_--
-
BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON,
D.C. 202680001
POSTAL
RATES AND FEE CHANGES,
2000 1
Direct Testimony
DR. JOHN
Docket No. R2000-1
of
HALDI
Concerning
STANDARD
A ENHANCED
CARRIER
ROUTE
MAIL
On Behalf of
VAL-PAR DIRECT MARKETING
SYSTEMS, INC.,
VAL-PAR DEALERS ASSOCIATION,
INC., AND
CAROL WRIGHT PROMOTIONS,
INC.
William J. Olson
John S. Miles
WILLIAM
J. OLSON, P.C.
8180 Greensboro Dr., Suite 1070
McLean, Virginia 22102-3860
(703) 356-5070
Counsel for Val-Pak Direct
Marketing
Systems, Inc.,
Val-Pak Dealers Association, Inc.
and Carol Wright Promotions, Inc.
May 22,200O
VPICW-T-1
BEFORE THE
POSTAL RATE COMMISSION
WASHINGTON,
D.C. 20268-0003
POSTAL
RATES AND FEE CHANGES,
2000 )
Direct Testimony
DR. JOHN
Docket No. R2000-1
of
HALDI
Concerning
STANDARD
A ENHANCED
CARRIER
ROUTE
MAIL
On Behalf of
VAL-PAR DIRECT MARKETING
SYSTEMS, INC.,
VAL-PAR DEALERS
ASSOCIATION,
INC., AND
CAROL WRIGHT PROMOTIONS,
INC.
William J. Olson
John S. Miles
WILLIAM
J. OLSON, P.C.
8180 Greensboro Dr., Suite 1070
McLean, Virginia 22102-3860
(703) 356-5070
Counsel for Val-Pak Direct
Marketing
Systems, Inc.,
Val-Pak Dealers Association, Inc.
and Carol Wright Promotions, Inc.
May 22,200O
CONTENTS
Page
AUTOBIOGRAPHICAL
I.
II.
III.
PURPOSE
SKETCH.
..
OF TESTIMONY
INTRODUCTION
.
. . ....
.
.
.
.
.
.
.
.
.
3
...................................... 4
DESIGN OF STANDARD A ECR RATES TO MEET
THE POSTAL SERVICE’S PROPOSED ECR
REVENUETARGET
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
A: The Postal Service’s Calculated Cost of Letters is Overstated
and the Cost of Flats is Correspondingly
Understated
.
B. Studies of the Weight-Cost Relationship
Are Not
Adequate to Support a Reduction in the Pound Rate
C. The Passthrough for Destination Entry Discounts
Should Be Increased
............. . .. . .
D. Other Passthrough
E. Initial
IV.
1
Standard
Adjustments
A ECR Rates
DESIGN OF STANDARD
A REDUCED REVENUE
11
. . . . . . 18
.
......................
19
25
........................
26
A ECR RATES TO MEET
TARGET . . . . . . . . . . . . . . . . . . . . . . . 29
A. The Proposed Contingency
is Too High
...... .
....
. 30
B. The Unit Contribution
and Coverage of
Standard A ECR Mail is Too High . . . . . . . . . . . . . . . . . . . . . 38
C. Widening the Gap in Unit Contributions
and
Coverages Makes Poor Management
Sense . .
D. Proposed Rates..
. .
. .......... .
i
. . . . . . . 48
. . . . . . . . 54
CONTENTS
(cont.)
APPENDICES
A.
ADJUSTMENT
TO THE UNIT COST DIFFERENTIAL
BETWEEN LETTERS AND FLATS
B.
THE RELATIONSHIP
STANDARD
A MAIL
C.
UNIT
CONTRIBUTIONS
BETWEEN
WEIGHT
AND COVERAGES,
AND COST WITHIN
1997-2001
AUTOBIOGRAPHICAL
1
2
My name is John Haldi.
3
economic and management
4
Americas,
5
covered a wide variety
6
organizations,
I
of Haldi Associates,
My consulting
of areas for government,
including
testimony
respectively,
experience
has
business and private
before Congress and state legislatures.
In 1952, I received a Bachelor
9
Inc., an
firm with offices at 1370 Avenue of the
New York, New York 10019.
with a major in mathematics
11
I am President
consulting
8
10
SKElTCH
of Arts degree from Emory University,
and a minor in economics.
In 1957 and 1959,
I received an M.A. and a Ph.D. in economics from Stanford
University.
From 1958 to 1965, I was an assistant
12
University
Graduate
13
the Program
14
responsible
15
Budgeting
16
government.
17
Planning,
18
establishing
19
O’Brien.
20
the initial
School of Business.
Evaluation
Staff, U.S. Bureau
for overseeing
implementation
United
of the Budget.
agencies of the federal
1966 I also served as Acting Director,
the Office of Planning
an initial
staff.
1
program,
Office of
I was responsible
under Postmaster
research
While there, I was
of the Planning-Programming-
States Post Office Department.
I established
at the Stanford
In 1966 and 1967, I was Chief of
(“PPB”) system in all non-defense
During
professor
for
General Lawrence
and screened and hired
I have written
1
-
one book.
numerous
2
authored
3
postal and delivery
4
Office Department,”
5
a book, Postal Monopoly:
6
published
I
(1974); an article,
8
and the Nature
9
Merewitz),
articles,
Items included
published
among those publications
economics are an article,
which appeared
Enterprise
“Measuring
“Costs and Returns
10
Areas,”
11
article
12
Payment
13
Delivery
14
Postal Retail Transaction
15
Products,”
in Managing
Institute
and Evidencing
in Mail Delivery,”
from Delivery
Systems,”
to Sparsely
in Regulation
(with Leonard
Settled Rural
Costs of Alternative
in Emerging
Services (1999); and an article
16
I have testified
17
Docket Nos. R97-1, MC96-3,
18
R84-1, R80-1, MC78-2
19
No. RM91-1.
Customer
(1997); an
Postage
in Postal and
“Controlling
Access to Postal
in Postal Reform (2000).
as a witness
before the Postal Rate Commission
MC95-1,
and R77-1.
Competition
(with John Schmidt),
Costs and Improving
Directions
(1970);
for Public Policy Research
Services (1992); an article
“Transaction
of the Post
of Public Output
Change in the Postal and Delivery Industries
(with John Schmidt),
in Current
that deal with
of the Private Express Statutes,
Performance
of Postal Delivery
studies, and co-
“The Value of Output
in The Analysis
An Assessment
by the American
consulting
in
R94-1, SS91-1, R90-1, R87-1, SS86-1,
I also have submitted
2
comments
in Docket
I. PURPOSE
This testimony
OF TESTIMONY
has two purposes.
The first is to propose several
changes in the design of rates for the Standard
on analysis
of the data and information
A ECR Mail Subclass, based
presented
by the Postal Service in
this case. The effect of these changes is illustrated
by developing
set of ECR rates that yield the total revenue proposed by witness
the ECR Subclass.
above-cited
a different
Mayes for
The second is to propose ECR rates that incorporate
rate design changes while setting
ECR Subclass than that proposed by witness
3
the
a lower target revenue for the
Mayes.
II. INTRODUCTION
1
2
This testimony
is presented
Inc. (“VPDMS”)
on behalf of Val-Pak
3
Systems,
4
collectively
referred
to as “Val-Pak,”
5
hereinafter
referred
to as “Carol Wright.”
6
Pak’s mail primarily
7
Saturation
8
both letter and non-letter
9
High-Density
As described
Inc.,
more fully below, ValA Mail ECR
mail consists of
sent at the Standard
A Mail ECR
rate.
is the nation’s
12
“coupons in an envelope.”
13
same market
14
in Largo, Florida.
15
of Cox Enterprises,
16
jointly
advertising
17
VPDMS Mailing
segment.
largest firm in a subset of the hard-copy,
industry
which is sometimes
Carol Wright
Headquarter
VPDMS
Inc. of Atlanta,
referred
direct
to as
is one of the largest firms in this
offices of all three companies
and Carol Wright
mail over 700 million
VPDMS
Promotions,
and Cox Sampling’s
mail primarily
mail cooperative
19
and Carol Wright
Inc., hereinafter
consists of letter mail sent at the Standard
11
18
Dealers’ Association,
rate, while Carol Wright’s
VPDMS
10
and Val-Pak
Direct Marketing
Georgia.
are wholly-owned
Val-Pak
are located
subsidiaries
and Carol Wright
pieces annually.
Practices
entered
in 1999, and is estimated
416 million
pieces of its own mail in the United
to mail 450 million
4
pieces during
States
the year 2000. In
1
addition,
2
1999.
it entered
27 million
pieces under contract
About 95 percent of VPDMS’
3
mailings
use letter-shaped
4
envelopes, while about 5 percent use letter-shaped
5
average weight
6
VPDMS
7
ECR Saturation
for individual
States through
10
Val-Pak
11
supplemented
for over 30 years, VPDMS
approximately
10
The
All are trayed by
at the Standard
A Mail
13
businesses
14
targeted
15
This is accomplished
16
the country
17
consisting
18
neighborhood
19
zones and natural
20
businesses
21
market
households
States each year.
Its mailings
to meet the marketing
into thousands
of approximately
can be highly
advertising
of “Neighborhood
patterns,
barriers,
can precisely
geographic
Trading
10,000 residences.
purchasing
taking
such as rivers.
segments that are most economically
retail
businesses.
plan, which divides
Areas” (“NTAs”),
most
These NTAs are built around
into account factors such as traffic
Through
target for advertising
5
is
and over 1 million
needs of even the smallest
by Val-Pak’s
of the
1,200 sales representatives.
reach 47.7 million
in the United
the United
which are members
Inc. The work of these franchisees
by efforts of approximately
mailings
operates throughout
210 U.S. franchisees
Dealer’s Association,
VPDMS’
12
routes and entered
number
6” x 9” envelopes.
piece is about 2.5 ounces.
carrier
clients in
Rate.
In business
8
9
of a VPDMS
for various
this NTA construct,
purposes those geographic
attractive.
Advertisers
may
1
purchase
coverage for the entire nation,
2
thousand
down to only one.
Most franchisees
3
4
mailing
on a monthly
schedule.
advertising
with VPDMS.
I
businesses,
but the vast majority
Once an advertiser
distribution
particular
I1
headquarters
12
created.
VPDMS
13
layouts
each year.
14
frequency,
fashions
16
may be simple, involving
17
color printing.
VPDMS
are national
There, the graphics
area with a
for the coupon are
million
by the advertiser,
advertising
the coupons are printed
states).
only one color, or may involve sophisticated
has been encouraged
19
point barcodes on all of its mail.
20
Delivery
21
result of adding the delivery
VPDMS
for
corporate
or Las Vegas, Nevada (for 11 western
Point Barcoded.
or regional
franchisee
geographic
to Val-Pak’s
as many as one quarter
After review and approval
either Largo, Florida
18
coupon to a particular
in Largo, Florida.
saturation
are small, local businesses.
the order is directed
15
purchase
places an order with a VPDMS
of a particular
10
advertisers
Some of these advertisers
6
8
of NTAs, from several
mail at least eight times per year, with many offices
Each year, over 130,000 individual
5
9
or any number
in
Printing
four-
by the Postal Service to put delivery
At present,
100 percent of VPDMS’
incurs additional
point barcode to mailing
6
computer
mail is
charges as a
lists that have only ZIP
1
+ 4 information.
VPDMS
works closely with firms supplying
2
ensure that it buys the cleanest and most up-to-date
3
anywhere.
4
these lists are updated
5
bimonthly
lists to
lists available
For example, when the Postal Service changes boundary
by list companies
supplying
VPDMS
within
lines,
the next
update from the Postal Service.
Also, for 10 years, VPDMS
6
mailing
has participated
1
Service tests, such as those involving
8
and palletizing
9
VPDMS
traying
voluntarily
letter-shaped
in Postal
carrier
route mail
.-
to incur additional
10
such tests.
11
compliance.
12
trays, despite the fact that these procedures
costs. VPDMS
Since such traying
Virtually
all of VPDMS’
has been a national
test site for
became mandatory,
VPDMS
mail is transported
by truck at VPDMS
13
expense, of which 97 percent is entered
14
remainder,
15
being entered
at the destinating
has been in full
SCF. Of the
2 percent is entered at BMCs, with about 1 percent of the mail
locally, in either St. Petersburg,
VPDMS
16
have caused
fashion.
advertisers
17
timely
18
be delivered
19
business
generated
20
additional
staff.
require
For example,
during
Florida
that the Val-Pak
if a pizza carry-out
a particular
or Las Vegas, Nevada.
mail be delivered
in a
firm issues $1-off coupons to
week, it must anticipate
the additional
.-
by purchasing
additional
If the mail is delivered
ingredients
and hiring
too early, the client may not be
7
prepared,
or if late, the extra ingredients
can be wasted and the staff can
stand idle.
