Initial briefs on Network Rationalization: The parties weigh in with the PRC

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Yesterday was the deadline for submitting initial briefs to the Postal Regulatory Commission on the Postal Service’s Mail Processing Network Rationalization (MPNR) plan to consolidate processing plants and relax service standards for First Class mail and periodicals.

The briefs summarize key points in the testimony and construct arguments for and against the plan.  They give a good preview of where the Advisory Opinion is headed.  Here’s an overview of these new and important additions to the PRC docket.

 

The Postal Service

The Postal Service’s brief is over one hundred pages, and nearly all of it is devoted to reviewing the case presented by its own witnesses.  It begins by characterizing the Postal Service’s financial problems as an existential crisis.  The very survival of the postal system is at risk:

“In the face of trends largely beyond its control, Postal Service management must implement measures that preserve the long-term viability and relevance of the national postal system. Simply put, this is no time for strategies founded on half measures and hope. Rather, it is a time for expeditious action that strikes a reasonable balance between historical service levels and the need to eliminate the excess mail processing and transportation capacity that is fueling the imbalance between revenues and operating costs.”

The brief proceeds to address the fact that the Postal Service has already implemented the service standard changes that the Advisory Opinion is supposed to review.  The Postal Service reminds the Commission that an Advisory Opinion is “non-binding,” and it suggests that section 3661 of Title 39 (which establishes Advisory Opinions) should not be seen as “an invitation for the Commission to second-guess the judgment of postal management.” 

Moreover, says the Postal Service, the Commission shouldn’t be spending months “reducing the cost or savings implications to the PRC’s own best estimate.”  According to the Postal Service, it’s up to the Board of Governors to look at the numbers and make a decision.  Only in a footnote does the Postal Service acknowledge that if there were fundamental flaws in its financial analysis, it might be appropriate for the Commission to point them out, but in this case, the Postal Service maintains, there are no flaws of such magnitude.

In any case, having already implemented the service standard changes under review by the PRC and having reminded the Commission that its advice is “non-binding,” the Postal Service says that it “greatly appreciates the potential constructive value that may be derived from the Commission’s exercise of its section 3661 responsibilities and will review and consider the Commission’s advisory opinion with great care when it is issued.”

The Postal Service’s brief proceeds to describe how the various classes of mail will be affected by the changes in service standards and how the changes are consistent with various statutes.  The brief then reviews what all of the USPS witnesses have had to say about how significant cost savings will be achieved and how revenue losses will be kept at a minimum. 

These sections take up nearly the entire brief, and it’s only on page 93 that the Postal Service turns its attention to the experts who challenged its plan.  The Postal Service dismisses their testimony in a few pages because “it deserves little weight.”  In the Postal Service’s view, “The testimony does not credibly rebut the Postal Service’s explanations of the operational changes it will implement or the estimates of the costs expected to be saved when the operational and personnel changes are fully implemented.”

There’s one witness, however, that the Postal Service seems concerned about refuting, and that was NALC’s witness, Michael Crew, a professor of regulatory economics at Rutgers.  Much of Crew’s testimony challenged the market research on which revenue loss projections were based.  The Postal Service spent over three hours cross-examining the professor a few weeks ago, and it brought back its own witness, Rebecca Elmore-Yalch of Opinion Research Corporation (ORC), the company that conducted the research, for surrebuttal testimony to refute the criticisms.  Several pages of the Postal Service’s initial brief are devoted to defending the market research from the criticisms it’s received.

As we now know, there were two phases of quantitative research into the question of how mailers would respond to the change in service standards.  The first phase predicted a 7.7% reduction in mail volume, a revenue loss of approximately $5.2 billion, and a contribution loss of nearly $2 billion.  The second phase predicted a more acceptable $500 million contribution loss. 

The phase-1 research was not presented by the Postal Service in its initial testimony, and its existence was revealed only during cross-examination of the Postal Service’s witnesses.  The Postal Service explained that it abandoned the phase-1 research because it was flawed.  The concept statement used to initiate interviews mentioned eliminating Saturday delivery and closing post offices, and that induced customers to predict large reductions in their mail volumes.  (The phase-1 research is consequently referred to as the “all-causes” research.) The second survey was careful not to mention other causes, and the Postal Service believes it’s more reliable for evaluating the impacts of the change in service standards.  

