Gleiman_gca2000.txt

Before the
Graphics Communications Association
Chicago, Illinois
December 6, 2000
Good morning ladies and gentlemen.
This is the third time I have participated in a Graphics
Communications Association conference.
My first GCA conference was in February of 1997, the 17th to be
precise, in Coral Gables, Florida. Norm Scharf lured me to Florida
with promises of sunshine, warm temperatures and the chance to
follow Gene Del Polito on a panel. It was cloudy, the temperature
never got above 45 degrees Fahrenheit and, after listening to Gene
proselytize about postal reform, I tried to enlist!
Earlier this year, Norm invited me to the April 14th GCA
conference in Clearwater, Florida. "How could I resist," he asked,
" a chance to get a head-start on my summer tan?" It rained---the
entire time!
When Norm called in June to ask if I would participate in an
R2000-1 postmortem conference, I agreed on the condition that (1) I
speak before Gene and (2) that I not be subjected to Florida's
erratic weather.
Norm, I see that Gene's performance is tomorrow---afternoon. So,
I want to thank you on meeting my first condition.
On your meeting my other condition, what can I say Norm but
thank you. It certainly is a pleasure to be here in Chicago---in
December!
Now before you get upset with me, I think you need to know the
real reason we are in Chicago---in December. How many of you know
Neal Denton? Neal who is on the
program tomorrow---with Gene---is rabid. Oops, I mean he is a
rabid baseball fan. So much so that he tries to see at least one
game at each major league diamond every year. Well, as I heard the
story, Denton was leaning into the plate in fantasy baseball camp
last winter when he took a high, inside, fast ball on the head.
Ever since he has been more confused than usual. Apparently he
thought the Cubbies and the Chisox had a home and home inter-league
series this week. So, he convinced Norm to hold the conference out
here so he could get a "two-fer" on that every ballpark every year
deal.
By the way, for those of you who want the straight skinny on why
I'm leaving the Commission, that's Denton's fault, too! He told me
that there is a "three strikes and you're out" rule for
commissioners on omnibus rates cases. And, judging from the
comments some of you have been making, it appears that I didn't
make it to first base in the R2000-1 game. I've got to tell you,
though, that most industry comments pale by comparison to some of
the suggestions I received from the general public on what I can do
with the 34 cent stamp.
Seriously, though, I know some of you are not all that happy
with a number of the Commission's recommendations. I will speak to
some of the concerns of which I have become aware. And, while I do
not mean to suggest that I view anyone's concerns as being
parochial, I think it might be useful to set the broader stage of
postal ratemaking---to lay out the general principles that guide
the Commission's conclusions. I also plan to spend a few minutes
discussing the state of USPS finances and mention a couple of other
matters of more than passing interest---at least to me, and I hope
to you.
The law that established the US Postal Service in 1970 provides
that the Postal Service may, from time to time, request that the
Postal Rate Commission recommend "rates and fees [that] shall
provide sufficient revenue so that the total estimated income…to
the Postal Service will equal as nearly as practicable the total
estimated costs of the Postal Service."
But the Commission isn't free to make just any old
recommendations so long as the numbers add up. It has to act in
accordance with the general policies set forth in the Postal
Reorganization Act and nine specific ratemaking factors.

§ 3622. Rates and fees
(1) the establishment and maintenance of a fair and equitable
schedule;


(2)
the value of the mail service actually provided each
class or type ofmail service to both the sender and the recipient,
including but not limited to the collection, mode of
transportation, and priority of delivery;


(3)
the requirement that each class of mail or type of mail
service bearthe direct and indirect postal costs attributable to
that class or type plus that portion of all other costs of the
Postal Service reasonably assignable to such class or
type;


(4)
the effect of rate increases upon the general public,
business mailusers, and enterprises in the private sector of the
economy engaged in the delivery of mail matter other than
letters;


(5)
the available alternative means of sending and receiving
letters andother mail matter at reasonable costs;


(6)
the degree of preparation of mail for delivery into the
postal systemperformed by the mailer and its effect upon reducing
costs to the Postal Service;


(7)
simplicity of structure for the entire schedule and
simple, identifiablerelationships between the rates or fees charged
the various classes of mail for postal services;


(8)
the educational, cultural, scientific, and informational
value to therecipient of mail matter; and