Several other national
known
and regional
to operate in a manner
Manhattan
followed
Beach, California,
similar
firms around the country
to that of Val-Pak.
United
Coupon in Springfield,
Delaware.
Money Mailer
is believed to be the second largest
by many others, such as Super-Coups
Virginia,
Many other competitors
are
of
such firm,
in Boston, Massachusetts,
and Tri-Mark
in Wilmington,
operate only in limited
geographic
markets.
10
Carol Wright
Mailing
Carol Wright
11
Practices
is located in Elm City, North
12
of approximately
20 million
13
sent 11 times per year to households
14
Wright
mailed
15
million
pieces again in 2000. These mailings
16
advertisements
17
Carol Wright.
200 million
envelopes containing
throughout
Carolina.
cooperative
the United
pieces in 1999, and is estimated
and coupons for national
Its mail consists
advertisements
States.
Carol
to mail 200
consist of shared mail
and regional
account customers
of
,-
18
The Carol Wright
19
The weight
20
average weight
cooperative
of a piece typically
mailings
ranges between
of 2.8 ounces.
8
generally
use 6” x 9” envelopes.
2 and 4.5 ounces, with an
1
Carol Wright’s
primary
2
serves the major packaged
3
companies,
4
retailers
whereas
reached through
targeted
primary
a network
highly
geographic
I
message by means of distribution
8
which is also divided into retail
Timeliness
All Carol Wright
Mailing
Program
target window,
cooperative
12
depend on and demand that this standard
13
have other promotional
14
promotions
15
Wright
16
that they will be prepared
17
Carol Wright,
Monday
distribution
structure
through
Retailers
delivery
Thursday.
Carol Wright
customers
be met.
In many cases, customers
in conjunction
Notification
with the distribution
of Carol
delivery,
with the Postal Service, participates
the voluntary
and Tracking
19
program
20
postmasters
21
on that week’s work load for the Postal Service.
worksharing
of the impact which Carol Wright
9
so
shelf stock and store staffing.
18
enhances Carol Wright’s
and in-store
also depend on timely
with sufficient
and its
have a four-day
to occur in conjunction
“Advance
of their marketing
mailings
efforts such as radio, television,
mailings.
offers customers
is also a major concern for Carol Wright
11
scheduled
of local
trade zones.
customers.
cooperative
base is comprised
segments based on a market
10
usually
and direct response
customer
and demographic
of delivery
in that it
of franchisees.
Cooperative
6
9
base differs from Val-Pak’s
goods manufacturers
Val-Pak’s
The Carol Wright
5
customer
System” program.
in
That
efforts by alerting
cooperative
mailings
may have
III. DESIGN OF STANDARD
RATES TO MEET THE POSTAL
PROPOSED
ECR REVENUE
I
2
3
This part of my testimony
4
5
ECR Mail which are designed
6
reasons explained
I
(USPS-T-35)
A ECR
SERVICE’S
TARGET
develops alternative
rates for Standard
to achieve several important
objectives.
below, they depart from the rate design of witness
in these important
A
For
Moeller
ways:
8
9
10
11
12
.
Letter-flat
differentials
are increased to correct for
a misstatement
of costs that arises from
inconsistencies
between the way data are recorded
by the Inter-Office Cost System (“IOCS”) and the
Revenue, Pieces and Weight (“RPW”) system.
13
14
15
16
.
The pound rate is not dramatically
reduced due to
the unreliability
of the weight-cost studies used by
the Postal Service to support its proposed
reduction.
17
18
19
.
The passthrough for destination
maintained
at the Commission’s
approved rate of 85 percent.
20
In order to illustrate
entry discounts
previously
is
clearly the effect of these changes, rates have
21
been designed using (i) the same formula
22
the Commission,
23
million
employed
by witness
Moeller
and
and (ii) the Test Year After Rates revenue target of $5,162
proposed by witness
Mayes (USPS-T-32),
10
which represents
an
1
average rate increase for the ECR subclass of 4.9 percent.’
2
from witness
3
differences,
4
5
A.
6
-.
,L
Moeller’s
The departures
rate design, as well as the reasons for those
are explained
herein.
The Postal Service’s Calculated Cost of Letters is Overstated
and the Cost of Flats is Correspondingly
Understated
Within
Standard
A Mail, Postal Service data systems systematically
I
overstate
the cost of letters while the cost of flats is correspondingly
8
understated.
9
RPW system records revenue, volume and weight
This situation
is caused by a mismatch
between
on the one hand, and
10
(ii) the way that the IOCS develops mail processing
11
costs on the other.
12
differentials
13
explained
14
separate
15
16
17
18
19
.
the IOCS misclassifies as
letters pieces that have letter-shaped
dimensions
but weigh in excess of 3.3 ounces, pay the pound
rate, and are therefore entered for revenue
purposes as nonletters.
20
21
22
23
.
Detached
mailings:
This mismatch
used for ratemaking
below, the mismatches
all four Standard
between revenues
Overweight
A subclasses.
letter-shaped
the IOCS misclassifies as letters
of letter-shaped
pieces accompanied
,-
USPS-T-32,
Exhibit
USPS-32B,
11
p. 1.
As
and costs arise from two
letters:
address label (“DAL”)
in-office
cost
practices:
mailings
DAL.
1
and city carrier
biases the letter/nonletter
within
(i) the way the
by a
1
1. Overweight
breakpoint
letters.
Letter-shaped
(approximately
pieces that weigh in excess of
2
the weight
3
nonletter-shaped
4
Part D of Form 3602, which consists generally
5
therefore
6
all such pieces meet the Domestic
Mail Manual’s
I
and width
From a rate category perspective,
8
the RPW are recorded
9
nonletter
mail rates.’
record the revenues,
dimensions
rate.
of flats.
pieces and weight
The RPW system may
as nonletters,
(“DMM’s”)
because these overweight
even though
height,
length,
data in
pieces pay the
The IOCS, on the other hand, conforms with DMM
10
definitions.
11
letter-shaped
12
costs are subsequently
13
perspective,
14
DMM are not in sync with definitions
15
RPW represents
16
systems, at least with respect to the ratemaking
2
to pay
In other words, all such pieces are entered in
for letters.
correctly,
3.3 ounces) are required
Consequently,
whenever
(unless the thickness
such mail is tallied,
happens
a fundamental
as
to exceed 0.25 inches), and the
assigned to letter-shaped
the IOCS data are not correct.3
it is recorded
mail.
From a rate category
The fact that definitions
used for ratemaking
in the
purposes or the
problem with the Postal Service’s data
See Response to VP-CW/USPS-T5-3
3
process.
(l’r. 2/846X
The way Standard A Mail is entered on Form 3602 and recorded
in the RPW system needs to be conformed with the IOCS instructions
in
Handbook F-45, In-Office Cost System, Field Operating Instructions
KJSPSLR-I-14). USPS witness Ramage recognizes the inconsistency between the
two systems, but opines that it might be easier to change the RPW System
than the IOCS (see Response of witness Ramage to Question Raised by OCA
During Hearings, filed April 18,2000X
12
1
Recording
the revenues,
2
mail as nonletters
3
letters
4
the unit costs of both letters
5
letters
obviously
while systematically
results
the letters
of an identifiable
subset of
the costs of that mail to
of the data.
The effect is to misstate
Computation
and nonletters.
Unit Cost
Within
charging
in a mismatch
and flats is straightforward;
6
I
8
9
pieces and weight
of unit cost for
i.e.,
Total Cost
-_--_---------Total Volume
=
category,
IOCS tallies of overweight
10
misclassified
11
to compute unit costs while the RPW system fails to record any corresponding
12
increase to the denominator
13
and overstating
14
as letters increase the numerator
pieces
(total volume),
(total cost) of the fraction
thereby
incorrectly
used
increasing
the unit cost of letters.
The reverse is true for nonletters.
Within
the nonletters
category,
--
..
,-
15
the RPW system includes
16
(total volume),
17
numerator
18
understating
19
help visualize
20
conformity
21
nonletter
such heavy-weight
nonletters
in the denominator
while the IOCS fails to record such pieces (when tallied)
(total cost) of the fraction,
thus incorrectly
The following
the unit cost of nonletters.
reducing
in the
and
schema is designed to
what happens when the IOCS fails to classify pieces in
with the RPW System.
costs are concurrently
The costs for letters increases while the
understated.
13
Unit
Cost for
Nonletters
(7 decreases)
Unit
Cost for
Letters
(A increases)
Total Cost (~1
---______________
Total Volume
5
6
7
2. Detached
8
9
Total Cost (v)
______________-_Total Volume
address labels.
When a detached
cased, the IOCS tally clerk is instructed
to “always
address card is being
use the accompanying
10
mailpiece
11
accompanying
12
such, and costs will accrue to letter-shaped
13
under Postal Service regulations,
14
with detached
15
with DALs must pay the nonletter
rate.s Thus, on Form 3602, all DAL
16
mailings
regardless
17
shape; hence the RPW system appropriately
18
weight
19
costs of DAL-accompanied
20
letters,
to determine
shape.“4 Following
mailpiece
is letter-shaped,
as nonletters,
as nonletters.
while revenues,
letter
5
mail.
At the same time, however,
rates cannot be paid for letters
so all Standard
letter-shaped
A Mail entered
of the DMM definition
records the revenues,
This clearly results in another
of
pieces and
serious mismatch,
mail are systematically
pieces and weights
USPS-LR-I-14
(Handbook
CW/USPS-T5-l(c)
(Tr. 2!843-44).
when the
the IOCS will record the piece as
address labels (“DALs”),
are entered
4
these instructions,
are systematically
since
charged to
charged to
F-451, pp. 12-11; see response to VP-
Response to VP-CWKJSPS-TlO-7
14
(Tr. 5/1932).
1
flats.
2
while the IOCS data do not.6 The net result is exactly the same as with
3
overweight
4
while reducing
5
Again, the RPW data reflect the correct rate category
letters;
i.e., it systematically
increases
the unit cost of letters,
the unit cost of flats.
3. Adjustments
to unit costs and letterhonletter
6
The two mismatch
I
ways that the RPW System and IOCS record data.
8
for Standard
9
unit cost data in Docket No. MC95-1,
problems
discussed here are fundamental
differentials.
to the different
Consequently,
the data
A Mail in Docket No. R97-1 also reflect the same biases.
10
because their unit cost development
11
on modeled cost. These systematic
12
identified
above probably
13
heretofore
unexplained,
14
MC95-1.
15
information,
explain
clearly overstated
17
and an appropriate
18
differential
were not similarly
biases in the underlying
much or all of the apparent
in the shape-based
cost differentials
problems,
therefore
for shape. As explained
cost data
decline,
since Docket No.
understated,
needs to be made to the unit cost
below, data exist for making
6
instead
the unit cost of letters is
and the unit cost of flats is correspondingly
adjustment
biased
was not based on IOCS, relying
Because of the two mismatch
16
however,
The
an
The way Standard A Mail is entered on Form 3602 and recorded
in the RPW system needs to be conformed with Handbook F-45 (USPS-LR-I45) so that IOCS clerks, when tallying an employee handling a detached
address card, will record the shape in a consistent manner.
15
1
adjustment
2
mail in Standard
3
,-
letters,
4. IOCS Tallies
of Overweight
A ECR letters,
letters.
for all Standard
5
Appendix
6
ounce weight
I
above and below the 3.3 ounce breakpoint
8
60 percent of these tallies
9
3.3 to 3.5 ounce range, this mismatch
11
but data on the volume of DAL.
A do not exist.7
4
10
-
on account of overweight
A, Table A-l.
by pertinent
The number
weight
in the 3.0 to 3.5
but the number
is not known
of tallies for letters
precisely.
Allocating
to the 3.0 to 3.3 ounce range and 40 percent to the
cost is conservatively
about 2.6 percent of the total cost attributed
is available
12
overweight
letters,
13
distributed
uniformly
14
Saturation
presort categories.
15
unit cost differential
7
of IOCS tallies
range, is shown in
of tallies for letters
range is shown (183 tallies),
As no information
The number
the adjustment
over Standard
estimated
at
condition
of
to letters.’
concerning
the presort
to the letter-flat
cost difference
A ECR Basic, High-Density
The computed
is shown in Appendix
adjustment
and
to the letter flat
A, Table A-2.
See response to VP-CWILTSPS-T5-l(c)
8
is
and 2 (Tr. 2/843-45).
An alternative
estimate, based on volume data used by
witnesses Daniel (USPS-T-281 and Moeller (USPS-T-35), indicates that ECR
pieces with letter-shaped
dimensions (per the DMM) and weighing over the
3.3 ounce breakpoint may constitute as much as 17 percent of total ECR
“letters.”
