The Case Against Consolidation: Rebuttal testimony challenges Network Rationalization
April 29, 2012
While the week’s postal news was dominated by the Senate vote on postal reform, something else important was going on. Opponents of the Postal Service’s plan to consolidate the processing network submitted their rebuttal testimony to the Postal Regulatory Commission (PRC).
This testimony — along with that of two independent experts brought in by the Commission — paints a vivid picture of what’s wrong with the Postal Service’s Network Rationalization plan. The testimony presents a devastating indictment of the plan — its underlying assumptions, its modes of analysis, and its potentially disastrous effects. The testimony is not just critical, however. There are also many suggestions for how to improve the plan or how to replace it with alternatives that realize substantial cost savings without reducing the service standards for First Class mail and periodicals.
Although the PRC’s Advisory Opinion won’t be completed for several months, the rebuttal testimony provides a good preview of where things are headed. While the PRC is likely to confirm the view that there's some excess capacity in the network, it's hard to imagine that the Commission will come out with a ringing endorsement of the plan. There's just too much that's obviously wrong with it.
Midway in the Advisory Opinion process
The process officially began on December 5, 2011, when the Postal Service filed its Request for an Advisory Opinion on the Network Rationalization initiative — a plan to close or consolidate about 250 mail processing plants. The Postal Service submitted testimony from a dozen witnesses (a summary is here).
Behind the scenes, the process actually had begun months before. In August, the Postal Service was briefing industry insiders on the plan and saying it would submit a Request for an Advisory Opinion in September or October. For reasons that have never been made public, the Request was delayed for two months. There’s circumstantial evidence that the postponement was caused by a market research survey — conducted in August and completed in September — showing that the plan would cause significant volume and revenue losses. It took a few weeks to re-do the survey and come up with less damaging market research, and that may explain the delay.
Once the Request and USPS testimony were submitted, it was time for the discovery phase (which ended Feb. 24), during which intervenors in the process posed interrogatories to the Postal Service witnesses. These intervenors included the postal worker unions, newspaper and magazine associations, industry stakeholders like Valpak, Time Inc, Pitney Bowes, and the Greeting Card Association, as well as several other interested parties, including David Popkin, Douglas Carlson, and the cities of New Orleans and Pocatello, Idaho.
The questions sought clarifications and information, and they produced a mountain of additional testimony. Some of the interrogatories looked for evidence that would help justify the plan for those who favor it, but mostly they picked apart the Postal Service’s testimony and began to reveal the flaws in the plan.
Next came a period for oral cross-examination of the Postal Service witnesses (March 20-23). More questions were posed, and more weaknesses in the case for consolidations were exposed. But the Q&A format of the interrogatories and cross-examinations did not always make it clear what the questioners were driving at and how the opponents to Network Rationalization were building their cases.
Things got much clearer this week. April 23 was the deadline for filing rebuttal testimony challenging the Postal Service’s case, and some seventeen witnesses submitted testimony. Most of it is very critical of the plan, and the Postal Service has its work cut out if it wants to undermine, discredit, or otherwise challenge the evidence presented by these witnesses.
The PRC’s procedural schedule indicates that the Postal Service has until Tuesday of this week to submit supplemental testimony that revises earlier testimony by taking into consideration that not all 252 consolidations were approved.
Over the coming weeks, the Postal Service will have a chance to submit interrogatories to the rebuttal witnesses, and then in mid-June, these witnesses will be cross-examined in person as well. The process is expected to continue through most of July, and then the Commissioners will need some time to digest everything and prepare their Advisory Opinion. It might be done in August, but September is more likely.
The PRC is basically halfway through the process, and we can now see both the case for and the case against Network Rationalization. Here's a summary of the rebuttal testimony.
Network Rationalization not looking very rational
The rebuttal testimony covers a wide range of topics, and much of it requires a very technical understanding of the ins and outs of the mail processing system. The main issues, however, recur throughout the seventeen testimonies, and they are not all that difficult to grasp. Among the main points are the following:
1. The Postal Service’s cost-saving estimates are flawed. The plan would supposedly save $2.6 billion in operating costs, but witnesses note that the calculations:
- Are based on the consolidation of 252 plants, when only 223 or so were approved;
- Include savings that have nothing to do with Network Rationalization per se, like using more non-career employees;
- Assume that there is significant down-time in the system that, if eliminated, would increase productivity, when in fact there’s very little idle time to begin with;
- Overestimate how many fewer trips and miles would be involved in the new transportation network;
- Underestimate transition costs, like setting up the new transportation hubs;
- Employ a computer-generated simulation to calculate cost savings, rather than the AMP studies, which, though flawed, provide a more accurate picture and show a savings of about one billion, not $2.6 billion.
