USPS-T-40
BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON,
D.C. 20268-0001
POSTAL RATE AND FEE CHANGES, 2000
DIRECT TESTIMONY
OF
KIRK T. KANEER
ON BEHALF OF
UNITED STATES POSTAL SERVICE
.-
Docket No. R2000-1
4-4,
USPS-T-40, Docket No. R2000-1, page
CONTENTS
Autobiographical
Sketch . . .. . .. .. .. . .. . . . .. . . .. . .. . .. . .. . . .. . .. . . .. .. . .. . .. . .. .. . .. . .. . . .. . . .. . .. . .. . .. . .. . . .. . .. . . ii
I.
Purpose ............................................................................................................
.I
II.
Guide to Supporting
..............................................................
.2
Ill.
Background
..........................................................
.2
IV.
Research
Documentation..
and Need For Investigation
Results and Proposed
A. The Current Classification
.............................................
Schedule.. .....................................................
4
4
Groups ..............................................
.7
C. Transition
Sites and the Lessons Learned ............................................
10
D. Proposed
Post Office Box Classification
11
Cost Homogeneous
B. Constructing
-.
Classifications..
Structure.. .............................
V.
Price Elasticity of Post Office Box Demand .....................................................
VI.
Box Counts and Costs.. ..................................................................................
VII. Unit Costs.. ......................................
A. Capacity
Weighted
Average
. ..............................................................
Location
Cost per Square
15
.I7
.20
Foot by
Fee Group.. ..........................................................................................
.22
B. Square Feet Allocation for Each Box Size.. ..........................................
.23
C. Space Provision Unit Cost by Fee Group and Box Size.. ..................... .24
VIII. Improving
Post Office Box Service . . .. . . .. . .. . . .. . .. . .. . .. . .. . .. .. . .. . .. . . .. . . .. . . .. . .. . .. . .. . . .. . .. 26
A. Assessment
B. Conclusion
IX.
of the Six Classification
Criteria .._......................................
. .. . . .. . .. .. .. . .. . . .. . . .. . .. . .. . . .. . . .. . .. . .. . .. . .. . .. . .. .. . .. . .. . . .. . . .. . . .. . .. . .. . .. . .. . . .. 29
List of Exhibits
A. Reclassification
Examples
B. Reclassification
Proposal
C. Developing
26
a More Cost Homogeneous
Classification
Structure
i
-,
.-
USPS-T-40.
Docket No. R2000-1, page
Direct
af
Kirk T. Kaneer
AUTOBIOGRAPHICAL
1
SKETCH
My name is Kirk T. Kaneer and I am employed
2
economist
3
1998. My current duties are to development
4
for use in domestic rate and fee designs.
5
Product Development,
6
in Pricing, I was employed
7
involved in labor negotiations
a
I was a rebuttal witness for post office box service, as well as the Nonprofit and
9
Classroom
rate design witness, in Docket No. R97-1, and the rate witness for
10
Classroom
Mail in Docket No. MC96-2.
11
in Classification
and Product Development.
by the Postal Service as an
I have held this position since
classification
proposals
Prior to my move to Classification
and
I did similar work in Pricing from 1992 to 1998. Before working
in the Labor Economics
I have been employed
Research
Division as an economist
by the Postal Service since 1988.
Prior to coming to the Postal Service, I worked from 1983 to 1988 at the Bureau
12
of Labor Statistics (BLS), Office of Prices and Living Conditions,
13
Surveys Research
14
Distribution
15
109(2), 50-53, April 1986.
16
and cost analyses
Division.
of Consumption
While employed
by Aggregate
Consumer
at BLS, I published an article titled:
Expenditure Share,
MONTHLY LABOR REVIEW,
In 1982, I received a Master of Science degree in Economics
17
University in Tallahassee,
Florida.
ia
with double majors in Economics
19
Central Florida in Orlando, Florida.
Expenditure
from Florida State
In 1978, I received a Bachelor of Science Degree
and Business Administration
from the University of
ii
.-.
.-
USPS-T-40,
Docket No. R2000-1, page
DIRECT TESTIMONY
OF
KIRK KANEER
1
2
t--
I.
Purpose
This testimony
presents the Postal Service’s proposal to restructure the
3
post office box service classification.
Section II gives a summary of supporting
4
documentation.
5
IV describes the current classifications
6
section also describes the Postal Service’s experience
7
approach for selected facilities.’
a
in this section as well. Using data developed
by Postal Service witness Yezer
s
(USPS-T-31)
the widespread
Section Ill presents the background
and related issues.
and presents research
results.
This
with a location-based
The need for a new classification
it is now possible to encourage
Section
fee
is discussed
and economically
10
efficient provision of box service by restructuring
the current post office box fee
11
groups into seven groups primarily differentiated
by location costs.’
12
discusses
13
the test year box counts and costs for the proposed
14
section also discusses
15
of developing
16
“fee shock” for current customers.
17
methodology.
the derivation
of post office box price elasticity.
Section V
Section VI discusses
classification
structure.
This
the tradeoff between the Postal Service’s long-term goal
true cost-homogeneous
classifications
and the need to mitigate
Section VII discusses
Section VIII explains how the proposed
test year unit cost
post office box
’ The Postal Service reassigned selected post offices to one higher or lower fee
group on January 10,1999. (See 63 Fed. Reg. 71374-75 (December 28,1998)
modifying Domestic Mail Manual 3 D910.5.3.)
’ No substantive changes are proposed in the provision of what is now called
“Group E” post office box service to customers who, because of decisions made
by the Postal Service, are ineligible for carrier delivery.
1
USPS-T-40,
1
classification
2
path for future fee development.
3
II. Guide to Supporting
4
satisfy the statutory classification
Documentation
Docket No. R2000-1, page
criteria and provide an optimal
Documentation
supporting
my testimony
includes my workpapers,
5
reference l-l 55, and summary exhibits.
The workpapers
6
counts and unit costs.
l-155 provides documentation
7
1998 Facility Profile, the SAS Reclassification
a
outlier review.
9
results that are the source of the box size distributions
Library reference
The library reference
10
elasticity utilized in my workpapers.
