February 3, 2016

On January 25, the Alliance and several other associations representing market-dominant mailers filed comments with the PRC in opposition to two proposals made by UPS which we described as:

• “Proposal One would allocate to individual mail products all variable costs, whether or not those costs are caused by the particular product to which the costs would be allocated, and whether or not the allocated costs are part of the marginal, attributable, or incremental costs of a particular class or product.”
• “Proposal Two would reclassify as variable and attributable about $3.4 billion of FY 2014 costs that the Postal Service and the Commission now classify as institutional, and which Petitioner refers to as “reported fixed costs.”

In the comments the Alliance and its allies gave two main reasons for opposing the proposals:

• “Adoption of the two proposals would increase the costs attributed to market-dominant mail and services by an average of 47 percent, or about $13.4 billion per year. (Indeed, the overall rise in reported attributable costs would be greater in both percentage and absolute terms than for competitive products, whose reported attributable costs would increase by only 31 percent, or about $3.4 billion per year). The reported coverage ratios of individual market-dominant products would fall. Several products now covering their reported attributable costs would no longer do so, and reported coverage ratios already below 100 percent would plummet further.”
• “Second, proposals One and Two would violate one of the most basic requirements of postal costing and ratemaking: the requirement of causation. Decades of Commission and judicial precedent recognize that costs may not be attributed to a particular class, product, or other increment of the Postal Service’s total mail volume without reliable evidence that the increment of volume at issue causes the costs (in the sense that the costs would be avoided absent the incremental volume). Proposals One and Two abandon that approach. Hence, neither allocation method satisfies the legal standards for cost attribution.”

Our filing ended with this conclusion:

• “The undersigned parties will continue to encourage and, if warranted, support changes in existing postal cost systems and methodologies that improve the measurement and distribution of costs. We support efforts to make more use of technology, such as the Intelligent Mail barcode, to more accurately and affordably measure and track costs. Proposals One and Two, however, lack merit, whether considered from the legal or the economic point of view. Accordingly, we strongly support maintaining the current understanding and application of the term ‘costs attributable.’ The Commission should reject Proposals One and Two as presented in the Petition.”