and low productivity. Id. at 25-30.

• The total compensation of Postal Service employees—more than $80,000 per employee on average—is well above the amounts paid in the private sector for comparable work. According to the Postal Service’s own experts, this compensation premium is probably more than 30 percent. This inefficiency costs the Postal Service and the public $10 to 14 billion or more in needless costs annually. Id. at 30-34, 55-56.

The loss of mail volume to the Internet was not an unforeseeable surprise. The Postal Service had notice of this threat years before significant volume losses occurred. Id. at 35-39.

• The Postal Service’s failure to cope effectively with the 2008-2009 recession is further evidence of structural inefficiency. The average firm in the private sector saw its revenues collapse by nearly as much as the Postal Service; and many large firms saw their revenues collapse by 20 percent or more. Well-run private firms, including the Postal Service’s competitors, responded to the downturn with immediate headcount reductions and other aggressive and painful austerity measures that resulted in a return to profit relatively quickly, even while sales volume and revenue remained depressed. The Postal Service, by contrast, contented itself with a business-as-usual incremental approach to cost cutting that allowed productivity to plummet and unit costs to get further out of control. Id. at 39-55.5

• The Postal Service’s financial loss projections in this case assume no major improvements in cost control in the future. Id. at 55-57

The Postal Service has many cost-saving opportunities available to it that remain to be pursued seriously. Given the magnitude of the Postal Service’s inefficiencies, even a modest improvement could result in billions of dollars of additional savings annually. For example:

(1) The Postal Service makes much of the supposed legal obstacles to closing retail post offices. But the Postal Service cites no legal obstacles (including restrictive language in appropriations bills) to the closure of most Processing & Distribution Centers and other central mail processing facilities. Since 2005, however, the Postal Service has closed only 2 of its 270 P&DCs. “U.S. Postal Service: Strategies and Options to Facilitate Progress toward Financial Viability,” Report No. GAO-10-455 (April 2010) at 13-14, 31. Instead, the Postal Service boasts because it saved $68 million—only about 1/10 of one percent of total USPS revenues—from area mail processing consolidations (“AMPs”) in the past year. Tr. 1/60-61 (Corbett).

(2) A number of enterprises in the United States have asked their employees to reopen existing collective bargaining agreements in light of the recession. See Motion to Dismiss (Aug. 2, 2010) at 15, 45-46. Given the supposedly parlous state of the Postal Service’s finances, reopening of existing collection bargaining agreements with postal labor would be a logical step. During the August 10 hearing, however, USPS witness Corbett admitted that he was completely unaware of whether such relief would be sought. Tr. 1/100.

(3) Two of the Postal Service’s national collective bargaining agreements expire in November 2010 (with the American Postal Workers Union and the National Rural Letter Carriers’ Association), and two more in November 2011 (with the National Association of Letter Carriers and National Postal Mail Handler Union). The expiration of these agreements presents a timely opportunity to negotiate reductions in head counts, greater freedom to employ layoffs and furloughs, and improved flexibility in work rules and employee utliization. Successful negotiations could narrow, or even eliminate entirely, the forecast 10-year shortfall.

(4) The expiration of the same collective bargaining agreements also presents a timely opportunity to deal with the more than $10 billion in above-market compensation that the Postal Service concedes it pays. The Postal Service, however, already appears to have taken the renegotiation of these compensation premiums off the table. Tr. 1/120-121 (Corbett). Instead, the Postal Service appears content simply to try to reduce its share of the total cost of the health benefit packages—from the current 81% down to 72%, the percentage paid by other federal agencies. Id. Even a full nine-point reduction would save the Postal Service only about $750 million per year. This is a small fraction of the $10 to $14 billion or more in excess costs that the Postal Service incurs each year because of the existing compensation premiums. Moreover, even these limited savings would occur with halting slowness: the Postal Service does not seek to increase the employee contribution by more than one percentage point per year. Tr. 1/121 (Corbett).
At that pace, even the $750 million savings target will not be reached until 2020.

(5) The Postal Service suggests that seeking relief in arbitration from inflexible hiring and work rules and above-market compensation premiums is useless because arbitrators tend simply to rubber-stamp the status quo. USPS Response at 31-33. But the Postal Service has not invoked its right under 39 U.S.C. § 1207 to arbitrate its major collective bargaining agreements in years, and certainly not since the beginning of the recent recession. It is premature to assume without exhausting the arbitration remedy that arbitrators today would ignore the supposedly “extraordinary” and “exceptional” economic developments since the last arbitration decisions, and the desperate financial straits the Postal Service says it now faces as a
result. This is particularly so given the number of economic concessions made by unionized employees of state and municipal government employees downturn. Motion to Dismiss (July 26, 2010) at 45-46; Brophy (Consumers Union) Impact Statement. At a minimum, best practices of “honest, efficient and economical management” certainly require that the Postal Service at least exhaust its administrative remedies under 39 U.S.C. § 1207 rather than throwing up its hands and shifting $3 billion in costs annually to mailers as the stakeholders of first resort.