The total cost assigned to “letters” on account of these heavyweight pieces would be even higher, assuming that their extra weight causes
some costs to be incurred.
See Appendix A for further discussion.
16
5. Letter-shaped
1
letters,
pieces with DALs.
2
overweight
no information
3
category
4
has all letter-shape
5
ECR.i’
6
substantial,
I
well known for use of DALs on a regular
8
until
9
underlie
of DAL mailings
Moreover,
within
is available
Standard
dimensions.’
ECR mailers
basis.
adjustment
11
conservatively
12
FY 1998 consisted
13
adjustment
14
A-2. For the reason stated above, the resulting
15
uniformly
of mismatched
in the country
rate categories,
Accordingly,
and
some
I have
of the total ECR flats volume in
DAL mailings.
The relatively
minimal
to the unit cost of letters and flats is shown in Appendix
over all presort
are
in its data systems which
but required.
assumed that only 1.0 percent
could be
Under the circumstances,
of unit cost for individual
10
itself
clearly exist within
DAL mailings
the Postal Service can achieve consistency
not only is appropriate,
with
on the volume or presort
Yet such mailings
as some of the largest
the computation
the situation
A ECR where the mailpiece
the volume of individual
inasmuch
Unlike
adjustment
A, Table
is also applied
categories.”
9
See response to VP-CWICTSPS-T5-2
IO
See Moeller
cross-examination
(Tr. 2/843).
exhibit
VP-Moeller-XE-1
(Tr.
10/4137-38).
11
The Postal Service calculates the letter/nonletter
differential
for
High-Density
at 0.280 cents, and for Saturation at 0.478. No explanation is
offered as to why the calculated Saturation differential
is 70 percent greater
than the High-Density
differential.
If the Postal Service implements the
necessary changes to the IOCS to eliminate the mismatch problem, the
rather large difference in these shape differentials
may be reduced or
(continued...)
17
The combined
1
2
letter/nonletter
differentials
Presort
9
10
B.
result of the two adjustments
by 0.466 cents, as follows (cents):
Adjusted
Letter-Flat
Differential
USPS
Letter-Flat
Differential
Category
Basic
1.790
2.256
High-Density
0.280
0.746
Saturation
0.478
0.944
Studies of the Weight-Cost Relationship
Are Not
Adequate to Support a Reduction in the Pound Rate
For reasons explained
11
is to increase the
12
cost relationship
13
rejected as inadequate
14
overstated.”
15
drastic reduction
16
Accordingly,
17
slightly
more fully in Appendix
B, studies of the weight-
offered by the Postal Service in this docket must again be
to demonstrate
that the effect of weight
They provide no basis for the Commission
in the pound rate as requested
on costs is
to recommend
a
by the Postal Service.
I propose that the ECR pound rate be set at $0.661, which is
less than the existing
rate and is equal to the same rate proposed by
“(...continued)
eliminated.
Until better data become available, a uniform adjustment over
the different presort categories would appear to be the most appropriate
alternative.
12
See USPS-T-28
(witness
Daniel)
therein.
18
and the library
references
cited
1
witness
2
rate at close to its present level, while increasing
3
amount
4
Subclass, produces a decrease in the pound rate relative
5
Moreover,
6
in the passthrough
7
further
8
their mail at destination
9
10
11
C.
Moeller
for the Standard
sufficient
A Regular
Subclass.i3
Retaining
the pound
all piece rates by an
to provide a 4.9 percent increase in revenues from the ECR
for reasons explained
in the next subsection,
for destination
to the piece rate.
I propose an increase
entry worksharing
discounts,
reduces the actual rates paid by ECR nonletter
mailers
who enter
facilities.
The Passthrough for Destination
Should Be Increased
In Docket No. R97-1, the Commission
12
destination
entry discounts
13
explained
14
maintained
15
to design of rates for Standard
16
that this 85 percent passthrough
17
discounts
Entry
Discounts
established
the passthrough
for
at 85 percent of avoided costs. For reasons
here, I propose that in this docket the passthrough
at a level of 85 percent
be applicable
which
or raised higher.
A ECR Mail.
to all Standard
My testimony
Nevertheless,
and the resulting
either be
is limited
I would suggest
destination
entry
A Mail, as has been the custom in
13
Should the Commission adopt witness Moeller’s proposed pound
rate of $0.661 for the Regular Subclass, rather than the current $0.663, the
rate proposed here will avoid having the anomalous situation of an ECR
pound rate which exceeds that of the Regular Subclass.
19
1
prior dockets, and as the Postal Service proposes to continue
2
Applying
3
witness
in this docket.r4
.-
r.
an 85 percent passthrough
Crum”
to the avoided costs developed by
results in the destination
entry discounts
shown in Table 1.
4
Table 1
5
6
I
.-
Proposed
8
9
10
11
12
Entry
Point
13
Standard A Mail
Destination Entry Discounts
(1)
(2)
(3)
costs
Avoided
($ per lb.)
Pound
Rate
Piece
Rate’
DBMC
$0.114
$0.097
$0.020
14
DSCF
0.140
0.119
0.025
15
16
DDU
0.173
0.147
0.030
1 Computed at 3.3 ounces.
17
18
Witness
19
20
DBMCs
Moeller proposes a passthrough
that is 4 percentage
for destination
points less than the passthrough
entry at
for destination
-
14
For reasons discussed here and in Appendix B, a passthrough of
more than 85 percent would be warranted
for Standard A ECR Mail. Since
this testimony makes no attempt to design rates for any of the other three
Standard A subclasses, the impact on those subclasses of a passthrough
greater than 85 percent has not been investigated here.
USPS-T-27,
Attachments
B and C.
20
1
entry at DSCFs and DDUs. i6 My proposal would maintain
2
passthrough
3
that supports
4
volume to ship deeper into the Postal Service network.
5
and equity dictate that the basis used to determine
6
mailers
I
underlies
8
DDUs,
9
mail deeper into the postal network.
10
for all destination
entry points because I can find no rationale
a reduced passthrough
who enter mail at DBMCs
the incentives
for those mailers
offered to mailers
Since the rates in the previous
12
a departure
from the established
13
Commission
used an 85 percent passthrough
14
discounts
15
his systematic
16
testimony
17
in the absolute
18
adopted by the Commission.
19
20
to be fair and equitable,
precedent.
Witness
16
to justify
entering
rationale
justification
for
is needed for
to establish
Moeller
provides
destination
entry
no justification
for
In fact, his
of the discount
(and changes
and does not even discuss the 85 percent standard
entry discounts
USPS-T-35,
required
in the 85 percent passthrough.
Several good reasons support
destination
offered to
In Docket No. R97-1, the
focuses solely on the absolute amount
amount),
the incentives
case (and the underlying
those rates) are presumed
reduction
In my view, fairness
who enter mail at DSCFs and
11
A Mail.
who lack sufficient
should be on par with the basis that
and who have the larger volumes typically
for Standard
a uniform
maintaining
at 85 percent.
pp. 14-16.
21
the passthrough
One is that weight-related
for
costs
i7 However,
1
are almost surely avoided by presortation.
2
discounts
3
possible even to contemplate
4
presort
5
incapable
of estimating
6
is entered
into the Postal Service network,
I
almost by definition.
8
any weight-related
9
destination
10
do not recognize
discounts
adding a weight-related
cost avoidance
Although
due to presort.
to the
studies are
The deeper that mail
the more highly
presorted
it is,
maintaining
the
at least equal to 85 percent of avoided cost
that is documented
reason is that Standard
12
In N
13
entry discounts
14
level of destination
15
network
16
network.
17
mailers
18
since only 38 percent
19
the Postal Service for transportation
A mailers
of all Standard
to be weight-related.
respond to such discounts.
A Mail that received destination
was 62 percent by volume, and 71 percent by weight.i8
entry indicates
that a private
now exists to complement
It also indicates
find competitive
17
component
from presortation,
to cost avoidance
1998, the amount
and it is not
it is not possible in this docket to recognize
cost avoidance
entry passthrough
Another
any such cost avoidance,
because the Postal Service’s weight-cost
gives recognition
11
or reward
the per-piece presort
consolidation
the Postal Service’s own transportation
that a substantial
private
sector freight
This
percentage
sector transportation
of all Standard
A
more advantageous,
of Standard A volume(and 29 percentby weight) uses
See Appendix
from originating
B for an explanation
18
entry points.
of the underlying
USPS-LR-I-125,
N 98 Billing Determinants,
(data are for Commercial and Nonprofit combined).
22
rationale.
Section G-6, p. 5
1
Maintaining
2
retain
3
destination
4
transportation
5
shipments.
6
has benefitted
I
total cost of mailing,
8
important
9
the passthrough
the incentive
at a level at least equal to 85 percent will
for Standard
entry discounts,
companies,
Growth
A mailers
including
those that specialize
private
and nurturing
this network
reason which supports
advantage
of
for
in consolidating
sector transportation
and the Postal Service by helping
step to help keep mail competitive
A further
taking
and also will retain the incentive
of this competitive
mailers
to continue
network
to hold down the
can be viewed as an
with other media.
maintaining
the passthrough
at 85
10
percent or higher is that the Postal Service’s projected
11
highway
12
recent increases in the cost of oil. The Postal Service is asserted to be facing
13
a $300 million
14
increasing
fuel costs. a0 Higher
15
avoidance
from destination
16
increased
cost avoidance
17
costs over FY 1998,27.6
increase in transportation
Yet another
in light of
cost over Base Year because of
costs increase the cost
Worksharing
discounts
that reflect such
the passthrough
at 85 percent is
have higher value.
reason for maintaining
the Postal Service’s continuing
19
factor productivity
(“TFP”),
USPS-T-27,
may be understated
transportation
entry.
18
19
percent,”
Test Year increase in
inability
to keep
Attachment
to increase its efficiency
and total
cost increaseswell below the level of
B, Table 5.
20
USPS, April 4,2000, Release No. 25, citing then-Chief
Officer and Executive Vice President Richard Porras.
23
Financial
1
inflation,
and to provide
2
management
3
with the principle
4
and worksharing
5
Admittedly,
6
who do little
or no worksharing.
I
worksharing
discounts
8
nothing
9
in its inefficient
with the efficient
which they deserve.
of efficient
discounts
and economical
A higher passthrough
component
pricing.
will encourage
it may also add slightly
to promote
is fully consistent
Increasing
more private
sector participation.
to the rate increases for those mailers
But artificially
holding
down the level of
sends the wrong signals to high-cost
social efficiency,
passthroughs
and helps perpetuate
mailers,
does
the Postal Service
ways.
Maintaining
10
mailers
the passthrough
for destination
at least equal to 85 percent and offering
11
discounts
12
witness
13
Mail, most especially
14
the pound rate is set at $0.661 as I propose, my proposed discount
15
per pound for DDU entry (up from the current
16
reduces the net pound rate from $0.537 to $0.514, a decrease of 4.3 percent.
17
In light of the fact that the entirety
18
must be derived from the piece rate in this case, and under witness
19
proposal
Moeller
entry which are deeper than those proposed by
will provide
benefits to every category of Standard
to nonletter-shaped
A ECR
mail entered at the pound rate.‘i
discount
If
of $0.147
of $0.126 per pound)
of the 4.9 percent increase in revenues
some piece rates for Standard
Moeller’s
A Mail could increase by as much as 9
21
Of pound-rated
Standard A ECR Mail, 96.3 percent (by weight)
receives a destination entry discount. USPS-LR-I-125,
N 98 Billing
Determinants,
Section G-3, pp. 1-2.
24
1
or 10 percent,
2
adequate,
3
D.
4
such a reduction
would appear to be adequate,
if not more than
at this time.”
Other Passthrough
Adjustments
If an average rate increase of 4.9 percent is to be imposed on the ECR
5
subclass, a fair and equitable
6
across-the-board
7
pound rate essentially
8
across-the-board
9
increase proposed by witness
starting
increase by the required
unchanged
increase.
amount.
However,
negates even the possibility
maintaining
the
of such an
In order to help spread the effect of the rate
Mayes more evenly, two further
10
been made to witness
11
passthrough
12
same passthrough
13
Second, the presort
14
to 140 percent.
1.5
equal to the rate for Basic nonletters.
22
point for rate design would be an
Moeller’s
for High-Density
as witness
passthrough
rate design.
First, the letter/nonletter
mail is increased
Moeller
changes have
from 65 to 95 percent (the
recommends
for High-Density
for Saturation
ECR Mail).
mail is increased
from 125
This helps to offset the fact that the Basic letter rate is set
The corresponding
and 3.7 percent, respectively.
reductions
25
for DSCF and DBMC
entry are 3.4
1
2
E.