(9) such other factors as the Commission deems appropriate.
Factor number three deserves special mention as it is the
mandatory factor. It is at the heart of many a difference of
opinion between the PRC and the Service, the Service and mailers,
mailers and the PRC, and between groups of mailers. It is the
factor that causes the Commission to examine all operational costs,
from collection to delivery and the processing that takes place in
between. It is the bedrock on which rates are based. Each subclass
must generate sufficient revenue to cover its costs. This policy is
important for another reason. It, combined with factor number six,
forms the basis for the many, important work-sharing discounts that
are on the books.
It seems to me that, at times, critics of Commission
recommendations tend to take lightly the considerations embodied in
39 USC 3622(b)(3) and (6). "How come," they ask, "did we wind up
with an increase that was larger than that proposed by the USPS,
when almost everyone else got a break?" There are usually a number
of reasons that situations like this occur. For example, the
Commission believes that costs vary more directly with volume than
does the USPS. As a consequence, the PRC costing methodology
generally attributes a larger portion of total operating costs than
does the Service.
But why not even things out by ignoring cost differentials
between, say, letters and flats; cost differential put on the table
by the USPS a decade ago? Why not just look the other way on these
cost differences, or level the playing field by passing on to some
mail 300 percent of costs avoided by work-sharing? Why not give
discounts based on cost avoidances promised in a previous rate or
classification case but which savings were never captured by the
Postal Service? Because it is one thing to encourage work-sharing,
but quite another to ignore the law, and give revenue away. And,
giving away revenue has an effect.
Keep in mind the requirement that a subclass has to generate
revenue to cover its costs. Now, what happens when we give
excessive discounts for some type of mail? Simple! We have to make
up the revenue from other mail, for example, by bumping up, if you
will, the benchmark from which those discounted rates are
measured.
One rather formidable group of mailers whose members will
benefit mightily from the Commission's recommendations, the
periodicals mailers, pointed out in a press statement that the
overall average increase for First-Class mail was much smaller than
the average increase for mail their members send. Does it matter
that the cost of processing their mail went way up and the cost of
processing First-Class mail declined? Yes. By law, it must matter
to the Commission!
What if the Commission chose to ignore this divergence in costs
and hit First-Class mail with a larger increase? Whose interest
would be served by our doing so and for how long?


PRC R2000-1
(Dollars in Millions)
Total Contribution to Institutional Costs: $25,453
Package Other Service 7.15% 0.89% $1,820

Percent Contribution to Percent Institutional Percent Volume
Revenue Cost

Total 100.0% 100.0% 100.00%
1/ Includes Priority Mail
I want you to take a moment to look at this pie chart. I think
it is important for everyone to understand the extent to which
First-Class mail is already carrying a disproportionate share of
the institutional cost or overhead burden of the postal system.
Now, forget about this rate case and put aside any notion that I am
suggesting others mailers should pay a larger share. Think instead
about the discussion---the hand wringing--- that has been taking
place since the fall of last year when the General Accounting
Office unveiled an assessment prepared for the Postal Service by a
Postal Service contractor concerning the extent to which
transaction mail---First-Class mail---is likely to fall prey to
electronic bill presentment and payment. Should we load up on that
type of mail---give it heftier increases? Might not doing so just
accelerate the departure of this mail from the system? When that
mail leaves the system, who gets to eat that big slice of the
institutional cost pie that First Class mail currently enjoys?
Now, remember a few minutes ago when I talked about the
Commission and Postal Service difference of opinion on the matter
of how costs vary with volume? In the USPS view of the world,
institutional costs are a larger share of total costs and fewer
costs can be expected to be shed, if and when, say, transaction
mail leaves the system. This means, potentially, an even bigger
slice of institutional pie for someone else---one of you, to
swallow. Not a pleasant prospect and not one easily avoided---not
even by any reform package or proposal that I've seen.
Well, I guess I have already crossed the line and gotten into
some specifics of the R20001 case. And, I did not paint a horrific
picture of the future, just so you might think the present PRC
recommendation ain't so bad, after all. However, before I lose the
forest---and a very important one it is---for the trees, I want to
step back a bit.
In my almost seven years at the helm of the PRC, if I have
learned nothing else, I've learned that each case presents a new
challenge. In this case the challenge lay in evaluating the
Service's request for additional funds over and above its expected
operating expenses.
Last January the Postal Service proposed an array of rate
increases designed to generate an additional $2.8 billion in
revenue. What was unusual about this request was that roughly $1.7
billion of these dollars was for a contingency, a hedge against the
unknown---to cover unforeseen events. Another quarter billion plus
dollars of the total amount sought was earmarked to pay down
operating debt accrued in past years.
The size of the contingency quickly became a cause celebre with
many parties to the rate case. They sponsored evidence challenging
the need for a cushion so substantially above and beyond the Postal
Service's own best estimate of future increases in the cost of
collecting, processing and delivering the mail.
And, as you probably know, in presenting estimates of its future
needs, the Postal Service used financial and operational data from
fiscal year 1998 as a benchmark. Unfortunately, by the time the
Service filed its request, fiscal year 1999 had already come and
gone. The Commission requested and the Postal Service completed an
update of its original cost projections in mid-July.
To give you a flavor of the impact of this updating effort,
which allowed the Commission to use more recent information than
was in the Service's initial package, let's look at a few of the
changes:


