USPS-T-23
BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON, D.C. 20268-0001
POSTAL RATE AND FEE CHANGES, 2000
Docket No. R2000-1
DIRECT TESTIMONY
OF
NANCY R. KAY
ON BEHALF OF
UNITED STATES POSTAL SERVICE
A.
TABLE OF CONTENTS
SKETCH . .. . .. . .. . .. . .. . .. . .a. .. . . .. . .. . .. .. . .. . .. . .. . . .. . .. . .. . .. . .. . . .. .. . .. . .. . .. .m.....1
AUTOBIOGRAPHICAL
PURPOSE
MATERIALS
I
-,
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
AND SCOPE OF TESTIMONY
ASSOCIATED
ESTIMATING
WITH THIS TESTIMONY
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
COST FOR BY1998 ............................................
INCREMENTAL
A.
Identify Cost Components..
B.
Find independent
C.
Determine the Correct Incremental
D.
Calculate
E.
Identify Product Specific Costs .....................................................................
II
ESTIMATING
Ill
RESULTS
...........................................................................
and Dependent
Incremental
.5
...........................................
.5
Cost Procedure .....................................
.6
Components
Cost for Dependent
INCREMENTAL
4
Components..
.............................
8
.9
COSTS FOR TY2001 . .. . .. . . .. . .. . .. . .. . .. . .. . .. . .. . .. .. . .. . .10
OF INCREMENTAL
COST ANALYSIS
.........................................
12
A.
General Results.. .........................................................................................
12
B.
Subclass Results .........................................................................................
13
1.
Priority and Express.. ...............................................................................
.I3
2.
First-Class,
3.
Special Services ......................................................................................
.I7
Product Groups.. .........................................................................................
.I9
C.
Periodicals,
Standard (A), and Standard (B). ........................ .I5
ii
USPS-T-23
-
DIRECT TESTIMONY
1
2
OF
3
NANCY R. KAY
4
5
AUTOBIOGRAPHICAL
SKETCH
6
7
8
My name is Nancy R. Kay. I am a project director with Foster Associates,
Bethesda,
Maryland.
I have been with Foster Associates
Inc., in
since 1993.
9
10
-
My work at Foster Associates
has involved analysis of Postal costing issues,
11
specifically
in the areas of incremental
cost, mail processing,
12
city and rural carrier delivery.
13
rate cases, most recently in the preparation
14
developed
15
library references
16
assisted in the preparation
post office box costs, and
I have assisted in the preparation
of incremental
the model used to estimate incremental
for the incremental
of testimony for several
cost for Docket R97-1.
I
costs, and prepared workpapers
cost testimony presented
in that rate case.
and
I also
of rebuttal testimony on rural carrier costing.
17
18
Prior to joining Foster Associates,
I was a senior engineer with Quyen Systems,
19
where I was primarily involved in analysis for the U.S. Postal Service.
20
studies analyzing
21
that was to be used in various Postal analysis projects.
mail transportation
network flows.
I participated
I also created a data warehouse
22
23
I have a M.S. in Computer Science from Johns Hopkins University.
1
in
USPS-T-23
PURPOSE
AND SCOPE OF TESTIMONY
The purpose of this testimony is to present incremental
BY1 998 and TY2001.
Incremental
costs are developed
cost estimates for
for each subclass and special
5
service, as well as for groups of subclasses.
This testimony will discuss the
6
procedures
7
explains the analytic basis for the calculation of incremental
used to calculate these incremental
costs.
Dr. Bradley (USPS-T-22)
cost.
8
9
Incremental
costs for postal products were first presented
in Docket No. R97-1,
10
in the testimony of witness Takis (USPS-T-41).
11
method of calculating
12
Dr. Bradley explains, the new method is consistent with established
13
costing methodology.
incremental
In this testimony,
cost as described
I follow the new
by Dr. Bradley (USPS-T-22).
As
Commission
14
15
This testimony
is organized
into four sections.
16
general methodology
used to estimate incremental
17
the procedures
18
describes the procedures
19
section presents the results of the incremental
20
and discusses
used to estimate incremental
The first section discusses the
costs.
