Mnr22 5 39 PM‘00
BEFORE THE
POSTAL RATE COMMISSION
POSTAL
RATE AND FEE CHANGES,
2000
:
DOCKET
DIRECT TESTIMONY
OF
STEPHEN E. SELLICK
ON BEHALF OF
UNITED PARCEL SERVICE
ON COST SEGMENT 3
POSTAL RAiE CISr!5313H
OFFICE C7 fiiE SiCkiii',Al
NO. R2000-1
TABLE
INTRODUCTION
OF CONTENTS
. .. . .. . . .. . .. . .. . . . .. . . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . . .. . .. . . .. . .. . . .. . .. . . .. . .. . .. . .. . .. . . .. . .. . .. .
1
. .. . .. . .. . . .. . .. . .. . .
2
COSTS . . .. .. . . .. . .. . .. . . .. . .. . .
3
The DegenNan-Ty-Smith
MODS-Based Approach Addresses
the Concerns Raised by the Commission in Docket No. R97-1 . . .. . . .. . .. .
3
B. The Postal Service’s Proposed Distribution Method Should
Be Used, with Minor Modifications . .. . .. . .. . .. . . .. . . .. . .. . . .. . . .. . .. . .. . .. . .. . .. . .. . .. . . ..
4
PURPOSE
OF TESTIMONY
MODS-BASED
A.
AND SUMMARY
ALLOCATION
OF CONCLUSIONS
OF MAIL PROCESSING
CALCULATION
OF IOCS OBSERVATIONS
AND TALLY DOLLARS
BY COST POOL . . .. . .. . . .. .._......................................................................................
7
CALCULATION
OF NON-BMC OUTGOING MAIL PROCESSING
COSTS INCURRED BY DBMC-ENTRY PARCELS .. . .. . . .. . . .. . . .. . . .. . .. . .. . .. . .. . .. . .. . .. . .. .
7
SUMMARY
7
OF CONCLUSIONS
. .. . . .. . .. . .. . .. . .. . .. . .. . .. . . .. . .. . . .. . . .. . . .. . . .. . . .. .. . .. . .. . .. . .. . .. . . ..
INTRODUCTION
1
2
My name is Stephen E. Sellick.
I am a Vice President at PHB Hagler Bailly, Inc.
3
(“PHB”), an economic
4
Washington,
5
and New York, New York.
6
Bartlett, Inc. and Hagler Bailly. Inc. in 1998. I am located in PHB’s Washington,
7
office.
8
9
10
11
and management
DC.; Cambridge,
consulting
Massachusetts;
Los Angeles and Palo Alto, California:
PHB was formed through the merger of Putnam, Hayes &
I have more than ten years of consulting
assignments
in regulatory
regulated industries.
firm with principal U.S. offices in
economics,
experience,
cost accounting,
including a wide range of
and financial analysis of
In addition, I have extensive experience
I have worked on PHB’s analytical
investigations
DC.
in environmental
litigation.
of United States Postal Service
12
(“Postal Service”) costing issues since 1990. In Docket No. R90-1 and again in Docket
13
No. R94-1, I assisted Dr. George R. Hall in the preparation
14
regarding the attributable
15
Docket No. R94-I,
16
testimony
concerning
17
(“IOCS”).
In Docket No. MC95-1, I assisted Ralph L. Luciani in the preparation
18
analyses and testimony
19
Postal Service in First Class and Standard
20
testimony
regarding
21
presented
direct testimony
22
in Cost Segment 3 to incorporate
of analyses and testimony
costs of Parcel Post, Priority Mail, and Express Mail. In
I assisted Dr. Colin C. Blaydon in the preparation
the treatment
of analyses and
of mixed mail costs in the In-Office Cost System
regarding the costs associated
of
with parcels handled by the
(A) Mail and in preparing supplemental
rate design for Standard
(A) Mail parcels.
In Docket No. R97-I,
I
regarding the Postal Service’s proposal to modify the costing
a Management
Operating
Data System (“MODS”)
1
based approach.
2
R97-1 regarding the MODS-based
3
I also presented
supplemental
Since 1995, I have visited and observed the operations
Service facilities, including the Washington,
5
Sectional Center Facilities; two Associate
6
Spoke Project”) facility; and an Air Mail Center.
