Copyright 1999 Federal News Service, Inc.
Federal News Service
FEBRUARY 4, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH:
3245 words
HEADLINE: PREPARED TESTIMONY OF
ROBERT
"KAM" KAMERSCHEN
SATURATION MAIL COALITION
BEFORE THE
HOUSE GOVERNMENT REFORM COMMITTEE
POSTAL SERVICE SUBCOMMITTEE
BODY:
INTRODUCTION
I am Robert "Karo" Kamerschen, Chairman of ADVO, Inc.
Advo provides saturation shared mail advertising programs serving more than
23,000 retail and service businesses in markets throughout the country. Our
programs are distributed to over 60 million households by mail and through
private delivery. I am appearing on behalf of the Saturation Mail Coalition, an
organization of more than 40 companies that provide saturation advertising
programs throughout the nation.
The saturation advertising industry consists
of weekly community newspapers, shopper publications, enveloped coupon
distributors, and shared mailers like Advo. In total, the industry serves
hundreds of thousands of mostly small businesses and individual entrepreneurs
that have few if any affordable alternatives for distributing advertising
messages to potential customers. Affordable saturation advertising is a lifeline
that keeps them in business and enables them to grow. Saturation advertising
also delivers valuable information and savings to consumers. In an era when
advertising is increasingly focused on the more affluent consumers, our industry
serves the needs of every socio-economic segment of society, including those who
depend upon the values and savings in our advertising programs to meet their
household budgets. Not all consumers have access to a newspaper or computer, but
all consumers receive mail.
Although many Saturation Mail Coalition members,
like Advo, use private delivery for part of their saturation advertising
distribution, mail is the preferred means of distribution because of its
credibility and reliability in the eyes of consumers. A viable postal system is
essential because of the highly competitive nature of our industry. We compete
not only among ourselves but with advertising distribution through daily
newspapers (the dominant competitors in most markets) and private delivery
companies. This competition between postal and non-postal distribution has
stimulated the economy over the last two decades. It has fostered innovation and
efficiency, spawned new products and services, expanded the market, and forced
all competitors to meet the needs of the local retail and service industries
they serve.
The postal system has always been a vital part of the
infrastructure of the American culture, commerce, and economy. Changing it
through comprehensive legislation is a daunting task that presents both
opportunities and risks. Postal reform legislation, as did the
Postal Reorganization Act of 1970, will affect the course of
the Postal Service for decades. Whatever else
reform legislation does, it must ensure a healthy, viable
Postal Service that can meet the nation's needs.
The
Coalition endorses the objectives of postal reform to achieve
greater postal rate stability, predictability, and flexibility.
The provisions of H.R. 22 in large measure align with those objectives. The
price cap mechanism, for example, holds the promise of more stable, predictable
rates for mailers in the non-competitive category. However, price caps alone
will not ensure that result if the Postal Service does not have sufficient
pricing flexibility to respond to changing market conditions.
The Postal
Service appears to be doing well at the present, but as a businessman, I know
there is no room for complacency. Change in the marketplace is not only
inevitable, it is intensifying in frequency and amplitude. Any business that is
unwilling or unable to anticipate and adapt to change will fail. In my view, the
Postal Service's biggest challenge is retaining its core volumes, or
replenishing lost volumes, in the face of new electronic communications
technologies and hard copy delivery competitors. If this challenge is not met,
the losers will be the Postal Service, those mailers that have no effective
alternatives, and most of all, the American public.
The Postal Service's
ability to meet this challenge depends on having flexibility to respond to the
inevitable marketplace changes. The litmus test of postal
reform is whether it provides adequate flexibility for the
Postal Service, while affording reasonable safeguards against
exploitation of monopoly users and competitors. I commend your efforts, Mr.
Chairman, and the efforts of the Ranking Member, and I suggest the following
changes that will improve H.R. 22, encouraging competition and allowing the
Postal Service the flexibility it needs to meet the challenges of the future:
1. Allow Negotiated Service Agreements so long as they produce an equal or
greater total dollar contribution to institutional costs.