The next section describes
costs in BY1998.
used to estimate incremental
2
costs in TY2001.
The last
costs analysis for BY1 998 and TY2001,
those results for individual subclasses
21
The third section
and groups of subclasses.
USPS-T-23
-
1
MATERIALS
ASSOCIATED
WITH THIS TESTIMONY
2
3
This testimony
is accompanied
by supporting
include a detailed discussion
workpapers
of the procedures
and library references.
4
My workpapers
used to calculate
5
incremental
cost for each component.
6
incremental
costs for BY1 998 and TY2001 are included in the workpapers.
Printouts of the model used to estimate
7
8
The Library References
associated
with this testimony are:
9
10
LR-I-150
11
12
Supporting
Material Relating to Incremental
Cost Model (USPS-T-
23)
LR-I-151
Calculation
of Single Subclass Stop Ratios (USPS-T-23)
3
USPS-T-23
1
I
ESTIMATING
INCREMENTAL
COST FOR BY1998
2
3
This section of my testimony
discusses
how the general methodology
for estimating
4
incremental
cost is put into practice in the estimation of BY1998 incremental
5
procedures
used to estimate BY1998 incremental
6
while specific details on the incremental
7
be found in the workpapers
cost are discussed
cost calculations
cost. The
in this section,
for each cost component
can
to my testimony.
8
9
I implement the algorithm for calculating
incremental
cost with this five-step process:
10
Step 1:
Identify each cost component.
If volume variable cost calculations
12
done at a more disaggregated
level than the cost component,
13
constituent
11
are
then the
cost pools are identified.
14
15
Step 2:
Identify independent
and dependent
components.
An independent
16
component
has a volume variability analysis and distribution
17
dependent
cost component
18
key from another component
cost
key. A
borrows its volume variability and distribution
or group of components.
19
20
Step 3:
Determine the correct incremental
cost procedure
21
incremental
cost for independent
22
incremental
cost. The incremental
23
of cost component.
24
(USPS-T-22,
Component
components,
to use in calculating
and calculate the
cost calculations
are based on the type
types are identified by Dr. Bradley
Table 1).
25
26
Step 4:
Calculate volume related incremental
cost for dependent
components.
Step 5:
Identify product specific costs and add these to the volume related
27
28
29
30
31
incremental
cost.
USPS-T-23
-
1
A. Identify
Cost Components
2
3
The first step in calculating
4
volume variable cost calculations.
5
BY1998 CRA model (USPS-T-l
6
(USPS-T-l
7
volume variability analysis for each of the cost components.
8
analysis is done at the same level as the volume variability analysis.
9
the volume variability analysis is performed at the sub-component
1, Workpaper
10
use the CRA workpapers
11
of sub-components,
incremental cost identifies each cost component
I start with the cost components
used in
identified in the
1, Workpaper A). I then analyze the CRA workpapers
B) and the testimony of other witnesses
to determine the
The incremental
In some cases,
level. In this case, I
or other reference to divide the cost component
called cost pools, for use in incremental
cost
into a series
cost analysis.
12
13
-
For example, Window Service is a cost component
used in the CRA model.
14
Analysis of the Window Service workpapers
(USPS-T-l
1, Workpaper
15
WS 3.2.2) shows that there are ten cost pools in this component,
16
variability analysis.
17
Express, Money Orders, and Special Services.
18
Acceptance
19
Time. A separate
20
ten cost pools.
B, WS 3.2.1 and
each with its own
These include four cost pools for acceptance
mail - Weigh & Rate,
The other six cost pools are for Non-
mail, Stamped mail, Metered mail, Cards, Stamped Envelopes,
base-year
incremental
cost analysis will be performed
and Waiting
on each of the
21
22
The volume variability analysis for mail processing
23
component
level.
24
and Van-Ty Smith (USPS-T-17)
25
processing
is also done at the sub-
In this case, I refer to the testimony of witnesses
incremental
Bozzo (USPS-T-15)
to determine the cost pools to use in the mail
cost analysis.