8
I hold a B.S. in Economics
at a number of Postal
D.C., BMC on two different occasions;
Offices/Delivery
two
Units; a HASP (“Hub and
from the University of Pennsylvania’s
Wharton School
of Business and an M.A. in Public Policy Studies from the University of Chicago.
PURPOSE OF TESTIMONY AND
SUMMARY OF CONCLUSIONS
9
10
11
in Docket No.
approach for Cost Segment 3.
4
7
and rebuttal testimony
I have been asked to examine the Postal Service’s
new methods of costing in
12
Cost Segment 3. In so doing, I have reviewed the testimony
13
Service witnesses Degen (USPS-T-26)
14
My testimony
15
1.
and Van-Ty-Smith
and workpapers
(USPS-T-17)
of Postal
among others.
provides the following:
A recalculation
of base year Cost Segment 3 costs using (a) the improved
16
methods proposed
17
and (b) the Commission’s approach using 100 percent mail processing
18
labor cost variability as proposed
19
2.
An identification
by Postal Service witnesses
Degen and Van-Ty-Smith
by UPS witness Neels (UPS-T-l);
of the number of IOCS observations
and tally dollar costs
20
by cost pool for use by UPS witness Neels in his testimony
21
processing
costs (UPS-T-l);
and
-2-
on mail
3.
An identification
of the costs of certain Parcel Post operations
then used by UPS witness Ralph (UPS-T-5)
appropriate
to calculate a more
DBMC discount.
4
5
6
which are
MODS-BASED ALLOCATION
OF MAIL PROCESSING COSTS
The Postal Service presents several modifications
7
MODS-based
distribution
8
These modifications
9
Postal Service witnesses
of mail processing
and improvements
costs among the subclasses
are discussed
Degen and Van-Ty-Smith.
10
degree to which mail processing
11
testimony
12
distribution
13
with minor programming
14
distributing
15
Commission.
and improvements
and presented
in the testimony of
the
labor costs are variable and therefore attributable;
labor costs to the subclasses
modifications,
mail processing
of mail.
Mr. Degen also discusses
does not address this section of Mr. Degen’s testimony.
of mail processing
to its
I address only the
of mail. I recommend
the Degen/Van-Ty-Smith
my
approach
that,
to
labor costs to each mail subclass be adopted by the
The DegenNan-Ty-Smith
MODS-Based Approach Addresses
Concerns Raised by the Commission in Docket No. R97-1.
16
17
A.
18
The Postal Service’s approach
to distributing
attributable
the
mail processing
19
costs to subclasses
20
in Docket No. R97-1.
21
minor modifications
22
Service costs to the Mail Processing
23
of costs in certain “allied” pools) and was ultimately adopted by the Commission.
labor
follows, for the most part, the method the Postal Service proposed
This method was endorsed
to address the “migration”
component
-3-
by UPS in that proceeding
of certain Administrative
(subject to
and Window
of Cost Segment 3 and the distribution
1
In this proceeding,
2
it recommended
3
l
the Postal Service proposes several changes to the approach
in Docket No. R97-1:
Costs at Non-MODS
facilities have been broken into eight processing-based
4
functional
5
incoming, outgoing, transit, and other) cost pools used in Docket No. R97-1;
6
l
9
Costs associated
with “not handling”
basis than proposed
7
8
cost pools rather than being based on the “Basic Function” (e.g.,
l
in allied pools are distributed
on a broader
in Docket No. R97-1; and
Costs in MODS “support” pools are distributed
in a “piggyback”
fashion based on
the cost pools which those pools support.
10
Each of these changes represents
11
in Docket No. R97-1, and they should be adopted.
12
13
B.
14
The improvements
an improvement
over the Postal Service’s approach
The Postal Service’s Proposed Distribution
Be Used, with Minor Modifications.
the Postal Service has proposed
15
processing
labor costs in Cost Segment
16
development
of the most appropriate
17
Commission
determined
18
necessary
19
methodology
20
adapted to incorporate
relationship
proposed
Method Should
3 represent
methodology
in the distribution
a further evolution
for distributing
in Docket No. R97-1, improvements
full attribution of mail processing
-4-
in the
these costs. As the
of this type have no
to the degree of variability of mail processing
by Mr. Degen and Ms. Van-Ty-Smith
of mail
labor costs. The
in this case can be easily
labor costs.
A further adaptation
is also required to conform to Commission
respect to Cost Segment 3. The “migration”
of some costs previously
practice with
defined as
Window Service (and assigned to Cost Segment 3.2) and Administrative
(and assigned
to Cost Segment 3.3) should be reversed to ensure treatment
with the
Commission’s
established
practice.