•
Notwithstanding the comments of one of the Postal
Governors at the November Board meeting about not being able to
recover increased fuel costs and the need for flexibility to permit
them to level a fuel surcharge, the USPS was able to factor into
the update the increased costs of fueling its delivery
fleet.


•
Despite the comments of a Governor concerning costs
associated with the NALC arbitration, the USPS was able to include
these additional labor costs in the update.


•
It also was able to take account of the dollars
associated with actual cost-of-living adjustments, health insurance
and the like, which were higher than earlier projected
figures.


But the update was not one-sided, only adding new costs, some
$450 million. The Postal Service also presented additional revenue
and costing-cutting initiatives, such as the billion-dollar-a-year
"break through productivity plan" announced by the Postmaster
General this past spring. Unfortunately, the Postal Service was
only willing to commit to saving slightly more than one half the
highly publicized, promised amount.
The one item that did not change in the Postal Service update
was the contingency. The $1.7 billion remained.
The many parties who had already argued that a $1.7 billion
contingency was unreasonable before the update, were absolutely
certain that amount was unjustified given the incorporation of new
cost data and shorter time frame for prognosticating.
The evidence presented by the parties on the contingency issue
was determinative. My colleagues and I, reduced the requested
amount by $700 million, leaving a $1 billion contingency. We
concluded that this amount more than met the reasonableness
standard of the law.
Now, you should know that I put these remarks together over the
weekend, before the December board meeting that took place Monday
and Tuesday of this week. So, I had no idea of what action the
Governors might take. It would not surprise me, however, if the
governors returned the case because we cut the contingency, if for
no other reason than that the USPS views the contingency as its
private sandbox and doesn't want the PRC playing there.
Nevertheless, I think the Governors should be quite happy with a
billion dollar contingency since, after all, at the board
meeting---at least some of the Governors apparently did not even
know there was a contingency provision. One Governor is said to
have remarked at the public meeting that he thought the Postal
Service needed some mechanism for recovering unforeseen
expenses!
You have already heard the doom and gloom projections about USPS
finances generally and about this Recommended Decision not
providing the Postal Service with sufficient revenue to breakeven
in the current fiscal year. But think about this: if rate increases
are implemented in January---which the Service has indicated is
likely---and the Service's best estimate from just this past July
is on target, the Postal Service should be sitting on a sizable
cushion at the end of this fiscal year. Put another way, based on
the evidence the Postal Service put on the record during rebuttal
hearings as recently as this past August 30th, in the absence of
the occurrence of unforeseen events costing more than---the portion
of the full $1 billion contingency earned when new rates are
implemented in January, $600 million, the Service should do quite
well with what we recommend.
This is, I believe, a good point to do a comparison of the
evidentiary record the Commission based its decision on and the
financial picture postal officials are now painting just three
months later.
UNEXPLAINED CHANGE IN USPS FY 2001 FINANCIAL POSIT ION



UNEXPLAINED CHANGE IN USPS FY2001 FINANCIAL POSITION ($
Millions)
Net Income PRC R2000-1 Rate Decision - 11/13/00 1,342
Impact of Jan. 2001 Delayed Rate Implementation (658)
Adjusted FY 2001 Net Income 684
Operating Plan - 11/14/00 (480) (Expected Net Loss)
Unexplained Swing in Net Income: (1,164) (11/13/00 compared to
11/14/00)
I have a couple of tables I want to share with you. Each carries
the title "Unexplained Change in USPS FY 2001 Financial
Picture."
The first table is based on USPS assumptions regarding rates,
costs, volumes, contingency and recovery of prior years'
losses.