26
27
B. Find Independent
and Dependent
Components
28
29
30
This step examines each cost component
independent
(or cost pool) to determine
if it has an
variability analysis, or if it borrows its variability and distribution
5
key from
USPS-T-23
1
another component
or group of components.
2
this way, so the incremental
Volume variable costs are determined
cost calculations
in
follow that structure.
3
4
In the CR4 model (USPS-T-l
1, Workpaper
A), the total cost for a dependent
5
component
is distributed to mail products using a cost-weighted
6
distribution
key is the sum of the costs, by mail product, for each of the components
7
the key.
8
components
9
Workpaper
The dependent
component
in the distribution
distribution
also receives the cost-weighted
10
products using the cost-weighted
distribution
11
product, in each of the cost pools comprising the key.
12
weighted variability of the components
13
pool) is distributed
14
pool) as dependent.
in
variability of the
key. Likewise, in the CPA workpapers
B), a cost pool within an individual cost component
key. This
(USPS-T-l
is distributed
1,
to mail
key. This key is the sum of the costs, by
in the distribution
The cost pool receives the costkey. If a component
in the CPA in this manner, then I classify the component
(or cost
(or cost
15
16
This step also identifies the components
17
dependent
18
calculations.
component.
that comprise the distribution
This information will be used in the incremental
key for a
cost
19
C. Determine
20
the Correct
Incremental
Cost Procedure
21
22
I evaluate each independent
I first categorize
cost component
23
cost method.
each component
24
defined by Dr. Bradley (USPS-T-22,
to determine
the correct incremental
(or cost pool) into the eight types
Table 1).
25
26
27
*
Type 1. The costs in this component
incremental
are fixed and common.
There are no
costs for this component.
28
29
30
m Type 2. The costs in this component
to one or more products.
are fixed, but some or all costs are specific
Incremental
cost equals the specific fixed costs.
31
6
USPS-T-23
-
.
1
Type 3. The costs in this component
2
one product.
3
Incremental
are variable, but all costs are distributed to
The variability for the component
is one hundred percent.
cost equals accrued cost for this component.
4
5
m Type 4. The costs in this component
6
one product.
7
Incremental
are variable, and all costs are distributed to
The variability for this component
is less than one hundred percent.
cost equals accrued cost for this component.
8
9
9
Type 5. The costs in this component
are variable, distributed
to more than one
10
product, and the variability equals one hundred percent.
11
variable costs intrinsic to a product.
12
intrinsic costs equals the volume variable cost plus the institutional
13
incremental
The incremental
There are non-volume
cost for the product with
costs. The
cost for the other products equals their volume variable cost.
14
15
‘-
.
Type 6. The costs in this component
are variable, distributed to more than one
16
product, and the variability is less then one hundred percent.
There are non-
17
volume variable costs intrinsic to a product.
cost for the product
18
with intrinsic costs equals the volume variable cost plus the institutional
costs.
19
The incremental
costs are
20
determined
21
Section Ill, for a discussion
22
base year incremental
23
component
(i.e. the volume variability for the component
24
incremental
cost will equal the intrinsic cost.
The incremental
cost for the other products containing
volume-variable
with the constant elasticity method (see Dr. Bradley, USPS-T-22,
of use of the constant elasticity method in calculating
cost).
If there are no volume-variable
costs in the
is zero) then the
25
26
n
Type 7. The costs in this component
27
one product.
28
no intrinsic costs. Incremental
29
cost.
are variable and distributed
to more than
The volume variability equals one hundred percent, and there are
cost for all products will equal volume variable
30
7
USPS-T-23
1
.
Type 8. The costs in this component
are variable and distributed
to more than
2
one product.
The volume variability is less than one hundred percent, and there
3
are no intrinsic costs. The incremental
4
calculated with either the constant elasticity method or, for letter route access
5
and time at stop, with single subclass stop ratios.’
cost for these components
will be
6
7
D. Calculate
Incremental
Cost for Dependent
Components
8
9
The incremental
cost of dependent
components
10
that parallels the determination
11
Dependent
12
components.