Much of the testimony challenging the Postal Service argues that the first phase of the research is valid, perhaps more valid than the second phase.  Witness Crew’s criticism of the research did not focus on this issue, however.  He found the phase-2 research flawed.

One of the problems with the research is that it uses a "Probability of Change” factor to adjust lost revenue projections downward.  ORC asked customers how much mail (less or more) they would send after service standards were changed, but it also asked them how likely they were to make this change in their mailing habits.  The two numbers were then multiplied.  If you said you’d mail 30% less, and you said you were 70% likely to do so, the reduction in volume would be 21%.  That made no sense to witness Crew because the “30% less” already contains a notion of probability. 

The Postal Service and the PRC have been arguing about this issue since the Saturday delivery case.  Professor Crew testified back then that it was wrong for the Postal Service to use a probability of change factor, and the PRC concurred.  The Postal Service and ORC continue to maintain, however, that it’s valid, and they have come up with some scholarly sources to make their case.  It will be interesting to see if the Postal Service has made any progress in convincing the PRC that it makes sense to use the factor. 

The Postal Service’s brief reviews other criticisms made about the market research (discussed below).  It concludes by maintaining that the research “provides an accurate and reliable basis for estimating volume, revenue and contribution impact.”  The research was “conducted according to the highest standards and in full conformity with standard industry practice….   Hence the market research provided a sound foundation for the Postal Service decision to go forward with MPNR.  While some volume decreases will follow, the magnitude is small, especially in light of the financial gains that MPNR will provide year after year.”

After a few pages devoted to dismissing the other expert testimony brought forward to challenge its plans, the Postal Service concludes that its Network Rationalization plan fully conforms with Title 39.  The brief ends with a rhetorical flourish:

“At its heart, Network Rationalization consists of the single most comprehensive effort the Postal Service has ever undertaken, to ensure that its mail processing network can continue to meet the needs of all users.  Hence the Postal Service seeks to facilitate the universal and cost effective availability of postal services to all users, thereby continuing to bind together the people of this Nation to the personal, educational, literary and business correspondence of the people.”

 

The PRC's Public Representative

The Public Representative’s brief stops short of opposing the Postal Service’s plan, but it provides a strong argument that the plan is seriously flawed: “While the Public Representative does not oppose the Postal Service’s plan, he cannot endorse it based on the incomplete analysis presented in this proceeding.”

The PR begins by examining the legal requirements surrounding an Advisory Opinion.  The Postal Service maintains that the purpose of an Advisory Opinion is to give the PRC an opportunity to address the question, Does the proposed change in service standards comply with Title 39?  The Public Representative disagrees:

“The Postal Service’s misreading of the statute is a subtle difference, but it illustrates a fundamentally flawed view of the advisory opinion process, and the Commission’s role in that process. The proceeding is not meant to be a simple approval or disapproval, but rather expert advice crafted within the bounds of the policies established under title 39, following the opportunity for due process for those mailers affected by the change.

“The policies established under title 39 undoubtedly provide a lens through which to view the Postal Service’s proposal, but the plain reading does not require the Commission to give a thumbs-up or a thumbs-down, rather, the Commission is tasked with giving advice that conforms to the statute. For the Postal Service to continue to suggest otherwise is a misrepresentation of the law.”

Given that the Advisory Opinion is about giving advice, the PR’s brief proceeds to examine a number of questions that the Postal Service needs to address before moving forward.  There are basically four areas of concern:

1. Price Cap

The PR argues that relaxing service standards is equivalent to a relaxation of the price cap.  In other words, decreasing service amounts to a de facto rate increase.

That raises the difficult question, how much of a rate increase does the change in service standards represent?  If mailers don’t care much about speed, the implicit rate increase is small; if the phase-1 market research is correct in its projections of huge volumes losses, however, mailers care a lot about speed, and the implicit price increase is significant.

The Postal Service has not had much to say about the price cap issue, and the PR finds that very problematic.  Apparently, the Postal Service believes that there’s no direct link within the law between quality of service and the price cap.  “The Postal Service’s failure to discuss the economic link raises serious concerns about its consideration of the policy implications of its proposal.”

In effect, says the PR, the Postal Service is “circumventing its price cap constraints by decreasing the quality of service for First-Class Mail and Periodicals.”