Initial
Standard
A ECR Rates
The effect of the rate design changes described
3
rate schedule in the top portion
4
unchanged
from the rate proposed by witness
5
percentage
changes of each rate cell from current
6
bottom portion
I
10.0 percent,
of Table 2. The rate for Basic letters remains
of Table 2. The maximum
as with witness
above is shown in the
Moeller’s
Moeller,
rates are shown in the
increase is 8.0 percent
proposed rates).
26
at 17.5 cents. The
(and not
1
Table 2
2
3
4
Standard A ECR Rates Resulting
from Proposed Changes in Rate Design
(dollars)
5
6
I
8
9
Destination-entrv
BMC
SCF
DDU
12
Letters:
Basic
Automation
High Density
Saturation
0.175
0.163
0.149
0.140
0.155
0.143
0.129
0.120
0.150
0.138
0.124
0.115
0.145
0.133
0.119
0.110
13
14
15
16
Non-Letters (PC-rated):
Basic
0.175
High Density
0.156
Saturation
0.149
0.155
0.136
0.129
0.150
0.131
0.124
0.145
0.126
0.119
17
18
20
21
Non-Letters (lb-rated):
per piece:
Basic
0.039
High Density
0.020
Saturation
0.013
0.039
0.020
0.013
0.039
0.020
0.013
0.039
0.020
0.013
22
23
24
25
per pound:
Basic
High Density
Saturation
0.564
0.564
0.564
0.542
0.542
0.542
0.514
0.514
0.514
10
11
19
0.661
0.661
0.661
27
Table 3
Percentage Changes from Current Rates Resulting
from ECR Rates with Proposed Changes in Rate Design
4
5
6
I
8
9
10
11
12
13
14
15
16
17
18
19
BMC
SCF
DDU
8.0%
4.5%
7.2%
7.7%
6.2%
2.1%
4.9%
5.3%
6.4%
2.2%
5.1%
5.5%
6.6%
2.3%
5.3%
5.0%
Non-Letters (PC-rated):
Basic
8.0%
High Density
3.3%
Saturation
6.4%
6.2%
0.7%
4.0%
6.4%
0.8%
4.2%
6.6%
0.8%
4.4%
Non-Letters (lb-rated):
per piece:
Basic
56.0%
High Density
42.9%
Saturation
333.3%
56.0%
42.9%
333.3%
56.0%
42.9%
333.3%
56.0%
42.9%
333.3%
Letters:
Basic
Automation
High Density
Saturation
20
21
22
23
per pound:
Basic
High Density
Saturation
-0.3%
-0.3%
-0.3%
-3.4%
-3.4%
-3.4%
-3.7%
-3.7%
-3.7%
-4.3%
-4.3%
-4.3%
24
25
26
21
Example: 8-02 piece
Basic
3.6%
High Density
1.4%
Saturation
2.7%
1.3%
-1.3%
0.0%
1.1%
1.5%
-0.2%
0.9%
-1.9%
-0.6%
28
1
2
3
IV. DESIGN OF STANDARD
A ECR RATES
TO MEET A REDUCED
REVENUE
TARGET
This Section explains
A ECR Mail.
the development
4
Standard
5
provisionally
6
Section III of my testimony,
I
below the $5,283 million
8
Mayes. 23 The key changes are:
of my proposed rates for
The Postal Service’s revenue target for ECR,
used to isolate and illustrate
the modifications
is herein reduced by $177 million,
TYAR target proposed by witness
9
10
11
12
13
USPS (Mayes/Moeller)
Alternative
proposed
Difference
14
The proposal
discussed in
or 3.4 percent,
Moeller
Revenue
($, million)
Coverape
(Percent)
5,283
5.106
177
209
242
7
here reduces minimally
by the Commission
the existing,
15
of ECR recommended
16
Decision in Docket No. R97-1, by 1.0 percent,
17
proposes to raise it even higher.
23
in its Opinion
following
very high coverage
and Recommended
whereas witness
Mayes
There is a slight discrepancy between the cost figures of witness
Mayes and witness Moeller: 2471.864 vs. 2466.132. These costs are
expanded by a contingency allowance of 2.5 percent. Mayes uses a coverage
of 208.8, Moeller a coverage of 209.0. Mayes’ final revenue requirement
is
5290.283; that of Moeller, 5283.071. The figure adopted here is that of
Moeller, which he has used in his detailed rate design for ECR.
29
The proposed rates generating
1
the above revenue target retain the
2
same basic rate design features
3
(i) adjustment
4
RPW system and the IOCS; (ii) passthroughs
5
entry discounts;
6
discussed in the prior section; that is:
of the letter/nonletter
differential
for mismatches
the
at 85 percent for destination
and (iii) a pound rate of $0.661.
It is not necessary
7
revenue reductions,
8
requirement
9
allowance
to consider raising
any other rates to offset ECR
because I consider the Postal Service’s revenue
to be excessive.
In particular,
of 2.5 percent is too high.
the requested
It represents
10
of the proposed increase to the revenue requirement.
11
requirement
12
especially
13
The following
14
deserving
15
A.
to a reasonable
level provides
for those products
discussion
contingency
an astonishing
a substantial
Reducing
margin
46 percent
the revenue
of relief,
that do not deserve the proposed rate increases.
explains
why, within
Standard
A, ECR is most
of such relief.
The Proposed
Historically,
16
between
insurance
Contingency
the contingency
17
provide
18
forecasting
19
Postal Service’s operating
is Too High
provision
has served two purposes:
against a test year deficit resulting
errors whose cumulative
profit,
from possible
effect would be to underestimate
and (2) to help offset truly
30
(1) to
the
unforeseeable
1
events that, by definition,
are not capable of being forecasted
2
not be prevented
honest, efficient,
through
The Postal Service, by its own admission,
3
4
forecasting
5
the Postal Service created a new forecasting
6
function,
7
forecasting
8
results
9
fund of $1.7 billion
capabilities.
According
to witness
process. ” Moreover,
management.24
has added significantly
Tayman,
organization
within
personnel
large contingency
forecasting
capability,
to insure against forecast error.
13
cumulative
14
Service finances
15
minuses),
16
amount
17
years’ losses. This amounts
effect of unforeseeable
(i.e., if the pluses from unforeseeable
capital
events balance out the
the Postal Service should have a Test Year surplus
of the contingency
improvements.
plus the amount
budgeted
to quite a substantial
24
25
Whatever
and if the
events turns out to have no effect on Postal
surplus
for recovery of prior
to borrow
is generated
31
(Tr. 21146).
for
by the amount
See Op. & Rec. Dec., Docket No. R84-1, at ¶ 1017.
See response to ANMKSPS-TS-9
equal to the
sum.
1. The Postal Service has ample authority
18
Given the
it should not need such a
If the Postal Service’s forecasts turn out to be accurate,
12
on the
close to the mark that a contingency
would appear to be far more than adequate.
11
its Finance
the Postal Service’s forecast for FY 1999
is, on net balance, sufficiently
Postal Service’s improved
to its
in Fiscal Year 1999
which added new people and focused existing
10
19
and economical
and which could
of
1
the contingency
2
part the Postal Service’s capital improvements
program.
3
to the Postal Service’s Annual
the last six years it has
4
reduced outstanding
5
1992 to $5.9 billion
at the end of F’Y 1998, while continuing
6
capital investment
on its books.
7
approved
by the Commission
Reports, during
debt by $3.8 billion,
The Postal Service is not required
8
advance, through
retained
9
ample borrowing
authority,
earnings,
favorable
11
is deployed
12
accompanied
13
Postal Service has never exceeded its annual
14
2/177).
15
percent of the aggregate
government
It has
rates, to fund its
Despite all of the publicity
program,
according
to witness
statutory
that has
Tayman
borrowing
the
limit.
(Tr.
debt at the end of F’Y 1998 was less than 40
statutory
limit of $15 billion.
If the Postal Service’s capital improvement
17
the statutory
cap with respect to its borrowing
18
cash flow would operate to curtail
19
reason for a significant
20
and actually
21
its capital
contingency
program,
program
limit,
were approaching
and any shortfall
in
that program,
there could indeed be a
allowance.
But this simply is not now,
has never been, the case. Until
improvement
basis.
in
over the same period that the new equipment
and put into service.
And its outstanding
to record net
to fund its capital improvements
capital improvements
16
program
according
at the end of F’Y
or on a pay-as-you-go
at highly
to finance in
Moreover,
from $9.2 billion
10
its automation
will be available
the Postal Service accelerates
net capital investment
32
(i.e., investment
in
1
excess of depreciation
and amortization)
2
conventionally
3
created by a deliberately
employed
borrowing,
not through
excessive allowance
2. The RPYL mechanism
4
allowance.
operates
5
contingency
6
envisions
7
recovery of prior years’ losses (“RPYL”).
8
would be imperative
9
during
a contingency
shortfall.
11
contingency
12
of the contingency
13
not necessary
14
during
15
retrospective
16
the requirements
17
contingency
allowance,
intentionally
for contingency.
as a retrospective
Act expressly
but it does not provide any mechanism
Without
the RPYL mechanism,
that the Postal Service achieve financial
The RPYL mechanism
mechanism,
fund.
it would be seriously
acts, however,
backstopping
and taking
to be overly conservative
contingency
protection
by any
over much of the function
firmly
established,
against
contingency.
it is
any shortfall
In essence, the
of the RPYL mechanism
of the Act. Moreover,
it
break-even
disadvantaged
about protecting
the Test Year via a large prospective
for
as a retrospective
With the RPYL mechanism
largely fulfils
as discussed below, too large a
factor may, over the long run, be self-defeating.
3. The contingency
18
surpluses
The Postal Reorganization
the Test Year, otherwise
10
should be funded over time through
rates higher
itself should never be a major factor
19
driving
20
obligation
21
a week to most addresses in the country.
as it presently
and volumes
lower.
Under the universal
exists, the Postal Service provides
33
delivery
service
six days
The fured costs of this delivery
1
network
2
to all, the Postal Service requires
3
Service, the Commission,
4
concern about the prospect of major future
declines in volume.
5
concern exists about electronic
information
transfer
6
presentment
which threatens
7
Class Mail volume.
8
monopoly
9
concern, though
To help spread these fixed costs and keep rates affordable
This development
provided
involving
Recently,
the GAO, and others have rightly
and bill payment,
protection
large volumes of mail.
threatens
by the Private
smaller
10
and rates assigned to mail products
11
and Priority
12
costs.
13
,-
are large.
of relatively
Mail, which bear a disproportionate
Every rate increase, however
expressed
Particular
applied to bill
to cut seriously
into First-
serious erosion of the
Express statutes.
total volumes,
the Postal
Also of
are the very high coverages
high elasticity,
burden
small, contributes
It may be objected that mail products,
such as ECR
of institutional
to driving
volume out
14
of the system.
15
elastic ones, have elasticities
16
increases
17
the short run, but fails to account for technological
18
longer run. The higher the rates, the more likely they are to stimulate
19
innovations
will raise, rather
in competing
even the relatively
below unity in absolute value; therefore,
than depress, postal revenues.26
activities
rate
This is true in
change that occurs in the
that the Postal Service has difficulty
26
Technical issues connected with the definition
its magnitude are discussed further below.
34
of elasticity
and
1
following
or offsetting.
Past experience
2
seldom, if ever, recaptured
indicates
that markets,
once lost, are
by the Postal Service.
In order to preserve necessary volume, the Postal Service needs to keep
3
4
rate increases
5
prospective
6
leading to volume declines.
I
to an absolute
contingency
minimum.
allowance
It is a truism,
contributes
What needs to be recognized
explicitly
to current
which the proposed prospective
9
rate increases,
10
rate increases.
11
three rows of Table 4, almost half the rate increase,
12
percent, is driven by the prospective
13
prospective
14
increase above the rate of inflation.
15
is driving
not only the proposed
but also the volume declines projected
Table 4 illustrates
contingency
the point.
rate increases,
in this case is the extent to
8
contingency
of course, that a
to occur because of the
As can be seen from the last
contingency
an astonishing
factor.
46
The 2.5 percent
is also the factor that drives the proposed rate
For these reasons, the proposed prospective
16
high, but also counter-productive
17
It superficially
18
cushion against inflation,
19
reality,
20
faster than the rate of inflation,
21
based on innovations
to sound management
appears to provide the Governors
enabling
it does just the opposite.
contingency
is not only
of the Postal Service.
with additional
cash, as a
them to defer the next rate case. Yet, in
By driving
it stimulates
both in information
35
up postal rates across the board
the kind of competition
technology
that is
and in more traditional
1
arts.
