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F ederal R eser v e Bank
f i r s t v ic e

p re s id e n t

N0V6ITlb6r 21, 1991

DALLAS, TEXAS 7 5 2 2 2

Notice 91-95

The C hie f Ope rat ion s O f f i c e r of
each f i n a n c i a l i n s t i t u t i o n in th e
Eleventh Federal Reserve D i s t r i c t

Withdrawal of a Proposed Modification to the Price Structure
for the Interdistrict Transportation System
The Federal Reserve Board has withdrawn a proposed m o d i f i c a t i o n to
th e p r i c e s t r u c t u r e f o r th e I n t e r d i s t r i c t T r a n s p o r t a t i o n System (ITS) compo­
nent o f t h e Federal R ese rve ’ s check c o l l e c t i o n s e r v i c e .
This m o d i f i c a t i o n , which was is su e d f o r p u b l i c comment in August
1990 ( C i r c u l a r 9 0-6 8) , would have capped t h e cumulative amount o f p e r - i t e m
f e e s a s s e s s e d t o a bank f o r each shipment o f checks t o a s p e c i f i c Federal
Reserve O f f i c e .
The Board concluded t h a t t h e proposed cap s t r u c t u r e did not accu­
ra te ly r e f le c t costs.

A copy o f th e Board’ s n o t i c e (Federal Reserve System Docket No.
R-0705) i s a t t a c h e d .

For more inf o rm a tio n re g a rd in g th e ITS, p l e a s e c o n t a c t Robert
Whitman, (214) 698-4357, a t th e D a lla s O f f i c e ; E l o is e Guinn, (915) 521-8201,
a t t h e El Paso Branch; Luke Rich ar ds, (713) 652-1544, a t th e Houston Branch;
or Herb Barbee, (512) 978-1402, a t th e San Antonio Branch.
For a d d i t i o n a l c op ie s o f t h i s Bank’ s n o t i c e , p l e a s e c o n t a c t th e
Public A f f a i r s Department a t (214) 651-6289.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (

Docket No. R-0705
Federal Reserve Bank Services;
Interdistrict Transportation System Price Structure

Board of Governors of the Federal Reserve System.


Final Action.


The Board has decided not to implement the proposed

modification to the price structure for the Interdistrict
Transportation System (ITS) component of the Federal Reserve
Banks' check collection service.

The proposed price structure,

which includes an overall cap on charges assessed to the shipper,
does not accurately reflect the marginal cost of shipping checks
via ITS.

The Board has not adopted an alternate price structure

at this time due to a broad review of ITS that has been
undertaken by the Federal Reserve Banks.

Louise L. Roseman, Assistant

Director (202/452-3874), Julius Oreska, Manager (202/452-3878),
or Kathleen M. Connor, Senior Financial Services Analyst
(202/452-3917), Division of Reserve Bank Operations and Payment
Systems; Stephanie Martin, Senior Attorney (202/452-3198), Legal
Division; for the hearing impaired only:


Device for the Deaf, Dorothea Thompson (202/452-3544).
The Federal Reserve Banks strive to provide an
efficient nationwide check collection service.

Accordingly, to

facilitate interdistrict check collection, the Federal Reserve
Banks have established their own delivery system, known as the




Interdistrict Transportation System (ITS), for transporting
between Federal Reserve Bank offices checks collected by the
Federal Reserve Banks as well as other Federal Reserve materials.
ITS is an air transportation network that uses mostly
air but also ground couriers that are privately operated on a
contract basis.

The network links the 48 Federal Reserve offices

in five "hub and spoke” configurations.

Checks and other Federal

Reserve materials are transported between the "hub" cities and
also between the hubs and their respective "spoke” cities.


is configured to provide the Reserve Bank offices a means to
collect checks nationwide on an overnight basis on Monday through
Thursday nights, and over the weekend.
A bank may collect nonlocal checks through the Federal
Reserve Banks in several ways.

First, a bank may collect checks

drawn on banks in other Federal Reserve check processing regions
by depositing the checks in a mixed or Other Fed cash letter at
its local Federal Reserve office.

The local Federal Reserve

office sorts these checks by receiving Federal Reserve office and
ships them via ITS to the Federal Reserve offices serving the
paying banks.

Second, a bank may deposit at its local Federal

Reserve office separately sorted cash letters containing checks
drawn on banks located in another check processing region.


local Federal Reserve office does not have to process these
checks on its automated equipment due to the sorting performed by
the depositing bank.

These checks are sent via ITS in

"consolidated shipments" to other Federal Reserve offices.
Third, a bank may "direct send" a cash letter for deposit to the




Federal Reserve office serving the paying bank, using
transportation other than ITS.
A per-item fee is currently assessed for ITS

The fee is imbedded in the mixed and Other

Fed check collection fees or, in the case of consolidated
shipments, is assessed separately.