2. The lost revenue due to the decline in service standards has been understated. When it presented its case, the Postal Service said market research showed total volumes would decline by 1.7%, gross revenues by $1.3 billion, and net revenues by $500 million. That would make the net savings from the plan about $2.1 billion. The rebuttal testimony challenges these estimates of potential losses because the market research:
- Asks respondents about their likely behavior in 2012, when it’s very likely customers will shift away even more in the following years as they adjust further to the lower standards;
- Adjusts estimated losses downward by improperly using two probability factors;
- Fails to consider the cumulative impacts of the change in service standards along with eliminating Saturday delivery and closing post offices;
- Does not look at impacts on mail categories not directly impacted by the change in service standards but that might suffer collateral damage, especially parcels, which represents a potential growth area.
Another problem with testimony on the market research is that it presented only the second phase of the research. An earlier phase, done by the same firm, revealed much more significant losses — 7.7% in volume and $5.3 billion in revenues. That translates into a $2 billion net contribution loss, which just about totally wipes out the $2.6 billion in cost savings.
3. Network Rationalization may cause serious delays and numerous problems in the mail stream. Bottlenecks will occur during an uninterrupted sequence of peak mail days, machines will break down because they’re running many more hours per day, and so on.
4. The Postal Service did not consider alternative plans that do not depend on reducing service standards. Although such alternatives encompass fewer facilities and might not save as much in operating costs, maintaining service standards would cause much less lost revenue and, in the end, yield greater savings.
5. The plan violates the price cap established by PAEA in 2006.
Given the likelihood that the plan will save less in operating costs than advertised, drive more business away than anticipated, cause delays, and violate the price cap, the witnesses consistently express fear that the plan will have devastating effects not just on customers but on the Postal Service itself. The plan will push the Postal Service into a death spiral of declining service, lost business, and deeper cuts.
The APWU Witnesses: The savings are padded, the losses will be worse
The APWU filed three testimonies about the plan. There’s a summary in the APWU’s “Statement in Opposition to Proposed Changes” (April 23, 2012). Here are some highlights:
Kathryn Kobe (APWU-RT-1) is the Director of Price, Wage and Productivity Analysis for Economic Consulting Services. She testified that the Postal Service significantly overstated cost savings from the plan for various reasons:
1. The Postal Service used the FY2010 processing network to determine cost savings. Many plants (23% of them) were consolidated between 2009 and 2011, and some twenty-one of these AMP consolidations were used in the Postal Service cost-saving analysis. Those consolidations were initiated prior to the plan to reduce service standards and did not depend on a change in service standards, so those savings estimates should not be included in the totals for Network Rationalization.
2. The Postal Service used FY2010 labor costs and mail volumes in its calculations, so those numbers don’t reflect reductions in costs and volumes since 2010.
3. The calculations fail to include the flexibilities provided by the APWU 2010 national contract, which allows the Postal Service to use a large number of non-career employees (PSEs) in the processing network — as many as 20% to 30% of the workforce complement. The cost savings from using non-career employees should not be included as cost savings from the Network Rationalization per se.
4. The Postal Service decided not to close all 252 facilities on the original list, so the calculations need to be updated to reflect the fact that about 232 were approved. (Some of that updating is already taking place in supplemental testimony by the USPS witnesses.)
5. The Network Rationalization analysis of productivity does not take into consideration other flexibilities currently available. For example, one USPS witness (Neri) based his analysis on the assumption that the Postal Service must staff an eight-hour tour, but PSEs can be called in for as little as two hours. Similarly, the Postal Service can make cost-saving changes in its transportation system without degrading service standards.
6. The Postal Service underestimates the transition costs. For example, the calculations assume that closed plants will be sold and the income from the sales will be used to generate more income, but out of 17 recent consolidations, only one building has been sold, and 11 still have some USPS operations.
7. The cost of setting up transportation hubs has not been included in the cost-savings analysis. These hubs are locations where mail that comes from a long-haul truck is broken down into some short-haul trips so smaller trucks can move the mail to their destination plant. Setting them up could involve significant transition costs, but they are not included in the Postal Service’s analysis.
Marc Schiller (APWU- RT-2) is CEO of Shorter Cycles, a consulting firm focused on business development and marketing. His testimony discusses qualitative market research done by his firm to see how customers might react to the change in service standards. Schiller’s testimony examines “the adverse consequences in the market associated with the purposeful degradation of service standards.”
