BEFORE THE

POSTAL REGULATORY COMMISSION

WASHINGTON, D. C. 20268-0001

POSTAL RATE AND FEE CHANGESDocket No. R2006-1

REPLY BRIEF OF

TIME WARNER INC.

January 4, 2007

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TABLE OF CONTENTS

Page

I. /

THE POSTAL SERVICE HAS TAKEN A STAND-PAT APPROACH

TO PERIODICALS RATES1
II. /

ABM SUBSTITUTES BLUSTER AND UNSUPPORTED ASSERTION

FOR ARGUMENT7
III. /

McGRAW-HILL CHARACTERIZES THE RECORD AND COMMISSION

PRECEDENT INACCURATELY21
IV. /

ABM AND McGRAW-HILL PRESENT A MISLEADING

CHARACTERIZATION OF THE IMPACT OF TIME WARNER'S

PROPOSAL ON SMALL PUBLICATIONS29
V. /

TIME WARNER'S PERIODICALS RATE PROPOSAL BEST

COMPORTS WITH THE RELEVANT STATUTORY FACTORS AS

INTERPRETED BY THE COMMISSION36

APPENDIX: METHODOLOGY FOR FURTHER TEMPERING OF

TIME WARNER'S PROPOSED RATES41

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BEFORE THE

POSTAL REGULATORY COMMISSION

WASHINGTON, D. C. 20268-0001

REPLY BRIEF OF

TIME WARNER INC.

I.THE POSTAL SERVICE HAS TAKEN A STAND-PAT APPROACH TO PERIODICALS RATES

In the 25 pages of its Initial Brief devoted to Periodicals rates (Section VI-G), the Postal Service uses the word "balance" 15 times. It says that “[t]he major concern that animates witness Tang’s rate design is a desire to achieve a balanced proposal; that is, to avoid percentage increases well above the subclass average for individual rate categories” (p. 361 [emphasis added]), and that its "recent rate design philosophy for the Periodicals Outside County subclass has been to move graduallyin the direction of lower-cost preparation by providing incentives for reducing the number of containers, and for destination entry” (p. 347 [emphasis added]).

On the other hand, the word "incentive" is used 25 times. The Postal Service speaks with apparent approval of rates that "promote[ ] efficiency and lower costs” (p. 343), and says that its rates would "promote more dropshipping” (p. 344), "promote co-mailing and co-palletization” (p. 345), and "send a consistent and clear signal to mailers, encouraging more efficient mail preparation and worksharing” (p. 344).

The Postal Service's putative commitment to these contradictory goals raises important questions. Has its interest in "balance" constrained it from proposing rates that would help to achieve goals that it has plainly espoused? How big must a step be before it qualifies as being meaningful? And how much progress can be expected from incentives that are poorly related to costs and that do not recognize major, well-understood cost drivers? Specifically:

1. Is a sack charge of 85¢ reasonable when some sacks cost $4.75 to handle, and others $1.60?

2. Is a pallet charge of 85¢ reasonable when some pallets cost $66.70 to handle, and others $2.90?

3. When bundles cost from 10 to 44¢ to handle, and there are large numbers of bundles, is it reasonable to neglect these costs and somehow average them in with the piece rates?

4. When adjustments in the number of pieces in sacks cause associated adjustments in the costs of bundle handling, should the costs of bundles be ignored?

5. When handling a 5-digit sack costs $5.60 if it is origin-entered and $2.30 if it is destination-entered, should the rates simply disregard these cost differences?

See TW-LR-5 Revised (workpapers of witness Mitchell).

Plainly, the Postal Service's commitment to "balance" is stronger than its (asserted) commitment to "incentives."

"Balance" is not an especially helpful notion unless one has a principle for determining what should be balanced against what. According to witness Taufique (see USPS-RT-12), balance is a tradeoff between maintaining the status quo and making the kinds of changes that would allow meaningful progress. To him, for a proposal to be balanced, it must lean toward the status quo, as measured by his standard deviation; but if a proposal takes bigger steps than the Postal Service wishes to take, it becomes "unbalanced."

In other words, the Postal Service is saying that progress is not very important; that those benefiting from the current rate structure, whether they be non-machinable or a few pieces per container or something else, should be allowed to continue benefiting; and that giving them appropriate incentives is not something that should be done. Much less attention is given to those hurt by the current rate structure, such as local publications and all those who believe that Periodicals costs should be lower.

The Postal Service's guiding principle is thus one of standing pat and making as little change as possible. If the Periodicals class and its rate structure were close to what they ought to be, that might be comprehensible, even laudable. But it is neither comprehensible nor laudable for a class that is widely recognized to be in the grip of a long-term decline in its efficiency and whose rate structure is widely recognized to be outdated in important respects.