11
made available under protective
12
requesting
13
Ill. Background
14
library
forecast test year box
for the
Program, and Facility Profile data
also contains the 1999 PO Box Survey
and the estimates of price
A data set for fee group specification
conditions,
can be
which the Postal Service is
by motion filed with its Request in this proceeding.
and Need For Investigation
The longstanding
approach
to classifying
post office boxes for fee design
15
purposes has relied on the type of carrier delivery, thus grouping boxes without
16
much regard to costs.3 In Docket No. R90-1 the Postal Service began to align
17
fees with costs more closely by proposing
18
Groups A and B, for higher cost locations.
19
20
21
22
23
2
two new fee groups, now termed Fee
Wetness Larson stated:
. ..the market costs of space are not the same in all city carrier
offices throughout the country; rather these costs vary widely by
location... Unlike other postal services, the costs of post office
boxes are significantly influenced by space costs!
3 The City I Non-City classifications appear to have originated
as 1958. (Docket No. MC96-3, USPS-T-8, at 17. In. 20)
4 Docket No. R90-1, USPS-T-22, page 9, In. 9-15.
at least as far back
USPS-T40.DocketNo.R2000-l,page
I
Furthermore, the cost of space in some areas, such as central
business districts in certain metropolitan areas, has become so
high as to make procurement of additional space to provide box
service, despite sufficient demand, uneconomic.5
1
2
3
4
5
In Docket No. MC96-3, Witness Needham
6
between
recognized
that the fee differences
city and non-city offices was too large.
Any difference between city and rural carrier delivery offices does
not justify such a large difference in fees. First, the salary levels of
clerks putting up box mail is the same nationwide. Second,
customers in both these fee groups are eligible for carrier delivery.
Moreover, as developed in witness Lion’s Testimony, Postal
Service costs for providing post of5ce box service are only about
10 percent less in Group II than in subgroup IC. Finally, witness
Lion shows that the usage rate for Group II boxes is comparable to
the usage rate for Group I boxes, and that a greater proportion of
Group II offices than of Group I offices have no vacant boxes for at
least one size. Therefore, the Postal Service is proposing to begin
moving toward comparable treatment for all offices with carrier
delivery.6
7
a
9
IO
11
12
13
14
15
16
17
ia
19
20
So, for nearly a decade, the Postal Service has sought ways to align post oftice
21
box service with its costs.
Recently, in Docket No. R97-1, Office of Consumer
22
23
witness Callow proposed
a Cost Ascertainment
24
classification
25
costs.’
26
classification
27
location cost information
28
The Postal Rate Commission
Advocate
(OCA)
Group (CAG) based
structure for post office boxes in an attempt to align fees and
As a rebuttal witness in that docket, I outlined a hypothetical cost-based
structure,
and proposed
developing
a comprehensive
source of
for future use as the basis for optimal fee group design.
(PRC) encouraged
the development
’ Ibid. In. 18-22.
6 Docket No. MC96-3, USPS-T-8, at 18, In. 9-l 9.
’ Docket No. R97-1, OCA-T-500, p. 3 (Tr. 23/12280).
of this
3
USPS-T-40, Docket No. R2000-1, page
1
proposed
2
witness Yezer’s location cost research, which I now use as the basis to propose
3
a practical,
4
IV. Research Results and Proposed Classifications
5
cost information. * Since that time, the Postal Service has sponsored
cost-based
classification
This section examines the current classifications,
6
rental equivalent
7
post office box classification.
a
cost-based
9
10
11
structure.
cost distribution
classification
and addresses
displays witness Yezer’s
the long-term implications
Also, this section closes by proposing
for
a mitigated
and fee group specifications.
A. The Current Classification
Schedule
The Domestic Mail Manual (DMM, § 0910.5)
defines the five current post
office box fee groups?
12
1) Group A - New York ZIP Codes: 10001-10299;
13
14
2) Group B - Selected ZIP Codes for large cities
(see DMM 54, at D-42);
15
16
3) Group C - “City Other”: offices with at least one City Delivery route not
in fee Group A and B locations;
17
4) Group D - Non-city delivery and non-delivery
ia
5) Group E - Customers
operational reasons.
19
offices;
ineligible for delivery for postal policy or
’ “While the Commission is rejecting the CAG proposal, it recognizes that the
Postal Service presently lacks the information to optimally align box costs and
fees. Consequently, we encourage the Postal Service to actually follow through
on its plan to develop the cost information described in witness Kaneer’s
testimony.” PRC Op., R97-1, Volume 1, page 566, sec. 5912.
’ Twenty-one transfer sites were also selected early in 1999 for fee group
reassignment as an aid in gauging the proposed classification concept.
4
USPS-T-40,
/-
1
Docket No. R2000-1, page
5
The current fee groups are not strongly related to their costs and thus are
I
2
sub-optimal
3
problem has been the lack of data showing location-based
4
has recently developed
5
used to delineate variations
6
allowing the development
7
with respect to the fairness and equity criterion.”
the necessary
Part of the
costs. Witness Yezer
location cost data. These data can be
in economic space costs by five-digit ZIP Code, thus
of truly cost-based
The current classification
categorizes
post office box fee groups.
most boxes by the carrier delivery
8
type without focusing on the economic cost of the space they occupy.
On the
9
other hand, some locations thought to have high costs are segregated
into Fee
10
Groups A and B. Yet the rent ranges for Groups A and B overlap those of
11
Groups C and D. Exhibit C, table 1, column (b) shows the high and low cost per
12
square foot values, or “Rent Range,” as developed
13
current fee groups.
14
For example, all four rent ranges contain facilities having a space cost of $8.92
15
per square foot -the
16
3, column (e)). A purely cost-based
17
(though fee shock considerations
1%
locations with wide-ranging
19
there are likely thousands
20
that have location costs as high as ZIP Codes in Groups A and B.
by witness Yezer for the
Note that each fee group’s range overlaps that of the others.
overall average cost per square foot (Exhibit C, table 1, line
costs).
classification
system would avoid this result
force the proposed groups to still contain
Given the overlap of rent ranges, currently
of ZIP Codes in Groups C and D around the nation
” OCA witness Callow pointed to the wide space provision cost variations and
cost heterogeneity
within the current post office box fee schedule (Docket No.
R97-1, Tr.23/12286-87).