2. Provide
increased pricing flexibility within the Noncompetitive Category baskets (other
than single-piece First Class Mail in Basket 1) by allowing limited rate bands
around the rate caps, as proposed by the Postal Service.
3. Eliminate the
prohibition on transferring products that are currently covered by the postal
monopoly into the Competitive Category. The only test should be whether a
product is in fact competitive, under marketplace standards.
These points
are discussed more fully below.
I. Negotiated Service Agreements That
Maintain Or Increase Total Dollar Contribution To Institutional Costs Should Be
Allowed.
Contract rates and volume discounts are common in the business
world, and are used by the Postal Service's competitors. Negotiated Service
Agreements (NSAs), which would be subject to public disclosure and
non-discrimination safeguards not applicable to private contracts, are an
essential tool for the Postal Service. Properly structured, NSAs would enable
the Postal Service to respond to market conditions, and to preserve or increase
postal volumes and contributions, without detriment to other mailers.
H.R.
22 would allow the Postal Service to enter into NSAs with mailers in the
non-competitive category, but under very limited circumstances that will be of
little use to mailers or the Postal Service. The main problem is Section 3641's
requirement that the NSA mail make a contribution to institutional costs that is
"equal, on an average unit basis" to that of the most similar mail
classification. This "equal unit contribution" requirement would transform NSAs
into an inferior form of traditional "worksharing" discounts. The only rate
benefit for a mailer would be the amount of additional postal cost savings that
the agreement causes, regardless of how much new volume and institutional cost
contribution the agreement may generate. And, the mailer would have to incur
additional preparation costs to achieve those savings. Yet unlike worksharing
discounts, an NSA discount would impose the risk of liquidated damages if the
mailer fails to perform as contracted. I believe that few mailers would be
willing to undertake the additional costs and financial risks that this entails
for the benefit of a worksharing-like discount.
The NSA provision should be
expanded to permit NSAs that generate an equal or greater "total dollar
contribution" to institutional costs. Such an increased contribution could be
achieved by increased volumes, reduced costs, or a combination of the two. The
principal concern raised about NSAs is that they might lead to rates that reduce
the contribution of contracted mail to institutional costs, thereby burdening
other mail or the postal system. This concern would be met by a requirement that
the agreement not result in a loss of contribution to institutional costs.
With this modification, NSAs would be subject to the following
requirements that fully protect the public interest:
1. NSAs must be made
available to similarly situated mailers on substantially the same terms;
2.
NSA agreements must be publicly available;
3. The mail under the agreement
must cover its attributable costs;
4. In addition, the mail must generate
either (i) an equal or greater total dollar contribution to institutional costs,
or (ii) a unit contribution that is equal to or greater than that for the mail
classification most similar to the mail under the agreement;
5. The mailer
is subject to liquidated damages for failure to meet the terms of the agreement,
including any minimum volume commitments or the institutional cost recovery
requirement.
As a result of the above, the NSA will be "self financing" and
will not burden other mailers.
The 1995 Reclassification Case (Docket
MC95-1) is a good example of how rate reductions for certain mail can generate
increased volumes and contributions to institutional costs. From FY 1988 to FY
1996, a period of substantial rate increases preceding reclassification, the
volume of Third Class carrier route presort mail (now Enhanced Carrier Route
mail) declined 0.1%, while non-carrier route volumes grew 34% and First Class
volume grew 15%. As a result of reclassification, rates for Enhanced Carrier
Route mail were reduced by an average of about 2.7 percent. Yet over the two
fiscal years since reclassification, following nearly a decade of stagnant
carrier route volumes, ECR volumes have grown nearly 17 percent - producing a
significant increase in total dollar contribution to institutional costs. Our
modification to the NSA provision would allow the Postal Service to achieve
similar beneficial results without adverse impact on other mailers.