Schiller was particularly interested in the impacts on the parcel market, since about one million First Class Mail parcels will be affected per day. He also looks at collateral damage, i.e., how changes in service standards for First Class mail might affect consumer behavior with respect to other products not directly affected by the change in service.
Service downgrades and the general perception of Postal Service financial problems will drive customers away to a much greater extent than the Postal Service wants to acknowledge, concludes Schiller. Plus, by dismantling its network, “the Postal Service risks positioning itself as mainly a fringe player in the market for parcels.”
That would be too bad, since parcels business provides an opportunity for real growth. As Schiller points out, the Business-to-Consumer (B2C) market is very large and fast growing due to e-commerce. The Postal Service’s market share (20% of volume) could grow considerably and bring in billions of dollars in new revenue. But degrading standards and disinvesting in the network will move things in the opposite direction and result in a loss of significant growth opportunities.
The testimony also examines how mail not directly part of the change in service standards — like Priority Mail — will also suffer from the changes.
Pierre Kacha (APWU-RT-3) is Director of the Postal Practice at decision/analysis partners. Kacha provides a modeling tool to help evaluate the performance capabilities of the Postal Service network. This work is still in progress, but the APWU concludes that “even the first stage of this modeling work strongly indicates that USPS still has opportunities for consolidations and can achieve cost savings without changing service standards. Continuation with consolidations and other cost savings initiatives through individual AMP studies is a more certain and safe alternative to the high risk Network Rationalization initiative.”
NPMHU Witnesses: The view from down here
The National Postal Mail Handlers Union (NPMHU) brought forward seven mail handlers as witnesses to testify about their first-hand experience with previous consolidations:
- Michael Hora (NPMHU-T-1) works in the union’s Contract Administration Department, having formerly worked for many years as a Mail Handler in the Denver, Colorado P&DC.
- Paul Hogrogian (NPMHU-T-2) is a Mail Handler at the NJI Network Distribution Center in northern New Jersey.
- Christopher Bentley (NPMHU-T-3) is a Mail Handler at the Springfield, Missouri P&DC.
- James Haggarty (NPMHU-T-4) is a Mail Handler at the Grand Rapids, Michigan P&DC.
- David Wilkin (NPMHU-T-5) is a retired Mail Handler who worked at the Rochester, New York P&DC.
- Kenny Hayes (NPMHU-T-6) is a Mail Handler at the Charlestown, WV P&DC.
- Robert J. Broxton, Sr. (NPMHU-T-7) is a Mail Handler at the Central MA Processing & Distribution Center.
The NPMHU witnesses bring up a number of points:
1. Underestimating costs: The AMP studies don’t add up to anything like the cost savings estimated by the Postal Service for the whole plan, and even the AMP studies underestimate the cost of consolidations. Witness Bentley, for example, notes that the AMP study for Springfield, Missouri, says the plant will be consolidated with Kansas City but remain open as a hub; the AMP, however, does not include any mail handlers in the calculations, nor does it include any increase in maintenance costs for Kansas City, even though a dozen large machines will be added.
Witness Wilkin criticizes the cost estimates contained in the Buffalo AMP. For instance, the AMP budgets only $748,000 for employee relocation, yet the AMP also stated that 404 craft employees and 24 management positions will need to be added in Rochester. That would bring the relocation costs for this consolidation to well over $2 million.
More generally, witness Hora observes that “the AMPs do not budget for increased maintenance or replacement costs for processing equipment, despite the fact that the Postal Service plans to run these machines significantly more hours per day.”
2. Overestimating productivity increases: The Postal Service is drastically overestimating the amount of productivity increases it will be able to achieve. Witness Hora, for example, says that the Postal Service’s testimony “seems to be based on the notion that there is significant down-time or idle time in the mail processing equipment. However, the ‘productivity’ savings calculations are based upon decreases in labor hours, not decreases in equipment costs. Increasing the time that the equipment runs will not result in labor savings, unless it also significantly decreases the staffing at these facilities. Whether or not there is idle time among the machines, there is not much idle time among the labor force. There simply are not paid employees standing around manning machines that are not processing mail.”
2. Transportation issues: Witness Broxton observes that the consolidation of Eastern Maine into Southern Maine is unsound because weather conditions make transporting the mail over country roads difficult and slow, and the area is mostly rural, so it’s rural residents — people without the same access to the internet, retail, and pharmaceuticals that urban residents enjoy — who will suffer most.
3. Stressing the machines: Witness Haggarty testifies that he has observed other plans in which the Postal Service tried to operate longer processing windows. “Grand Rapids was on a seventeen hour plan several years ago, and this operating plan had to be abandoned because the machines were breaking down too frequently…. These multi-million dollar machines require precise maintenance routes that take a manufacturer-recommended time frame. When they are not adhered to, the machines tend to break down more often and for longer periods of time, interrupting the normal processing runs.”