2. Lost revenue estimates

The PR does not mince words about the market research conducted by ORC.  While the Postal Service characterizes the research as “accurate,” “reliable,” and conducted “according to the highest standards,” the PR has this to say:

“Two sets of market research, with the same goals and company performing the research, produced two drastically different results. The two different results in the record show there can be no confidence in the accuracy of the Postal Service’s calculation for the lost value to mailers.”

The PR reviews the testimony challenging the market research and the testimony by Elmore-Yalch defending it.  One issue has to do with the time frame.  The research focused on the first year after the service standards are changed. “The Public Representative is concerned the Postal Service underestimates total volume and revenue loss resulting from their proposed changes to service standards,” particularly because they focus only on the first year of implementation. 

Since the plan will be implemented over a longer period of time, it’s very likely the impacts will be much worse than projected: “The Public Representative considers the estimates produced by witness Whiteman impractical representations of mail volume change based on proposed service plans.”

As for the use of the “likelihood of change” factor, the PR says, “The Postal Service does not, despite all of the research submitted in this docket, show that a probability factor is used in market research as a measurement tool for consumer purchase intentions when service is degraded.” 

The PR also examines the phase-1 research that the Postal Service abandoned as flawed because it inadvertently introduced eliminating Saturday delivery and closing post offices.  The PR believes the phase-1 research is still useful: “The abandoned results highlight the Postal Service’s knowledge of a more substantial runoff of mail volume and revenues if all proposed policies are implemented.  As such, volume and revenue estimations submitted in this docket are underestimated and net savings estimations are overestimated.”

3. Cost savings estimates

The PR observes that the cost savings estimates put forward by the Postal Service “may not be reliable” for a number of reasons: “There are issues regarding baseline costs (whether all of the savings put forward by the Postal Service can be attributed to the mail processing realignment) as well as methodology for calculating future costs (especially in the transportation area). The Postal Service also makes assumptions about productivity that appear to be out of touch with reality.”

This section of the brief gets into the technicalities of calculating cost savings from changes in the transportation system.  The PR concludes that these savings have been overestimated.  Ditto for anticipated increases in productivity within the plants.  The PR finds the Postal Service’s testimony “problematic.”

The PR then pulls all of the testimony together to come up with his own estimate of cost savings.  The Postal Service had estimated that it would save $1.4 billion in mail processing labor costs.  The Public Representative puts his estimate at $338 million — over a billion dollars less.

The Postal Service says the entire plan will save about $2.1 billion in operating costs, minus $500 million in lost revenue.  If that savings in costs is reduced by over a billion, and the lost revenue is increased to anywhere near the $2 billion projected by the phase-1 research, the whole plan could end up losing a significant sum.  The PR doesn’t spell this out in his brief, but the implication couldn’t be clearer.

4. Optimization tools

The final section of the PR’s brief is a technical discussion about the tools the Postal Service and other witnesses used to analyze the new network.  The discussion is complex, but the conclusion is clear enough: “The Public Representative is concerned that the Postal Service’s expected reduction in plants, and the concomitant savings, are based upon an unrealistic expectation in productivity improvements implicit in witness Rosenberg’s analyses.”

In conclusion, the PR says the following: “It bears repeating that the Public Representative does not oppose the need for network rationalization as the basis Postal Service’s proposal.  These are desperate times for the Postal Service, and it should be encouraged to find what relief is within its control to grasp.  However, the Postal Service’s basis for the proposal, as put forward in this docket, is neither complete nor robust.  For those reasons, the Public Representative cannot endorse the proposal.  

“The Public Representative respectfully requests that the Commission advise the Postal Service to carefully consider the questions raised (and shortcomings identified) in each facet of its proposal, and to only proceed if it believes the benefit to the Postal Service will significantly outweigh the harm to postal customers.”

 

National Association of Letter Carriers

The NALC brief focuses primarily on the argument that “degrading service standards would almost certainly 
cause a greater drop in mail volume than USPS
 anticipates.”  Because the lost volume projections were based on the market research commissioned by the Postal Service, NALC takes a close look at the research and makes the following points:

1. No confidence intervals: Typically, market research like this provides something called a “confidence interval.”  It’s a number that shows the range within which the estimated drop in mail volume would have been expected to fall were the market survey repeated.  But ORC said it could not provide a confidence interval for the total losses it was projecting, and there were also technical issues in the confidence intervals it provided for the various types of accounts it examined.  The absence of a confidence interval makes the research problematic, to say the least.