•
When the Service filed its case last January, we all were
told the net income for FY2001, after covering increased operating
costs, would be $1.9 billion---$1.7 billion for the contingency and
$250 million for recover of prior years losses.


•
When the Service filed its July update, which it could
have modified during rebuttal in late August, we were told the net
income for FY2001 would be $1.5 billion.


•
When you adjust those figures for a January
implementation, you get a positive $630 million on the bottom
line.


•
But the USPS operating plan presented to and approved by
the Board in mid-November shows a deficit of almost $500 million
even if the Commission had rubber-stamped the original Service
request.


•
When ones substitutes generally lower PRC rates and uses
all other USPS assumptions, one still gets a positive, albeit much
smaller, bottom line---the $132 million figure.


•
Going from a plus $630 million to a minus $480 million is
a swing of $1.1 billion.


The second table shows the numbers using PRC assumptions and
recommended rates.
So, regardless of whether one uses the Service's updated
assumption or the Commission's rates and assumptions, there has
been an unexplained swing of $1.1 billion in the projected bottom
line for FY 2001 in just a couple of months!


•
Were the July-August updates that far off target? We now
know one figure, the FY2000 ink was not as red as the USPS thought
it would be---the loss is $199 million as opposed to the $325
million they projected last July. But that's good!


•
Are the November operating plan figures wrong?


•
Has that USPS commitment for half the promised "break
though productivity" fallen through?


•
Has something else happened?


•
If so, what is the explanation?


I know that some of you are unhappy with the Commission's
recommendations as they relate to your mail. I don't mean to be
glib about your concerns, but if I were you, I might be more
concerned about the near-term rate implications of this $1.1 bottom
line swing. For those of you who have only disdain for the current
ratemaking process---the length of time it takes and the cost of
litigation---please keep in mind that the PRC process affords the
only opportunity you may have to truly scrutinize this swing before
you get the next $1.1 billion plus kick in your billfold.
Now, about our recommended rates: Could we have made different
recommendations? Most certainly! Would they have been better
recommendations? Maybe!
But let's look at the score card on how the several classes made
out:


•
By our count, roughly 87 percent of Standard mail will
have rates that are less than or equal to those proposed by the
Postal Service.


•
Almost all Periodical mail rates will be lower than those
proposed by the Postal Service.


•
The average increase in Parcel Post, save the not so
small matter of a non-machinable surcharge that impacts about 3
percent of total volume, is on target with the USPS
request.


•
Priority Mail, Bound Printed Matter and Media Mail---gosh
I'm having a hard time keeping up with all these name
changes---took a bit of a hit, 1 percent more, give or take, than
the USPS requested, based primarily on cost updates.


•
Nonprofits benefited from last minute legislation and
will have smaller increases than would have otherwise been the
case.


However, we did not, as you know, lower the Standard pound rate
as much as the Service wanted and we did not raise the breakpoint.
To those who choose to be supercritical of the Commission regarding
our recommendations in these areas, I hope you will consider that
ratemaking generally involves a zero sum situation where one works
against a revenue target. Lowering pound rates or raising
breakpoints may benefit some mailers, but it will also have a
negative impact on others who find themselves dealing, for example,
with higher piece rates and the like.
I have a host of one-liners I've collected over the years that I
thought about using at this point in response to some of these
critics who think we missed a "no-brainer," but I won't do that.
One will suffice. It's the one that comes to mind when I think
about how smart I was before I actually had to deal first hand with
an omnibus rate case. It's the H.L. Mencken line I've used before:
"For ever problem there is a solution that is simple, neat,
plausible and wrong!"
Let's see now, where am I?


•
Lay out guiding principles. Check!


•
Talk about rate recommendations. Check!


•
USPS finances-the $1.1 billion swing. Check!


•
Saw barrel off shotgun and fire at critics.
Check!


•
I'm forgetting something. Ah, those other matters of
passing interest.