4. Delivery delays: Witness Hayes notes that previous consolidations in Maryland and West Virginia area have caused numerous problems in the efficient processing and delivery of the mail. “For instance, after the Frederick consolidation into Baltimore, the Baltimore facility had major difficulties in handling the additional volume, particularly during the holiday rush. This resulted in news coverage, reporting that mail was sitting in the yard for eight to ten days due to backups.” As Hayes notes, the USPS OIG has initiated an audit review of the Frederick-Baltimore consolidation.
5. Illogical decisions: Witness Bentley explains why the consolidation of the Springfield, Missouri P&DC into the Kansas City, Missouri P&DC will encounter many problems. The Kansas City plant is already at capacity and struggling to keep up to its schedule, while the Springfield plant has some of the highest productivity numbers in the country. Plus, the Springfield area is one of the top ten fastest growing regions in the country and twice as big as Kansas City’s in terms of square mileage.
6. Failure to consider community input: Witness Hogrogian describes several of the public hearings he attended in New York, Connecticut, and New Jersey. USPS representatives did not have sufficient information to answer questions about logistics and cost savings, did not want to hear criticisms or comments, and basically just read the script.
Overall, the testimony of the mail handlers is very disturbing because it reflects years of personal experience with previous consolidations. These workers know what the machines can tolerate, they know the geography and transportation issues, and they know how the Postal Service systematically underestimates costs and overestimates savings when justifying consolidations. It’s just this kind of local knowledge that the top-down Network Rationalization plan failed to take advantage of.
NALC Witness: Beware the downward spiral
Michael Crew (NALC T-1) is a Professor of Regulatory Economics at Rutgers. His testimony does not mince words: “I conclude that implementation of the proposal, especially if USPS is also successful in implementing its plan to abandon Saturday delivery, may herald the death knell for the Postal Service. USPS’s relentless focus on cost-cutting to the effective exclusion of other measures creates the serious danger of irreparable damage to mail service and to the enterprise. It threatens to undermine USPS’s viability.”
Summarizing the general theme of much of the rebuttal testimony, Crew says that the Postal Service has underestimated how much business it will lose as a result of the change in service standards, and it has overestimated how much savings it will gain as a result of the plant consolidations.
Concerning lost business, Crew reviews the testimony of Greg Whiteman, Manager of Market Research at the Postal Service, which was about how customers would respond to the change in service standards. The clear intent of Whiteman’s approach, says Crew, was to find “as small an impact as possible.” Crew notes the following problems in the market research commissioned by the Postal Service:
1. The research only asked respondents to estimate how their mailing behavior would change in 2012. That suggests the volume loss will be a one-time phenomenon, but it’s very likely that the volume losses will get worse as customers become increasingly dissatisfied and turn to alternatives.
2. The research considers the proposed First Class mail service changes in isolation, without regard for the cumulative impact of other possible changes to postal operations that the Postal Service is contemplating and that may cause mail volumes to fall, such as elimination of Saturday delivery or the closure of thousands of post offices.
3. The research performs a numerical calculation that “adjusts” what respondents in the survey said so that, for example, when someone said they would mail 10,000 fewer pieces, the calculations reduce this to 2,500. The Postal Service says the adjustment is justified because it reflects a “probability of change” factor and a “solely attributable” factor.
The “probability of change” factor is a way of quantifying the tendency of people to say one thing and do another: they may say they’ll send 20% less mail, but when the time comes, they’ll send 10% less. The Postal Service also used this factor to downsize the market research when it presented testimony for the Five-Day delivery case, and Crew testified back then as well, explaining that the Postal Service was being “illogical” in its use of the factor. His testimony was persuasive enough to make the PRC come up with a figure for potential lost revenue that was much greater than what the Postal Service had calculated. The issues surrounding the “probability of change” factor are obviously not resolved, and they will continue to be a bone of contention.
The “solely attributable” factor refers to the way the Postal Service adjusts volume losses downward by asking respondents to provide an estimate of how much their use of mail would decline “due solely” to the changes in First-Class mail. That doesn’t make any sense, says Crew, since the question posed to the respondent didn’t even mention any causes for a possible change in mail volume other than the proposed first-class mail service standards.
So, says Crew, the question posed to the respondent was already limited to a drop in mail volume caused by the proposed service standard changes, and there’s no basis to further reduce the estimated drop in mail volume by the “solely attributable” factor. As Crew notes, the Postal Service didn’t use a “solely attributable” factor in the five-day case, and there’s “no legitimate basis” for using it in this case either.