2
institutional
3
provided
4
even before the next rate case. Thus, a higher
5
a counter-intuitive
6
the need for the next rate case, it can actually
I
another
extremely
rapid pace of technological
changes in the private
sector, the initial
result.
rate increase,
Instead
of providing
i.e., to between
11
conformity
12
materialize
beyond that amount
13
contingency
RPYL mechanism.
$400 and $500 million
with established
practice,
$1,200 million
16
reducing
17
below.
to $1,300 million)
the unit contribution
losses
leads to
a cushion that would delay
hasten the day when yet
shortfall
will be needed.
contingency
without
to no
any contingency;
in this case, with the proviso, in
that any shortfalls
be made up through
I also suggest that at least $177 million
15
market
allowance
limit the prospective
of the projected
10
14
contingency
also above the rate of inflation,
more than 20 to 25 percent
and
revenue increases
by higher postal rates can easily turn into painful
I suggest that the Commission
8
9
With the current
which actually
the retrospective
of any such reduction
in the revenue requirement
demanded
36
(i.e.,
be directed
to
of ECR mail, for reasons discussed
Table 4
Role of the Contingency in Driving Rate Increases
and Volume Declines
Amount
($, 000)
5
6
7
i
10
Test Year Costs:
Cost Segments
RPYL
Dist,
68,046,556
268.257
68,314,813
11
Less: Test Year Revenue Before Rates
12
Shortfall Without Contingency
1,986,412
53.9%
13
Contingency
1,701,164
46.1%
14
Increase in Revenue Requirement
3,687576
100.0%
Before Rates
-66.328.401
15
16
17
Sources:
Test Year Costs and Contingency, USPS-T-g, p. 22, Table 15.
Test Year Revenue Before Rates, USPS-T-32, Exh. USPS32A, p. 1.
-
18
37
1
2
3
B.
The Unit Contribution
and Coverage
of Standard A ECR Mail is Too High
Under witness
Mayes’ proposal,
4
is exceedingly
5
A substantially
6
ECR Mail than the other commercial
high, 208.8 percent,
the coverage of Standard
and among the highest
A ECR Mail
of all subclasses.
-.
greater
burden
of institutional
subclass within
is placed upon
Standard
A.
Test Year 2001 After Rate.?
7
Unit
Contribution
(cents)
8
9
10
ECR
Regular
Difference
11
12
13
14
contribution
Unit contributions
Coverage
(vercent)
8.194
5.478
2.716
208.8
f132 9
75.9
and coverages describe the same underlying
15
situation.
Given one, the other can always be readily
16
recognized
that the Commission
17
recommendations
18
of 3622(b) can and should be applied to the unit contributions,
19
percentage
20
demonstrate
27
contributions
has traditionally
in terms of coverages.
markups
and coverages.
why the burden
calculated.
explained
Nevertheless,
It is
its
the non-cost criteria
as well as
A focus on unit contributions
helps
on ECR is excessive.
The derivation of the Postal Service’s unit coverages and unit
for Test Year 2001 is shown in Appendix C, Table C-l.
38
r
1. Percentages
1
vs. absolute
magnitudes.
Much discussion
2
postal rate cases revolves around coverages, markups,
3
At times, however,
4
absolute,
5
needed clarity
6
rates and costs are viewed solely in percentage
7
Mayes testifies?
attention
not relative,
and percent increases.
needs to focus simply on dollars
values.
Working
to the ambiguities
with absolute figures
and cents can bring much
that arise when the relationships
terms.
in
between
For example, witness
8
9
10
11
12
13
14
15
16
17
The more highly prepared the mail, the lower the postal cost
attributed
to that mail. The lower the costs attributed
to that
category of mail, the lower the cost base to which the rate level
is applied. If the same cost coverage is assigned to two
categories of mail differing only in the degree to which the
mailer has prepared the mail, the more highly-prepared
mail
would have a reduced unit contribution.
Thus, as the degree of
preparation
increases over time, all else equal, the coverage
required to obtain the same contribution
also increases.
[Emphasis added.1
18
Within
-
certain
19
witness
20
analysis.
21
represents
22
only percentages
23
percentages
limits,
this statement
Mayes herself acknowledges.
28
93
First, according
the “difference
to witness
is a mathematical
*’ Beyond that, however,
p. 10,ll.
it requires
cost.” When
it is easy to lose sight of how such
operate when applied to mail products
USPS-T-32,
as
Mayes, the “same contribution”
between revenue and volume-variable
are discussed,
truism,
that have different
1-8.
Response to VP-CW/USPS-T32-l(a)
39
(Tr. 11/4388).
unit
1
costs. When the coverage assigned to any mail product
2
product
3
a sufficiently
high coverage is assigned to a lower-cost
4
contribution,
in absolute terms, will necessarily
5
product.
6
Regular
7
imposes a unit contribution
8
Regular
a higher unit contribution.
Such is exactly the situation
Mail.
Therefore,
product,
its unit
Standard
A ECR and
high coverage of lower-cost
which substantially
ECR Mail
exceeds that of higher-cost
Mail.
of unit contributions.
Figure
1 and Table 5 show
10
the unit contributions
11
points, beginning
12
in Docket No. R97-1, and ending with the Postal Service’s proposals
13
current
14
when
exceed that of a higher-cost
regarding
That is, the exceedingly
2. Past pattern
9
-
will yield progressively
is raised, that mail
of Standard
A ECR and Regular
with the Commission’s
Opinion
Mail for seven data
and Recommended
Decision
in the
docket.30
The origin of the unusually
high burden
15
placed on Standard
16
Subclass was created from Third-Class
17
adopting
18
cost criteria
A ECR goes back to Docket No. MC95-1,
its recommended
30
contributions
of institutional
Bulk Rate Regular
contribution,
the Commission
of Set 3622(b), summarized
contributions
when the ECR
(“BRR”).
relied on the non-
as:
Backup data, including the coverages that correspond
discussed, are presented in Appendix C, Table C-l.
40
In
to the unit
,-
1
2
1
2
4
5
Fairness
Value of
Effect of
Available
and Equity
Service
Rate Increases
Alternatives
6
7
8
9
Degree of Preparation
Simplicity
ECSI
Other Factors
Figure
1
Unit Contribution
from Standard
and Standard A Regular
1997 - 2001
(cents)
A ECR
101
5.478 AR
‘L
I
0 I
1997
t
ECR - BR t
Source:
1998
1999
Regular - BR +
Table 5
42
2000
ECR - AR -C
2001
Regular - AR
Table 5
Unit Contributions of Standard A
ECR and Regular Mail (cents per piece)
5
6
ECR
Reaular
7
1997
PRC
R97-1
7.552
5.444
2.108
8
1997
Actual (CRA)
8.572
7.289
1.183
9
1998
Actual (CRA)
8.660
6.010
2.650
10
1999
Actual (CRA)
7.605
5.344
2.261
11
2000
Projected
7.978
3.791
4.186
12
2001
R2000-1 BR
7.460
3.571
3.889
13
2001
R2000-1 AR
8.194
5.478
2.716
14
15
Source:
Appendix C, Table C-l
.,-
43
-.
ECR - Reg
Difference
In Docket No. R97-1, witness
1
O’Hara
testified
2
of these criteria,
3
contributions
for ECR.
4
Nevertheless,
the Postal Service at that time justified
5
coverage for ECR, 228 percent,
6
to avoid major, disruptive
I
existing
9
Nos. 2, 5, and 6, would have strongly
groupings
coverage by stating
That counsel remains
supported
valid to the present
day.
its requested
by focusing solely on criterion
readjustments
lower
high cost
4 and its desire
in rate relationships
between
of mail.
The Commission
8
that no less than three
offered support
to efforts to reduce ECR’s cost
that “the largest volume subclasses in First-Class
10
Standard
Mail should have roughly
11
Commission,
nevertheless,
12
contributions
to institutional
13
Regular
14
increase the institutional
15
between
16
contributions
17
Section 3622(b), as against
18
classes and subclasses (criterion
19
1, through
equivalent
markup
indices.“31
expressed its concern that reductions
costs from the former Third-Class
and
The
in
Bulk Rate
(out of which the ECR subclass was created) should not directly
31
cost burden
placed on First-Class
the opposing concerns of(i) reducing
to criteria
the resulting
2,5, and 6 of
impacts
on other
4), has carried over from Docket No. MC95-
Docket No. R97-1, to the current
Docket No. MC95-1,
Tension
the excessive institutional
by ECR Mail by giving more weight
(ii) dampening
Mail.
docket.
Op. & Rec. Dec., ‘jl 1019.
44
In addition
1
to the data taken from Docket Nos. R97-1 and R2000-1,
2
Figure
1 and Table 5 show actual unit contributions
3
projected
4
observed from Figure
5
tended to diverge rather
6
Mail, which was lower to begin with, has subsequently
I
sharply,
8
constant.
9
resulted
contributions
whereas
for 1997-1999,
as well as
for the year 2000 and Test Year 2001. As can be
1, the unit contributions
than narrow.
The unit contribution
the unit contribution
The rates recommended
in a unit contribution
of ECR and Regular
from Regular
declined rather
from ECR has remained
by the Commission
difference
Mail have
relatively
in Docket No. R97-1
between ECR and Regular
10
cents (Table 5). After the rate increase proposed by witness
11
docket, the difference
of 2.1
Mayes in this
-
in unit contribution
The overall trend of widening
12
13
contributions,
wholly
14
reason for concern.
15
failed to keep up with increases
16
institutional
17
problems
18
virtue
19
unit contribution
20
worksharing.
21
other subclasses reconcilable
would increase to 2.7 cents.
differences
in effective unit
ignored by the Postal Service in its case-in-chief,
It indicates
that (i) rate increases for Regular
in unit costs, and (ii) the burden
is
Mail have
of
costs is being shifted from the subclasses most affected by cost
to other subclasses whose costs have remained
of the high degree of preparation
relative
by mailers
under control by
(criterion
6). A higher
to other subclasses is no way to ?eward”
Nor is a long-term
increase in unit contribution
with criterion
45
mailer
relative
to
6 (degree of mailer preparation).
3. Ex ante vs. actual unit contributions.
1
2
5 shows the Commission’s
3
contributions
4
2.1 cents per piece. The Postal Service projects that in the year 2000 the
5
difference
6
figure.
7
happen in future
8
prevail.
9
be substantially
ex ante figure for the difference
of ECR and Regular
in unit contributions
Mail at the conclusion
Given this discrepancy,
it is relevant
years should witness
The actual difference
in the years 2001-2003
the year 2003 the differential
11
2.7 cents to as high as 5.4 cents per piece.
14
of volume in each subclass consists of advertising
15
the same service standards
16
feature
17
suited to demographic
18
targeting.
19
transportation
21
Mail have comparable
bottleneck
content,
mail.
targeting,
Both subclasses have
the subclasses is that Regular
whereas
Mail simply requires
component
is applied,
mail products.
The principal
-
46
Mail is more
more Postal Service processing
pricing
comparable
demand
ECR is more suited to geographic
than ECR, because ECR is more highly
pricing
by
insofar as the vast majority
and the same priorities.
between
When the efficient
docket
could easily turn out to
from comparable
ECR and Regular
20
in the current
Should the past be prelude,
13
Regular
of Docket No. R97-1,
could as much as double, from the anticipated
differences
that is different
the unit
to consider what could likely
Mayes’ proposal
larger than she anticipates.
4. Contribution
between
will rise to 4.2 cents, double the ex ante
10
12
-
The last column of Table
principle
products
prepared.
for monopoly
should have unit
and
1
contributions
that are roughly
2
contributions
of the Standard
3
anomaly
4
move toward
a condition
5
contributions
of these two subclasses,
6
On the other hand, given the genuine
7
can hardly
8
as the Postal Service proposes.
-
in the rate structure.
be regarded
difference,
Thus, the widely divergent
A ECR and Regular
subclasses border on an
of at least rough equality
between
need for that movement,
as an excuse for standing
Mayes’ intentional
widening
from 2.1 cents at the conclusion
11
rate case to the 2.7 cents now proposed, cannot reasonably
12
giving proper weight
The unit contribution
to ECR mailers,
unfair
15
lowering
the unit contribution
16
principle
of rough comparability
17
subclasses.32
18
approach
32
this failure
of the ECR versus
of the Docket No. R97-1
be regarded
of ECR runs counter
Besides being
under control by
to the Commission’s
among rates of comparable
to what a rational,
classes or
businesslike
of the Postal Service would suggest.
See Docket No. MC95-1,
Op. and Rec. Dec., ¶4212.
47
as
and Equity.
to bring the difference
it is also contrary
to the management
deliberation
from ECR Mail is simply too high.
14
Moreover,
1, Fairness
manner.
still, let alone for regressing
Regular
to criterion
to
the unit
albeit moving in a deliberate
10
13
unit
For that reason, it would seem essential
Rates based on witness
9
equal.