2. "Probability of Change" Factor: As noted above, the market research asked customers how their mailing habits would change (by what percentage) if service standards were changed, and then it asked them how likely they were to make this change in their mailing habits.  NALC reiterates its criticism of the way the Postal Service has used this factor to “adjust” lost volumes downward.

3. "Solely Attributable" Factor: The Postal Service reduces the lost volume in a second way, using what it calls the “solely attributable factor.”  This refers to another question asked of customers: What percentage of the change in your mailing is "solely because of" the proposed service standard changes? 

The point of that question was to make sure things like closing post offices and eliminating Saturday delivery were filtered out of a customer’s responses.  So if you said you were going to send 30% less mail, and you were 70% sure of it, and that 80% of your decision was solely attributable to the decline in service standards, all three numbers were multiplied, leading to a 17% drop in revenue. 

NALC says this makes no sense, especially when you consider that the second market research went out of its way not to mention any other issues, like Saturday delivery.  The idea for using this factor, we learned in testimony, did not come from ORC.  Elmore-Yalch admitted in testimony that she knew she no other market research in which such a "solely attributable" factor was used.  The idea for using it came from the Postal Service.

4. Speed matters: While it should seem obvious that slowing down the mail will have a negative impact on volumes and revenue, some participants in the market research said they would increase their use of the mail.  Witness Crew pointed this out as yet another indication the research was flawed.  

In response, Elmore-Yalch tried to explain away the anomaly, or as the NALC brief puts it: Elmore-Yalch made “a valiant, although whole unconvincing effort,” to explain why certain postal customers might increase their mail usage.  She speculated, for example, that some customers might increase their mail use simply to help save USPS, or perhaps some thought that the change in service standards would make delivery more reliable, even though the Postal Service never claimed that.

Although NALC does not take note of the fact in its brief, there’s actually a very good explanation why some customers said they would increase their use of the mail.   In the concept statement used for phase-2, a passage has been added that does not appear in the phase-1 concept statement.  It says the following:

“Commercial organizations using bulk First-Class Mail, Standard Mail or Periodical Mail may have fewer locations at which they can deposit their mail and this may result in a need to transport this mail to a location different from the one they are currently using.  However, there is also the potential that these mailers may be able to achieve improved transportation efficiencies since the service areas of these facilities may be larger than they are currently.  For example, if a mailer currently sends mail to two facilities which are consolidated to one, this can allow the mailer to prepare a larger mailing for deposit at the consolidated site, resulting in a reduction in the required transportation.” (Elmore-Yalch testimony, p. 100)

No wonder, then, that some mailers might say they would increase their mailings — under the new network there would be “improved transportation efficiencies.”   That passage probably also led many commercial mailers to downplay how much less mail they might send.

Overall, the NALC brief argues that reducing service is not the way to fix the Postal Service’s problems.  “The problem at the core of USPS's approach,” says the brief, “is that it ignores the impact that its proposal would have on its customers.”  The degradation in service amounts to a price increase, so “USPS plans to give its customers less for their money with nothing in return.”  Volumes will decline even more after the first year implementation because it will take time for customers to respond to the changes.

“This accelerating loss of mail volume would truly snowball when and if the degraded service standards were combined with other USPS cost-cutting measures, like the elimination of Saturday delivery, the closure of post offices and the reduction of post office hours,” says the NALC brief.  The phase-1 market research clearly shows just how big the impacts might be.

The NALC brief concludes by turning to the cost-savings estimates.  It notes that the Postal Service is not acknowledging how many serious logistical glitches this monumental change in the network will cause, nor how much these transitional problems will cost.

 

National Postal Mail Handlers Union

The NPMHU brief makes many of the same points we’ve seen covered in other testimony.  With regard to how much the plan will save in operational costs, the NPMHU argues, along the same lines as the Public Representative, that over $1 billion in labor savings projected by the Postal Service are “unlikely to materialize.”  The transportation savings are overstated by about $100 million, and the projections for maintenance costs are unrealistic as well.  The Postal Service’s savings analysis also fails to include the costs associated with scores of mail transfer hubs and transition costs, which could amount to hundreds of millions of dollars.

The big discrepancy is between the Postal Service’s estimates of how much the plan will save in labor costs and what the AMP studies indicate — a difference of over $1 billion.  The union says the Postal Service’s projections are “castles in the air because they are all based on the totally unsupported estimates of productivity enhancements.”  The union thus challenges the basic premise of the Postal Service’s modeling, namely that expanding the operating window will allow for increased productivity. 