4. The Postal Service’s market research uses a “single-point estimate” rather than a range or confidence interval. That refers to the fact that the Postal Service said that mail volumes would decline by 1.7% with the new service standards, but it did not provide a confidence interval indicating how likely it would be to come up with the same results if it did the survey again. However, the research did provide a confidence interval for the different types of account (National, Premier, etc.), and these showed a large range of possible outcomes.
Crew’s testimony makes only passing reference to another issue — the earlier phase of market research, which showed much more significant volume and revenue losses. The Postal Service dismissed the earlier round as “unreliable,” but if nothing else, it shows what a low confidence interval the second round must have. If the Postal Service can’t trust the first phase, there’s even less reason to trust the second.
Crew proceeds next to why the Postal Service overestimates the cost savings:
1. Fixed costs will be spread over lower volumes, and economies of scale start working the other way. “Falling output requires greater and greater costs savings to stay ahead of the curve.” In other words, the death spiral.
2. The plan is based on presumed improvements in productivity, but the increase in productivity is largely illusory because the quality of the product has been diminished with the change in service standards.
3. The Postal Service has taken little account of transition costs. The estimate of $315 million is “extremely optimistic.”
Crew also goes into the issue of the price cap: “USPS is trying to end run this price cap by imposing, de facto, a real price increase through a reduction in first-class mail service standards.” (p. 23).
In the end, writes Crew, “relentless cost-cutting and quality reduction . . . can only make the situation worse. Degrading first-class mail service standards will only drive away the customers who buy USPS’s most profitable product and undermine USPS’s chances of maintaining the value of its enterprise.”
Crew summarizes the case against the plan as follows: “USPS’s proposed reduction in first-class mail service standards has many problems including the fact that it amounts to a real price increase. It is short-sighted and ill-advised. It seeks short-term savings at the risk of causing irreparable damage to the business. Combined with other quality reductions like the ending of Saturday delivery, USPS’s approach could create a downward spiral of lost business from which USPS will not be able to recover.”
NNA Witnesses: A plan driven by machines is a plan without a mission
Max Heath (NNA-T1) is Postal Committee chairman of the National Newspaper Association (NNA), a 2,400 member organization that has served community newspapers for 126 years. Heath begins by citing statistics about how important traditional newspapers remain to small communities, even in the age of the Internet. Looking at towns with fewer than 15,000 people, surveys show that 74% read the newspaper every week, 48% never read local news online, 91% count on the newspaper for local news and/or general news and information, etc. Heath makes it clear that community newspapers remain a vital and essential means of communication, and mail distribution is crucial to their survival.
Many community newspapers depend on the Postal Service for rapid delivery, i.e., within 24 to 48 hours of printing. If the mail is not delivered within this time frame, the information is no longer of any value. “It is obvious that old news is not news,” says Heath, and that applies to information about retail sales and other kinds of announcements.
The problems for community newspapers have just been getting worse over the past few years due to a wide variety of issues, says Heath, like poor on-time delivery rates, barcode requirements, etc.
Heath observes that “the optimization plan is being driven by the need to fill up letter-sorting machines with volume so greater automation efficiency will be achieved, in the hopeful belief that the mailers will not desert the Service, a lot of postal employees will retire and costs will fall. To me, a service plan driven by the need to run a machine is a plan without a mission. It is an engineering plan, not a business plan…. I have sincerely counseled the Postal Service not to optimize its network in this way. Closing buildings does little to save costs and stockpiling mail to feed a machine inevitably damages service. That is why USPS is here today.”
Heath says that the Postal Service has already inflicted damage on itself just by proposing the Network Rationalization plan. “This proposal has injected great uncertainty into the mailing community and inevitably — regardless of the outcome — has accelerated the move of mail out of the system forever.”
Heath recommends that some overnight mail be maintained — the time sensitive mail within SCF zones — which is part of the Senate bill just passed. “Maintaining these smaller zones for overnight mail would give the Postal Service some new flexibility and still assure mailers that important correspondence, checks in the mail, newspapers and other mail needing timely service will remain in the mail stream.” (As this excellent post in Courier Express suggests, however, it’s not clear that the Senate bill would succeed in maintaining overnight delivery for as much of the mail as the architects of the bill seem to think.)
Heath makes a number of other recommendations that would help protect community newspapers: Business Mail Entry Units should remain within closing SCF zones, Critical Entry Times (CETs) must be meaningfully available, and so on (see pp. 13-18 for more recommendations).
