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Questions Submitted to Timothy J. May, Parcel Shippers

Association, From the Committee on Post Office and Civil Service

1.

In the Joint Task Force Report, the members
recommend the four-year rate cycle based
directly on the Postal Service's strategic
plans with rate adjustments occurring in
mid-cycle, if necessary. Do you believe
that a contingency reserve is necessary
under this proposal?

How should prior year losses be treated?

ANSWER:

It is our position that a contingency reserve is unnecessary under the current ratemaking mechanism, and even less necessary if the four-year rate cycle with mid-cycle changes were implemented. The contingency reserve has always been used by the Postal Service as a slush fund to finance inefficient operations,

or to stretch out the rate cycle.

The inclusion of $1.5 to $ 2

billion in a rate case earmarked for contingencies completely

corrupts the process of attempting to properly estimate costs and

revenues that match those costs.

The treatment of prior-year losses is a far more difficult

problem.

The ability of the Postal Service to recover its past

losses in future rate increases is an invitation to inefficiency, since the Postal Service knows that no matter what happens they may always recoup their losses from future rate payers. private enterprise system this, of course, would not be tolerated. Losses would result in a dilution of the company's

In any

equity and would be sustained by the shareholders.

A refusal to

allow the Postal Service to recover its losses would impair the Service's ability to borrow and would ultimately lead to severe cutbacks in service. Unfortunately, the Postal Service has rot recaptured its prior-year losses through rate increases, but

rather uses that portion of the rate increases to finance further operations rather than restore equity. It has long been our

recommendation that the Postal Service be required to use that

portion of rate increases earmarked for prior-loss recovery to restore its equity.

2.

Do you

Under the current system set up in Title 39
USC there are no real incentives for the
Postal Service to control costs.
have any suggestions on what Congress might
do to improve Title 39 to provide incentives
for cost control in the Postal Service?

ANSWER:

As we have stated in filings at the Postal Rate

Commission:

"Unfortunately, in our view, the principal defect in

the ratemaking mechanism is beyond the power of ... the PRC to change. That defect is simply that there is no device by which

the Commission can design rate recommendations that would create

the incentive for the Postal Service to operate more

efficiently

11

Since the normal influences of the

marketplace to bring about efficient operations are inapplicable to most of the Postal Service's operations, a way must be found

to create incentives for the employees of the Postal Service to

bring costs under control. The most obvious way to do this is to tie employee compensation to meeting certain agreed upon performance standards. However, to dictate that kind of

compensation scheme legislatively would interfere with the

collective bargaining process.

Under current law, the parties

are free themselves, through collective bargaining, to arrive at such compensation systems.

3.

Have you been experiencing service problems?
If so, would you please elaborate on what
types of delays and other problems that have
been occurring?

ANSWER:

The members of the Parcel Shippers Association have not reported any unusual service problems recently. On the contrary, they have been laudatory of the efforts of Postal Service

employees to make the new parcel post rate schedules work

effectively and to capture a larger share of the parcel market.

Our members are, however, greatly concerned that the

revolutionary restructuring, and massive employee reductions

ongoing at the Postal Service will result in serious service disruptions for all classes of their mail. Like other mailers,

our members have been critical of excessive bureaucracy and overstaffing in the Postal Service. Having said that, however,

we also will be stunned if the Postal Service is able to

eliminate 40,000 to 50,000 employees in the short span of three months and not suffer serious service degradation. It doesn't

take any particular business genius to know that a 10% cut in

employees (where labor is 84% of the costs) will achieve

substantial cost reductions.

The challenge has always been, and

remains, how to reduce and control costs without suffering

serious deterioration in service.

Questions Submitted for the Record by Hon. Frank McCloskey

Additional Questions for Ralf seiffe, National Association of
Presort Mailers

SEIFFE 1. Do you have any comments on the overall productivity of autonation? A recant GAO report tound that savings from automation are not as great as anticipated by the Postal Serivce. Since the savings is not as great as first thought, how will that allect the presort mailers? 2. Do you have any comments on the Joint Postal Rate Commission/Board o. Governorc Tack Force report or the recent GAO report on Demand Pricing?

1. our comments regarding the overall productivity of automation are made in context of these facts:

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The Postal Service's automation program is incomplete. The total program incudes Automatic Facer/Cancelers, Multiline Optical character Readers, mail processing Barcode Sorters, Delivery Barcode Sorters and other machines. By far, the largest category of automated machines are Delivery Barcode sorters because they complete the automation cycle and actually realize much of automation's savings. It is our understanding that the Service's Automation Plan calls for 5,000 of these machines yet, to date, less than 20% have been installed. It's difficult to judge the overall productivity of automation without including these machine's prospective contribution.

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We're not sure how effectively existing automation is used. Evidence is plentiful that barcoded mail is being processed on old-fashioned Letter Sorting Machines (LSM) instead of on automated machines. This may be due to the lack of enough Delivery Barcode Sorters or the Service's inability to change its labor-intensive character in the face of automation.

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The future of the 11-digit Barcode is uncertain. It's crucial for automation's success; mailers are assessing the cost and benefits of compliance. The Postal Service's unfortunate decision to contradict their own Rate Case testimony and simply shift the 11-digit development and operating costs to mailers, without a compensating increase in the incentive, won't help. On the other hand, Presort Service Bureaus and the very largest mailers (as distinguished from smaller mailers) have made the investment to produce these codes. Finally, we are not sure the Postal Service can produce 11digit codes on their existing machinery.

In this context, and in light of the Service's recent delay in
procuring new Barcode Sorters, it seems likely that automation
savings will not meet expectations. If automation's savings are
not as great as anticipated, the Service's cost reporting mechanism
should reveal it. If private sector mailers undertake automation
and
provide the benefits cheaper

earlier, it's in everyone's interest that the Postal Service outsource these tasks.

can

or

Postal Service costs are growing faster than the associated incentives paid accordingly to the Service's own cost and revenue analysis. This should indicate USPS support for private sector Worksharing. One example, manual presort, produces 6-7 cents per

letter after paying the incentive. as "of declining value".

Yet, management describes this

2. With regard to the Joint Task Force's recommendations, we are concerned that a "two-by-four" rate structure will work against the private sector's propensity to invest in automation--or for that matter, any--mailing equipment. Our concern is that more frequent changes in postage rates adds uncertainty to mailers' capital budgeting decisions that will delay or diminish investment. Moreover, it is possible that more frequent changes will also work against the relevance of mail as a medium. Developing a mail-based communications strategy for advertising or marketing is a long-term task; frequent rate changes can frustrate development efforts and drive marketeers to other mediums.

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