USPS-T-40,
Moreover,
1
Docket No. R2000-1, page
in current Fee Groups C and D, given the wide range in cost
2
per square foot, thousands
3
These space costs comprise approximately
4
service costs. The mismatch between these costs and the current fee group
5
definitions
6
group definitions.
demonstrates
of within-group
divergent costs could be found.
45 percent of total post office box
the need to redesign the classification
The current fee groups are an understandable
7
6
a
development;
9
can include higher fees in distressed
however,
10
areas.
11
as space availability,
undesirable
consequences
outgrowth
schedule and
of their historical
of cost and fee misalignment
urban areas than in prosperous
“non-city
Given that post office boxes require retail space, short-run factors, such
can influence box service expansion;
some post offices
.-
12
may have waiting lists of customers
seeking post office boxes. A waiting list
13
could indicate that expansion
14
that particular location; yet local managers,
15
expand because the cost of the space exceeds revenues that new post office
16
boxes might generate.
17
pricing and resource allocation.
16
the allocation
19
cost of the service provided.
is needed, or that costs are not being recovered
To an economist,
at
closely attuned to cost, may not
these are indications of sub-optimal
Correct pricing provides incentives to improve
of post office box resources to customers
while charging them the
USPS-T-40, Docket No. R2000-1. page
~-.
1
B. Constructing
Cost Homogeneous
2
Cost homogeneous
7
Groups
groups can be defined based on Space Provision
3
costs, since Space Support and All Other, the remaining two cost categories,
4
not vary by location.
5
box cost. Space Provision reflects the cost of the space used for post office box
6
service.
7
maintenance
8
Lastly, All Other accounts for costs arising from Postmasters,
9
Technicians,
Each cost category accounts for a dimension
do
of post office
Space Support accounts for costs that arise from custodial and
services, fuel and utilities, custodial/building
supplies and services.
Supervisors
&
Clerks, Carriers, Motor Vehicle Services, and Other Supplies and
IO
Service.
11
the same assumptions.
12
foot and the space occupied
13
number of installed boxes, their size, and their particular location produce the
14
total Space Provision cost measured
15
be allocated to the boxes in use as a part of their unit cost. Space Support costs
16
are allocated to boxes in use based on box size. Lastly, All Other costs are a
17
function of the number of boxes in use and are allocated equally to all boxes in
18
use - regardless
19
These cost categorizations
are the same as in past cases and follow
Space Provision costs are related to the cost per square
by post office boxes at each facility.
Therefore,
the
by the rollforward model which in turn must
of location or size.
Cost are allocated
in this testimony just as they have been in the past,
20
except that the usual pool of Space Provision costs are now distributed
21
witness Yezer’s analysis of location space costs.”
based on
The costing methodology
.-,
” Total Space Provision cost is in part a function of the space required by the
number of post office boxes installed. As in the past, Space Provision costs are
apportioned to boxes in use to recover attributable costs from users.
USPS-T-40. Docket No. R2000-1, page
1
allocates attributable
2
in use, times their fully allocated
3
TYBR post office box attributable
4
2, line 30, column c; and Exhibit A, page 2, line 72, total cost).
5
office box costing and classification
6
prorating of attributable
7
estimated
0
attributable
9
8
cost such that the TYBR number of boxes estimated to be
unit cost, yields a total dollar value equaling the
cost plus contingency.‘*
schedule
(Compare Worksheet
post
design is an exercise in the
costs to boxes in use. Accordingly,
costs per square foot constitute
In essence,
an appropriate
witness Yezer’s
means of allocating the
Space Provision costs to post office box fee groups.
Figure 1 shows witness Yezer’s cost per square foot frequency
10
distribution
for post office box locations with an overlay of seven cost groups
11
numbered
I to VII and gives a view of the longer term goal of a truly cost-based
12
post office box classification
13
these seven cost groups reflect the underlying
14
homogenous
system and fee group definition.
As can be seen,
location cost differences
and are
(non-overlapping).
” I have reduced the CRA post office box cost by an estimate of that portion of
Caller Service and Reserve Number cost included in the CRA figure (see WP-3).
USPS-T-40, Docket No. R2000-1. page
Figure 1
1
2
3
Post Office Box Space Cost Per Square Foot Distribution
Classified Into Seven Cost Groups:
I to VII
6
Hypothetical Cost Groups
II
III
IV
9
.=$12.5
.=$lO.O
>=$7.5
& ~$16.0
h <$12.5
& <$lO.O
10
13
I
14
15
16
17
18
19
If locations were strictly assigned to these seven fee groups based solely
20
on cost, without regard to fee shock, average cost per square foot for each group
21
could appropriately
22
each group.
23
cost distribution.
be used to allocate Space Provision cost to the boxes in
Cost group IV is constructed
to be centered near the mean of the
Three additional cost groups are constructed
to each side of
9
USPS-T-40,
DocketNo.RZOOO-1,page
10
1
Cost Group IV based on rent ranges of roughly equal size (except for the tails) to
2
capture the full range of cost variation.‘3
3
conjunction
4
based classifications
5
Middleburg,
6
lowest price group under the current fee structure.
7
cost per square foot is greater than $4.00.
0
Middleburg
9
greater fee increase than Group D7 (see Exhibit A, page 3). An example of
These cost groupings
with the current fee groups to specify the proposed
(see proposed
classification
-.
serve in
mitigated cost-
design below).
For example,
VA ZIP Code 20117 is currently classified as a Group D location, the
is reclassified
Yet Middleburg’s
Under the proposed
estimated
structure,
as a Group D6 location and would experience
IO
Group D7 is Crawfordville,
11
foot is less than $4.00.
12
Group D location.
13
as a Group D7 location and would experience
14
Middleburg
15
based fees can be met by relaxing the limitations on location assignments
16
time (for example, compare
17
shock mitigation).
a
GA ZIP Code 30631, for which the cost per square
Crawfordville
is currently grouped with Middleburg
as a
.-
Under the proposed fee structure,
Crawfordville
is reclassified
a lower fee increase than
(see Exhibit A, page 3). The long-term goal of realizing truly costover
Exhibit C, page 1, tables 2-3 with and without fee
18
C. Transition Sites and the Lessons Learned
19
At the same time as the implementation
of the rates resulting from Docket
20
No. R97-I, the Postal Service reassigned
21 “transition
21
or low location costs and post office box utilization
sites” having very high
rates to different fee groups.