13
proportional
14
specific costs.
15
that borrows its variability and distribution
16
with the following formula:
components
is calculated
with a methodology
of the volume variable cost of these components.
borrow their variability and distribution
The incremental
cost for a dependent
to the incremental
component
keys from other
will be directly
cost for the related component(s),
The incremental
minus any product
cost for subclass (i, in dependent
key from cost component
cost component
r’J
(k), is calculated
17
ICf = WC, *
18
[
IC, - PS,
Jwk
1
19
20
The distribution
key for a component
The key is generated
may be comprised
21
components.
22
across these components.
23
products and to determine the variability of the dependent
24
volume variable costs for the dependent
25
independent
26
volume variable cost ratio for the independent
27
of the dependent
components
of several other
in the CRA by summing of the costs by product
This distribution
key is used both to distribute costs to
component
component.
are first divided among the various
that are used to form the distribution
component
In this case, the
component
costs that are associated
key. The incremental to
will be applied to that portion
with the independent
I Single subclass stops measure the number of stops receiving only one class or subclass of mail. The
stops are caused by that class or subclass alone and are thus part of its incremental cost. The accrued
cost for letter route access and time at stop, multiplied by the single subclass ratio, is the cost that will be
saved in this component if that subclass were eliminated.
8
USPS-T-23
-
1
component.
2
dependent
3
component.
The last step adds up the portions of the incremental
component,
by product, that are associated
This is represented
mathematically
cost for the
with each independent
as:
4
5
(2)
6
I
E. Identify
Product
Specific
Costs
8
9
Product specific costs are non-volume
variable costs caused by the provision of a
10
product.
Product specific costs for a mail product are incremental
to that mail product.
11
These costs appear in three of the component
12
22, Table 1). These include specific fixed costs (Type 2) and intrinsic costs (Types 6
13
and 7).
types identified by Dr. Bradley (USPS-T-
14
-.
15
I use a variety of sources to identify product specific costs, including the reallocated
16
trial balance (LR-I-9), the CRA spreadsheets
17
Workpaper
of witness Meehan (USPS-T-l
B), and special analysis (LR-I-150).
18
9
1,
USPS-T-23
II
ESTIMATING
Incremental
aggregate
INCREMENTAL
COSTS FOR TY2001
costs for TY1998 in Docket R97-1 were estimated
base year incremental
by multiplying
costs for subclass &I by the ratio of aggregate
year volume variable costs for subclass (i,l to aggregate
base year volume variable
costs for subclass (i). Product specific costs were included in the ratio.
represented
mathematically
This was
as:
vw,TY
zCi,n
=G?,
*[wc,,BY
1
9
test
(3)
10
11
In this case, however, to calculate test year incremental
costs, we follow the roll-
12
forward methodology
used to calculate test year volume variable costs.
13
factors to calculate test year incremental
14
volume variable and product specific costs. This means that I calculate test year
15
incremental
16
cost.
I use the same
costs that are used to calculate test year
cost at the same level of detail that is available for test year volume variable
17
18
The roll-forward
model, described
19
works on the cost component,
20
costs for all cost pools are aggregated
21
component
22
year there is a lack of information
23
pools. Therefore, test year incremental
24
done at the component
in the testimony of witness Kashani (USPS-T-14),
not the cost pool, level. For example,
goes through the rollforward
into one component.
mail processing
This aggregated
process as one unit. As a result, in the test
on volumes and cost drivers for the constituent
cost calculations
for mail processing
cost
will be
level.
25
26
Test year volume-related
incremental
costs for subclass (i,l in cost component
27
calculated with the following formula, which ‘rolls-forward’
28
incremental
cost (see Dr. Bradley, USPS-T-22,
base year volume-related
Section IV-C):
29
30
zcq7 = [ZC, - F;?](l+ g,)(l + Zj)(l + rjj)(l + #j)
10
(4)
ci) are
USPS-T-23
-
1
2
Non-volume
variable costs do not get a volume effect in the roll-forward.