Heath’s final words convey just how serious the changes being proposed by the Postal Service will be: “The ending of overnight service standards is a grave development for the Postal Service. I believe it will prove to be an error in the long run. However, I agree with the Postal Service that the massive facilities closings it contemplates will necessitate a slowing of the mail. I continue to hold out hope that wiser heads prevail and that the Commission's analysis and advice will cause the Postal Service to re-examine this issue.”
David Bordewyk (NNA T-2) is the general manager of the South Dakota Newspaper Association, and his testimony focuses on how plant consolidations have already affected people and businesses in rural areas, specifically the closing of the Mobridge Sectional Center Facility in 2011 and the resulting decline in service performance.
Slower mail has caused cash flow problems (the check is in the mail instead of a business’s bank account); shipping essential supplies and products has become problematic; publishers are experiencing significant delays to subscribers and having to absorb new expenses to get issues delivered on time where it is possible to do so (such as shifting to First Class).
Bordewyk concludes with an eloquent comment about how Washington, D.C., treats rural America: “It is alarming to residents in rural areas how easily their interests are written off by people in our nation's capital. Our ranches, agriculture and small-scale manufacturing and after-market suppliers are essential to the nation's economy. Yet it seems that in the nation's capital the needs of these communities are insignificant, dismissed as special interests or ignored because population densities do not impress people who have lived in urban areas all of their lives.”
Bordewyk criticizes the Postal Service for the decisions of the past that basically say “it is more important to stockpile mail in urban centers so that sorting machines can be run longer than it is to actually get the mail to people…. I firmly believe more information about the impacts on rural America is needed before the Postal Service changes its service standards and closes more facilities.”
The Public Representative's Witnesses: Circumventing the price cap, and taking unnecessary risks
Kevin Neels (PR T-1) leads the transportation consulting practice at the Brattle Group, an economics consulting firm headquartered in Cambridge, Massachusetts. His testimony focuses on the relationship between service standards and the price cap. Neels’ thesis here is clear: Reducing service standards is equivalent to a rate increase.
Neels goes into the history of the regulatory regime established in 2006 by the Postal Accountability and Enhancement Act (PAEA), which divided postal products into two categories — market dominant (first-class mail letters and sealed parcels, first-class mail cards, periodicals, standard mail, single-piece parcel post, media mail, etc.) and competitive (priority mail; bulk parcel post; bulk international mail; etc.).
The Postal Service has a statutory monopoly on market-dominant products, so it’s important to protect the users of these products by preventing the Postal Service from using its monopoly status to impose excessive rate increases. The PAEA thus says that the Postal Service cannot raise rates beyond the increase in the Consumer Price Index (except by seeking an exigent rate increase). This “price cap regime” gives the Postal Service some rate flexibility to raise rates, but within limits.
Neels proceeds to explain something with which every consumer is familiar: “We are accustomed to trading off price and quality when we make purchasing decisions. When we compare prices we readily account for quality differences between alternative offerings.". That’s why consumers quickly see that a reduction in quality is basically the same as an increase in price.
One problem with the price-cap regime is that the Postal Service has an incentive to reduce quality — and thereby its costs — because there’s a limit on increasing prices. That’s why we have service standards in the first place. As Neels explains, “Price cap regulation sets a ceiling on prices; service standards set a floor on service quality."
“The inevitable conclusion that must be drawn from these observations,” says Neels, “is that the reduction in service standards that the Postal Service has requested is, in effect, a relaxation of the price cap that has been established for market dominant services.”
While reducing service standards may be the Postal Service’s best option for reducing costs, “we should recognize this option for what it is. The Postal Service is asking for relief from regulations intended to protect users of market dominant services. And while service standard reductions may be far more palatable to First-Class Mail mailers and mail recipients than rate increases, the fact remains that in making this request for relief the Postal Service is essentially balancing its budget on that backs of customers of market dominant services.”
Subramanian Raghavan (PR T-2) is Professor of Management Science and Operations Management at the University of Maryland. His testimony focuses mainly on USPS witness Rosenberg’s testimony, which provided a cost-benefit analysis of expanding the operating windows and travel time between the collection points, mail processing centers, and delivery units, etc. The testimony is technical, detailed, and hard to summarize, but Raghavan has several concerns:
1. The new network won’t be able to handle periods when there are several days in a row with peak loads. In such cases, there’s no slack period to catch up, and it could cause “severe disruptions in the ability to handle and move mail through the network."
2. A large quantity of mail that was previously handled overnight — it entered and left the facility very quickly — will now be held for processing the next day. The facility will therefore need a lot of extra space, and the layout of the facility will need to be able to keep its inventories separate. But Rosenberg’s analysis did not take into consideration the need for “staging space" to store destinating mail overnight for processing the next day.