Rate
Band Flexibility IS Needed Within The Non-Competitive Category. H.R. 22 would
lock in rate relationships for all mail in the "noncompetitive" category. All
rates would move up in near lock step based on the annual CPI-based adjustment
factor, with little freedom to adjust rate relationships that, over time, become
out of sync with marketplace realities. The marketplace does not move in lock
step, nor does it move with predictability; rate relationships that today seem
reasonable will not remain so indefinitely.
This lack of flexibility is
particularly troubling for the Enhanced Carrier Route (ECR) subclass of Standard
A mail, a subclass that includes saturation mail used by the Coalition's
members. ECR mail is highly competitive and relatively price sensitive, and the
saturation mail component of ECR is price elastic. Yet at current rates, ECR
mail is assessed a 203% institutional cost coverage, or a 103% markup over costs
- the highest institutional cost coverage of any mail subclass. This is
substantially higher than First Class Mail and other competitive products like
Express Mail, Priority Mail, and Parcel Post. Within Standard A mail, which
consists primarily of advertising mail, the higher density, lower-cost, and
more-price-sensitive ECR subclass is charged an institutional cost contribution
substantially higher than that for the Regular (non-ECR) subclass, both on a
percentage markup basis and on a per-piece contribution basis: (Chart not
transmittable)
Locking these rate relationships into place permanently is
unfair, economically unsound, and counterproductive in the long run. Saturation
mailers operate in a highly competitive environment. We cannot pay high postal
rates that price us out of the market in competition with non-postal
distributors like newspapers and private delivery companies. If rates for
saturation mail do not reflect market realities, the Postal Service will lose
that volume and overhead contribution - because mailers either go out of
business or are forced to leave the mail and start up their own private delivery
operations, transforming themselves from Postal Service customers into
competitors.
This shift from mail to private delivery has already occurred
in some of our markets. Just this January, Advo switched most of its mail in the
Cincinnati market from postal delivery into our own private delivery operation.
For the Postal Service, that shift represents an annual volume loss of 18
million pieces and more than $2 million postage. We have also established
private delivery operations in Philadelphia and Boston. In the aggregate, these
private delivery operations have diverted more than 44 million pieces and cost
the Postal Service over $8 million in lost revenue annually. Many other
saturation advertising companies also use private delivery for a portion or all
of their advertising distribution, as do many newspapers for their total market
coverage saturation advertising programs.
The problems caused by freezing
existing rate relationships are not confined to ECR mail. I believe that ECR
mail will continue to be highly competitive and price sensitive, probably even
more so than today. Perhaps some components of Standard A Regular mail will
become more price sensitive. Perhaps segments of bulk First Class mail, such as
billing statements, will become more price sensitive. Because no one knows what
will happen in the marketplace, the Postal Service must have increased pricing
flexibility within the non-competitive category to respond to marketplace
changes with differential pricing adjustments.
The Postal Service's modest
rate band proposal, with 2% downward flexibility and 1.5% upward flexibility
around the price cap, makes sense and provides a modicum of critical pricing
flexibility. We agree with the Postal Service that this pricing flexibility
should apply at the basket level, not the subclass level.
Greater
Flexibility Is Needed In Classifying And Pricing Mail That Faces Competition.
A. Competition Is Beneficial And Should Be Encouraged.
Postal Service
competitors argue that any form of competition by the Postal Service is
inherently bad. I disagree. Competition is inherently good. Competition fosters
innovation and efficiency, and benefits mail users and all consumers by ensuring
the greatest choices among competing alternatives in terms of both price and
service. The goal should not be to eliminate the Postal Service as a competitor,
but to maximize competition within reasonable boundaries that guard against
abuse of the postal monopoly.
Some believe that a quasi-government entity,
like the Postal Service, should never compete with private companies, or that
there is something inherently "unfair"about rates for competitive products that
provide a less-than-average contribution compared to non-competitive products.
But the concept of "fairness" cannot be divorced from economic and competitive
marketplace realities. If competition is arbitrarily precluded, or if rates for
competitive products are arbitrarily priced at a markup above what the
marketplace will bear, the Postal Service will lose that volume and its
institutional cost contribution. Rates for the remaining mail, even in the
noncompetitive category, will have to be increased. Everyone (except postal
competitors who are insulated from competition) loses. Market-based rates for
competitive mail are "fair" to all mailers in both an economic and a real sense.