(6) Finally, the Postal Service’s analysis of the legal implications of the “honest, efficient and economical” standard is as inaccurate and one-sided as the Postal Service’s discussion of the facts. The notion that the standard of “honest, efficient and economical management” requires the regulator to ignore inefficiencies that result from past decisions by the regulated company (USPS response at 23-25) is contrary to precedent and would have perverse consequences. It is well-established, for example, that the standard of
honest, efficient and economical management supports the disallowance of capital investment in long-lived assets as imprudent when made, even though the investment was the result of past decisions, and is now sunk and irrevocable. Missouri ex rel. Southwestern Bell Tel. Co. v. PSC, 262 U.S. 276 (1923); Verizon Communications Inc. v. FCC, 535 U.S. 467, 485-486 (2002). Indeed, the regulator may deny a regulated company a return on a sunk longlived investment that was prudent when made but “rendered useless by
unforeseen events.” Verizon, 535 U.S. at 484 n. 6 (citing Duquesne Light Co. v. Barasch, 488 U. S. 299, 311-312 (1989)).

In any event, a very large share of the Postal Service’s excess costs is neither fixed nor sunk. Inefficient Processing and Distribution Centers, for example, can be closed or consolidated in a relatively short period. Likewise, as previously discussed, the Postal Service’s major collective bargaining agreements are up for renegotiation when they expire this year or next, even if the Postal Service is unwilling to seek to reopen them during their term.8 as well as private sector employees—including the unionized employees of the Postal Service’s customers—since the beginning of the current economic downturn. Motion to Dismiss (July 26, 2010) at 45-46; Brophy (Consumers Union) Impact Statement. At a minimum, best practices of “honest, efficient and economical management” certainly require that the Postal Service at least exhaust its administrative remedies under 39 U.S.C. § 1207 rather than throwing up its hands and shifting $3 billion in costs annually to mailers as the stakeholders of first resort.

see full pdf file submitted to PRC

Re: Docket No. R2010-4, Rate Adjustment Request Due to Extraordinary or Exceptional Circumstances

August 12, 2010

The purpose of this letter is to offer our comments on the above-mentioned request that is now before the Postal Regulatory Commission. The Envelope Manufacturers Association rarely comments on rate or regulatory matters, however, we in this case, that we should provide our point of view.

Background
The Envelope Manufacturers Association was established in 1933 from two associations that were established in 1909. Since 1915, we have worked closely with the United States Postal Service. We believe that for the most part, what has been good for the United States Postal Service was also good for our industry. EMA and its sister organization, Global Envelope Alliance (GEA), have envelope companies in 38 nations and we count 11 posts in our current global membership. We regularly provide global postal assessments and a number of Commissioners have spoken at our conferences worldwide. We have great respect for the work of the Postal Regulatory Commission and know that the decision you now have before you represents more than a normal rate increase; it represents an important precedent for the future.

We were very engaged in much of the work that went into the Postal Accountability and Enforcement Act of 2006. Starting in 2002, we provided a host of studies to Congress and the Postal Service on various aspects of the need to reform the Postal Service. While we chose not to engage ourselves in rate and regulatory reform as we strongly supported the work of the mailing industry that pushed for price cap regulation, the same caps we must live under today.

Basis of Our Concerns

When Congress, with input from many of us, created a rate-ceiling mechanism that would allow prices for non-competitive products to be adjusted upward within the strict limit of the Consumer Price Index (CPI), we believed this to be a critical aspect of establishing a rate-making system that was more predictable and regular. Our understanding of the inflation-based cap was not only to restrict the United States Postal Service to these increases to provide a valuable incentive for it to improve its business model and its effectiveness, but also to give it an opportunity to generate and bank gains for future periods as well to avoid extraordinary cost increases. The Postal Service, as we understand it, has the authority under the law to raise rates every year, not to exceed the CPI cap. It chose not to do so in 2010 but it had the authority to do so and made a management decision not to do so for the same reasons we argue against this rate case today. The economy has not recovered and increasing rates at this time will have a detrimental impact on the entire postal value chain.

Besides the impact on our business activities, we think there is an important precedent here that should not be violated. That precedent is that the Postal Service must operate under the parameters that were set up in PAEA for an important reason; to incentivize the USPS to operate in a businesslike manner. If we want to have our Postal Service here in the future, it must operate its business under these parameters. We cannot return to the previous system of ratemaking.