A "balance" that places almost all of the weight on the side of maintaining the status quo has no apparent foundation either in the policies of the Act or the precedents of the Commission. Among the statutory factors to be considered in setting rates is § 3622(b)(4): "the effect of rate increases upon the general public, business mail users, and enterprises in the private sector of the economy engaged in the delivery of mail matter other than letters." That provision neither states nor implies a presumption that mailers should receive equal percentage increases. But even if such a presumption were implicit in (b)(4) or some other provision of the Act, the Commission gave fair notice in the most recent omnibus rate case that the presumption could not be relied on in this docket, stating that “[p]arties should be aware that the Commission will seek to obtain economically efficient cost-based rates [in the next proceeding].” PRC Op. R2005-1, p. 92, ¶ 5032.

A review of the Commission's opinions in Dockets No. C2004-1 and R2005-1 would lead one to think the current proceeding would be the least likely occasion for the Postal Service to base its rate proposal on a desire "to avoid percentage increases well above the subclass average for individual rate categories” (USPS Int. Br. at 361) or " to limit the impact of its rate proposal on various mailers to as narrow a range as practicable" (USPS-RT-12 at 5 [Tr. 39/13457]). The Commission's Opinion in Docket No. R2005-1 made clear that it holds an entirely different view of the changes that need to be made in Periodicals rates:

The Commission recommends, without change, the set of Periodicals Outside County rates and fees identified in the settlement proposal. The recommended rates represent an across-the-board increase; they do not reflect application of traditional rate design methodology. Pound charges, for example, do not reflect the actual distribution of pound miles in the base year. This result carries forward into the test year; thus, in the future, some rate elements may require larger than expected increases to realign rates with costs. Consequently, mailers must stand forewarned that some may face “rate shock” in subsequent proceedings.

PRC Op. R2005-1 at 146, ¶ 6104.

Even weaker than the Postal Service's response to the Commission's request for progress towards cost-based rates in Docket No. R2005-1 has been its response to the Commission's finding in Docket No. C2004-1 that "the Postal Service should update and examine the Stralberg model to determine its usefulness for future ratemaking efforts." Order No. 1446 at 30, ¶ 4034. In fact, the Postal Service has shown no interest at all in Periodicals modeling beyond responding to witnesses Stralberg's and Glick's identifications of specific problems with Postal Service witness Miller's mail flow model.

In response to interrogatories, the Postal Service as an institution did provide useful new information, obtained from a web based survey, on the flow of sacks and pallets entered at origin facilities. Stralberg was able to use that information to upgrade his C2004-1 model, concluding that sacks and pallets entered at origin facilities pass through more intermediate facilities than previously believed, and therefore incur even higher costs than his original model had indicated. In other words, the savings caused by entering Periodicals containers closer to their destinations are larger, and dropshipping saves more, than previously thought. The Postal Service's complete silence regarding Stralberg's use of this new data in his modifiedmodel suggests that it concurs with his improvements. Similarly, the Postal Service's complete silence on the subject suggests that it does not disagree that bundles, sacks, and pallets, as well as flats machinability, are important drivers of Periodicals costs.

In addition, the Postal Service has expressed no disagreement, either in its testimony or its initial brief, with Stralberg's and Mitchell's conclusions that the likely future standard for Periodicals machinability is the same as the standard now being applied to First and Standard class flats, namely AFSM-100 machinability (as modified in the Postal Service's September 7, 2006 proposed rule, New Standards for Domestic Mailing Services).[1]

Stralberg's conclusion, based on an analysis of MODS and IOCS data, that the UFSM-1000 machines are being used in a manner fundamentally different from that assumed in Miller's model, was strengthened when Miller was forced to concede on cross-examination that he had not understood what data Stralberg had based his analysis on. Tr. 33/11103. If the Postal Service had any valid reason to disagree with Stralberg's conclusions about how the UFSM-1000s are used, it could have so stated in its initial brief. Instead, this is one more issue on which its brief is silent.

Nor has the Postal Service expressed any disagreement that the cost differentials associated with mailer-supplied barcodes on flats, when separated from the question of machinability, are as Stralberg's model shows them. Nor has the Postal Service explained (other than formulaic appeals to "balance") how passing through over 800% of such cost differentials represents "progress towards cost- based rates." The silence of the Postal Service even extends to issues on which it should have had no difficulty at all in accepting Stralberg's conclusions, such as the demonstrated need for a more rational treatment of firm bundles.

II. ABM SUBSTITUTES BLUSTER AND UNSUPPORTED ASSERTION FOR ARGUMENT

According to ABM, "in a variety of relevant areas, what makes sense in theory makes none in practice." Br. at 2. ABM goes on:

[T]he four witnesses for Time Warner and MPA/ANM . . . are, by education, a mathematician, a physicist, and two economists who, to be sure, have a world of insight into the unique economics of postal costs, but their view is gained from the lofty plane of theory rather than the more useful planes of the publishing office and the printing plant. ABM does not for a minute question their skill or their numerical, economic or theoretical premises or conclusions, lacking the resources even to make the attempt. But American Business Media does question in meaningful ways the application of their elegant yet sterile theories and conclusions to the real world of periodicals publishing and distribution.

Br. at 2-3.