‘3 The term rent is used to denote witness Yezer’s cost per square foot estimates
of projected market values of economic space cost.
USPS-TAO, Docket No. R2000-1, page 11
.-
1
Fees were increased where costs and utilization were exceptionally
2
decreased
3
moved up or down one fee group.
4
reaction and management
5
gain limited experience
low; each site was either
By changing fees in 21 sites customer
of change could both be observed.
in the dynamics of regrouping
Several lessons were learned.
6
The goal was to
boxes.
First, the 21 transition sites were specific
7
facilities, rather than ZIP Codes or post offices.
a
post office box fees by facility have convinced the Postal Service not to define
9
the new fee groups the same way.
The burdens of administering
For example, approximately
40,000 post
IO
office box locations would require individual fee designations
11
fees applicable
12
managerial
difficulty and customer confusion.
13
determined
that the use of five digit ZIP Codes holds the best potential for
14
customer understanding
15
new classification
16
propose capacity utilization as a factor determining
17
time.
18
,I-
where cost and utilization were exceptionally
high and
within single ZIP Codes.
and administrative
In brief, the experience
Service does presently
20
box fees at the ZIP Code level.
21
D. Proposed
22
Three converging
box classification
This might cause considerable
The Postal Service has
convenience.
Second, to keep the
schedule simple, the Postal Service has determined
19
23
having differing
not to
post office box fees at this
at these 21 locations suggests that the Postal
have the ability to administer
Post Office Box Classification
events support introduction
location-based
post office
Structure
of a redesigned
structure at this time: cost heterogeneity
post office
of the existing fee
USPS-T-40.DocketNo.R2000-1,page
groups, the Commission’s
availability
support for better alignment
and economic
specific aim of the proposed
efficiency.
with principles
of
In keeping with section 3622(b), a
post office box restructuring
is better alignment
of
fees with costs.
In other words, post office boxes having similar costs should be
grouped together
and have the same fee. This is the concept of fee group “cost
homogeneity.”
8
continuum
9
segments.
Purely cost homogeneous
fee groups would require dividing the
of facilities with post office boxes into contiguous,
Because of the large difference
10
Group D, however, true cost-based
11
promulgated
12
of fees and costs, and the
of new data that permit such alignment consistent
cost-causation
12
non-overlapping
in the current fees for Group C and
post office box classifications
in one simple step without unacceptable
cannot be
fee shock.
Exhibit C, table 2, shows the cost groups without fee shock mitigation.
13
The groups are cost-homogeneous;
14
average rent in column (e) declines uniformly from Cost Group I to Cost Group
15
VII. In contrast, Exhibit C, table 3, shows the proposed
16
consider the need for fee shock mitigation.
17
Postal Service anticipates
18
groups defined by cost “bands.”
19
gradually
there are no cost overlaps.
Beginning
Also note that
fee classifications
with this proposal, the
moving all locations into appropriate
To obtain more cost homogeneous
post office box classification
20
the Postal Service proposes
21
six location cost-based
22
through D7), with a seventh group designated
23
delivery customers,
which
fee
groups,
to assign post office box service ZIP Codes to the
groups shown in Exhibit C, table 3 (Fee Groups 82
as available).
for zero-fee boxes (for non-
ZIP Codes, and the post office boxes they
USPS-T-40, Docket No. R2000-1, page 13
P
1
contain, are assigned to fee groups based on estimated space costs - and
2
current fee levels, which serve as the basis for fee shock mitigation.
3
Code composition
4
Yezer’s assessment
5
overlay based on current post office box fee groups, which are used to mitigate
6
extreme fee changes,
7
can become increasingly
0
reassigned.
9
be developed
of each of the cost-based
of the economic
groups is determined
both positive and negative.
cost homogeneous
Over time, the cost groups
as ZIP Codes are appropriately
Along with this ongoing process, new fee levels and groups could
with less worry about fee shock.
Proposed Classifications
11
The following fee classifications
12
Group B2 -former Group A with cost per sq.ft. L $12.50,
former Group B with cost per sq.ft. t $12.50,
13
14
15
16
by witness
space costs in each ZIP Code with an
10
-.
The ZIP
are proposed:
17
Group C3 - former Group A with Cost per sq.ft <$12.50,
former Group B with cost per sq.ft. 2 $10.00 & <$12.50,
and former Group C with cost per sq.ft 2 $10.00,
18
19
20
Group C4 -former Group B with cost per sq.ft. <$lO.OO
and former Group C with cost per sq.ft. 2 $7.50 & ~$10.00,
21
22
23
24
Group C5 -former
Group C with cost per sq.ft. <$7.50,
Group D6 -former
Group D with cost per sq.ft. 2 $4.00,
Group D7 -former
Group D with cost per sq.fi. ~$4.00,
25
.-~
26
27
28
29
Group E - box service at zero-fee for customers
delivery.
30
Exhibit B, page 1 presents this classification
31
ineligible for carrier
proposal in tabular form,
Exhibit B, page 2 shows the box counts for each of the current and proposed
USPS-T40,DocketNo.
R2000-l,page
1
groups, as well as their costs. With one exception,
2
unit costs that decrease
3
results from the need to mitigate fee increases for the higher cost ZIP Codes
4
currently in Group D.
5
the proposed groups have
as the proposed fees decrease.
Exhibit C illustrates
how the proposed
14
The one exception
classification
schedule
mitigates
It
6
fee shock while allowing for better cost and fee alignment in the future.
7
compares
a
approaches.
9
fee groups without fee shock mitigation and Table 3 shows the proposed
Test Year post office box counts and costs under three classification
Table 1 shows the current fee groups.
Table 2 shows hypothetical
fee
Note in Table 3 that the boxes currently within
10
groups with fee shock mitigation.
11
Fee Group A are limited to proposed groups B2 and C3. Since the cost per
12
square foot for current Group A locations fall within the range for current Group
13
B, there is no basis for the separate treatment
14
Also, the boxes within current Fee Group B are limited to proposed
15
B2, C3, and C4, while current Fee Group C is limited to Fee Groups C3, C4 and
16
C5. Lastly, current Fee Group D is limited to proposed
17
A general comparison
18
better aligned after implementation
19
why fee shock mitigation
20
example,
21
to Group D6 (having a 2 $4.00 & ~$7.50 cost per square foot range).