2
Widening the Gap in Unit Contributions
and
Coverages Makes Poor Management Sense
3
1. Cost incurrences
1
C.
vs. institutional
4
return
5
may obscure the underlying
6
When a sufficiently
I
as Standard
8
does exceed that of a higher-cost
9
to an issue discussed earlier.
Figure
contributions.
Cost coverage of different
unit cost differences
product,
exceeded those of Regular
11
Docket No. R97-1 to the proposals
12
time Table 6, below, clearly indicates
13
over the same years are well below those of Regular
14
than half.
Whenever
Mail, and the difference
in the current
exceeds that of a product
17
position
18
business terms, it is spending
19
step removed from that of the legendary
20
lost a little
21
22
In N
Mail.
widens considerably
docket.
from
Yet at the same
A ECR Mail
Mail, consistently
less
of a mail product with a low unit cost
16
of incurring
A Regular
that unit costs of Standard
the unit contribution
such
of ECR Mail have consistently
10
15
product,
in absolute terms, can and
such as Standard
1 shows that unit contributions
subclasses
and their significance.
high coverage is assigned to the lower-cost
A ECR mail, its unit contribution,
I shall now
with a higher unit cost, the Postal Service is in the
higher costs to obtain a lower contribution.
more to earn less. This situation
firm (reportedly
Or, in
is only one
now defunct)
that
on each unit but tried to make up for it on volume.
1999, total revenues,
costs, and contributions
millions):
48
were as follows ($,
Total revenues
Total volume-variable
Total contribution
5
ECR
4,827
2.336
2,491
costs
Regular
7,935
5.851
2,084
As the above data shows3, the Postal Service spent only $2.3 billion
6
Standard
7
outlay of almost $6.0 billion
8
over $2.0 billion
33
A ECR Mail to obtain a contribution
was required
from Regular
See Appendix
Mail.
C, Table C-l.
49
of almost $2.5 billion.
to obtain a contribution
on
An
of slightly
Table 6
Unit Costs of Standard A
ECR and Regular Mail (cents per piece)
4
5
ECR
Regular
ECR - Reg
Difference
-
6
1997
PRC R97-1
7.330
15.732
-8.403
I
1997
CRA
5.977
13.545
-7.568
8
1998
CRA
5.860
14.477
-8.616
9
1999
CRA
7.132
15.004
-7.873
10
2000
Projected
6.999
16.521
-9.522
11
2001
R2000-1 BR
7.517
16.653
-9.137
12
2001
R2000-1 AR
7.530
16.644
-9.114
13
Source:
Appendix C, Table C-l
50
-
2. Rates influence
to mailers;
specifically,
demand for mail products.
higher prices of a given product
the volume of that product,
and vice uersa. As between
products,
the effect varies and can be quantified
measure,
computed
The elasticity
and presented
by witness
of ECR Mail as reported
by witness
8
increased
9
percent rise in the rate of Regular
10
percent,
11
times more price-sensitive
12
same percentage
13
than it would reduce Regular
14
rate reduction
15
would expand Regular
mail
elasticity
of Regular
Tolley is -0.808; that
the ECR rate is
Mail is -0.162.35 Thus, a 1
Mail reduces the volume by only 0.162
much less than in the case of ECR. The demand for ECR is over five
than that for Regular
Mail.
This means that the
rate increase will reduce ECR volume over five times more
Mail volume.
Conversely,
the same percentage
would expand ECR volume by over five times more than it
Mail volume.
The high elasticity
16
different
Tolley.
is, the volume of ECR falls by 0.808 percent whenever
The elasticity
of mail will reduce
by the economists’
I
by 1 percent.34
Prices send signals
of demand for Standard
A ECR probably
17
number
of factors, but above all, the ready availability
18
(criterion
5). Such alternatives
19
shopping
guides (which may be given out in stores or delivered
34
35
USPS-T-6,
include
advertising
p. 129.
Id., p. 138.
51
reflects a
of alternatives
in local newspapers,
by alternate
1
delivery
companies),
2
indicates
a relatively
3
radio, and local television
low value of service (criterion
The above discussion
4
keep the unit contribution
5
current
6
discourages
I
that has a particularly
8
unbusinesslike
9
spots. A high elasticity
2).
shows why it makes poor management
sense to
and thus the coverage of ECR at the very high
level, let alone raise it further.
This, in effect, disproportionately
the use of ECR - intentionally
favorable
restricting
growth
ratio of contributions
in the subclass
to cost - a very
decision.
To be sure, section 3622(b)(4)
of the Act imposes a duty on the
10
Commission
11
That is, however,
12
the Postal Service must also give proper weight
13
consider cost increases from the point of view of the efficiency
14
operations.
15
cost increase.
16
Service and the Commission
17
discouraging
18
also
to consider the impact of rate increases
on mailers
only one of eight non-cost criteria.
The Commission
to the other criteria
In this docket, the increase for Regular
4).
and
and
of postal
Mail barely covers the
At the same time, ECR rates increased
have acknowledged
(criterion
from levels that the
were already
too high,
the use of ECR.
The Postal Service is charged to provide mailers
19
and economical
management.”
20
be financially
21
breaks even financially.
self-supporting,
The Act also requires
by achieving
The eight criteria
52
with “honest,
efficient,
that the Postal Service
an operational
outcome that
of the Act surely were not
1
intended
2
Service into a sort of welfare
3
nurture
4
subclasses asked to carry so heavy a burden,
5
equitable
6
point of view of postal efficiency.
I
of whether
8
helping
9
to use the ratemaking
and support
(criterion
In conformity
agency, attempting
every high-cost
of mail.
financial
11
ECR relative
12
lower level, even if such reductions
13
disruptive
To those few
such an outcome is not fair and
include
consideration
and the rates that result,
viability
are
of postal operations.
with the above discussion,
ratemaking
it should be decided that the
target for ECR, over time, is to reduce the unit contribution
to Regular
Mail.
to
should also consider rates from the
of rate criteria,
long-term
to turn the Postal
to use a few subclasses
This should certainly
10
This reduction
should progressively
are undertaken
of
move to a
slowly to avoid highly
effects on users of other mail products.
Many irrationalities
14
category
1). The Commission
the application
to sustain
process as a mechanism
of the rate structure
ultimately
15
Postal Service’s loss of control over its costs, especially
16
nonletters.
17
the rate structure,
18
inefficiencies
19
Postal Service would feel pressured
20
Regular
21
adjustment
The consequent
cost imbalances
derive from the
the costs of handling
lead the Service to manipulate
in an effort to soften the impact of its more critical
on certain
segments of the mailing
gap could be moderated.
public.
One hopes that the
to control its own costs so that the ECRSuch a result would make the ECR-Regular
process far less painful.
53
1
D.
Proposed
Rates
The rates which I propose for Standard
2
A ECR Mail are shown in
3
Table 7. They incorporate
4
Section III, as well as the reduced revenue requirement
5
present
6
Standard
7
Section IV, designed to moderate
9
they incorporate,
better, by virtue
of
l), because
of the rate design changes which
albeit by a
small amount.
The slight reduction
in coverage from 203 to 202 percent also accords
with the relatively
13
value of ECR service (criterion
high elasticity,
low processing
priority,
and relatively
low
2).
The proposed coverage of 202 percent ECR Mail, of course, is amply
15
sufficient
to meet ECR’s attributable
16
generous,
indeed still disproportionately
17
institutional
18
demanded
(criterion
and reduce the very high unit contribution,
12
14
discussed in the
the unit contribution
The rates proposed here are fair and equitable
they reflect cost incurrence
11
in
A ECR Mail.
8
10
all the rate design changes discussed previously
costs (criterion
3), together
high, contribution
with a
to the Service’s
expenses.
No deeper reduction
in coverage has been proposed at the present
19
time, in order to avoid possibly adverse effects of rate increases
20
classes and subclasses (criterion
21
creation
4). Although
past coverages, ever since the
of the ECR subclass, are held to have been significantly,
54
on other
inequitably,
-
1
and inefficiently
2
is recognized.
3
indeed symbolic,
4
term target of gradually
5
same range as now applies to Standard
Therefore,
the reduction
subject to the urgency
Ample available
6
.--
excessive, the Commission’s
7
degree of preparation
8
substantially
9
against
reducing
deeper reduction
the considerations
in coverage proposed here is minimal,
that the Commission
A Regular
alternatives
adopt a long-
Mail.
(criterion
5) and the high
6) of ECR Mail would have counseled
in coverage, but had to be balanced
of criterion
4.
-
c.
55
-
rate shock
ECR coverage over the years to roughly
commercial
(criterion
concern for avoiding
a
for now
the
-
Table 7
1
Proposed
2
3
Standard A ECR Rates
(dollars)
Destination-entrv
4
5
6
BMC
SCF
DDU
7
8
9
10
11
Letters
Basic
Automation
High Density
Saturation
0.170
0.158
0.144
0.135
0.150
0.138
0.124
0.115
0.145
0.133
0.119
0.110
0.140
0.128
0.114
0.105
12
13
14
15
Non-Letters (PC-rated)
Basic
0.170
High Density
0.151
Saturation
0.144
0.150
0.131
0.124
0.145
0.126
0.119
0.140
0.121
0.114
16
17
18
19
20
Non-Letters (lb-rated)
per piece:
Basic
0.034
High Density
0.015
Saturation
0.008
0.034
0.015
0.008
0.034
0.015
0.008
0.034
0.015
0.008
21
22
23
24
per pound:
Basic
High Density
Saturation
0.564
0.564
0.564
0.542
0.542
0.542
0.514
0.514
0.514
0.661
0.661
0.661
56
Table 0
Percentage Changes from Current Rates Resulting
from Proposed Standard A ECR Rates
Destination-entrv
4
BMC
SCF
DDU
;
10
Letters
Basic
Automation
High Density
Saturation
4.9%
1.3%
3.6%
3.8%
2.7%
-1.4%
0.8%
0.9%
2.8%
-1.5%
0.8%
0.9%
2.9%
-1.5%
0.9%
1 .O%
11
12
13
14
Non-Letters (PC-rated)
Basic
4.9%
High Density
0.0%
Saturation
2.9%
2.7%
-3.0%
0.0%
2.8%
-3.1%
0.0%
2.9%
-3.2%
0.0%
15
16
17
18
19
Non-Letters (lb-rated)
per piece:
Basic
36.0%
High Density
7.1%
Saturation
166.7%
36.0%
7.1%
166.7%
36.0%
7.1%
166.7%
36.0%
7.1%
166.7%
20
21
22
23
per pound:
Basic
High Density
Saturation
-0.3%
-0.3%
-0.3%
-3.4%
-3.4%
-3.4%
-3.7%
-3.7%
-3.7%
-4.3%
-4.3%
-4.3%
24
25
26
27
Example: 8-02 piece
2.2%
Basic
High Density
0.0%
Saturation
1.2%
-0.3%
-2.9%
-1.7%
-0.5%
-3.2%
-1.9%
-0.9%
-3.7%
-2.4%
5
6
I
51
-
-
1
Appendix
2
3
ADJUSTMENT
TO THE UNIT COST DIFFERENTIAL
BETWEEN LETTERS AND FLATS
This Appendix
4
provides detailed
A
information
on adjustments
for two
-
5
separate
mismatches
between
the IOCS and RPW data collection
6
which have the effect of misstating
7
text, the first mismatch
8
letter-shaped,
9
i.e., “heavy-weight
the cost differentials.
arises from pieces whose height
are under l/4 inch in thickness
systems
As explained
in the
and length are
but over 3.3 ounces in weight;
letters. n These pieces are recorded by RPW as
10
nonletters
(because they pay the nonletter
11
instructions
they are recorded as letters,
12
letters.
13
shifted from letters to flats.
14
The second mismatch
rate), while under IOCS
thereby
attributing
To remedy this error, the costs of such heavy-weight
address label.
arises from letter-shaped
15
detached
These pay the nonletter
16
recorded by the RPW system as nonletters,
17
eligible
18
such pieces would be recorded as letters,
19
letters.
20
pieces with a DAL are shifted from letters to flats.
to be entered with DALs.
their cost to
letters
are
pieces entered with a
rate and are entered and
for the reason that letters are not
At the same time, under IOCS instructions
thereby
To remedy this error, again, the estimated
A-l
attributing
their cost to
costs of letter-shaped
Adjustment
for Heavy-Weight
Cost estimate.
of heavy-weight
4
-
by weight
letters
increment
Letters
The adjustment
be estimated.
are provided
procedure
here requires
that the cost
IOCS raw tallies for Standard
by witness
Ramage.
at hand, the tally data are less than ideal in two respects:
For the purpose
(1) they are for all
Standard
A Mail, not ECR mail alone; and (2) only the raw tallies
available,
not dollar-weighted
8
available
can be used to develop a reasonable
9
as described
10
Nevertheless,
the information
yet conservative
are
that is
cost estimate,
here.