A higher ITS fee is

typically assessed for transportation during the week than for
transportation during the weekend, when time pressures are less
In August 1990, the Board proposed a modification to
the ITS pricing structure [55 FR 34075, August 21, 1990].
Specifically, the Board proposed that the cumulative fees
assessed to a bank for each shipment to a specific Federal
Reserve office destination be limited or capped at a
predetermined level.

Thus, under the proposal, an ITS user would

pay the per-item fee for checks in an ITS shipment up to
the volume threshold that is determined by the cap amount, but
would pay nothing for checks that exceed the threshold.
Accordingly, large-volume depositors that ship checks in excess
of the threshold volume in a single shipment would benefit from
the proposed structure.

The Board anticipated that the weekday

cap initially would be set in the range of $25 to $35 and the
weekend cap would be set in the range of $20 to $30 per Reserve
Bank office destination.

The Board has decided not to implement

the proposed price structure or an alternative new price
structure at this time.

Following is a summary of the comments




received on the proposal together with staff's analysis of the

summary of co m m ents and Analysis

The Board received 71 comments on the proposed price
structure change.1

The following table reflects comments by

category of respondent:
Comments Received
Commercial banks/Bank
holding companies
Air couriers
Trade associations
Savings institutions
Credit unions
Government agencies
Federal Reserve Banks


Sixty-three commenters opposed the proposed price

Eight commenters, including three Federal Reserve

Banks, supported the proposed change.

The major issues raised by

the commenters opposed to the proposal related to the proposed
price structure's deviation from prevailing market pricing
practice, its anticipated effects on correspondent banks and
private air couriers, the proposal's fixed cost assumption, and
the competitive impact analysis.

Seven commenters initially submitted requests for extension
of the comment deadline and later submitted comment letters on
the proposal. Letters requesting an extension of the comment
deadline are not included in the count of comments received. The
Board extended the public comment period until January 18, 1991
[55 FR 41387, October 11, 1990].


Pricing Issues.



Four bank commenters indicated in

their letters, and in subsequent discussions with Board staff,
that it is fairly common for private-sector air couriers to
employ price structures that assess lower average per-item fees
to large-volume customers than to small-volume customers.
According to these commenters, couriers frequently charge a fixed
fee to ship a standard weight of checks and usually assess
additional but lower per-pound fees for additional
standard-weight increments in the shipment.

Eleven commenters

generally agreed with the intent of the Federal Reserve Banks to
move closer to prevailing market pricing practices (i.e.,
volume-sensitive pricing), but did not believe that the proposed
price structure, which included an overall cap on charges
assessed to the shipper, was consistent with market practice.
Nine commenters were concerned that the proposed price
structure would not reflect the cost per shipment.

For example,

the Federal Trade Commission (FTC) indicated that the proposal
assumes that costs per shipper do not increase at all with any
volume larger than that eligible for the ceiling or maximum
The Board agrees that, although the concept of
volume-sensitive pricing is consistent with market pricing
practices, the proposed cap structure does not accurately reflect

The marginal cost of shipping incremental volume on ITS is

minimal but does not fall to zero when a threshold volume is
exceeded, as is implied in the proposed price structure.





this reason, the Board believes that the proposed price structure
should not be implemented.
Fixed Cost Assumption.

Twenty-five commenters did not

believe that 90 percent of ITS costs are fixed and do not vary
with volume.

Both bank and air courier commenters believed that

a much lower percentage of ITS costs is fixed.
Only a small portion of ITS cost varies directly with


cost components that vary based on volume

fuel costs and air freight forwarding charges.


Fuel expenses

comprise 20 percent of total ITS cost; however, less than 20
percent of fuel cost varies directly with volume.

Air freight

forwarding charges vary directly with the number of pounds of
freight shipped.

Air freight charges, however, constitute only

three percent of ITS costs.
Generally, other ITS costs are fixed over broad volume

Fixed price contracts for air charters and ground

services are set

for three or four years and constitute 75

percent of ITS costs.

These contracts are based primarily on

business requirements and on the overall design of the network,
rather than on the volume of checks shipped via ITS between
Federal Reserve offices.
Twelve commenters predicted that a rapid volume
increase on ITS, resulting from a price change, would consume the
network's excess capacity.

They stated that the Federal Reserve

Banks would have to add equipment and personnel to handle the
additional volume, which would increase cost and prices.

ITS can

accommodate a twenty percent volume increase on all routes and a




doubling of existing volume on almost half of the network's
routes without increasing the capacity of the network.
ITS Performance.

Thirty commenters discussed the

current level of ITS service and generally stated that private
air couriers provided more flexible and more reliable service at
significantly later deadlines.

Twenty of these commenters

believed that private couriers had better on-time performance
than ITS.