22
cost homogeneous
of current Group A locations.‘4
Fee Groups
Fee Groups D6 and D7.
of tables 1, 2, and 3 illustrates how cost and fees could be
of the proposed
classification
schedule
could play less of a role in future proposals.
and
For
in the next filing, low cost Group C5 locations could be allowed to “fall”
fee groups can eventually
Completely
be realized, perhaps similar to
USPS-T-40,
1
those described
in Table 2, by reassigning
2
higher/lower
3
completely
4
V. Price Elasticity
Docket No. R2000-1, page
higher/lower
15
cost locations to the next
i-’
5
The continuation
cost homogeneous
of such a process would lead to
(non-overlapping)
fee groups.
of Post OfTice Box Demand
In order to gauge the effect of the proposed
fee changes on the number of
6
post office boxes in use and the subsequent
7
estimates of the price elasticity of demand are required.
a
demand for a product or service may be defined as the responsiveness
9
quantity demanded
10
.-I
fee group.
11
percentage
effect on post office box revenues,
to a change in price as measured
change in quantity to the percentage
The price elasticity of
of
by the ratio of the
change in price.
The number of boxes in use is forecast to grow from a baseline period of
12
mid-June
1998 to the Test Year (GFY 2001) at the rate of real GDP growth,
13
adjusted for changes in quantity demanded
14
The response to real price changes depends
15
which was estimated from the 1998 and 1999 Post Office Box (POB) Surveys.
16
The elasticity was estimated
17
GFY 1999 and GFY 2000. The methodology
increase on January IO,1999
in response to real price changes.
on the price elasticity of demand,
using an accrual methodology
for the interim years
reflects the fact that the fee
takes up to 12 months to go into effect since some
19
boxes were prepaid for 12 months just prior to the January increase. See
20
Workpapers
9 and 10.
l4 Therefore I am not proposing the top one of the seven hypothetical
my unmitigated classification structure.
groups in
USPS-T-40,
Docket No. R2000-1, page
In Docket No. MC96-3, Postal Service witness Ellard conducted
1
an
2
opinion survey of post offrce box holders in an effort to gauge the response of
3
box holders to price changes.
4
states:
5
6
7
a
9
10
11
12
In section Ill, “Findings,”
of his testimony,
he
“My experience has been that questions regarding
the effect of price increases are never well received by
respondents.
There is a generally a reflexive objection to
price increases which turns out to overstate the degree of
the objection.”
Witness Ellard suggested
that the survey findings be treated as a “worst
13
case, setting a limit for the proportion
14
alternatives
15
utilized in Docket No. MC96-3 were essentially the survey elasticity estimates
16
reduced by half.
17
16
to the proposed fees.“‘6
of customers
who would seek to find
Indeed the post office box elasticities
Post office box price elasticities for the present case were estimated from
and 1999
18
the 1998
19
D). The first survey was conducted
20
locations
21
Docket No. R97-1.
22
locations during the month of July 1999. In both surveys, counts of boxes in use
23
were taken.
24
box usage at each location could be measured.
25
behavior in response to the price increase was observed and measured,
-just
POB Surveys (for details, see library reference
in November
before the implementation
The second
1998 in approximately
of the new fees recommended
surveyconsisted
of re-surveying
Thus, the effect of the implementation
I5 Docket No. MC96-3, USPS-T-6,
” Ibid. Lines 17-19.
l-l 55 section
1500
in
the responding
of Docket No. R97-1 fees on
Hence, actual customer
page 7, In. 5-16.
as
USPS-T-40,
.-
1
opposed to measuring
stated customer intentions regarding hypothetical
2
changes.
Observation
of actual behavior likely explains the smaller elasticity
3
estimates
obtained from these latest POB surveys, since survey respondents
4
tend to overstate their reaction to hypothetical
Individual customers
5
likely to use larger box sizes.
7
were categorized
8
for differences
,--
Thus, for purposes of estimating
price
are more
elasticities,
boxes
by size into two groups, Size 1 and All Other Sizes, to control
in price sensitivity for these two customer groups.
Elasticity estimates
of -0.229 for size one boxes and -0.306 for size two-
10
five boxes were obtained. These reflect the response
11
real price changes of 10.19% and 10.15%, respectively.
12
calculations
13
VI.
-.
17
price changes.
tend to use Size 1 boxes while businesses
6
9
I
Docket No. R2000-1, page
are documented
in library reference
of quantity demanded
to
Details of the elasticity
I-1 55, part D.
Box Counts and Costs
14
A spreadsheet
model of the interactions
15
and revenues is developed
16
the derivation of post office box unit costs and the impact of the proposed
17
based classification
18
attributable
19
rollfonvard model (see Workpaper
20
TYBR post oftice box costs by their assigned
21
categories:
22
3 shows caller service and reserve numbers cost adjustments
23
workpaper
in my workpapers.
schedule
among box counts, costs, fees,
By examining
may be understood.
My workpapers
test year costs before rates, as determined
2). Workpaper
the workpapers,
begin with the
by the Postal Service’s
2 shows the allocation of
cost segments
into three
1) Space Provision, 2) Space Support, and 3) All Other.
2.
cost-
Workpaper
used in
USPS-T-40,DccketNo.R2000-1,page
To prorate attributable
1
18
costs to boxes in use, I have forecast the number
2
of TYBR boxes in use, by size and fee group. My workpaper
3
count data for the current and proposed
4
the 1998 Facility Profile (FP). The FP is a census of all postal facilities (see:
5
USPS-LR-I-155,
6
derive base year box counts, installed and in use, for the current and proposed
7
fee groups.
9
5 summarizes
(POB) Survey (see USPS-LR-I-155,
10
to estimate the distribution
11
data do not distinguish
My workpaper
12
fee groups based on data collected
Part A). These data are used in subsequent
My workpaper
8
4 displays box
worksheets
in
to
some results of the 1999 Post Office Box
Part D). This survey was conducted
in part
of post office boxes by size since the Facility Profile
by box size.
6 displays other summary statistics from the 1999 POB
13
Survey showing the percentage
14
elasticities
for Box Size 1 and Box Sizes 2 through 5 are also shown.