3
product specific costs are calculated by applying the appropriate
4
base year product specific costs.
Test year
roll-forward
factors to
5
6
lq
= F, (1+ 7rj)(l + 17,)(1+ g$)
(5)
7
8
9
10
11
Test year product specific costs are added to the test year volume-related
incremental
costs.
Finally, total test year incremental
by adding together the incremental
ZC, = c [ICC - Fg](l + g,)(l+
cost for subclass (i) is calculated
cost in subclass (i,l for all components
zj)(l
+ qj)(l + +j) + FvT
j=l
II
(6)
(j):
USPS-T-23
RESULTS
Ill
1
OF INCREMENTAL
COST ANALYSIS
2
3
This section presents the results of the incremental
4
for each major subclass, plus groups of subclasses,
5
I also present results for a set of two-subclass
6
calculations
cost analysis.
I present results
mail classes, and special services.
combinations.
Incremental
cost
are made for BY1 998, TY2001 (BR), and TY2001 (AR).
7
A. General
8
Results
9
10
11
Tables IA and 2A in Attachment
A show, for each subclass,
group of subclasses,
and special service:
12
13
a
BY1998 total volume variable cost
14
.
BY1998 total incremental
15
.
TY2001(BR)
16
.
TY2001 (BR) total incremental
17
.
TY2001(AR)
18
m TY2001 (AR) total and average unit (per piece) incremental
19
20
The subclasses,
cost
total volume variable cost
cost
total and average unit (per piece) volume variable cost
groups of subclasses
21
the subclasses,
groups of subclasses,
22
Revenue Analysis report (LR-I-2).
23
selected pairs of subclasses.
24
subclasses,
25
components.
26
calculations
and mail classes in Table IA correspond
and mail classes presented
Table 2A displays incremental
Total incremental
to my testimony
to
in the Cost and
costs for additional
cost for a particular subclass, group of
or special service is the sum of the products
The workpapers
cost
incremental
costs for all cost
present detailed incremental
cost
for each cost component.
27
28
There is a close similarity between average incremental
29
variable (marginal)
cost for the majority of subclasses.
30
close to volume variable cost if:
31
12
cost and average volume
Incremental
cost will be very
USPS-T-23
7
I
1) the amount of the driver in a subclass is not too large,
2
2) the volume variability is relatively high, and
3
3) product specific costs are not too great.
4
5
Dr. Bradley (USPS-T-22)
6
table shows the difference
7
incremental
illustrates this point in his Table 2 his testimony.
This
between volume variable cost and volume-related
cost with various proportions
of the driver and percentages
of variability.
8
B. Subclass
9
Results
10
11
-
This section examines the results of the incremental
12
subclasses.
13
average volume variable cost. Following the discussion
14
subclasses
15
reasons:
16
17
.
18
m marginal cost changes significantly
19
n
20
21
This section discusses
Average incremental
cost for most subclasses
where there is a large difference,
do not vary much from
in the previous section, in those
it will be due to one of these three
large product specific costs associated
the proportion
cost analysis for individual
with the particular subclass;
as the driver changes; or
of the driver is large.
each of the subclasses
where incremental
22
volume variable cost, and highlights the reason for the difference.
23
this section are for TY2001 (AR), unless the discussion
24
are aggregated
25
case, BY1998 costs are provided.
into components
cost differs from
Incremental
costs in
requires costs for cost pools that
for test year incremental
cost calculations.
In this
26
27
1. Priority
and Express
28
29
~c
Table IA shows the difference
between volume variable and incremental
cost for
30
Priority and Express.
31
significantly
32
product specific costs. The following table shows the product specific costs for Priority
33
and Express, by cost component.
Total incremental
cost for Priority and Express are both
greater than volume variable cost.
13
This difference
is primarily due to
USPS-T-23
TABLE 3.
PRODUCT
SPECIFIC
COSTS FOR PRIORITY AND EXPRESS
IN MILLIONS ($000,000)
MAIL (TY2001(AR)),
7
8
9
Mail processing
(CS 3) contributes
significant product specific costs to both Priority
10
and Express Mail.