We know that electronic diversion has been occurring for quite some time. If you go back to 2001 in the First-Class mail data, you can see the impact of this diversion, even when the economy was doing well following the recession of 2001 and 2002. We all know that economies are cyclical and while this recession was deeper than normal recessions, we adjusted our operations accordingly. We cut staff, we cut purchases and we cut benefits.

If we allow the United States Postal Service to breach the intent that was put in place in 2006, we believe we do long-term harm to ever operating the Postal Service as a business. We believe that a recession is not an exceptional circumstance under the law as we understand it, and we should not set a precedent for future generations to have to deal with by breaching an important protection for postal customers that was designed to ensure the Postal Service would be here in the future.

Summary
The Envelope Manufacturers Association opposes the Postal Service Request for a price increase based on the exigency provisions of the law. To allow this increase might offer short-term benefit, however, would do long-term harm to the need to reshape the Postal Service into a more modern, effectively functioning enterprise. We all are well aware that there are other avenues to lower Postal Service costs, primarily the overfunding of benefits, which need to be pursued before cutting services and increasing rates.

We sincerely hope you will uphold the important protections that PAEA has created and continue to do the diligent work you do to help create a postal system that will serve future generations.

Sincerely yours,

Maynard H. Benjamin, CAE
President & CEO

click here for the PDF of the letter

WASHINGTON — In a move designed to maintain true value in a competitive shipping market, the U.S. Postal Service has asked the Postal Regulatory Commission (PRC) to reclassify some Standard Mail parcels to complement its current shipping product line.

The strategy for Standard Mail small parcels redesign is included in the Postal Service’s exigent price case, filed with the PRC on July 6. The redesign eliminates confusion for customers by breaking this category of mail into two significant and distinct customer segments; marketing parcels and fulfillment parcels.

Today’s filing is a formal request to transfer commercial Standard Mail Fulfillment Parcels from the market-dominant product list to the competitive product list. If approved, fulfillment parcels would become a lightweight subcategory of Parcel Select.

The only real difference between the two products is the weight. Standard Mail fulfillment parcels weigh less than 1 pound; prices for Parcel Select start at 1 pound.

“This is a competitive market and there are other shippers in the marketplace fulfilling this weight for packages,” said Gary Reblin, vice president, Shipping Services.“This is a logical change and customers will no longer have to navigate two different products and rate structures for one business need.”

Marketing parcels is replacing the not-flat machinable category that will be eliminated upon approval by the PRC. Pieces up to 2 inches thick can then be mailed as marketing parcels. An addressing qualifier, such as “Or Current Resident,” also must be included on the parcel.

Fulfillment parcels must be addressed to a specific resident or business owner and be used for mailing products ordered or purchased that weigh up to 1 pound: DVDs, CDs, checks and lightweight sweaters or shirts.

If approved by the PRC, Standard Mail fulfillment parcel prices will increase about 23 percent, effective Jan. 2, 2011. This price change proposal is not affected by today’s filing to move Standard Mail fulfillment parcels to the competitive product list.

Pricing is one of a suite of solutions the Postal Service is using to address its current financial situation. Other solutions include a change in delivery frequency, restructuring the prepayment of retiree health benefits and expanding access to Postal Service products and services.

• Opposes the Postal Service’s proposed exigent rate increases because the statutory requirement of “extraordinary or exceptional circumstances” is not met; and
• Supports the Postal Service’s proposal to extend the “volume incentive” proposal in Standard commercial flats to include High-Density flats as well as Saturation flats.

The Postal Service’s request in this case rests, at bottom, on the decline in mail volume that it has experienced during the recent economic recession,coupled with financial obligations created for it by Congress in the form of overpayments towards its Civil Service Retirement System obligations and
requirements to prefund its retiree health benefits. NAA is working with other 1 NAA represents the interests of nearly 2,000 newspapers in the United States and Canada. Its members account for nearly 90 percent of the daily newspaper circulation in the United States and a wide range of non-daily U.S. newspapers. NAA members use all classes of mail, including First Class Mail, Periodicals mail, and Standard mail.

**mailers to urge Congress to rectify the statutory funding obligations, which alone could save the Postal Service more than $5 billion annually, and which would make this case entirely superfluous.

Insofar as the Postal Service’s filing stems from the loss of mail volumes over the past two years, however, NAA submits that it should not be looking to mailers to ante up even more money. First, since R2005-1, mailers have already paid some $3.1 billion annually, first into an escrow for CSRS obligations and
subsequently towards the retiree health benefit fund.