15
workpaper
displays the data used to derive the number of zero-fee
16
use and the elasticity values used to gauge the impact of fee changes on boxes
17
in use.
18
Workpaper
of Group E boxes by current fee group.
7 displays baseline (mid-June
The
This
“E boxes”
1998) boxes disaggregated
19
fee group.
20
dates to the Facility Profile data. The “Group E” box counts were derived by
21
applying the percentages
in
by
The term “base line” denotes that these data still reflect submission
of Group E boxes from the 1999 POB Survey to the
USPS-T-40.DocketNo.R2000-l,page
.I
19
1
Facility Profile data in order to estimate the number of Group E boxes (see
2
column (e)).”
3
Workpaper
8 applies box size distributions,
shown in Workpaper
4
box counts found in Workpaper
5
installed and in use - by size for the current and proposed fee groups.
6
Workpaper
5, to the
7, thus yielding baseline box counts-both
9 displays forecasting
input data, and calculates changes in
7
real GDP and the CPI-U.
8
box counts to estimate box counts in the base year and forecast the box counts
9
in the test year for current and proposed fee groups.
10
Workpaper
These data are used in conjunction
10 shows the Government
Fiscal Year (GFY) 1999 and GFY
11
2000 average Docket No. R97-1 fee change timeline.
12
worksheet
*
13
with the baseline
The purpose of this
is to supply factors used to calculate interim year box counts.
Workpaper
11 displays the GFY 1998 “Base Year Estimate” and develops
14
a Revenue Pieces and Weight (RPW) adjustment
15
is only a $18,829,368
16
Reserve Numbers, and Group E box usage is taken into account.
17
basis used to estimate box count data at the rate cell level yields reasonable
18
estimates
19
methods in forecasting
20
21
As can be seen, there
variance to 1998 RPW revenue, once Caller Service,
of PO Box revenues.
My Workpaper
factor.
Hence, it is also reasonable
Thus the
to use similar
test year box counts and revenues.
12 applies real price change, elasticity, and GDP growth
factors to estimate End-GFY 1998 boxes in use.
” “Group E” applies to boxes rather than facilities because there is no facility
that can be termed a “Group E” facility. Currently, each facility is either Group A,
B, C, or D based on the type of carrier delivery or specified ZIP Code.
USPS-T-40,
Workpaper
1
DocketNo.R2000-l,page
20
13, “GFY 1999 Forecast,” starts in the left-most column with
2
boxes in use at the beginning
3
at the end of the previous year from Workpaper
4
GFY 1999 is then forecast taking into account the R97-1 fee increase, inflation
5
(as represented
6
boxes in use at the end of GFY 2000, TYBR 2001 and TYAR 2001 are forecast
7
in similar fashion in subsequent
9
workpapers
15, 17 and 31, respectively.
19, “Installed Box Forecast,”
estimates the test year number of
installed boxes based on the general growth of the economy
10
forecast changes
11
keeps pace with both population
12
VII.
13
12. Boxes in use at the end of
by the change in the CPI-U), and growth in real GDP. Total
Workpaper
8
of the year, which is carried over as boxes in use
as represented
in real GDP. This is based on the assumption
and real per-capita
by
that capital stock
GDP in the long run.
Unit Costs
The TYBR $584.874
million aggregate
must be apportioned
post office box costs and
14
contingency
to the nearly 18 million post office boxes
15
estimated to be in use during the test year to derive their unit costs.
16
the average cost per box for each fee group and box size. These unit costs
17
serve as the basis for setting post office box fees.
18
illustrates how aggregate
19
unit costs.
20
to the amount of space it requires.
Thus, fee groups must be defined in such a
21
way that they reflect the underlying
source of cost variation if the resulting unit
22
cost and fees are to be closely aligned.
Unit cost is
This section mathematically
post office box costs and counts are used to calculate
For any given fee group, the average cost per box is directly related
USPS-T-40,DocketNo.R2000-l,page
,-.
1
Calculating
unit costs begins by assigning the post office box-related test
2
year cost segment amounts to the Space Provision, Space Support, and All
3
Other categories
4
cost segment’s
5
boxes. The distribution
6
(in thousands):
(see Workpaper
relationship
2). These assignments
of the three cost categories,
$277,124
8
Space Support
$196,897
9
All Other
$110,853
Total Costs
$584,874
The equation sets and descriptions
12
post office box unit cost derivation.
13
workpapers.
14
among
including contingency,
is
TYBR
Space Provision
11
are based on each
to the three sources of cost differences
7
10
fly
21
below give a generalized
For the specific calculations
exposition of
see my
Space Provision Costs are rents paid for leased space, imputed rent for
15
owned space, interest expenses,
and depreciation
costs for floor space located
16
in postal facilities as reported in cost segments
17
segments
18
amount of space required for the installed box capacity at each post office box
19
location, and the location’s floor space cost per square foot.
In general, these
20
costs are allocated to fee groups and box sizes in proportion
to each fee group’s
21
average location space cost and amount of installed capacity (expressed
15.1, 20.3, and 20.5. These cost
are assigned to Space Provision because they are a function of the
in box
USPS-T-40, Docket No. R2000-1, page 22
” In essence,
I use witness Yezer’s analysis to assign ZIP
1
size one equivalents).
2
Codes to fee groups and then to calculate average rent in each fee group for use
3
as a distribution
4
reflects the underlying
key in the allocation
variations
of Space Provision costs.
The allocation
in space cost by ZIP Code.
Capacity Weighted Average Location Cost Per Square Foot by
Fee Group.
5
6
A.
7
This set of calculations
derives the weighted
average location cost per
8
square foot for each fee group using the number of boxes installed as the
9
weighting
IO
11
12
factor, expressed
Let:
in size I box equivalents.
CSQFTij = location cost per square foot, ZIP Codei, fee groupj,
POBINSTij
CAPFACi
= Installed box count, ZIP Cod%, fee groupj,
= (Ik(NSki
X
(60 + SSk)) + 1:k(NSki)r
13
= Average box size, expressed
14
Where:
15
NSki = Number of size k boxes installed, ZIP Codei,
16
SSk = Number of size k boxes held in a standard
box section,
17
60 = Number of size 1 boxes held in a standard
box section,
16
19
20
21
in box size 1 equalivents,
ZIP Codei,
(k= Box size 1.. Box size 5).