3. The Postal Service has not conducted any simulation studies to analyze a mail processing facility under the proposed service standard.
Raghavan also examines the testimony of witnesses Martin, who had focused on how the new network would cut down on transportation. Raghavan challenges the testimony on several grounds:
1. Plant-to-plant trips: The method Martin used to calculate the number of plant-to-plant trips is flawed. Martin had initially testified that the number of trips could be reduced by 25%, but in supplemental testimony that was revised to 8.44%. Martin suggested that new number was a “conservative estimate” and that post-implementaton reviews (PIRs) “generally show that post-consolidation transportation needs are less than the needs that were projected in AMP studies.” Raghavan, however, says Martin’s second, lower estimate may not be reliable either.
2. Plant-to-post office trips: Martin had testified that deactivating some mail processing facilities and consolidating two service areas into one will lead to a reduction in operating miles for that area. Martin’s initial testimony said there would be a 13.68% reduction in miles; in her supplemental testimony, she said 3.18%, but again indicated this was a “conservative estimate.” Raghavan questions the reliability of even that much lower estimate, noting that “if there are fewer mail processing facilities, at least some mail is being transported a longer distance, so it cannot always be the case that consolidation will lead to a reduction in operating miles.”
Raghavan examines USPS witness Neri’s testimony as well. Neri had testified about productivity improvements under the new network, and Raghavan questions the assumptions on which the testimony rests. For example, the Postal Service assumes that “in the new environment the workload can be smoothed out perfectly over a 24 hour day.” Given that this is not achievable, the productivity improvement estimates are probably overstated.
After reviewing the testimony of these USPS witnesses, Raghavan explores the question, “Can one keep the current service standard and optimize the postal network?” The Postal Service had not explored this alternative, so Raghavan looks into it. Using a methodology similar to Rosenberg’s, Raghavan finds that it would be possible to maintain the current service standards but still consolidate a significant number of plants. Rather than reducing the system to about 199 processing facilities (as originally planned), a network of between 239 and 277 facilities would achieve significant savings while preserving the service standard. “While this saving would be less than that achievable by changing the service standard,” concludes Raghavan, “it may have fewer risks associated with declines in revenue because of the change in service standard.”
The Commission's Witnesses: There is an alternative
The Commission brought in two experts to review the Postal Service’s plan, William Weed and Harold J. Matz.
William Weed (PRCWIT-T-1) is an independent consultant who worked at the Postal Service for decades in a variety of management positions until his retirement in 2001. He gave testimony that provided an independent evaluation of cost and changes resulting from the Network Rationalization plan.
Weed focuses on “productivity” and “productivity rates” at the losing and gaining facilities. The issue here is that if the gaining plants end up with lower productivity rates than the losing plants, it will affect the cost savings from the plan. The Postal Service’s proposal assumes “that the gaining plants will process the losing plants’ volume at least at the losing plants’ processing rates after accounting for institutional cost.” Weed describes several scenarios, however, where this would not happen.
Weed figures that the USPS proposal claims a savings of 14.3% in projected work-hour usage for mail processing LDC (Logistics and Distribution Centers) 11-18. However, as Weed notes, productivity would actually have to increase much more than that — more on the order of 20.9% — and that would “require a dramatic improvement in all processing operations, both in volume and non-volume measured operations.” That increase is far beyond what the Postal Service has been able to achieve in previous consolidations. That’s partly because “smaller plants have historically demonstrated a higher productivity,” so shifting their mail to larger facilities with lower productivity rates can be very problematic.
Weed outlines a number of scenarios to see what might happen when the mail moves from a losing facility to a gaining. Under his worst-case scenario, the gaining plants absorb the additional volume from the losing plants but they end up requiring more total work hours to process mail than had previously been required. Rather than saving money, the plan would actually drive up costs by 2.3%. Weed says this scenario is “not likely,” but “it can happen.”
The more likely scenarios are as follows: (1) The gaining plant achieves a 3.7% productivity improvement, and the plan breaks even. (2) The gaining plant achieves a 5% productivity improvement, and the plan saves $249 million for Direct Mail Processing LDC 11-18. (3) The gaining plant achieves a 9.1% improvement, and the savings would be $670 million. These scenarios are more likely than the one envisioned by the Postal Service, and they all show significantly smaller cost savings than projected by the Postal Service.
Harold J. Matz (PRCWIT-T-2) worked for the Postal Service for many years, including as a District Manager in Seattle, before retiring and becoming a consultant. His testimony looks at the incoming and outgoing windows and the feasibility and desirability of maintaining overnight standards for a portion of the mail.