Seventeen commenters indicated that they prefer the

later deposit deadlines that private couriers offer, which can be
up to two hours later than ITS deadlines.
It is difficult to draw comparisons between ITS and
private couriers, because the ITS network delivers checks only to
Federal Reserve Banks, while private couriers typically deliver
checks to depository institutions as well as to Federal Reserve

Also, the ITS network is designed to support the Federal

Reserve Banks' nationwide check collection service, while private
couriers may tailor their services to specific collection routes
in order to maximize profit.

The Federal Reserve Banks are

currently conducting a comprehensive review of ITS, including the
network's design, dispatch times, and performance.

The review

will address those issues related to the performance of ITS that
were raised by the commenters, and adjustments may be made to the
network based on the results of the review.

Due to the current

review of ITS, the Board believes that the Federal Reserve Banks
should not implement an alternative ITS price structure at this




Seven commenters indicated that the Federal Reserve
Banks should expand ITS to provide check transportation to
private-sector banks as well as to Federal Reserve Banks.
An analysis of whether the Federal Reserve Banks should allow
conjunctive business on the ITS network and whether a new
transportation service should be offered is provided in the
Board's request for comment on proposed services that Federal
Reserve Banks may offer in a same-day settlement environment [56
FR 10429, March 12, 1991}.

The Board concluded that conjunctive

business on ITS could disrupt ITS delivery schedules (resulting
in higher levels of debit float) and would reduce the Federal
Reserve Banks' control over ITS, which would have a detrimental
effect on the Federal Reserve Banks' check collection service.
For these reasons, the Board concluded that the Federal Reserve
Banks should not allow conjunctive business on the ITS network.
Other Issues.

Commenters raised several other issues

concerning the ITS price structure proposal.


commenters indicated a need for detailed data concerning ITS
operations in order to thoroughly assess the implications of the

The Board, however, generally does not provide data on

Federal Reserve Bank operations at the level of detail requested
by some commenters.
One commenter was concerned that the private sector
might not be given an opportunity to comment on ITS price or cap
changes in the future, if the proposed ITS price structure were

The Board requests public comment on significant price

structure changes and would request comment on any proposed




significant modifications to the ITS price structure.


generally is not requested when adjusting the levels of fees
within an existing price structure.
Competitive Impact Analysis.

The Board received 66

comments on the analysis of the competitive impact of the
proposed ITS price structure.

Both bank and air courier

commenters believed that the proposed price structure would
adversely affect the ability of other service providers to
compete with the Federal Reserve Banks.
Twelve commenters disagreed with the assumption that
private couriers do not compete directly with the Federal Reserve

The FTC, for example, stated that "A vertically

integrated supplier [such as the Federal Reserve System] does
compete with firms that supply one stage of the vertical process
whenever single stage suppliers can be linked with suppliers at
other stages to provide a close substitute for the integrated
The Board believes that the Federal Reserve Banks
compete directly with other depository institutions that offer
check clearing services, but do not compete directly with
private-sector air couriers.

This view is consistent with the

decision reached by the United States Sixth Circuit Court of
Appeals in the 1983 Jet Courier court case [See Jet Courier
Services v. Federal Reserve Bank of Atlanta. 713 F.2d 1221 at
1227 (6th Cir. 1983)].

One commenter raised questions about the

Court's decision in that case, based on subsequent court
decisions in other business areas.

The Jet Courier decision,




however, remains the only court decision that specifically
addresses the implications of the Monetary Control Act in the
context of air couriers.
One commenter noted that the proposal failed to comply
with the Monetary Control Act and the Board's pricing principles,
because the proposed price structure could result in a mismatch
of ITS cost and revenue.

Section 11A of the Federal Reserve Act

[12 USC 248a] requires that the Federal Reserve set its fee
schedule for priced services to recover all direct and indirect
costs actually incurred in providing Federal Reserve priced
services over the long run.

Neither the Monetary Control Act nor

the Board's pricing guidelines require that the Federal Reserve
Banks match costs and revenues for individual components of a
priced service, such as ITS.

Nevertheless, the Federal Reserve

Banks historically have matched cost and revenue for the ITS
component of the check collection service.
Thirty-four commenters were concerned that the proposed
price structure would shift checks from private check collection
and transportation alternatives to the Federal Reserve Banks,
thereby resulting in a diminution of, and corresponding increase
in the cost of, private-sector alternatives.

Six commenters

noted that a reduction of private-sector alternatives primarily
would harm small depository institutions.
Nine commenters asked that the Federal Reserve
establish a competitive fairness advisory committee to review
proposed payments system changes before proposals are issued for
public comment.

The Board does not believe that such an advisory




committee is necessary, because the public comment process gives
the industry an opportunity to share its views on payments system

In addition, the Federal Reserve staff routinely briefs

trade association representatives on proposed changes affecting
the payments system, which provides an additional opportunity for
dialogue on these issues.

By order of the Board of Governors of the Federal
Reserve System, October 30, 1991.

(signed) William W. Wiles

William W. Wiles
Secretary of the Board