(Note: Box size distribution is estimated from the 7999 POB sample
survey, CAPFACi is approximated using current fee group aggregates
since ZIP Code level data are not available.)
‘* A standard box section holds 60 size one boxes, or 40 size two boxes, or 20
size three boxes, or 10 size four boxes, or 5 size five boxes. Therefore, a size
two box is the equivalent of 1.5 size one boxes, a size three box is the equivalent
of 3 size one boxes, a size four box is the equivalent of 6 size one boxes, and a
size five box is the equivalent of 12 size one boxes.
USPS-T-40,
ic
.I
2
Then: Rj = WCOSTj + EQCAPj, = weighted
in fee group j,
3
Where: WCOSTj = &( POBlNSTjj
4
EQCAPj, = Ci( POBINSTij
1
5
B.
6
These equations
Docket No. R2000-I,
page 23
average cost per square foot
x CAPFACi x CSQFTij),
x CAPFACj).
Square Feet Allocation for Each Box Size
derive the amount of floor space allocated to each box
7
size given the total square feet attributed to post office boxes, the relationship
a
between box sizes and capacity, and the number of boxes installed.
9
Given: TSF = Total square feet attributed to post office boxes,
10
POBINST
= Total number of boxes installed,
11
lBSPQlSk
= Share of total boxes that are size k,
12
SlCAPEQk
= Size 1 Capacity Equivalent,
size k
(k = Box size 1. . Box size 5).
13
14
15
Then: POBlNSTk
= POBINST x lBSPDlSk
= Total boxes installed, size k,
16
17
18
BSl EQk = POBlNSTk
x S1 CAPEQk,
= Total size k post office boxes expressed
19
20
21
SFPBSl EQ = TSF + CkBSl EQk
= Square feet per size 1 equivalent
22
23
24
TSQFTAk
= BS’l EQk x SFPBSI EQ,
box,
in size 1 boxes,
USPS-T-40,
= Total square feet attributed
1
Docket No. R2000-1, page
24
to size k boxes,
2
SQFTPBlk
3
= TSQFTAk i POBlNSTk
= Square feet per box size k.
4
5
Space Provision Unit Cost by Fee Group by Box Size
6
C.
7
Having established
6
size in the two sets of equations
9
costs to occupied boxes, for each fee group and box size, based on box size
10
11
12
13
the relationships
= A(SQFTjk
X
location space cost and box
above, the next set apportions
capacity and the fee group’s weighted
SPjk
between
space provision
average location space cost.
Rj) + OBjk
= Space provision cost, by group j, by size k,
Where: SQFTjk = SQFTPBlk
x IBjk
= Square feet of Installed Boxes,
14
fee group j, size k,
15
16
SQFTPBlk
17
IBjk = Number of installed boxes, fee group j, size k,
18
Rj = Weighted
19
OBjk = Number of occupied
20
A =SPC+TAR
21
= square feet per box size k,
Average Cost per square foot, fee group j,
= Adjustment
boxes, fee group j, size k,
factor to convert from base year calculated
22
space provision cost to rollfor.vard test year rent and
23
depreciation
costs.
24
25
26
SPC = Cost Segments
15.1 and 20,
= Total rent and depreciation,
USPS-T40,DocketNo.R2000-1,page
TAR = xkZj(Rj
1
I
..---
These three sets of equations
show that the aggregate
4
costs, as reported by the test year rollforward
5
office boxes in proportion
to their box-weighted
6
foot for each combination
of fee group and box size capacity.
7
P
I
x SQFTjk)
= Total Annual Rent
2
3
25
Space Provision
model, are now allocated to post
average location cost per square
2) Space SUDPOI-I costs include custodial supplies and services, building
8
supplies and services, maintenance
9
elevators,
of plant and building equipment
heating and air conditioning),
(e.g.,
fuel, electricity and water, and protection
10
activities, internal audits, and special investigations.
11
office boxes are reported in cost segments
12
18.1.2. Since Space Support costs depend upon box size, they are allocated
13
relative to the capacity of each box as measured
14
size 5 box, which has 12 times the cubic capacity of a size 1 box, is assigned
15
times the costs for space support.
16
Support allocation calculations).
17
first multiplying the number of boxes in each fee group and box size by a factor
18
reflecting the relative capacity of each box size. For example, box size 2, which
19
is half again as large as box size 1 therefore
20
box size is then allocated
21
is a Space Support cost per box that varies only with box size (not with location).
22
3) All Other costs are primarily labor costs for window service, and related
23
supervisory
and personnel
The costs attributed to post
11.1.1, 11.1.2, 11.3, 15.2, 16.3.1, and
in cubic feet.
(See Workpaper
For example, a
12
21 for specific Space
Space Support costs per box are derived by
has a capacity factor of 1.5. Each
Space Support costs in relation to capacity.
costs. The costs are contained
The result
in cost segments
I, 2,
USPS-T-40,
Docket No. R2000-1, page 26
1
3, 6, 7, 18 & 20. Costs in the All Other category are allocated
2
the number of boxes because labor costs do not depend on box size or location.
3
The result is a cost per box that is constant across all fee groups.
4
Allocation
proportionately
to
factors are created for each of the above three cost categories
5
in Workpaper
6
column g). Space Support Cost per square foot (line 27, column g), and Space
7
Provision
8
are used in Workpapers
9
proposed
10
11
21. These factors are All Other Cost per box in use (line 25,
Cost in relation to total annual rent (line 30, column g). These inputs
fee groups.
each proposed
22 to 29 to apportion TYBR attributable
These workpapers
costs to the
calculate total unit costs by box size for
fee group.
Workpaper
30 summarizes
TYBR annual unit costs.
Workpaper
31
12
displays the TYAR 2001 average number of boxes in use, while Workpaper
13
gives a summary by proposed fee group.
14
VIII. improving
15
16
17
Post Office Box Service
The proposed
classification
32
post office box classification
criteria and will provide immediate
A. Assessment
schedule
meets the six
and future customer
of the Six Classification
benefits.
Criteria
18
Section 3623(c) sets forth six classification
criteria for the Commission
19
defining mail classifications.
post office box reclassification
20
provides a practical basis for the long-term goal of true cost and fee alignment
21
while carefully mitigating fee shock for current box customers.