Professor Samuelson's standard textbook on economics states that "when a student says, 'That's all right in theory but not in practice,' he really means 'That's not all right in theory,' or else he is talking nonsense."[2] In this instance, ABM is talking nonsense.

A postal rate case is primarily about postal costs: how those costs are incurred, measured, attributed, and ultimately recovered through rates. Expertise in economics and statistics is essential in studying these matters. Having printer's ink on one's fingers does not help. ABM's position seems to be that costs are not really important.

The defining characteristic of Stralberg's and Mitchell's rate proposal is that it reflects a far more realistic view of postal processing than either the current or the Postal Service's proposed rate design. If one looks through Stralberg's testimony, for example, one is hard put to find anything that could be described as derived "from the lofty planes of theory" rather than from a painstaking assessment of how mail processing is actually performed. The Commission found that this was so in Docket No. C2004-1:

There are several options open to the Postal Service by which it could immediately begin to better align the Periodicals rate structure with the costs imposed on the Postal Service by various existing mailing practices. The Complainants have made a major contribution by identifying and quantifying cost drivers associated with bundles, sacks and pallets.

......

There was little direct or implied criticism of Stralberg’s model. He appears to have accurately captured the cost causing characteristics of containers and provided the Postal Service with a sound framework for further study.

Order No. 1446, pp. 4, 22, ¶¶ 1013, ¶ 4013.

And the Postal Service has virtually conceded that it is so in this docket.[3]

Moreover, ABM tacitly concedes it is so when it accurately states that it "does not for a minute question [Time Warner's witnesses'] skill or their numerical, economic or theoretical premises or conclusions." Br. at 2. One searches in vain for any statement from ABM about what is wrong with Mitchell's and Stralberg's analysis. Are the costs not what they say they are? Is there an important cost driver that mailers can respond to which Mitchell and Stralberg have overlooked? Do mailers not have options as to how they make up their bundles or how many pieces are in their sacks? Is comailing not really occurring? Is there something about co-palletization that goes unrecognized? Are mailers not dropshipping? Do mailers not use computers and software to presort? Do some mailers not dropship by air at great cost? Are mailers not interested in service? Are there not local mailers? Are there relevant cost factors that have been neglected? Are Periodicals costs under control?

In the absence of insight on any of these questions, ABM proffers its "mud of the marketplace" theory. It argues that the people who really know what incentives should be built into Periodicals rates are not "ivory tower" mathematicians, economists, and other theorists with their "numerical, economic, or theoretical premises," but rather ABM's own ink-stained witnesses who have spent their lives "on the front line of the constant battle to weigh postage costs." Br. at "prologue," 1, 3.[4]

ABM's mud-of-the-marketplace theory is open to many objections. Perhaps the denizens of the ivory tower should have pride of place in responding to what is, as it pertains to them, no better than an ad hominem attack. We have seen what Professor Samuelson has to say. Here are the comments of two of his colleagues. First, the late Milton Friedman:

The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in the light of what can be done, politics aside, and not to predict what is "politically feasible" and then to recommend it.

Comments on Monetary Policy. In Essays on Positive Economics (Univ. of Chicago Press) [1951] 1953: 264.

Second, Michael Polanyi:

Almost every major systematic error which has deluded men for thousands of years relied on practical experience. . . . The scientific method was devised precisely for the purpose of elucidating the nature of things under more carefully controlled conditions and by more rigorous criteria than are present in the situations created by practical problems.

Personal Knowledge: Towards a Post-Critical Philosophy [1958] 1964: 163.

Evidently, the United States Congress agrees, for section 502 of the Postal Accountability and Enhancement Act provides that members of the Postal Regulatory Commission "shall be chosen solely on the basis of their technical qualifications, professional standing, and demonstrated expertise in economics, accounting, law, or public administration."

ABM's assertion that only printers and publishers can say what incentives are needed in Periodicals rates also runs up against the problem that printers and publishers occupy every side in this argument. They agree about only one thing respecting Periodicals postal rates: namely, that the appropriate rates are those that will make their own postage bills as low as possible. The Postal Reorganization Act requires the Commission to recommend rate changes only after a full hearing, and only on the basis of record evidence, in part because anecdotal, impressionistic, and unverifiable statements by self-interested participants are simply not trustworthy.

Perhaps as a fallback from its indefensible entrenchment in the mud of the marketplace, ABM's last recourse is to beg for the Commission's protection, on the ground that it is too small and weak and poor to defend itself. It says that it does not question the skill or the theoretical premises or conclusions of Time Warner's witnesses because it "lack[s] the resources even to make the attempt." This is one of many statements in ABM's brief that finds no support anywhere on the record. Perhaps ABM is as poor as this statement implies. Perhaps "[i]ts 290 member companies [who] reach an audience of more than 100 million professionals and represent nearly 5000 print and online titles" cannot muster the resources to hire a consultant with the ability to question Mitchell's and Stralberg's "numerical, economic, and theoretical premises or conclusions."[5] If that is the case, however, one must still wonder what accounts for the same inability on the part of the Postal Service. Do they too lack the resources to hire experts capable of evaluating the same evidence?