The NPMHU also criticizes the computer model used by the Postal Service to develop its new network.  The model relied on inadequate assumptions, and the network it developed was subsequently “jettisoned” after the AMP process was completed. 

The NPMHU complains that the Postal Service failed to give adequate consideration to public input during the AMP process.  Meetings were often held at inconvenient times and at inconvenient locations, and participants were sometimes limited to just a couple of minutes to make their comments.  “And, perhaps most troubling, the Postal representatives presenting the information read from a pre-prepared script and were unable to answer rudimentary questions about the proposal or provide the basis for the estimated savings calculations presented therein.”

Another issue raised by the NPMHU is that the Postal Service failed to give adequate consideration to how its plan would impact rural communities.  The new network favors the consolidation of mail processing in urban areas at the expense of rural communities.  That will cause mail from remote and rural areas of the country to travel longer distances prior to delivery, and the likelihood of delays in mail delivery will increase.

The union also questions the wisdom of consolidating plants into “mega” processing centers.  This increases the travel distances, which increases the risk of travel-related disruptions.  It also means there’s less opportunity for cross-coverage and more risk of equipment failure.

The NMPHU characterizes Network Rationalization as “plainly a haphazard consolidation plan that is based primarily on subjective and untested judgments, without any rigorous verification that the proposed network could continue to provide basic service as planned, and without any realistic and supportable assessment of the anticipated savings and likely costs (in terms of foregone revenue) of that consolidation plan. To compound this problem, the Postal Service announced a number of late changes to its proposal, including a two-phase implementation plan that lacks sufficient detail for the Commission to evaluate its feasibility.”

The NMPHU brief concludes: “The Commission should advise the Postal Service to return to the drawing board on its proposed consolidation plan in order to conduct a rigorous testing process and to put forth a proposal that is both cost-effective and that preserves the integrity of a public service relied on by millions of Americans….

“Seven months of proceedings before the Commission have shown that the Postal Service is poised to dismantle one of its most important assets — its extensive national network for processing and distribution of mail — without having done the homework for either the Postal Service or the Commission to determine that its plan is feasible, or advisable.  As such, the Commission should render its opinion finding this proposal ill-advised.”

In closing, the NMPHU urges the Commission to issue an Advisory Opinion recommending that the Postal Service “correct the fundamental errors in its proposed consolidation plan prior to implementation of any Phase or aspect of that plan.”

 

American Postal Workers Union

The APWU brief argues that “the record in this case fails to demonstrate that the proposed changes to service standards are a necessary or desirable solution to the Postal Service’s present financial situation.”  Rather, the record shows that Network Rationalization is a “high risk plan developed without serious consideration of its compliance with the policies and requirements of Title 39, many of which would temper such rash plans.”

On the savings side of the ledger, the cost savings are overstated because “the Postal Service has failed to separate which cost savings it could achieve without making any changes in its service standards from the cost savings that could be achieved only by degrading the service standards.”

The APWU brief goes into a lot of detail about how the cost savings are overstated.  For example, the Postal Service used 2010 as the baseline, but volume has fallen since then, so actual costs are already lower — even before Network Consolidation has been implemented — and it makes no sense to include these savings in the plan.  Second, many plants were approved for consolidation before Network Rationalization was announced, and they didn’t require a change in service standards, so they shouldn’t be included in the cost savings either.  Plus, there are other options for savings — like using more non-career workers (PSEs) — that can be implemented without changing service standards, and they too should not be included in the cost savings analysis.

The APWU notes that while the AMP studies add up to significantly less cost savings than advertised for Network Rationalization, even the AMP studies are unreliable and overstate savings, partly because they too include savings that have nothing to do with the consolidation per se.

The discrepancy between the $2.6 billion (or $2.1 billion in the February 2012 version with fewer plants) and the $950 million generated by the AMPs has never been satisfactorily explained by the Postal Service.  The Postal Service says there are “major areas of savings that the AMP process does not examine,” but it has produced no evidence that would explain a discrepancy of over a billion dollars.

On the revenue side, the APWU says the estimated impact is “understated” — the plan will have a “massive negative impact on the Postal Service.”  The APWU brief turns to the market research conducted by ORC.  Noting that the all-sources phase-1 research was abandoned, the APWU observes that “the Postal Service placed itself in the position of proceeding without completing the only research they had begun that would have confirmed the cumulative effects of ongoing Postal Service initiatives.” 

