COMMENTS OF THE DIRECT MARKETING ASSOCIATION Before THE PRESIDENTIAL COMMISSION ON THE UNITED STATES POSTAL SERVICE February 12, 2003

The Direct Marketing Association (The DMA) appreciates this opportunity to provide its views on postal reform to the Commission. The Commission is presented with a challenging task, but one that is of vital importance to The DMA and its members.

Founded in 1917, the Direct Marketing Association (DMA) is today the largest trade association in the database-driven direct and online marketing field, representing businesses – from small "mom and pop" operations to 50 of the Fortune 100 – in 52 industry sectors, including the nation’s top catalogs, online marketers, retailers, manufacturers, financial institutions, publishers, healthcare, new media providers.

DMA members – for-profit as well as nonprofit – use a number of marketing channels. However, direct mail, including catalogs, has been – and remains – a primary marketing channel to reach customers and prospective customers. In fact, direct mail in 2002 generated an estimated $634.4 billion in consumer and business-to- business sales. In addition, many DMA members employ U.S. Postal Service parcel and expedited delivery services for their fulfillment operations.

In short, an affordable and reliable U.S. Postal Service is vital to the future of our members and our industry.

Since its inception more than two hundred years ago, our national postal system’s primary objective has been to bind together a nation through communications and commerce. Although the nature of commerce and the communications landscape have evolved with increasing speed since then, the continuing and critical importance of our national delivery network in providing a communications vehicle to every American and a means for the delivery of tangible items to every address in our Nation cannot be overstated.

Today, this system supports a segment of our economy that accounts in its broadest sense for 8 percent of GDP—some $900 billion—and 9 million U.S. jobs. However, the 32-year-old business and regulatory model, under which the U.S. Postal Service currently operates, provides neither the flexibility nor the incentives needed to ensure the viability of the network and, in turn, the growth potential for a very significant segment of the economy.

The Postal Service as we know it today inhabits the no-mans’ land of a government agency. It must bind the Nation together but must also provide universal service in a business-like fashion while financially "breaking even." At its foundation is a de jure monopoly that is being eroded by rapid and ubiquitous technological advances. Yet, the Postal Service is restricted in the mail services it may offer, the plant network it may establish and what it may charge for services.

The overall objective of reforming the Postal Service is clear. The underlying business and regulatory model of the Postal Service must be updated in a manner:

• that will ensure the continued availability of a system that provides users with a gateway to every home and business in our nation and beyond;
• that is required to encourage overall efficiency; and,
• that affords users an opportunity to achieve the lowest combined cost for the delivery of their mail.

To this end, the DMA believes that the forces of competition should be harnessed to the maximum extent possible. The Postal Service is, in fact, competing every day with other communications media and other delivery systems. In order to remain viable, in order to continue to fulfill its fundamental role in this nation’s economy and society, the Postal Service must maximize efficiency and minimize costs. Therefore, a primary principle that should inform the Commission’s deliberations and that should infuse its recommendations is the desirability of maximizing the benefits that competition can bring to our nation’s postal system. For example, many business do not receive mail delivery on Saturdays.

The DMA views the continuation of universal service in the context of the Postal Service meeting the changing needs of both individuals and businesses to send and receive tangible items. Contrary to popular belief, the Postal Service does not now deliver to everyone, everywhere, everyday or even six days a week. The extent to which it does not now do so is based on customers’ needs.

The DMA supports the notion of universal service in this context, i.e., meeting the changing needs of customers. Moreover, we believe it could prove counter-productive to lock into any new law a nationwide standard that would burden the system either with costs of services that exceed the customers’ needs or restrictions preventing the Postal Service from meeting even greater service needs. The key, as is the case of other of our recommendations, is a standard that permits the Postal Service to accommodate changing circumstances.

When discussing levels of service, the focus should be on the Postal Service’s core business, which we view as being the delivery of letters, flat mail and parcels. Included in this concept are ancillary enhancements through the application of new technologies. Concentrating on the Service’s ability to offer the full range of core products and services provides an opportunity for all users to benefit from potential economies of scope. In this connection, however, the Postal Service should be encouraged to partner with other businesses to provide the core postal services to its customers as part of an overall package. For example, there might be a digital printing application for personalized catalogs to be sent through the Mail to consumers without Internet access while consumers with Internet access receive those catalogs electronically. That freedom to partner should be available to the Postal Service without restriction.