The tally data available
11
The first step is to estimate
12
for letter-shaped
13
the total tallies for letters
14
that weighed
15
weighed
16
tallies.
A Mail
from witness
the percentage
Ramage are shown in Table A-l.
of heavy-weight
mail over the 3.3 ounce breakpoint.
numbered
14,839.
tallies;
i.e., tallies
As shown in column
1,
Of these, 14,345 were for pieces
no more than 3.0 ounces, and 311 tallies were for pieces that
more than 3.5 ounces.
Some 183 tallies
reported
pieces that weighed
between
3.0 and 3.5
-
17
ounces, but no further
18
available.
breakdown
within
the 3.0 to 3.5 ounce increment
Row 5 of Table A-l uses a linear interpolation,
is
based on 40
-
36
Response of witness Ramage to question
cross-examination
(filed 4/18/2000).
A-2
of the OCA during
oral
1
percent
2
tallies
of the tallies
between
3.0 to 3.5 ounces in weight,
pieces that are overweight
4
ounce) are obtained
5
ounce range, shown in Row 6, yielding
6
represents
1
pieces. This percentage
8
letters by assuming
9
heavy-weight
10
by adding the tallies
a sum of 384 tallies
as all Standard
letters
judged by other available
13
alone.
14
will contain
15
Rates, while witness
16
ounce breakpoint
17
witnesses
18
corresponds
19
Before Rates, and represents
million
Moeller
and witness
costs
to the raw tallies.
appears rather
estimates
conservative
that Standard
letters of all weights
estimates
to be 10,799.400
Daniel and Moeller,
37
of
when
data which are drawn from the ECR Subclass
(USPS-T-28)
13,127.962
A ECR
A Mail, and (ii) the dollar weighted
are in proportion
12
Daniel
A letter-shaped
the ECR subclass has the same proportion
The above 2.589 percent adjustment
Witness
(row 6). This
can be applied to the total cost of Standard
that(i)
letters
(3.3 to 16
in Row 5 to the tallies in the 3.5-16
2.589 percent of the total tallies of Standard
of heavy-weight
11
73
in the 3.3 to 3.5 ounce range.
The total tallies of letter-shaped
3
to estimate
A ECR Mail
in Test Year Before
the volume of letters below the 3.3
million.37
2,328.562
to the volume of heavy-weight
The difference
million
letters,
between
ostensibly
ECR letters in the Test Year
17.7 percent of all ECR letters, which is almost
See response to VP-CWKJSPS-1 (Response filed May 4,200O)
Daniel response to ADVOIUSPS-T28-1
(Tr. 4/1202).
A-3
7 times greater
all Standard
than the estimate
developed here, based on IOCS tallies for
If heavy-weight
A Mail.
letters do indeed constitute
large share of all ECR mail that meets the DMM definition
4
such a
of letters,
then (i)
volume data developed by the RPW System and costs developed by the IOCS
(which uses DMM definitions)
mismatch
concern.
problem
are substantially
out of sync, and (ii) the
discussed in this testimony
The Commission
has repeatedly
should be a matter
stressed its desire to establish
Sound cost data are a fundamental
8
based rates.
9
cost-based rates successfully.
of serious
prerequisite
Its concerns about the quality
cost-
to implement
of Postal Service
-
10
cost data are well founded.
11
Cost adjustment.
12
in Table A-2, rows l-10.
13
respectively,
14
flats, 13,127,961,721
15
volumes used by witness
16
and flats, before any mismatch
17
The unit cost of letters
18
The unadjusted
19
row 3.
38
The procedure
used here to adjust costs is shown
The volumes of Standard
are shown in row 1, columns
and 20,455,078,077,
and flats,
1 and 3. The volume of letters
respectively,
correspond
Daniel. 38 Unit costs (total costslvolume)
adjustments,
and
to the total
for letters
are shown in Table A-2, row 2.
is 6.855 cents, and the unit cost of flats is 7.396 cents.
letter-flat
USPS-T-28
A ECR letters
difference
amounts
and USPS-LR-I-92.
A-4
to 0.542 cents, as shown in
1
2
Table A-l
3
4
Overweight Standard A Pieces
With Letter-Shaped
Dimensions
Weight
(oz.)
-
(1)
(2)
Tallies
Standard A
ECR “Letters”
Tallies as %
of Standard A
ECR “Letters”
9
0 to 3.0
14,345
96.671%
10
3.0 to 3.5
183
1.233%
11
12
13
3.5 to 16
Total 0 to1 6
14
15
Est. 3.3 to 3.5
40% of row 2
73
0.493%
16
17
Subtotal 3.3 to 16
= Overweight Pieces
384
2.589%
311
________________
14.839
2.096%
100.000%
18
19
20
21
22
23
24
Notes:
Col. 1, rows I-4
Col. 1, row 5
Col. 1, row 6
Cal. 2
Response of USPS witness Ramage to question of the OCA
during oral cross-examination (filed 4/18/00).
By linear interpolation.
Sum of rows 3 and 5.
Percentages based on column 1, row 4.
25
,-.
A-5
Since the percentage
1
of letters in excess of the 3.3 ounce breakpoint
2
2.589 percent of all ECR letters,
3
attributable
4
applied
to the total cost of Standard
9
A ECR letters,
which is the estimated
This is the amount
adjustment
that 2.589 percent of all
ECR letter costs should be shifted to nonletters.
$23,298,666,
8
I estimate
attributed
that needs to be shifted from letters
is shown in Table A-2, row 5, columns
Total volumes and costs after adjustment
to flats.
to
to letters.
The
for the first mismatch
are
recorded by RPW do not change.
Adjusted
costs result from adding the cost adjustment
11
costs in row 1. Adjusted
12
The difference
13
adjusted
unit costs in row 7 are shown in row 8, columns
14
adjusted
unit letter-flat
15
amounts
to 0.833 cents, and is shown in row 9. Finally,
16
letter-flat
17
the difference
18
computed
difference
amounts
2 and 4.
10
between
This percentage
$899,867,000,
cost mistakenly
shown in Table A-2, row 6. Volumes
is
in row 5 to the total
unit costs are shown in row 7, columns 2 and 4.
the respective
difference,
produced
unadjusted
calculated
unit costs in row 2 and the
2 and 4. The
from the unit costs in row 7,
by the first mismatch
the change in the
adjustment,
obtained
as
between row 3 and row 9, is shown in row 10 (this can also be
as the difference
between
row 9 and row 3).
A-6
Table A-2
Adjustment
in Unit Cost Differential Between Letters and Flats
For Overstatement
of Letter Costs. and Corresponding
Understatement
of Flats Costs On Account of Mismkh
ln%ving
Overweight
and DAL-Entered Letter-Shaped
Pieces
Row
1
2
3
Volume
Standard A
ECR Letters
(1)
Item
Total volume or cost
Unadjusted unit cost, cents
Letter-flat unit cost difference,
13,127,961.721
(2)
899,867,OOO
6.855
Volume
Standard A
ECR Flats
(3)
20,455,078.077
cents
1” Mismatch Adjustment:
Overweight Pieces with Letter-shaped
4
5
6
7
6
9
10
cost
Standard A
ECR Letters
Cost
Standard A
ECR Flats
(4)
1,512,906,000
7.396
0.542
Dimensions
Estimated percent of letters cost
Est. cost shifted from letter to flats
13,127,961.721
Totals after 1st adjustment only
Unit costs adj. for 1st mismatch, cents
Unit cost changes, cents
Letter-flat unit cost difference, cents
change in letter-fiat difference, cents
2.589%
(23,298,666)
876,568,334
6.677
-0.177
20,455,078.077
23,298.666
1,536,204.666
7.510
0.114
0.833
0.291
Zn6 Mismatch Adjustment:
DAL Items Misclassified
as Letters
11
12
13
14
15
16
17
18
19
Est. basis of flat volume mismatched
Est. volume of fiats mismatched
Est. number of mismatched flats as
1.558%
% of total letter volume
Shift the percent of letter costs in
row to fiats
13,127,961,721
Totals after 2nd adjustment only
Unit costs adj. for 2nd mismatch, cents
Unit cost changes, cents
Letter-fiat unit cost difference, cents
Change in letter-flat difference, cents
Both Mismatch
20
21
22
23
24
25
.-
adjustments
1 .OOO%
204.550.781
(14,021,103)
885,845.897
8.748
-0.107
20,455,078.077
14,021,103
1,526,927.103
7.465
0.069
0.717
0.175
Combined
Sum of both shifts of letter costs to flats
13,127,961.721
Totals after both adjustments
Unit costs adj. for both mismatches. cents
Unit cost: combined change, cents
Letter-flat unit cost difference, cents
^
.
. ..
tinangs In tatter-ttar crmerence, cems
A-7
(37,319,768)
862,547,232
6.570
-0.284
20,455,078,077
37,319.768
1,550,225.768
7.579
0.182
1.009
0.466
Table A-2
(continued)
NOTES:
Row
1:
Row 2:
Row
3:
Letters at USPS-LR-I-92, Section 2, p. 16; fiats ibid., page 19.
Letters: 100 * (2) / (1) at row 1; flats 100 * (4) I (3) at row I.
(4)- (1).
Row 4:
Row 5:
Row 6:
Row 7:
Row
8:
Row 9:
Row 10:
Table A-l, row 6.
Cost shift = total letter costs on row 1 multiplied by percentage on row 4.
Volumes are unchanged; costs are row 1 costs plus row 5 cost shifts.
Letters 100 l (2) / (1) at row 6; flats 100 * (4) / (3) at row 6.
Row 7 - row 2.
(4) - (2) at row 7.
Row 9 - row 3.
Row
Row
Row
Row
Row
Row
Row
Row
Row
11:
12:
13:
14:
15:
16:
17:
18:
19:
1% of flats volume in row 1.
Volume on row 12 expressed as percent of total volume of letters on row 1.
Cost shift = total letter costs on row 1 multiplied by percentage on row 13.
Volumes are unchanged; costs are row 1 costs plus row 14 cost shifts.
Letters 100 * (2) I (1) at row 15; flats 100 (4) / (3) at row 15.
Row16-row2.
(4) - (2) at row 16.
Row 18 - row 3.
Row
Row
Row
Row
Row
Row
20:
21:
22:
23:
24:
25:
Row5+row14.
Volumes are unchanged; costs are row 1 costs plus row 20 cost shifts.
Letters 100 l (2) / (1) at row 21; flats 100 l (4) / (3) at row 21.
Row8+row17.
(4) - (2) at row 22.
Row 24 - row 3.
A-8
1
Adjustment
for Letter-Shaped
The adjustment
2
3
presented
4
DAL mailings,
Pieces With a DAL
for letter-shaped
in Table A-2, rows 11-19. In the absence of any volume data on
I estimate
that 1.0 percent
ECR flats consists of letter-shaped
the IOCS as letters.
The number
row 12. The same number
8
Letter-shaped
of the total volume of Standard
pieces with DALs that are classified
of these pieces, 204,440,781,
10
enveloped,
they could not be mailed with a DAL).
11
necessarily
12
piece with an envelope and/or other loose pieces inserted
13
as in Moeller
14
have any cost data or cost study to ascertain
15
than ordinary
16
to be conservative
17
letter-shaped
18
estimate
19
cost of letters,
20
letters
exhibit
VPKW-CXEl-1.
untabbed
folded
into the centerfold,
whether
such pieces cost more
letters. ” In the absence of any such study or data,
I treat these pieces as if they had the same cost as all other
the cost of these misclassified
39
That is, they are
The Postal Service does not
mail, and adjust the cost proportionately.
or $14,021,103,
to flats.
of total
(if they were
“loose,” and may consist of an outside multipage,
enveloped
by
as shown in row 13.
pieces with a DAL are not enveloped
cross-exam
A
is shown in
of pieces, when expressed as a percentage
letter volume, is 1.588 percent,
9
pieces entered with DALs is
This adjustment
Accordingly,
I
pieces as 1.588 percent of the total
which is the cost that has to be shifted from
is shown in row 14, columns
Response to AAPNJSPS-T28-1
A-9
(Tr. 4/1157X
2 and 4.
1
The results
of the second mismatch
in a manner
adjustment
2
15-19, which are obtained
3
10. Row 15 shows the total volumes
4
second adjustment.
5
from adding the cost adjustment
6
row 1. Adjusted
7
difference
8
costs (row 16) are shown in row 17. The unit letter-flat
9
from the unit costs in row 16, amounts
Volumes,
analogous
are presented
to that applied to rows 6-
and costs that result only from the
again, do not change.
