3. CMSA's Proposal to Revise MAX 4

CMSA's amended application proposes the elimination of hourly (local) rate Territories B and C, and distance (weight/distance) rate Region 1 from MAX 4. This would be accomplished by removing all maximum rates applicable to Territories B and C and Region 1, along with all tariff references to hourly rate territory and distance rate regional distinctions, essentially resulting in one hourly rate scale and one distance rate scale applicable statewide.9

CMSA advances several arguments in support of its proposed revisions to MAX 4. The rationale for its recommendation is that the demographics of California have changed dramatically since the Commission's initial adoption of the regional and territorial boundaries, so that changing those boundaries is necessary to prevent cost and pricing anomalies. From the consumer's standpoint, CMSA contends that its recommended revisions would make MAX 4 more comprehensible and increase the ease of comparison shopping in relation to the allowable maximum rates. CMSA also observes that the tariff would be easier for Commission staff to administer and enforce because of its greater simplicity. Finally, a simplified tariff would be more amenable to technical application, for example by promoting the implementation of an interactive application on the Commission's website that would enable a consumer to research the maximum cost of a move and compare it to movers' estimates.

3.1. THE CMSA/DRA Joint Recommendation

The joint comments filed by CMSA and DRA following their collaborative effort to generate data about the existing maximum rate framework recommend four changes to MAX 4. Although these changes are not identical to CMSA's initial proposal, they reflect a well-supported consensus that the existing tariff boundary lines are outdated and require modification, and that in certain limited respects adjustments to the maximum rate formula are required. The specific joint recommendations are as follows:

1. Eliminate hourly rate Territory C; incorporate current Territory C counties into current Territory B.

2. Eliminate distance rate Region 1; establish Region 2 rates as applicable to the entire state.

3. Reset the productivity offset factor used in making annual rate adjustments from .667 (the current factor) to .95 for five years, effective with the tariff increase in January 2010.

4. Beginning in 2015, re-evaluate and reset the productivity offset factor every two years. If productivity change is positive, the productivity offset factor should be set at .85; if productivity change is negative, it should be set at .95.10

3.2. Factual Support for Revising MAX 4

With the concurrence of DRA, CMSA conducted two surveys of its approximately 430 carrier members. The surveys were contained in a single package, and consisted of a C&O survey and an F/B survey, as described above. The surveys covered calendar year 2008. The C&O survey consisted of questions about carrier operations, labor costs, and pricing. The F/B survey requested copies of carrier freight bills for moves conducted on specific days. The goal of the surveys was to collect information about carriers' operating and pricing practices, with emphasis on market pricing.

DRA and CMSA agree that the survey responses provide sufficient information to draw general conclusions for the purposes of this proceeding. The data and conclusions they developed are set forth below.

The Cost and Operations (C&O) survey asked for information about a carrier's geographic area of operation, number and types of moves, number and classifications of employees, employee base wages, pricing, and price discounting practices. Eighty-three carriers responded, representing about 19 percent of carriers surveyed and 7.1 percent of the licensed household goods carriers that reported revenue in 2008. These carriers were in the small, medium, and large reported-revenue categories and included both van lines and carriers not affiliated with van lines. The reported revenues ranged from $3,000 to $7.8 million, and average $687,000 per carrier. The carriers represent a wide geographic distribution around the state.

The C&O survey requested wage data for six job categories. These included two office categories (Clerical and Dispatch) and four categories of moving crew members (CDL driver, which is a higher-skill category requiring operation of larger tractor-trailer vehicles; Class C driver; Packer; and Helper). DRA analyzed the underlying labor costs that were originally used to assign particular counties to the three MAX 4 territories for hourly-rate moves to produce current labor costs.

The survey results showed that differences in average wage costs between and among current MAX 4 hourly rate territories correspond with the current maximum rates. In other words, average wages for Territory A were higher than those in Territory B, which were higher than those in Territory C. The same is true for maximum rates. However, there were great variations in the ranges of wages paid within territories, and even within counties.

For example, DRA examined Santa Barbara and San Luis Obispo Counties, which CMSA had identified as those with movers' hourly rates that are compressed against the Territory C MAX 4 limits.11 DRA's examination of Territory C carriers' freight bills showed that the carriers charging rates of 95 percent to 100 percent of the MAX 4 rates were from Santa Barbara, San Luis Obispo, and Stanislaus Counties. These results strongly indicate the existence of high labor rate pockets in otherwise low labor rate counties, indicating a need to consider average labor costs in Territory C in combination with wage ranges and market pricing for this territory.