22
classification
schedule
The proposed
is more in accordance
to use in
The proposed
with the six classification
criteria.
USPS-TAO. Docket No. R2000-1, page 27
1
I-
2
1. The establishment and maintenance of a fair and equitable classification
system for all mail.
The proposed
3
fee group assignments
5
begins a process whereby
6
Post office box service can be priced to reflect space cost differences
7
Code.
a
causation.
to mitigate fee shock for current box customers.
post office boxes may eventually
Thus, a fundamental
principle of fairness,
limits on
It also
be grouped
by cost.
by ZIP
pricing in accord with cost
is better accommodated.
The current post office box fee groups have resulted in a mismatch of
10
costs and fees. The proposed
11
analysis that considers
12
selection biases are avoided.
13
treated every available location in an evenhanded
14
basis for cost-based
15
classifications
16
17
2. The relative value to the people of the kinds of mail matter entered into the
ia
19
P
I
schedule incorporates
4
9
-
post office box classification
classification
schedule is based on a cost
cost at nearly all postal locations.
Hence, preconceived
Witness Yezer, an expert in location economics,
groupings.
manner.
Thus the proposed
provide for equitable
This produced the
post office box
pricing of post office box services.
postal system and the desirability and justification for special classifications
and services of mail.
The proposed classification
groups increase the desirability
20
box service by apportioning
21
relation to the cost of the resources
22
locations will see fee decreases
23
prefer box service in costly locations can better be accommodated
24
that better reflect costs encourage
of post office
post office box costs to each group and box size in
employed.
Many box customers
from the new classification,
in low cost
while people who
because fees
the addition of new boxes in those areas.
USPS-T-40,
1
2
Docket No. R2000-1. page 26
3. The importance of providing classifications with extremely high degrees of
reliability and speed of delivery.
The proposed
3
classification
schedule will produce fees that are closer to
4
cost, thereby promoting
5
additional
6
convenience,
7
to their post office boxes.
a
4. The importance of providing classifications which do not require an extremely
high degree of reliability and speed of delivery.
9
10
11
12
the installation
box locations are economically
of boxes in higher cost locations.
If
justified, there could be an increase in
or “access speed,” for box customers
by reducing travel distance
Not Applicable.
5. The desirability of special classifications from the point of view of both the
user and of the Postal Service.
Proper allocation
13
of costs in a price schedule
provides accurate price
14
signals to service providers and consumers,
allowing the forces of supply and
15
demand to operate, while promoting fair competition
16
It also fairly allocates the cost burden to those customers
17
the particular
18
Proper cost-based
19
of the cost burden to the detriment of those bearing more than their fair share.
20
Furthermore,
21
resources
22
burden.
23
entry by alternative
service providers only where warranted
24
society’s resources.
On the whole, both service consumers
costs that arise from the resources
within the economy at large.
who are the cause of
needed to supply their demand.
pricing avoids giving undue advantage
consumer
to those bearing less
choice is then made in terms of the actual cost of the
used, thus avoiding over- or under-usage
and a shifting of the cost
In terms of societal benefit, accurate cost-based
pricing encourages
and thus conserves
and producers
4
USPS-T-40,
r I
1
benefit by a price schedule that provides accurate price signals.
2
classification
3
from the points of view of the user and the Postal Service.
4
6. Such other factors as the Commission may deem appropriate.
5
that reflects costs and fee shock concerns
is desirable
Adding new post office box fee groups allows for a closing of the fee gap
between
7
system will help the Postal Service justify more boxes in high cost areas and
a
improve price signals for post office box use in low cost areas.
10
--
schedule
Clearly, a
6
9
!
Docket No. R2000-1, page 29
current Groups C and D. Moving towards a cost-based
classification
6. Conclusion
The new fee groups proposed
herein would provide immediate customer
11
benefits upon implementation
while allowing for future improvements.
12
recommending
13
levels as proposed
14
Service in utilizing the best available information
15
classification
the Postal Service’s post office box fee restructuring
in this docket, the Commission
criteria of the Postal Reorganization
By
and fee
will greatly aid the Postal
to better meet the pricing and
Act.
Exhibit USPMOA
Exhibit A
Reclassification
Examples
Exhibit USPS4OA
Page 1
Post Office Box Reclassification
Examples
To Fee Group C4 (Space Cost e $10.00)
Zip Code City
11223
19107
Brooklyn, NY
Philadelphia, PA
Current SemiAnnual Fee, Box
Size 1
$27.00
$27.00
Proposed SemiAnnual Fee, Box
Size 1
$22.50
$22.50
Percent
Change
In Fee
-16.7%
-16.7%
Exhibit USPS40A
Page 2
Exhibit
Post Office Box Reclassification
USPS40A
Page 3
Examples
From Fee Group D
I
E?aace
II
Cost >= $A.OO\
I
Zip Code City
54872
03053
20117
99740
I
Siren, Wl
Londondeny, NH
Middleburg, VA
Fort Yukon. AK
Current Semi- Proposed SemiAnnual Fee, IAnnual Fee, Box
Box Size 1
Size 1
$7.00
$7.00
$7.00
87.00
$10.00
$10.00
$10.00
$10.00
Pefcen
Change
In Fet
42.9%
42.9%
42.9%
42.9%
To Fee Group D7 (Space Cost < $4.00)
Zip Code
30631
85901
City
Crewfordville, GA
Show Low, AZ
Current Semi- Proposed SemiAnnual Fee, Annual Fee, Box
Box Size 1
Size 1
$7.00
$7.00
$8.50
$8.50
Pefcen
Change
In Fet
21.49
21.40,
Exhibit USPS40B
Exhibit B
Reclassification
Proposal
-.
Exhibit USPS-4OB
Page 1
Reclassification
Transition Matrix
1
2
3
4
5
6
7
a
9
10
11
12
Proposal
A
To mitigate “fee shock”, ZIP Code assignments
Current Fee Groups and Rent Range
1
B
C
D
are limited as shown:
Proposed
E
Fee
Group
I
Exhibit USPS-40C
Exhibit C
Developing a More Cost
Homogeneous Classification Structure.
Exhibit USPS4OC
Page 1
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