Matz notes that although the Postal Service wants to change overnight service standards for all First Class mail, it’s telling mailers that under some circumstances, they will continue to enjoy overnight delivery. The circumstances, though, are that the mail is pre-sorted, containerized, and dropped off at the destination facility by 8 a.m.
As Matz points out, however, most customers won’t be able to meet those criteria. The hardest hit by the new standards will be single-piece First Class mail, the kind of mail sent by average customers and small businesses. About 54% of single-piece is now delivered overnight — twice as much as the portion of pre-sorted mail that gets one-day delivery — and single-piece mailers have no way of taking advantage of the window for overnight delivery under the new system.
Matz describes a way to maintain overnight standards for a significant portion of the mail — what’s called “turnaround” or “Intra-SCF” mail. That’s mail that both originates from and destinates to the 3-digit ZIPs served by the plant. This is essentially local mail, and while it involves only a few zip codes — those closest to the plant — it can encompass a lot of volume. Matz estimates that in the current system, single-piece mail accounts for 74% of the total overnight volume.
The remaining 26% of the mail is “Inter-SCF,” i.e., it goes from an originating plant to a destinating plant before being delivered to the post office in the morning. Much of the burden of the system is about moving some inter-SCF mail overnight, and not about achieving the overnight standard for turnaround, Intra-SCF mail.
Matz shows how eliminating the overnight standard for Inter-SCF mail but maintaining overnight delivery for turnaround mail would have profound effects because such a large portion of the mail would qualify. Single-piece First-Class would benefit in particular. “Given that this alternative results in an incremental approach to network consolidation and service contraction,” says Matz, “it is surprising this option was apparently not considered.”
Matz outlines a way for a larger segment of the customer base to get overnight delivery. It gets pretty technical in terms of tours, passes, trays, and run times, but the gist is this: Eliminate the overnight standards for Inter-SCF mail, but maintain it for turnaround mail.
“The global elimination of OND [overnight delivery] service does not need to occur at this time,” concludes Matz. “A reduction of the Inter-SCF component of OND would create the opportunity to capture much of the savings outlined in N2012-1. It would require a new analysis of consolidation alternatives using the operating plan concepts as outlined in my testimony. The net savings projected by the Postal Service result from an all-or-nothing approach to closing plants. Significant savings could be realized by selectively closing plants, while simultaneously maintaining a high percentage of overnight service.”
On March 20, USPS VP David Williams, the man running the Network Rationalization show, testified to the PRC that the Postal Service planned to publish the Final Rule on the service standard changes in mid-April. Once that happened, Williams said, the Postal Service would begin preparing for the transition to the new network. The consolidations are scheduled to begin in May, when the moratorium ends.
Mid-April has come and gone, and the Postal Service has not published the Final Rule on the service changes. Perhaps postal management is waiting to see what happens when the Senate bill moves to the House. Or perhaps the Final Rule will be published in a few days. Are the consolidations on hold or on schedule? Postal headquarters isn't saying.
The PRC's Advisory Opinion won't be completed until late summer, so unless the Postal Service decides to put off the consolidations, it will be proceeding without the benefit of learning the Commission’s Opinion.
The legislative process is also proceeding without waiting for the Advisory Opinion. That's understandable, of course, given that lawmakers have bought into the view that there's a "dire" emergency and the Postal Service is "hemorrhaging" millions of dollars every day.
On March 6, during the confirmation hearing for Tony Hammond, who's been nominated to fill the fifth seat on the PRC, Senator Tom Carper blamed the PRC for not being able to share its views in a more expeditious fashion. Perhaps it would be helpful, offered Carper, if the PRC could prepare some sort of an interim report for Congress, so lawmakers didn’t have to wait until late summer for the Advisory Opinion.
The PRC naturally declined to produce such a report. Nothing could be more unfair to the participants on all sides — it would be like a jury issuing a tentative verdict in the middle of a trial. But if there are any lawmakers interested in understanding why the Network Rationalization initiative is a seriously flawed plan, they need only read over some of the rebuttal testimony.
The headlines all week have been about the Senate's nod toward protecting rural post offices, but there's a lot more at stake right now. Closing a few thousand small rural post offices would have a devastating effect on hundreds of thousands of people, but Network Rationalization will hurt the entire country.
As Professor Crew testified, implementing the proposal “may herald the death knell for the Postal Service.... The relentless focus on cost-cutting to the effective exclusion of other measures creates the serious danger of irreparable damage to mail service and to the enterprise.”
The warnings are loud and clear. Is anyone listening?