In addition to labor costs, actual carrier pricing was found to be useful in determining whether territorial boundaries should be changed. The reason is that the household goods moving industry is competitive in virtually every market, and market prices consequently reflect total carrier costs. The survey analysis concluded that wage costs on average appear to reflect existing territorial patterns, but analyzing market prices complements the cost analysis.

The F/B survey asked carriers to submit a copy of every freight bill for moves occurring on two specified days in 2008. One day was in the typical off-season for moving, and the other was for a day during the heavy summer moving season. The purpose was to observe actual carrier pricing behavior to determine market prices, giving particular attention to prices relative to maximum rates. The 54 carriers that responded by submitting freight bill summaries and/or actual freight bills comprise about 12.5 percent of all carriers surveyed and 4.6 percent of the licensed household goods carrier population in 2008. In terms of revenues, the responses represented 12.7 percent of total industry revenue for 2008. The responding carriers were in the small, medium and large reported-revenue categories, and their revenues ranged from $150,000 to $7.8 million and averaged $771,000. The responses comprised freight bills for all three hourly rate territories and both distance rate regions.

The F/B survey showed that, for the most part, carriers are generally charging rates appreciably below maximum rates, whether hourly or distance. The exception is hourly rate Territory C, where carriers are charging at or near the territory's maximum rates to a much greater extent than carriers in the other two territories. A result that was not expected by the parties is that carriers in Territory C typically charged higher rates than carriers in Territory B. Equalizing the maximum rates in these two territories to eliminate this discrepancy would eliminate one set of rates altogether, and leave two hourly rate territories, A and B. The parties found that the Territory B maximum rate would provide an adequate ceiling for former Territory C carriers, and preserve the consumer protection concept envisioned by the Commission, as only maximum rates, and not market prices, would be affected.

Maximum rate levels between Territories A and B differ significantly, and market pricing indicates even greater differences between these two territories. The maximum rate differences between these territories range from 4.75 percent for a vehicle plus driver (Van + 1) to 15.9 percent for a helper. For packers, who are a significant factor in many moves, the difference in rates is 13.4 percent. The typical comparison rate is that for a vehicle plus driver and helper (Van + 2); the difference in that rate between Territories A and B is 8.4 percent. The average observed difference between actual market prices for Van + 2 in the two territories is approximately 20 percent. The parties concluded that Territories A and B are significantly different in both market pricing and maximum rate levels.

The F/B survey results showed that most carriers charge well below maximum rates in both regions, although a greater proportion of moves were at or near maximum rates in Region 1 than in Region 2. The results support the proposition that eliminating Region 1, as proposed, will have no appreciable negative economic effect upon consumers.

A comparison of the maximum fixed distance rates of Region 1 (Item 300) and Region 2 (Item 310) reveals that the maximum rates of Region 1 are in the range of 91 to 100 percent of those of Region 2. The parties do not regard this difference as being at the level of significance. The F/B survey, as well as MAX 4 monitoring studies conducted by the Commission between 1992 and 1994, indicate that approximately 80 percent of moves conducted under MAX 4 are hourly rate moves. The impact of altering the long distance maximum tariffs would therefore potentially affect only about one fifth of all moves we regulate. Moreover, a footnote to Max 4 Items 310 and 320 provides that, where the point of origin and destination are in different regions, the higher Region 2 rates apply, further mitigating the potential impact of merging the regional rates. Additionally, although some carriers are assessing charges at or near maximum distance rates, the survey indicates that the overwhelming majority are pricing distance moves at discounts of 12 to 50 percent below MAX 4 maximum distance rates for either region.12

Overall, these results indicate that most intra-Region 2 moves are occurring at rates that would fit within the Region 1 maximums; intra-Region 1 moves are generally provided at rates below those maximums; and distance moves between the two regions are already governed by Region 2 maximum rates. Consequently, the potential effect of eliminating Region 1 would be small, and retaining the somewhat higher Region 2 rates is preferable, in the parties' view, in order to provide pricing flexibility to carriers in Region 1 that are struggling with compression of costs against the current maximum rates.