I'll try not to take too long, but I get to do this because this
may be my last shot as Chairman of the PRC. And, you know what they
say---Today a peacock tomorrow a feather duster! So, here goes-
(1) Postal or legislative reform or whatever you want to call
it: I am NOT opposed to postal reform! I just believe, to quote his
February 28, 2000, MIDS article, that that great American, Mr. Cary
Baer, had it right when he said, "Before we develop solutions we
need to reach some consensus on the problem." We've all got our
campaign ribbons from the war of HR22. Some people want to pick up
that very tattered battle flag, put on their brightest red coats,
form into straight lines and march one more time up Jenkin's Hill.
For those of you who may not know, Jenkin's Hill is the hill on
which sits the U.S. Capitol. Price caps may sound more attractive
with every passing rate case. But, as I have tried to explain to
some of you, costs trumped caps in HR22; that is, you were still
likely to see increases akin to those you experience under current
law. I propose that, rather than charging up the same hill with the
same old, tired ammunition, let's all of us regroup---and
rethink.

Dilbert kind of sums it up for me when it comes to postal
reform.


(2)
A better bet for legislation in the 107th Congress, and
one that may be as important to the postal community as some
perceive postal reform to be, is in the privacy area dealing with
the collection and sharing of personal data. This is an area I know
a bit about from a previous incarnation as the point man on
information policy at the then Department of HEW in the 1970s.
Overly restrictive privacy legislation at the federal level or,
even worse, 50 different restrictive state bills could spell
disaster for everyone up and down the chain from graphics and copy
people to printers to cataloguers to envelope manufactures to banks
and to shipping and logistics companies. You've got a split
congress and an issue with bipartisan appeal. Convincing
conservatives of the benefits of federal preemption and liberals of
the benefits of limiting causes of action, both stumbling blocks in
the past, might be doable as 107th searches for common ground. The
result could be a framework everyone can live with.


(3)
Negotiated Service Agreements. Setting aside for the
moment the pros and cons of notice versus pre-approval, for some
time now I have been preaching that NSOs are by and large nothing
more that narrowly drawn or niche classifications. We've already
approved several such USPS proposals. I urge the Service to move
forward with whatever proposals they have developed. If mailers, a
small group of or even one of them, can perform some task that may
drive costs out of the system, let's get on with
it---now!


(4)
And last but not least, another Ed Gleiman suggestion---I
try to include at least one classification and/or cost savings
proposal in each speech. This one is buried in a


concurring opinion to the R2000-1 decision. Certified Mail is
costly to the Postal Service and the consumer. Along with Return
Receipt, also not cheap, these oldfashioned offerings are frequent
recipients of criticism from users. Delivery Confirmation, on the
other hand, is a high tech, low cost service that works and works
well. By extending Delivery Confirmation to First-Class mail as a
replacement for Certified Mail, the potential exists to drive in
excess of $300 million per year in window clerk and letter carrier
costs from the system. I could be wrong about all this, and I don't
want to fall into my old buddy H. L. Mencken's simple solutions
trap, but that's a heap of money, and I think this one deserves
some prompt consideration by the folks at postal HQ!
It's pretty clear that some of you are tired of hearing from me
and others, I gather from the snoring, are just plain tired. So, I
best wrap things up.
When I talked with Bill Hoyt the other day, he said I was
obligated to wrap up with a story or joke. I told him I didn't have
any new material. He offered that hardly anyone ever listens to
what I say anyway, so you all would not even know that I was
recycling old material. Let's see if he is right.
John Nolan and I were talking about some of his
responsibilities. You know all those letters that kids write to
Santa. Well, seems Bill Henderson used to handle the responses,
personally. Bill has delegated that and now those letters all go to
John. Turns out that Bill got one letter last year that just tore
at his heartstrings. A little boy wrote that since his father's
death, his mother was having a hard time making ends meet. The
little fellow asked nothing for himself, only that Santa send his
mother $100. Well, the PMG, being the kind soul that he is, reach
in his pocket, pulled out one of those nice, crisp, new $50 dollar
bills and mailed it to the boy's mother. The boy wrote Santa again
this year, and the letter wound up in John's in box. He shared a
copy and I would like to share it with you.
Dear Santa, Thanks so much for all you did last Christmas.
Things are still pretty rough for us, and my mom sure could use
another $100. And, if you don't mind, Santa, when you send it to my
mom, please don't route it through Washington. The last time they
deducted 50 percent.
Actually, that is an old J. Edward Day joke, or so I've been
told, not an Edward J. Gleiman joke. I thought it fit both the
holiday season and the postal rate case postmortem.