1 Product Redesign MTAC Update Cost-Based Rates for Periodicals and Standard Flats February 5, 2004

2 Complaint Filing with PRC (Time Warner, et al) Initiatives Not Requiring a PRC filing Cost-Based Rate Structure PRODUCT REDESIGN Agenda

3 Complaint proposes new Periodicals rate structure Postal Service response due February 11 Overall approach similar to Redesign cost-based rates –New rate schedules for sacks, pallets & bundles –Incentives to go beyond current preparation –More flexibility, fewer rules Specifics of complaint proposal differ from Redesign –Editorial pounds: zoned, with “unzoned” discount –Piece-rate categories: auto & nonauto each divided further into machinable / nonmachinable –Presort levels: Basic Presort split into Mixed-ADC / ADC –Destination-entry levels: DBMC discount added PRODUCT REDESIGN Complaint Filing with PRC (Time Warner, et al)

4 Raise Standard Mail 5-D bundle minimum to 15 for pieces not over 5 ounces and not over ¾-inch thick –Federal Register Proposed Rule: December 2003 Major Theme in Comments: Make it Optional –Presort run before piece-weight is known ( > 5 oz?) –Pieces in 3-digit bundles may get slower service –Effect on USPS costs not known Possible Adjustments: –Address 5-ounce boundary in acceptance –Optional for pieces between 4 oz and 5 oz? Proposed Implementation: Summer 2004 PRODUCT REDESIGN Non-PRC Initiatives: 15-piece minimum

5 Co-palletization: Allow mailers to put independently presorted bundles of Periodicals, Standard, and BPM flats together on the same pallet –Deeper entry, Periodicals pallet discounts Co-mailing: Allow mailers to combine Periodicals, Standard, and BPM flats in the same bundle –Improved Bundle Presort (in addition to above) Standard Mail Service –Explicit agreement with each participating publisher –Dropship appointments required PRODUCT REDESIGN Non-PRC Initiatives: Co-palletization & Co-mailing

6 Initial Mailer Assessment: With current rates, participation may be limited –Some urge USPS to pursue, gain experience for future when cost-based rates may provide greater incentives –Build on experience with Periodicals co-palletization experiment To be viable, USPS needs to allow mailers to: –Co-mail at all bundle levels including ADC & Mixed ADC –Prepare ADC Pallets (now limited to Periodicals) –Need a pallet level on which to place ADC bundles –Most new ADC pallets w ould be dropshipped –Move Standard Mail from ADC sacks to ADC pallets – 2 billion pieces of Standard Mail in ADC sacks PRODUCT REDESIGN Non-PRC Initiatives: Co-palletization & Co-mailing

7 Exploring impact on USPS with Operations –Mixed-class ADC pallets would move some Standard Mail bundle sortation from BMCs to ADCs Need mailer feedback on probable participation and volume shifts under two scenarios: 1.If ADC pallets & bundles are permitted –Mixed classes permitted at all bundle & container levels 2.If only SCF or finer pallets are permitted –Mixed classes not permitted in ADC / MXD-ADC bundles –Prepare ADC / MXD-ADC bundles of each class in separate containers PRODUCT REDESIGN Non-PRC Initiatives: Co-palletization & Co-mailing

8 Fewer Rules, Not Zero Rules Retain weight maximums for bundles, sack & pallets May need lower limit on bundle-size due to bundle- integrity and equipment considerations May need limits on how much “inefficient” preparation mailer is allowed to buy –Limit risk that unexpected mailer preparation changes will complicate USPS Operations adjustment –Initially, rate differences may be significantly smaller than USPS cost differences, so postage differences may not outweigh production or service benefits –Want to preserve flexibility for mailers to make decisions based on individual mailing objectives and preparation capabilities PRODUCT REDESIGN Cost-Based Rate Structure

9 5-Digit Bundle Example When Objective is Low Postage 1.Make bundles for all 5-digits with at least as many pieces as the “absorption-doesn’t-pay” threshold –Threshold depends on container level –E.g., Threshold = 11 if bundle in SCF container, 17 in BMC container 2.Rank remaining 5-digits according to number of pieces 3.Starting with smallest 5-digit, put successive 5-digits in an existing 3-digit bundle. Stop when next 5-digit would push 3-digit bundle over weight-maximum 4.Either (a) make bundles for remaining 5-digits (will be smaller than those made in step 1) 5.Or (b) explore whether it would pay to combine remaining 5-digits into a new 3-digit bundle PRODUCT REDESIGN Cost-Based Rate Structure

10 Possible Sequence for Container Decisions Standard Mail example –Get total pieces & weight for each BMC area and each SCF area while doing initial pass for address-coding –Decide which BMCs get separate containers –Dropship plans / commitments –Initial pallet vs. sack decisions for BMC containers –Within each BMC, decide which SCFs get separate containers vs. host BMC container For subsequent bundle-level decisions, container level is more important than sack vs. pallet decision PRODUCT REDESIGN Cost-Based Rate Structure

11 Next Steps Toward Cost-based Rate Structure –Quantitative market research: February – May 2004 –May start Standard Mail research first –Use hypothetical but close to possible rate structure (end of February) –Use Peter Moore software to evaluate effects of rates on mail preparation –Near-final market research numbers by late May –Be ready to feed into regular Omnibus rate case preparation process PRODUCT REDESIGN Cost-Based Rate Structure