11
operations
12
would be discontinued
13
Dr. Bozzo (USPS-T-15)
14
a combination
15
group of cost pools contains fixed costs for work related to Express Mail, which are
16
incremental
For Priority, the costs of providing dedicated
are considered
incremental
to that subclass, because these operations
if Priority Mail were eliminated.
discusses
manual Priority
With respect to Express mail,
a group of mail processing
operations
that consist of
of costs that are fully volume variable and costs that are fixed. This
to Express Mail.
17
18
Intrinsic costs associated
with providing certain types of air transportation
contribute
19
to the product specific costs for both Priority Mail and Express Mail. These premium
20
costs, which are the costs over and above standard commercial
21
product specific to Express on the Eagle Network and Western Networks,
22
specific to Priority on the Christmas
Network (C-Net).
23
14
airline costs, are
and product
USPS-T-23
-
There are also significant advertising
1
costs for Priority Mail. These product specific
2
costs are not volume variable, and contribute to the difference
3
and incremental
between volume variable
cost.
4
5
Table 2A shows additional
6
volume variable and incremental
7
specific costs for Express mail administrative
8
segment 3, and for city delivery carriers in cost segment 7. These include costs for
9
drops and pickups from Express Mail facilities, costs for accessing
10
product specific costs that add to the difference between
cost for Express.
These are comprised
of product
clerks and clerks/messengers
in cost
Express mailboxes,
and costs for fixed time at stop at Express mailboxes.’
11
Product specific costs for Priority are also found in cost segments
12
13
15, 16, 18, and
19.
14
15
-
In addition to the product specific costs listed in Table 3, there are two relatively
16
small cost pools with volume variable cost where the entire amount of the driver is in
17
Express Mail.
18
for the component
19
loading of Express Mail boxes in CS 3.4 and the costs for window service clerks (CS
20
3.2) to provide Express Mail services.
The incremental
cost for these components
(see page 7 of this testimony).
will equal the accrued cost
These cost pools include costs for
21
2. First-Class,
22
Periodicals,
Standard
(A), and Standard
(B)
23
24
These four mail classes are discussed together because they have a common
25
feature - none of individual subclasses
26
costs.3
Yet, the relationship
within these mail classes have product specific
between volume variable and incremental
cost differs for
’ These are actually six separate cost pools, as shown in my workpapers. including DroplPU Express Mail
Facility SPR, DroplPU Express Mail Facility MLR, Access EM Box Collect SPR, Access EM Box Collect
LTR, Time at Stop Collect EM Boxes SPR, and Time at Stop Collect EM Boxes LTR.
3 The combination of two First-Class categories - Single Piece Letters and Presort Letters - has a small
amount of product specific cost, but it is only 0.1% of the difference between volume variable and
incremental cost for these combined categories.
15
USPS-T-23
1
the subclasses
within these mail classes.
This section will compare the difference
2
between volume variable and incremental
3
Periodicals,
4
These are First-Class Single Piece, Periodicals
5
(A) Regular Enhanced
cost for the subclasses
1
in First-Class,
Standard (A) and Standard (B) that have the greatest volume variable cost.
Outside County Regular Rate, Standard
Carrier Route, and Standard
(B) Zone Rate.
6
7
Incremental
costs for First-Class Single Piece and Standard
(A) Regular Enhanced
8
Carrier Route mail are 5.5% and 5.9% higher than volume variable costs, respectively.
9
However, incremental
10
costs are less than 1% higher than volume variable costs for
Regular Rate Periodicals
and for Standard (B) Parcels Zone Rate.
11
12
If all other conditions
are equa14, mail subclasses
with a larger share of the driver will
13
have a larger difference
14
compares the RPW volumes for selected mail subclasses
15
of incremental
16
percentage
17
volume variable costs.
between volume variable cost and incremental
cost. Table 4
with the percentage
cost over volume variable cost. The mail subclasses
of RPW volumes have a larger percent difference
increase
with a higher
between incremental
and
I8
4 The assumption of ‘all else being equal’ is important here, because there are other factors that may
contribute to the difference between volume variable and incremental cost. The presence of large
amounts of product specific cost, as well as low volume variability, will also contribute to this difference.