The Postal Service has therefore not completed any research into the cumulative effects of Network Rationalization and all the other plans on the table — five-day delivery, closing post offices, reducing hours, raising rates, reducing collection boxes, etc.

The brief proceeds to criticize Elmore-Yalch’s efforts to defend the market research in her surrebuttal testimony.  Most of the points have already been mentioned, but the APWU adds one more: “Even more troubling is witness Elmore-Yalch’s suggestion that there is possibility that the lost revenue will be even less” than what her phase-2 research estimated.  Given that the phase-1 research showed losses four times greater than phase-2, it’s likely that the actual losses will be somewhere in between — certainly not less than phase-2 projected.

The APWU brief proceeds to discuss how the Network Rationalization plan will limit the Postal Service’s ability to expand into the growing parcel business.  Redesigning the processing network to make more efficient use of letter sorting machine may make sense when it comes to dealing with declining volumes in First-Class letters, but this same network handles parcels, and the consolidation plan will put the Postal Service at a disadvantage with its competitors, FedEx and UPS.

In conclusion, the APWU asks the PRC to advise the Postal Service that it needs to itemize savings that require a change in service standards separately from those that can be realized under current standards.  The Postal Service should also look for ways to cut costs in the network without changing the standards, and it should “move carefully and step-wise” through the next set of consolidations.

 

National Newspaper Association

The NNA brief argues that “slowing the mail stream is a high-risk strategy.”  It may make some sense for First-Class mail, but the Postal Service’s plan “ensures even worse delivery for Periodicals already facing serious delays.”  In looking over all the testimony in the case, the NNA observes, “It is clear that such dramatic changes in nationwide service expectations carry grave implications for mailers, workers and the future of USPS.”

One of the main criticisms offered by the NNA is that the mail processing equipment capacities are driving the service standards.  The NNA cites its witness, Max Heath, who said he believes a good deal of the proposed plan is being driven by engineering plans to keep automated sorting equipment running, rather by than customer needs. “He likens the Postal Service’s intentions to a publisher’s holding up the publication of a newspaper until all possible ads are sold and news inserted, rather than delivering the product while information is fresh.”

The NNA is not simply opposed to the change in service standards.  It questions the rationale for consolidating plants to begin with.  “Bigger plants are not necessarily better,” says the NNA.  Smaller plants are often more efficient and show a higher degree of productivity. 

Perhaps more important, consolidating small rural plants into large urban plants unfairly impacts rural America.  As one of the NNA witnesses said, residents of rural areas find it “alarming how easily their interests are written off by people in our nation’s capital.”  The NNA was particularly disturbed by the fact that comments from many South Dakota residents were blocked from the record by the Postal Service’s objections.

“Their absence leaves open a gaping hole in the understanding of both USPS and the Commission on the importance of the mail in rural America.  And it enables assumptions like the one that began this case: moving mail long distances from smaller communities so it can be processed and delivered, albeit more slowly, through use of USPS’s urban centers is ok with rural America.”

In the view of the NNA, the Postal Service has not given sufficient consideration to how rural Americans will respond to the changes in the mail system.  “It has not fully considered that their alarm has roused rural members of Congress to oppose reforms that USPS considers necessary. But it has tasted the impact of these communities in the revolt against post office closings.”

The NNA brief then turns to the potential lost revenue the plan will cause.  As witness Crew remarked, this service degradation might be the “death knell” of the Postal Service.  The cumulative impacts inadvertently examined in the phase-1 market research show just how deep the revenue losses may get.

In conclusion, the brief states, “NNA believes significant errors in the starting point of the Postal Service’s decisions have been made and that they will accelerate the Postal Service’s downward spiral.  Cost reductions are imperative and urgently needed.  But serious examination of alternatives to service degradation must occur before the final phase of the network optimization is complete.”

 

National Postal Policy Council and the Major Mailers Association

The NPPC and MMA are two large industry associations representing the interests of big postal stakeholders.  Their brief argues that network consolidations are “regrettable but necessary” because of the “staggering” loss of mail volumes.  But NPPC and MMA are very concerned about the service standard changes.

Among their concerns is that the changes will lead not to two- and three-day delivery as promised, but to four-, five-, or six-day delivery.  