These are essentially
consistent
the same “migration”
reversals that were required in Docket No. R97-1 to adapt the Postal Service’s
9
approach
to established
testimony
(UPS-ST-2)
Commission
practice, as detailed in my supplemental
in Docket No. R97-1.
Table 1 compares the Postal Service’s proposal in this case with Dr. Neels’
10
recommended
(and the Commission’s
11
returns attribution
I2
combines
13
recommendations
14
these changes on Parcel Post, Priority Mail, and Express Mail in the Test Year.
of mail processing
Dr. Neels’ recommended
established)
treatment
of Cost Segment 3, which
labor costs to 100 percent.
treatment
of other UPS witnesses
UPS witness Luciani
as reflected in my Table 1 with the
to calculate the combined
-5
impact of all of
TABLE
BY1998 Volume
Variable
1
Cost Segment
3 Costs by Class/Subclass
-~-
Total First Class Mail
Priority
Mail
733,035
127,161
Express Mail
Mailgrams
192
Total Periodicals
Total Standard
(Al Mail
Standard (B) Mail
Parcel Post
Bound Printed Matter
Special Standard
Library Mail
Total Standard
813.249
3,151,448
3,479,195
260,580
134,482
275,359
143,723
86,972
93,043
12,397
13,035
525,160
Mail
197,640
‘ree Mail
nternational
16,808
339,278
Mail
rotal Mail
rotai Special
Services
Total Volume
Xher
Variable
185,985
253
738.428
(B) Mail
LIS Postal Service
901,232
13,286,293
14,980,919
365,777
361,356
15.342.275
2,304,197
17,646,472
rotal Accrued
Sources: Postal Service Proposal - USPS-T-l 1, Exhibit USPS-l IA, pages l-2.
100% Attribution - UPS-Sellick-WP-I-A,
page 2. Calculation of Total Accrued does
not match exactly due to rounding.
-6-
CALCULATION
OF IOCS OBSERVATIONS
AND TALLY DOLLARS BY COST POOL
1
2
At the request of UPS witness Neels, I have calculated
observations
and the IOCS tally dollar costs in each cost pool by mail class and non-
mail activity code.
These results are provided in Sellick-WP-2.
CALCULATION
OF NON-BMC OUTGOING MAIL
PROCESSING COSTS INCURRED BY DBMC-ENTRY PARCELS
6
7
At the request of UPS witness Luciani, I have calculated,
8
9
Service’s basic approach
outlined in USPS-LR-I-103.
costs incurred by DBMC entry parcels.
processing
11
determine
12
that can be ascribed to DBMC Parcel Post and non-DBMC
13
calculation
14
costs are for outgoing
15
provided in Sellick-WP-3.
the proportion
DBMC parcels at non-BMCs.’
In conclusion,
I find that:
The approach
to distributing
subclasses
19
1.
uses IOCS data to
of IOCS tally dollars by MODS pool and IOCS Basic Function
SUMMARY
.
This approach
Parcel Post. This
shows that $9.34 million in Base Year 1998 attributable
16
17
using the Postal
the non-BMC outgoing mail
10
18
the number of IOCS
as proposed
mail processing
The details of the calculation
are
OF CONCLUSIONS
attributable
mail processing
by Postal Service witnesses
labor costs to
Degen and Van-Ty-Smith
This approach is based on Postal Service volume variabilities for mail processing
labor costs; the calculation using 100% volume variability can also be found in
my workpapers.
-7-
is
an improvement
over past practice and, with minor modifications,
adopted by the Commission.
The Postal Service’s proposal continues
refinement
of mail processing
costing methods to more closely align the
distribution
of mixed mail and overhead
characteristics
l
costs to mail processing
The Postal Service’s approach
can be implemented
Commission’s
9
costs. The Base Year results of this approach
l
historic practice of attributing
The Postal Service’s calculation
11
incorrectly
12
entry parcels.
operational
of the costs in Cost Segment 3.
8
10
the
and continues to use the available data on counted mixed mail.
The result is an improved distribution
7
should be
while maintaining
the
100 percent of mail processing
labor
are provided in this testimony.
of the costs avoided by DBMC-entry
parcels
includes $9.34 million of costs which are actually incurred by DBMC-
-8-
:..