Copyright 1999 Federal Document Clearing House, Inc.
Federal Document Clearing House Congressional Testimony
March 04, 1999
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 3291 words
HEADLINE:
TESTIMONY March 04, 1999 ROBERT "KAM" KAMERSCHEN REPRESENTATIVE SATURATION MAIL
COALITON HOUSE GOVERNMENT REFORM AND OVERSIGHT
POSTAL SERVICE POSTAL MODERNIZATION ACT
BODY:
TESTIMONY OF ROBERT "'KAM" KAMERSCHEN On
Behalf Of The SATURATION MAIL COALITION Before The SUBCOMMITTEE ON
POSTAL SERVICE Of The COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT UNITED STATES HOUSE OF REPRESENTATIVES
March 4,1999 INTRODUCTION I am Robert "Kam" 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. 1.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. II.
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: Locking these rate relationships into place permanently is
unfair, economically unsound, and counter productive 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. III. 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, ' flt 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.
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April 12, 1999