While we take no position on the letter mail monopoly, a reexamination of the need to continue the grant of a monopoly to the Postal Service would appear to be in order since the monopoly no longer appears to afford the protection anticipated at the time of its inception. For example, the likelihood of damage to the Service’s revenue stream from letters being carried by others over "post roads" is now dwarfed by the potential permanent detour of letter mail to the electronic superhighway.

We support, in a modified form, the Mailbox Rule (i.e., the letter-box monopoly, which permits only pieces for which postage has been paid may be placed in a letter-box). We believe that the Mailbox Rule strengthens the economies of the delivery function of the Postal Service, also known as "the last mile." However, we believe the Postal Service’s control of the mailbox should not be absolute. Rather, access to the mailbox should be allowed to licensees in order to ensure the most affordable and efficient "last mile" delivery function.

The DMA views the delivery function, if not as a natural monopoly, at the very least as a "bottleneck" function the efficient and economical provision of which is required to achieve economies scale. Nevertheless, we envision circumstances wherein licensing access could benefit the overall postal system by enhancing the Service’s revenue stream and/or mitigating the potential for diseconomies. Of course, to achieve this end, the licensing function should be subject to review by a regulatory entity.

We believe the Postal Service’s 25-year experiment with worksharing in the transportation and processing of mail provides ample evidence of wide- ranging benefits to itself, all users of the system and the economy, generally. A paper prepared by staff of the Postal Rate Commission estimated the total savings from worksharing in 1999 alone was $15.3 billion.

That worksharing was conducted by mailers themselves or firms that mailers contracted to perform the presorting or transportation functions. In essence, worksharing brings competition into the overall mailing system of the United States. The continued unbundling of all functions upstream from the ultimate delivery of the mail should be a paramount objective for the "new" Postal Service in order to optimize efficiency and constrain costs, as users seek to achieve the lowest combined costs for getting their products to the intended recipient.

Implicit in capturing the full benefit of unbundling is that the Service be vested with adequate authority to right-size its upstream infrastructure. The Service cannot survive if there are constraints placed upon its ability to establish and constantly adjust an effective and economical processing, transportation and delivery network. It is clear that tomorrow’s network will not resemble today’s.

In the current pricing scheme, discounts purportedly reflecting avoided costs are the basis for establishing rates for workshared mail. On the premise that all upstream functions are to be unbundled and open to free competition, a seemingly more rational approach would be the building up of rates based on the cost of the services or functions purchased by the mailer, with the cost of delivery being the basic block on which all rates would be built. This approach would focus any rate process on the essence of the Postal Service's universal service— the so-called "last mile."

In conjunction with a "bottom-up" pricing approach and in furtherance of promoting unbundling, the efficient component pricing (ECP) theory now used in postal ratemaking should be abandoned. The costs (including the institutional, or fixed, costs) of the upstream, non-core functions should be borne only by those whose use of the system requires the maintenance of an upstream infrastructure. Such an approach would provide an incentive to mailers to find the most economical "total cost" mailing option.

Rate Change Methodology

With respect to the adjustment of rates, we support the establishment of separate and distinct mechanisms to govern the revenue received from single piece (retail) mail and from bulk (commercial) mail. The value of separate mechanisms is premised on the desirability and economic benefits of addressing more directly differences in user needs and marketplace considerations, as well as the split government/business personality of the Postal Service.

Separate and apart from the manner in which specific rates are developed, the magnitude and timing of rate changes are critical considerations in terms ensuring overall economic efficiency. As a general principle, rate adjustments for the delivery rate should, as nearly as is practicable, mirror the lesser of the rate of inflation as measured by the CPI or the actual cost of providing services. This general principle should be applied in a context that provides the Service with rate flexibility without any prior review from any regulatory body so long as the revenue for a full year resulting from rate adjustments meets the following formula:

Of course, any rate adjustments for bulk mail for other than the delivery function would be subject to open competitive pressure and be set at market prices.