This discussion relating RPW volume to the percentage increase in incremental cost is for illustrative
purposes, For some cost components, the driver is not mail volume. For example, the driver for city
carrier access costs is the number of stops. Incremental cost is determined by the number of these stops
that are for a single subclass. In the single delivery residential (SDR) cost pool for city carrier access.
Standard (A) Regular ECR has a higher percentage of single subclass stops than First-Class Single
Piece mail, leading to a larger incremental cost. Similarly, city carrier load costs are driven by shape of
mail. Flat shape mail has a lower volume variability than letter shape. Standard (A) ECR has a higher
proportion of flat shape mail volume than First-Class Single Piece, leading to a higher incremental cost.
16
-
USPS-T-23
-
1
2
3
4
COMPARISON
INCREASE
TABLE 4
OF TY2001 (AR) RPW VOLUMES WITH THE PERCENTAGE
OF INCREMENTAL OVER VOLUME VARIABLE COST
Mail Subclass
RPW Volume, in
Millions
First-Class Single Piece
Letters
Periodicals Outside
County Regular
Standard (A)
Commercial’Standard
ECR
Standard (6) Zone
52,878
25.5%
Percentage Increase
of Incremental over
Volume Variable
5.5%
7,352
3.5%
0.9%
32,828
15.8%
5.9%
I
Percent of Total RPW
for All Subclasses
374 I
0.2% I
0.9%
5
6
3. Special
Services
7
8
9
/-
This section will highlight the two special services that show a large difference
between volume variable and incremental
cost - Certified and Money Orders.
10
Incremental
cost for Certified mail is 18.9% higher than volume variable cost, while
11
incremental
cost for Money Orders is 39.6% higher than volume variable cost.
12
13
Money Orders has product specific costs in two components
- $5.4 million for Money
14
Order Division in CS 18, and $5.6 million in Advertising
15
specific costs account for 19% of the difference between incremental
16
variable cost. Most of the remainder of the difference
17
pool in window service (CS 3.2). All of the volume variable costs in this cost pools are
18
in the Money Orders special service.
19
equal the accrued cost for the component
20
pool, combined with the dependent
21
adds another $38.1 million to the difference between incremental
22
cost, 62.4% of the difference.
The incremental
costs in CS 16. These product
and volume
is due to the Money Orders cost
cost for this component
(see page 7 of this testimony).
This cost
cost pool for window service supervision
23
17
will
(CS 2)
and volume variable
USPS-T-23
1
The incremental
cost for Certified contains no product specific costs, yet incremental
2
cost is 18.8% higher than volume variable cost.
3
difference
Two of the reasons for a large
between volume variable and incremental
cost apply to this accountable:
4
5
a) the amount of driver in a subclass is large; and
6
b) the volume variability is particularly
low.
7
8
9
77% of the $72.0 million difference
BY1998 incremental
between incremental
and volume variable cost in
cost comes from four city carrier (C/S 7) cost pools - Letter Route
10
Load SDR, Letter Route Load MDR, Letter Route Load BAM, and Street Support Load’.
11
Letter route load costs are driven by shape of mail, including letters, flats, parcels,
12
accountables,
13
The volume variability for loading accountables
14
delivery residential (SDR) stops, 1.3% for multiple delivery residential
15
24.5% for business and mixed (BAM) stops!.
16
for loading accountables
17
volume variability and a large proportion of the driver in the Certified special service
18
lead to an incremental
collections,
and deliveries.
(See witness Baron, USPS-T-12,
is particularly
low - 4.2% for single
(MDR) stops, and
In addition, more than 60% of the driver
is in the Certified special service.
cost that is significantly
at 4-6.)
This combination
of low
larger than volume variable cost.
19
For example, BY 1998 volume variable cost for Certified in the Letter Route Load
20
21
SDR cost pool is $37.8 million, while incremental
cost is $61.4 million - an increase of
22
62%.