Second, the reason that the Postal Service has had less volume in the past two years is simple – mailers have mailed less due to economic conditions. In the case of newspapers, the entire industry saw substantial declines in advertising revenue, which meant less advertising both in the newspaper and in
mailed “Total Market Coverage” (“TMC”) programs reaching non-subscribers. Today, newspapers continue to focus intensely on efforts to increase revenue and cut costs. Unfortunately for the Postal Service, the higher postage rates in recent years caused many newspapers to cut costs by shifting newspaper
products and efforts away from the mailstream into other delivery options, including private delivery.2

NAA has devoted significant resources in recent years to encouraging
newspapers to make more use of the mail, and to educating the Postal Service
on how newspapers can be valuable business partners. Over the past decade,

2 The 2009 postage increase posed particular problems for newspapers, because (as
noted in more detail in Section II below) the new Standard Mail rates conferred a significant rate
advantage on Saturation mailers that compete with newspapers in the market for the delivery of
local advertising.

3 newspapers greatly expanded their use of Standard Mail, especially the High-Density and Saturation flats categories, for delivery of their TMC advertising products to households that do not subscribe to the newspaper. Raising postal rates at this time, however, could undo much of these gains. The Postal Service
could hardly think of a more counter-productive strategy than the current case, in
which it proposes to raise rates by an average of 5.6 percent (approximately five
times the rate of inflation), including increases of 8 percent for both the Within-
County and Outside County Periodicals rates paid by newspapers and aboveinflation
increases for the Standard Enhanced Carrier Route flats product.

At a time when all mailers are facing continuing economic storms, raising
postal rates by fivefold times the rate of inflation will do little but increase the
pressure on publishers to move mail away to alternate delivery. NAA has little
faith that the Postal Service’s volume forecasting methodologies, which rely on
trends over six years, have correctly adjusted to the new economic environment
spawned by the recession. NAA believes that the Postal Service’s volume
forecasts are overly optimistic, and that if the proposed rate hikes for Standard
Enhanced Carrier Route flats and Periodicals are implemented, the volumes of
those products would fall by more than the Postal Service expects.

The statutory predicate for the extraordinary relief of exceeding the rate
cap – “extraordinary or exceptional circumstances” – does not exist. A loss of
business due to an economic recession may be painful and difficult, but it is not
“extraordinary or exceptional.” Accordingly, the Commission cannot approve the
rate increases. However, the Commission can and should approve the proposed
modification to the Standard Mail volume incentive program, which would have
the effect of both retaining existing newspaper mailings and encouraging new
mailing initiatives.

I. AN “EXIGENT” RATE INCREASE IS NOT THE SOLUTION TO THE
POSTAL SERVICE’S FINANCIAL PROBLEMS

The purpose of rate cap regulation is to provide the regulated entity with
an incentive to operate efficiently. When Congress in the PAEA directed the
Commission to replaced cost-of-service regulation with a more modern rate cap
regime, it did so against a long history of the Postal Service’s chronic inability to
operate in a cost-efficient manner. Over the course of many years, the Postal
Service developed a network that has too many facilities to handle the
foreseeable volumes in an efficient manner, and has a staff that, while
appropriately and commendably reduced from its peak, still accounts for far too
large a share of the Service’s operating costs.

At the same time, Congress recognized, as is customary in price cap
regulatory regimes, that in rare and drastic circumstances it may be necessary to
raise rates by amounts larger than the CPI cap. For this reason, it crafted an
exception, allowing (but not requiring) the Postal Service to seek to raise rates by
amounts in excess of the rate cap “in extraordinary or exceptional circumstances”
where the resulting rates are “reasonable and equitable and necessary to enable
the Postal Service, under best practices of honest, efficient, and economical
management” to maintain and develop the postal services needed by the nation.
39 U.S.C. §3622(d)(1)(E).

A recession, even one as painful as the recent U.S. recession, is not what
Congress meant by “extraordinary” nor “exceptional.” It is simply a fact of
business life with which all commercial entities, whether newspapers or the
Postal Service, must deal. Nor can the financial problems associated with the
obligation to prefund the retiree health benefits be considered extraordinary or
exceptional – indeed, they were mandated by Congress in the PAEA itself and
mailers have been paying $3.1 billion annually towards those costs since Docket
No. R2005-1. The legislative history demonstrates that Congress contemplated
a drastic event and abnormal event, such as the anthrax attacks or a September
11-type event. This was recently summarized by Sen. Susan Collins (R-Maine)
in her letter to the Commission in this proceeding. Letter from Sen. Susan M.
Collins to Ms. Shoshana Grove, Docket No. R2010-4 (August 9, 2010).
Obviously nothing of that nature has occurred.