NPPC and MMA also predict that the “rather problematic market research” has underestimated the potential decline in Presort volume.  While the phase-2 research put the decline at 1.4%, NPPC and MMA suggest that figure is “optimistic” and the declines will be far greater, “although by how much is not known.”

Pointing to the “all-sources” phase-1 market research, NPPC and MMA observe that the results of that survey show that “the combined effects of these various initiatives could be quite worse than the sum of its parts, and that the steady drumbeat of crisis calls and various proposals to reduce service indeed have negative synergistic effects.”

The NPPC and MMA do not have much to say in favor of the phase-2 market research.  “At this point, there is little reason to place much credence in the Postal Service’s market research.” 

One other problem with the research is that the Postal Service simply assumed that survey respondents took into account their own additional expenses before responding.  “That assumption that cannot be taken seriously. The notion that mailers could understand the proposals in the market research, comprehend their cost and business implications, and formulate what changes would be necessary to their mailing practices during the course of a brief 20-minute telephone interview is preposterous on its face.”

“In any event, it is unclear whether the market research – however flawed — presented in this case remains even remotely relevant after the recent change to a two-phase implementation. The Commission should recognize that the actual Presort volume losses will likely exceed the forecasted amounts.”

The NPPC and MMA conclude by observing that “regardless of the accuracy of the Postal Service’s volume forecasts or the reports of NPPC and MMA members to their associations, the Postal Service will assuredly drive away much more volume than anyone expects if it fails to manage the rationalization process in a thoughtful and logical way that addresses and resolves mailer concerns.  Similarly, if the Postal Service is unable to maintain even the lessened service that the revised standards would dictate, it will serve only to compound its problems by driving away still more volume.”

Finally, one last point from the NPPC and MMA: “It is undisputed that the service that the Postal Service proposes to provide to Presort First-Class Mail under the network restructuring at issue in this proceeding will be reduced from the service standards today….  NPPC and MMA urge the Commission to address in its opinion the effect of this service reduction on the rate cap applicable to the classes subject to the service reduction.”

In other words, a reduction in service equates to a relaxation of the price cap.  “The Commission should consider whether the service quality erosion should be offset by a corresponding reduction in the applicable rate cap.”

 

Greeting Card Association

The GCA brief argues that it’s important to distinguish between streamlining the processing network — which it favors — and relaxing service standards — which it opposes.  The GCA says that declining mail volumes necessitate a reduction in the size of the processing network, and the Postal Service doesn’t need to seek an Advisory Opinion to make management decisions about how to do that.  What does require the PRC’s Opinion is the change in service standards, and that’s a separate issue.

The key point in the GCA’s argument is that much of the testimony in the case demonstrated that it would be possible to consolidate a lot of plants while maintaining current service standards.  For example, Dr. Subramanian Raghavan testified that plants and equipment could be reduced considerably without ending overnight delivery or making other changes to current service standards.

While the number of plants that could be consolidated might be fewer than the number the Postal Service is going for, the overall savings would be comparable because there would be no lost revenue to factor in.  The Postal Service says consolidating 230 plants will reduce operating costs by $2.1 billion but cause a revenue loss of $500 million, for a net savings of $1.6 billion.  Consolidating fewer plants would reduce costs by less but avoid the $500 million loss.

The GCA is dismissive of all the testimony in the case that seeks to demonstrate that plant consolidations usually don’t work out so well.  The testimony of mail handlers who’ve experienced consolidations is considered largely irrelevant by the GCA because the case, it argues, should be about the advisability of changing the service standards, not consolidations per se.

The GCA brief also focuses on the market research done to predict how much mail volume would be lost. The GCA argues that the phase -1 “all-sources” research is actually very useful because the Postal Service should be concerned about the cumulative impacts of its various plans.

The GCA brief also echoes criticism in the testimony of the way the Postal Service performed its analysis of cost reductions.  Rather than trying out a variety of models, and then coming to the conclusion that the best approach would be to end overnight delivery, the Postal Service started with the assumption that ending overnight delivery was the way to go.  In other words, it “incorporated its conclusion as one of its premises,” which makes the computer simulation work “inherently biased.”

The GCA also discusses the testimony of witness Kobe that shows that much of the cost savings claimed by the Postal Service have nothing to do with changing service standards.  For example, a number of AMP studies were approved before the Network Rationalization plan was presented, and these consolidations were not premised on reducing service standards.  They should therefore not be considered in the cost savings for the plan.