Postal Rate Commissioner Ruth Goldway, in her February 11 testimony to the
Committee, has correctly recognized the importance of maintaining beneficial
competition, rather than insulating competitors from competition. After
describing the benefits of competition, Commissioner Goldway stated that
"Likewise, H.R. 22 should rely more on the advantages of competition than on
protecting the marketplace from possible Postal Service competition." Testimony
at 1. She further observed that
"We should not curtail the ability of the
Postal Service to be innovative just because of its size. As the Supreme Court
has said, '(l)ow prices benefit consumers regardless of how those prices are
set, and so long as they are above predatory levels, they do not threaten
competition.' Further, it has said, '(i)t is in the interest of competition to
permit dominant firms to engage in vigorous competition, including price
competition.'" Id. at 2, footnotes omitted.
Mailers in the non-competitive
category have a stake in these issues. The bill technically separates
non-competitive from competitive mail. But non-competitive mailers will be
adversely affected by arbitrary prohibitions against transfer of products to the
competitive category, or by an arbitrary markup pricing constraint on
competitive mail that causes the Postal Service to lose competitive mail volumes
and their contribution to institutional costs. Those institutional costs will
have to be recovered from the remaining non-competitive mailers, perhaps through
an "exigent" rate increase.
Postal reform legislation
should ensure that the Postal Service not abuse its monopoly by
engaging in anticompetitive pricing against private competitors. In fact, the
H.R. 22's price cap mechanism for non-competitive products, particularly for
single piece First Class mail, provides the strongest form of protection against
such abuse. It would prevent the Postal Service from raising the price of a
First Class stamp above the CPI-based price cap in order to fund price
reductions for competitive products. Coupled with the provisions requiring
competitive mail to cover its costs and subjecting the Postal Service to the
antitrust laws, this adequately protects against unfair competition.
B. The
Prohibition On Transferring Products To The Competitive Category Should Be
Eliminated.
Section 3764(b)(2) of H.R. 22 would freeze the types of mail in
the noncompetitive category that could be transferred to the competitive
category, based on the scope of the letter monopoly. If a product is covered by
the monopoly, it would be forever barred from transfer to the competitive
category, regardless of how competitive it might become. This provision would
effectively nullify the transfer provision of Section 3764, an important part of
the supposed pricing flexibility for competitive mail.
Consider the case of
bulk First Class mail. At some point in the future, there may be components of
bulk First Class mail (such as billing statements) that, due to changes in
communications technology or the marketplace, become price sensitive and highly
competitive. Under the bill as currently framed, the Postal Service would be
unable to respond to that changed circumstance. It would risk losing that
volume, and its contribution to institutional costs. If the mail were, in fact,
"competitive" in the marketplace sense, then the Postal Service should be
authorized to transfer that mail to the competitive category. It would then have
the opportunity to retain that volume or mitigate losses through pricing
adjustments. Retaining some volume, and its contribution to institutional costs,
is a better choice than risking the loss of everything.
There should be no
statutory prohibitions on the types of mail that may be transferred between the
noncompetitive and competitive categories. The only statutory test for transfer
to the competitive category should be whether a product is, in fact, competitive
(under marketplace standards), not whether it technically falls within the scope
of the statutory monopoly.
Mr. Chairman, on behalf of the Saturation Mail
Coalition, I thank you for your efforts to modernize the Postal Service. With
the above modifications that enhance the ability of H.R. 22 to create greater
stability, predictability and flexibility in a modernized Postal Service, we can
support your bill. I would add that in an era of volatile economic and
marketplace changes greater than any in our nation's history, it is laudable
that you are working to reform the Postal Service in relatively
good times, rather than waiting for a crisis that would make the task of reform
much more difficult and perhaps too late.
END
LOAD-DATE: March 6, 1999 