Public Utilities Code Section 5191, subdivision (d), requires the Commission to adjust annually the maximum rates for household goods transportation. Pursuant to this requirement, since 1998 MAX 4 has been adjusted for inflation each January, but subject to a downward offset to "encourage higher productivity and promote efficiency and economy of operation by household goods carriers." (Id.) The present formula for increasing maximum rates consists of two parts: First, the average annual change in the Consumer Price Index for All Urban Consumers (CPI-U) in the Los Angeles and San Francisco Bay metropolitan areas; and second, a reasonable percentage reduction (productivity offset factor) to encourage productivity.

The productivity offset factor was derived from the average annual trucking productivity data for the period from 1970 through 1989, a period of net productivity gains, adjusted specifically for household goods transportation. The adopted factor is .669, which means that a given increase in CPI-U is reduced by that factor to yield the percentage increase in maximum rates for the year. Maximum rates have thus been increased by about 67 percent of the CPI-U each year since 1998. It has been more than 20 years since the current industry productivity element was calculated for use in indexing rate increases,13 and it has never been reviewed or updated. Recent data show that the current productivity offset factor is no longer accurate.

Since the productivity offset factor was first calculated, the federal Bureau of Labor Statistics (BLS) has developed a new index more appropriate for the household goods transportation sector, and BLS productivity data suggest that the Commission's annual increases to maximum rates may have been inadequate for several years due to assumed productivity gains in household goods moving that have been too great. DRA and CMSA agree that the productivity offset factor should be updated in this proceeding. They recommend that the Commission reset the factor for the purpose of annual recalculation of MAX 4 rates, taking into account more recent data that reflect the BLS "Used household and office goods moving" sector, North American Industrial Classification System (NAICS) 48421.14 During the 1987 - 2007 period this data series shows an overall decline in mover productivity, indicating that the MAX 4 productivity assumptions relied upon by the Commission have been exaggerated since 1998.

Whether analyzed for the entire 1987 - 2007 period or for the most recent two peak-to-peak business cycles, the NAICS 48421 data indicate a negative productivity trend, despite some positive increase in recent years. The parties agree that maximum rates therefore need adjustment to compensate for the years of overstated productivity that produced inordinate reductions from cost-of-living changes.

Relying upon the National Bureau of Economic Research (NBER) dating of economic peaks, the parties found that the 1990 - 2007 two-peak period was marked by a negative 1.2 percent average annual productivity change for the sector. For the entire 1987 - 2007 period it is a negative 0.7 percent.15 In recognition of these trends, DRA and CMSA propose that the current productivity offset factor be revised from the present .669 figure to .95, effective with the regular tariff rate adjustment in January 2010, and be maintained at that level for a period of five years. At the end of that period, i.e., commencing in January 2015, the parties recommend that the Commission annually update the factor, utilizing NAICS data. They recommend that the period of time that should be used in doing so is that encompassing the two most recent full U.S. business cycles as determined by NBER.16

Under the methodology proposed by the parties the industry would receive no less than 85 percent and no more than 95 percent of CPI-U increases, depending upon the productivity offset factor produced by biennial recalculation of the factor. They emphasize that the increases would directly affect only the Commission's maximum rates, but would not directly affect market prices, which typically are below those maximums.

9 Actually, two distance rate scales would remain (Items 310 and 390), both for distance moves in or through Region 2. Item 390 distance rates are for moves to and from storage, and are stated separately from ordinary distance move rates.

10 In accordance with current Commission practice, the parties anticipate that the initial re-evaluation and subsequent biennial reviews will be conducted by the Commission's Consumer Protection and Safety Division (CPSD).

11 One Santa Barbara County mover paid substantially above the Territory C average wage, and one San Luis Obispo County mover paid somewhat more than the average wage.

12 Carriers charging maximum or near-maximum rates are those conducting moves wholly within Region 1.

13 See Resolution TL-18831(January 21, 1998).

14 Appendix E of the Joint Comments provides statistical support for this recommendation. This data series includes productivity for a mix of long- and short-haul movers. Although DRA and CMSA agree that the NAICS 48421 series must be approached critically because used office equipment moving and national interstate movers are encompassed, they concur that it "far better reflects the industry sector than the existing productivity offset factor." (Joint Comments, p. 12, fn. 20.)

15 The most recent peak-to-peak period from 2001 to 2007 saw a 1.8% average annual gain.

16 This NBER information can be obtained online at http://www.nber.org/cycles. The methodology suggested in the Joint Comments is as follows:

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