23
part from these three Letter Route Load cost pools, so the incremental
The Street Support Load cost pool borrows the variability and distribution
in large
cost for Certified
5 These cost pools are aggregated into the CS 7 Load component for use in the Roll-forward model.
There is not enough information to determine the lY2001(AR) costs in the individual cost pools,
Therefore this discussion uses BY1998 costs.
6 The incremental cost for letter route load is calculated with a variation of the constant elasticity formula
that takes into account the multiple drivers. This is represented mathematically by
where I represents letters and collections, f represents flats, p represents parcels, a represents
accountables, and d represents deliveries (the deliveries term is not used for SDR stop types).
18
USPS-T-23
in this dependent
component
shows the incremental
is also much higher than volume variable cost. Table 6
and volume variable costs for all four cost pools.
TABLE 6.
AND VOLUME VARIABLE COSTS FOR CERTIFIED
MILLIONS ($000,000)
INCREMENTAL
Cost Component
Volume
Variable
cost
Letter Route Load - SDR
Letter Route Load - MDR
Letter Route Load - BAM
Street Support Load
TOTAL
$
$
Incremental
cost
37.8
9.5
46.6
16.3
110.2
$
$
(BY1998),
IN
Difference
(%I
61.4
15.5
63.8
24.4
165.1
62.4%
63.2%
36.9%
49.7%
49.8%
8
9
10
C. Product
Groups
11
-
12
Table IA contains incremental
cost estimates for product groups.
These product
13
groups correspond
to the groups listed in the Cost and Revenue Analysis report (LR-I-
14
2). These include the combination
15
and non-presort
16
presort and ECR Standard (A) Non-Profit.
17
classes, First-Class,
18
addition, Table IA includes incremental
19
business groups.
20
Advertising
21
Package Services (Priority, Express, Standard (B) Zone Rate, Special, and Library
22
Rate), and Special Services.
of presort and non-presort
First-Class
letters, presort
First-Class Cards, presort and ECR Standard (A) Commercial,
Periodicals,
Incremental
and
cost estimates for all mail
Standard (A), and Standard
(B), are also included.
In
cost estimates for each of the Postal Service
These include Correspondence
(all of First-Class
and Mailgrams),
(all of Standard (A) plus Standard (B) Bound Printed Matter), Expedited and
23
24
,-.
Note that the incremental
25
incremental
26
associated
27
group of subclasses
28
individual subclasses
costs may not be summed across subclasses.
cost for a group of subclasses
with the group of subclasses.
The
is found by removing the portion of the driver
For this reason, the incremental
will be different then the sum of the incremental
within the group.
19
cost for a
costs for the
USPS-T-23
1
2
The product groups in Table 1A are significant
3
technologies
within the individual subclasses
4
subclasses
5
mail processing
6
product groups contain highly competitive
within First-Class
operations,
because of the shared production
within the groups.
For example, the
Mail share many of the same production
purchased
transportation).
technologies
(i.e.
In addition, some of these
products.
7
8
9
Table 2A displays the results of incremental
of subclasses.
The subclasses
cost calculations
on 36 additional
pairs
in the pairs were chosen for one of two reasons:
10
11
12
13
a) base year per piece revenue is very close to base year per piece incremental
cost; or
b) a subclass contains large amounts of product specific costs.
14
15
These calculations
demonstrate
16
for groups of subclasses.
the ease in which incremental
cost can be calculated
.I,
18
Tables 1A and 2A present incremental
19
and TY2001(AR).
The same methodology
20
year incremental
21
the basis for the ratios.
costs.
costs for groups of subclasses
described
previously
for BY1998
is used to calculate test
I use the volume variable cost for the group of subclasses
20
as
USPS-T-23
ATTACHMENT
21
A
USPS-T-23
TABLE IA. BY1999 AND TY2001(AR) VOLUME VARIABLE AND INCREMENTAL COST FOR SUBCLASSES AND CLASSES
USPS-T-23
23
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