Instead of raising rates, NAA believes that the Postal Service’s financial
difficulties require a legislative solution. To this end, NAA is working with other
mailers for appropriate legislative reforms. NAA supports the elimination of the
retiree health benefits prefunding requirement, relief from the CSRS
overpayment, and better aligning of facilities with needs.

II. NAA SUPPORTS EXTENDING THE VOLUME INCENTIVE IN STANDARD MAIL TO HIGH-DENSITY MAIL

NAA supports the Postal Service’s proposal to extend the Standard Mail volume incentive program to High-Density flats mail.

A. Extending The Standard Mail Volume Incentive To High-Density Flats Is In The Public Interest

As the Commission has long understood, newspaper Total Market
Coverage programs compete directly with saturation mailers in the delivery of
advertising to homes. Newspapers deliver ads through a combination of in-paper
delivery to subscribers and by mail delivery to nonsubscribers. TMC mailings to
nonsubscribers pay either High-Density or Saturation rates, depending upon the
density on a particular route. The rate paid for a particular route can vary from
week to week as subscription levels change or as the Postal Service alters
routes.

The Saturation mail volume incentive program introduced by the Postal
Service in May 2009 conferred saturation mailers with an unwarranted
competitive rate advantage over newspaper TMC programs. Newspaper TMC
programs that primarily used High-Density rates, and had few Saturation-rated
mailings, were effectively ineligible. As a consequence, they saw the Saturation
mailers with which they competed enjoy a substantial price advantage, up to 39
percent in some circumstances.3 Newspapers believed that this rate advantage
hurt the Postal Service by encouraging third-party advertising inserts to shift from
newspaper TMC mailings (at High-Density rates) to Saturation mailers (at lower
postal rates). That would result in less revenue for the Postal Service and
transferred mail, not organic growth.

3 Under the 2009 incentive, “new” flats weighing less than 3.3 ounces entered at a DDU
paid 10.2 cents after the “credit,” 6.6 cents less than a High Density flat of the same weight.

The Postal Service now proposes to extend the volume incentive currently
in effect for Saturation flats mailers to High-Density flats. That expansion will
substantially improve the rate incentive program by making it available to
newspaper TMC programs as well as for Saturation mailers. Most importantly, it
provides a potentially valuable incentive to retain newspaper TMC programs in
the mailstream, both by establishing a rate incentive for TMC programs to
increase their use of the mail and by also narrowing the discriminatory rate
advantage that Saturation-rated mail has enjoyed over High-Density mail.
In addition, newspaper TMC programs will also enjoy the flexibility offered
by the revised program to qualify either their High-Density and Saturation rate
mailings, or both, for the incentive program. This flexibility has the potential to
make the program attractive to a larger number of newspapers, which can only
benefit the Postal Service.

Accordingly, NAA urges the Commission to approve the Postal Service’s
proposed changes to the Standard Mail volume incentive program. And, as
noted above, the Commission may do so regardless of how it disposes of the
request for an exigent rate increase.

B. The New Standard Mail Rate Incentive Should Be Approved
Regardless Of How The Commission Decides The Exigency
Request

The Postal Service’s proposal to extend the Standard Mail volume
incentive program to High-Density flats is a mail classification proposal that
legally can stand independently of the exigent rate request. The improved
incentive program can and should take effect regardless of the Commission’s
disposition of the exigent rates request.

Although the improvements to the Standard Mail volume incentive
program are included in the request for approval of exigent rate increases, the
exigent rates are not necessary for the volume incentive improvements to take
effect. Changes to the mail classification schedule for market-dominant products
may be filed at any time, and are subject to section 3020.30 of the Commission’s
rules. 39 C.F.R. §3020.30. That provides specifies the information that the
Postal Service must provide in support of its proposed change.

In its Request and the supporting statement of Mr. Kiefer, the Postal
Service has provided the required information. See Exigent Request at
Attachment A & Statement of James M. Kiefer. In particular, the Postal Service
has identified the product as required by section 3020.31 of the rules and
provided supporting justification required by section 3020.32. The Commission
has provided the appropriate public notice and solicited public comment. 39
C.F.R. §3020.33. Accordingly, NAA submits that the Postal Service had made a
sufficient showing for the proposed modification, and that it should be approved
regardless of whether the Commission approves the proposed exigent rate
increases.

IV. CONCLUSION
For the foregoing reasons, the Newspaper Association of America
respectfully asks the Commission not to approve the proposed “exigent” rate
changes, but to approve the proposed modification to the Standard Mail volume
incentive extending eligibility to High-Density flats.