In the case of bulk or commercial mail (including bulk First Class mail) delivery rates could be adjusted no more frequently than annually—preferably in the first or second quarter of the calendar year, thus providing a modicum of predictability to accommodate the needs of business planning and budgeting.

In the case of single piece mail, rates should be adjusted less frequently; perhaps every three years, with stamps in the hands of the public being available until used (similar to tokens for a subway system). In the alternative, consideration might be given to a non-denominated stamp (also available until used) the price of which could be changed more frequently but which would obviate the need for and costs associate with the requirement for make-up stamps. Even if consumers "stock-up" such stamps before a rate increase, the Service will have use of the money.

In addition, the Service should be permitted to entertain customized service (rate) agreements that offer an economical benefit to the overall system as well as to the parties to any such agreement. These agreements are also known as "negotiated service agreements." Economic benefits could include:

• Increasing volume from the previous year, for example, thus providing a broader base for institutional costs at a time when mail volume may be shrinking; or
• Seasonal rate offerings designed to shift volumes from peak load periods, thus encouraging more efficient use of resources.

The Postal Services should be permitted to retain earnings which could under the this pricing scheme be generated by both new volumes and productivity gains, so long as those gains are not associated with a diminution in service. Retained earnings could be utilized to provide management and workforce incentives. Moreover, such earnings could provide a base for de-coupling the compensation of postal management from federal government earnings limits.

We believe that there must be regulatory oversight of portions of Postal Service operations as a check against cross subsidies and discriminatory practices. First, there must be a review, which may occur after the fact, of the "base delivery rate" and base single piece rates. Second, as previously mentioned, the regulatory body would also have authority to ensure appropriate licensing of the mailbox access. Third, any increase above CPI or costs for the "delivery rate" and the single piece rates should require prior approval by the regulatory body. We also believe that the regulatory body should conduct an annual audit of Postal Service compliance with respect to both rates and service.

Whenever the regulatory body must establish rates for the delivery rate for bulk mail and the rates for single piece mail, the rate proceedings should be conducted as quickly as possible with a six-month deadline. Notice and comment procedures should be used to the fullest extent possible with the body having the option of holding hearings or workshops.

Finally, the Postal Service should be subject to anti-trust laws for all rates other than the delivery and single piece rates.

We believe that fair and full collective bargaining is required to optimize efficiencies within the Postal System. An alternative approach to the current collective bargaining process—one espoused by the governors of the Postal Service—is application of the Railway Labor Act. However, we recognize that the right to strike provision of that Act is viewed by many in the postal community as presenting a potentially intolerable situation.

If significant change to collective bargaining such as the Railway Labor Act cannot be implemented, we offer several suggestions for change regarding the perimeters of the current collective bargaining system, as follows:

• In addition to pay, the entire range of benefits should be subject to bargaining for all future employees;
• Arbitration awards should be only prospective in nature; and,
• The arbitrators should be required to give weight to the changing nature of the communications landscape, and the importance of achieving productivity gains as a means of ensuring the viability of the system.

Finally, in order to mitigate the impact of right- sizing the Postal Service’s infrastructure, which will likely be an evolutionary process, employee groups should consider a liberalization of work rules as a means of mitigating the impact of such changes on their members.

These suggestions are not intended to diminish the rights of employees but rather provide both a greater range of options and an incentive for management and labor when bargaining. Restricting the retroactivity of awards could, for example drive negotiations to a more timely conclusion thus enabling management to plan operations based on known costs while not placing employees at a financial disadvantage.

Many of The DMA’s suggestions require changes to existing law. It is imperative, however, that we not wait for these changes before we set about repairing the seriously deteriorating Postal Service foundation, the cracks in which have become increasingly evident under the pressures of the past several years.

There is much that can and should be done even under existing law. It is with this in mind that The DMA urges the Commission to act now to strongly endorse and support a continuation of the evolutionary process recommended by the Mailing Industry Task Force embodied in the Postal Service’s Transformation Plan.

It has been more than 30 years since the last time that the Nation's postal system was remade by a commission. It is imperative that we seize the opportunity embodied today by in this commission to develop strategies and goals flexible enough for a horizon that may well be another several decades away.

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