Having reviewed these various issues in the case, the GCA focuses on what the law has to say about service standards, particularly 39 U.S.C. § 404(c).  This passage of Title 39 says that there shall be “one such class” of mail that shall be given “the most expeditious handling and transportation.”  The GCA argues that the Postal Service is dividing up First Class mail into two classes by giving priority to Pre-sort mail that meets the criteria for overnight delivery. 

In conclusion, argues the GCA, the Postal Service most definitely needs to streamline its processing network, and soon.  “That said, GCA does believe that the ending of overnight delivery is in no way a necessary consequence of an effective network rationalization program.  We therefore urge the Commission to recommend against the harmful and unnecessary service change proposed in this Docket.”

 

Valpak Direct Marketing

The Valpak brief begins by congratulating the Postal Service for doing a “good job” identifying and assessing the legal principles involved with the case, but there’s more to be said on the subject.  Valpak argues that the concern for service needs to be balanced against “the provision of law relating to maintaining the financial health of the Postal Service and its near-desperate need to achieve increased efficiencies and cost savings.”

The brief then reviews some of the projections for declining mail volumes over the coming years.  Again, Valpak congratulates the Postal Service for the efforts it has made to cut costs by reducing the work force.  Valpak suggests that Congress is partly to blame because it has “stymied” the cost cutting — “resulting in the Postal Service making the cuts that it could make, not necessarily the cuts that it wanted to make to do the least damage to the company.”  A discussion of Five-Day delivery follows.  Valpak’s point is that if Congress had approved eliminating Saturday delivery, it might not be necessary to reduce service standards under Network Rationalization.

Valpak then takes the opportunity to complain about another of its pet peeves — many types of mail are underwater, that is, they cost more to process and deliver than the Postal Service takes in.  Periodicals are particularly problematic.  Valpak believes that it’s paying an unfair share of postal rates because the Postal Service has failed to rectify the situation.

Obviously, this is somewhat off the track of Network Rationalization, but Valpak’s point is that service standard reductions wouldn’t be necessary if Congress had approved five-day and the Postal Service would get more money out of the catalog mailers.

Valpak proceeds to criticize the Postal Service for not doing enough to examine alternative approaches, like determining which consolidations could take place without changing service standards and which could take place if service standards were changed only for a portion of the mail (as it eventually decided to with the two-phased approach).

Valpak examines the expert testimony about these alternatives and observes that it appears that “the Postal Service could obtain most of its projected cost savings without abandoning the overnight service standard for First-Class Mail.”

Valpak nonetheless concludes by urging the Commission “to find the Postal Service’s latest proposal in harmony with the policies of Title 39.” 

But Valpak has another concern it wants to bring up — possible changes in the Advisory Opinion regulations that would expedite the process.  Valpak doesn’t like the idea.

Valpak notes that the Advisory Opinion process for Network Rationalization has already proven very helpful.  The case “illustrates the desirability and need to preserve the due process rights of intervenors in Advisory Opinion dockets.  Intervenors need sufficient time to evaluate Postal Service proposals, to retain expert witnesses, to conduct discovery, to cross-examine witnesses, and to offer alternatives to the Postal Service proposals.” 

In this case, for example, the intervenor testimony helped the Postal Service reach its decision to do a phased implementation.  If the PRC had rushed the case, “it would not give intervenors time to develop alternative proposals of the sort made in this docket.”

Valpak then makes this interesting observation: “The Postal Service views Commission proceedings as an irritant. The Postal Service believes the nature of Commission proceedings make it look bad.”  But Valpak looks at it differently: “Intervenors are not an irritant — they often are the Postal Service’s customers who need to be heard.”

 

What's next?

Now that all of the parties have submitted their initial briefs, most of the participants will prepare reply briefs that address the arguments made in the initial briefs.  Those are due on July 20.  The whole process will continue through the rest of the summer. At the PRC’s monthly meeting yesterday, Chairman Goldway indicated that they planned to finish the process around Labor Day. 

By then, the 48 plants in the first stage of the first phase of the Network Rationalization plan will have been consolidated, and customers will have already started to feel the impacts of the change in service standards implemented on July 1.  After nine months of work, the PRC will issue an Advisory Opinion intended to advise the Postal Service about its plan and to protect the due process of mailers and the public.  The Postal Service will then “review and consider the Commission’s advisory opinion with great care.”

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