Adjusted
in row 14 to the unadjusted
costs result
total costs in
unit costs are shown in row 16, columns 2 and 4. The
between the unadjusted
unit costs (row 2) and the adjusted
18. Finally,
the change in the letter-flat
11
mismatch
adjustment
alone, that is, without
12
mismatch
adjustment,
is shown in row 19 and amounts
13
change in the letter-flat
14
difference
15
Heavy Letter
difference
difference
The effect of both mismatch
produced
previously
calculated
by the second
undertaking
Adjustments
adjustments
the first
to 0.175 cents. The
shown on row 19 is thus obtained
between row 18 and row 3 (not between
and DAL Mismatch
difference,
unit
to 0.892 cents, and is shown in row
10
16
in rows
as the
row 18 and row 9).
Combined
combined is shown in rows
17
20-25 of Table A-2. Row 20 shows the sum of cost shifts in row 5 and in row
18
14. Row 21, columns 2 and 4, shows total costs after both adjustments,
19
is the sum of row 1 and row 20. Row 22 shows adjusted
20
derived by dividing
adjusted
unit costs; these are
total costs on row 21 by the corresponding
A-10
which
1
volumes.
Row 23 records the difference
2
reflecting
both adjustments,
3
corresponding
columns in row 2. Row 24 presents
4
flat difference,
1.009 cents, which is computed
5
Row 25 shows the change in the letter-flat
6
adjustments
as the difference
between
and the unadjusted
between
the unit costs in row 22,
unit costs in the
the calculated
from the unit costs in row 22.
difference
produced
row 24 and row 3.
.-
A-11
unit letter-
by both
Appendix
1
THE RELATIONSHIP
WITHIN
2
3
4
the following
6
weight-cost
I
BETWEEN
STANDARD
In Docket No. R97-1, my testimony
5
statement
B
concerning
COST AND WEIGHT
A MAIL
on Standard
A ECR Mail contained
the Postal Service’s attempt
to study the
relationship.40
10
11
The relationship
between weight and cost of mail is an issue
that has bedeviled the Postal Service and the Commission for
many years. Despite a number of studies by the Postal Service,
including one in this docket, the results remain inconclusive,
unconvincing
and inadequate for ratemaking
purposes.
12
As Yogi Berra reportedly
8
9
13
appendix
14
detail, in a further
15
definitive
16
ECR Mail.
17
are woefully
18
is likely
will again examine the weight-cost
effort to establish
studies on how weight
I will also endeavor
deficient,
to be equally
40
said, “It’s d6ja vu all over again.”
relationship,
a framework
this time in more
and rationale
affects costs, especially
This
within
for more
Standard
A
to explain not only why the present studies
but also why any study based largely
on IOCS tallies
deficient.
Docket No. R97-1, VP/CW-T-1,
B-l
Appendix
D (footnotes
omitted).
1
2
What Weight-Cost
Witness
Relationship
Does the Study Seek to Estimate?
Daniel is admirably
3
estimate
4
IOCS data, which were “not specifically
5
measuring
6
origin/destination
I
dropshipping
8
the effect of weight
frank about the difficulties
the impact
on costs, especially
of weight
combination,
of trying
when relying
heavily
to
on
designed for the purpose of
on costs.“4’ As she points out, “The shape,
cube, and level of presorting
and
of mail can affect the cost of mai1.“42
The likely
possibility
that mail in different
9
at different
points in the postal network,
10
relationships
11
weight-cost
12
the answer would appear to be: estimate
13
most appropriate
14
subclasses of Standard
raises a fundamental
presort
conditions,
can give rise to different
threshold
question:
entered
weight-cost
Which particular
__
15
relationship
does the study seek to estimate?
the weight-cost
for the purpose of establishing
In this instance,
relationship
that is
pound rates for the two
A Mail.
The rate structure
for Standard
computed
A Mail already recognizes
on a per-pound
16
entry discounts,
17
discounts
18
assume that the study seeks to determine
the weight-cost
relationship
19
mail that does not receive any destination
entry discount;
i.e., mail that is
at the breakpoint).
41
USPS-T-28,
42
Id, p. 3,ll. 26-27.
As a starting
p. 4,11. 24-25.
B-2
basis (and converted
destination
to per-piece
point, it seems reasonable
to
for
1
entered at an “originating”
2
prior to, or short of, a destinating
3
mail to destination
4
cross-docking,
5
at the DDU.43
6
7
The Destination
Entry Discount Model Sheds Light On and Is an
Additive Component of the Total Weight-Cost Relationship
.-
facilities,
are reflected
weight-cost
relationship
some place in the postal network
BMC.
including
The subsequent
and which varies with the extent of dropshipment.
11
Daniel’s
12
neither
13
relationship
14
handling
15
to some immediate
efforts to estimate
the weight-cost
nor scarcely references
estimated
and
for mail entered
entry discounts
computes
a
for mail of all shapes, at all levels of presortation,
10
utilizes
unloading
entry discount
A Mail destination
that is
cost to move the
all costs of loading,
in the destination
The model for Standard
8
9
facility
by witness
costs are accurately
Curiously,
relationship
for Standard
A Mail
this aspect of the weight-cost
Crum. 44 The assumption
captured
witness
by the destination
that all dock
entry model leads
observations.
43
Technically, these destination entry discounts are applied in a
“top-down” approach to ratemaking.
This discussion assumes (i) that the
model used to develop the discounts is appropriate,
and (ii) that costs avoided
when mail is entered at a destination entry point are, on average, equal to
costs incurred by the Postal Service when mail is not so entered and instead
must be transported
by the Postal Service.
,-
44
USPS-T-27, pp. 1-6 and Attachments
use witness Crum’s data to adjust for worksharing;
ADVO/USPS-T28-10
(Tr. 40209-20).
B-3
A-C. She does, however,
see response to
1
2
3
4
5
.
First, weight-related
costs developed by the
destination entry model can be added to the
weight-related
costs for those mail processing and
delivery functions not captured by the destination
entry model.
6
I
8
9
10
11
12
13
.
Second, if the destination entry model is considered
reliable, the object of the study should be to
estimate the weight-cost relationship
for the
“excluded” functions ; i.e., the per-pound costs that
are embedded (implicitly)
within CRA costs for
mail processing and delivery, without attempting
to duplicate or replicate the results captured by the
destination entry model.
14
15
16
17
18
19
.
Third, if dock handling costs are reasonably
captured in the model used to develop destination
entry discounts, then it would seem inappropriate
to include dock handling tallies in the study
because such inclusion would result in doublecounting.
20
21
22
23
24
25
.
Fourth, the non-transportation
(cross-docking)
portion of the weight-cost relationship
that is
developed in the destination entry model, and that
has withstood the test of scrutiny and time, is
developed without any reliance on or study of IOCS
tallies by weight increment.
26
21
28
29
30
31
32
.
Fifth, for the destination entry component (i.e., for
transportation
and dock handling costs) of the total
weight-cost relationship,
costs predictably increase
smoothly and continuously
with weight; other
weight-related
costs should build on and be in
addition to the weight-related
costs documented in
the destination entry model.
B-4
1
The Weight-Cost
Relationship
for Mail Processing
In this section, I will again explain
2
3
direct impact on mail processing
4
the weight-cost
5
monotonic.
relationship
costs. Further,
would,
in general,
I argue that the more extensive
6
7
mail within
postal facilities,
8
side” of this proposition
9
presorted,
of processing
and
required
by
on cost. The “flip
the depth to which mail is
steps that are avoided, the greater will be
10
the costs avoided by heavier weight
11
a given number
12
presortation
13
the presort
14
likely
15
has a number
mailpieces.
In effect, that presortation
of pieces when they are heavier avoids more costs than
of the same number
discounts,
of pieces when they weigh less. As a result,
which are based solely on per-piece costs avoided, are
a weight
component.
of immediate
If the preceding
argument
is correct, it
implications.
First, each major level of presortation
16
condition,
appear to be continuous
the effect of weight
is that the greater
of mail has a
for a given presort
the amount
the greater
and the more processing
missing
why (and how) weight
e.g., the weight-cost
will have a different
17
relationship;
18
differs from that for Basic ECR mail, which in turn, may be quite different
19
from Basic Presort or Basic Automation.
20
multiple
21
presortation
cost-weight
relationships
relationship
for saturation
weight-cost
Facing up to the possibility
that reflect the differing
again raises the fundamental
B-5
ECR mail likely
threshold
of
levels of
issue: Which weight-
of
1
cost relationship
2
relationship
3
order to be conservative
4
that the study should endeavor
5
related
6
Basic category for ECR and Regular
I
should reflect all weight-related
8
reflect both weight-related
9
appropriate
10
11
should the study seek to estimate
is to be estimated
for each subclass of Standard
(from a ratemaking
perspective),
A Mail?
I would suggest
mail within
Presort.
the subclass; i.e., the
The pound rate for the subclass
costs, and the discount
and piece-related
entry discounts
structure
cost avoidance
should
wherever
do this; the presort discounts
do
not).
A second implication
is that any study which randomly
mail to the most presorted
mixes tallies
12
from the least presorted
13
result that, at best, is useless and, at worst, is hopelessly
14
misleading.
15
document
16
flawed from the outset, at least until IOCS tallies can distinguish
17
condition.
18
In
to focus on mail with the highest weight-
cost, which is the least presorted
(the destination
if only one weight-cost
This is one reason why any attempt
how weight
Witness
Moeller
affects mail processing
has previously
19
study must control for variations
20
presortation,
mail is likely to yield a
confused and even
to use IOCS tallies to
costs would appear to be fatally
presort
observed that a properly-designed
“in the amount
average haul of non-dropshipped
B-6
of drop shipping,
mail, and other factors, all of
1
which could cause variations
2
Daniel has similarly
3
for such factors.
4
factors.46
5
6
A Hypothetical
Example to Illustrate
of Weight on Mail Processing Cost
noted the problems
example
8
how weight
9
model, this hypothetical
11
hopefully,
more concretely
Like a formal simulation
to be controlled
of pieces in a mailing
some worthwhile
As noted previously,
12
A Mail.
allows conditions
on what happens when the weight
to control
the Effect
seeks to explore and illustrate
10
Witness
do not control for any of these
can affect the cost of Standard
to illustrate
increment.“45
that arise from inability
The data in USPS-LR-I-92
The following
7
in the unit by weight
so as to focus solely
increases
and,
points.
it is generally
recognized
and understood
13
any given class or type of mail (e.g., letters or flats) with homogeneous
14
density,
15
a simple illustration,
16
identical
17
readily
18
following
weight
letters
divisible
45
that for
is a good proxy for cube because the two vary in tandem.
consider
a nationwide
or flats (this number
by 16, the number
bulk mailing
is deliberately
For
of 1,600,OOO
selected because it is
of ounces in a pound, which facilitates
the simple math that is involved).
If each mailpiece
Docket No. R97-1, response to NAAKJSPS-T36-22
46
has a uniform
(Tr. 1517714).
An effort is made to adjust for destination entry which increases
weight-related
cost over the initial effort. See response to ADVOILTSPS-T2810 (Tr.4/1209-20)
and responses cited therein.
B-7
1
weight
of 0.5 ounces, total weight will be 50,000 pounds.
2
foot trailer
3
slightly
more than the capacity
4
uniform
weight
5
than two trailer
6
mailing
I
1,600,OOO pieces in the mailing.
can carry approximately
40,000 pounds, hence 50,000 pounds is
of one trailer.47
of 1.0 ounce, total weight
loads).
increases
And if each mailpiece
has a
will equal 100,000 pounds (more
Table B-l illustrates
uniformly
One 40-foot to 44-
how cube of this hypothetical
with an increase in average weight
of the
8
9
10
11
Table B-l
Weight Cube Relationship
(1,600,OOO pieces)
12
13
14
15
Weight
Per Piece
(ounces)
Total
Weight
(pounds)
0.5
1.o
1.5
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
16
17
18
19
20
21
22
23
2.0
2.5
3.0
3.5
4.0
of Mail
Trailer
Loads
(approximately)
1.25
2.50
3.75
5.00
6.25
7.50
0.75
10.00
24
The density
25
26
slightly,
27
cube of a mailing
(pounds per cubic foot) of letters
and flats may differ
but for a given type of mail, this example illustrates
vary directly
with the weight
47
of individual
Since weight limits vary by state, the weight
is necessarily approximate.
B-8
how weight
and
pieces in a bulk
capacity
of a trailer
1
mailing.
The range of data in Table B-l is sufficient
2
be illustrated
3
the weight
here, but the range could be extended
limit for Standard
Dock handling
4
6
every type used to ship the particular
7
sacks, OTRs, etc. Using the lowest weight
8
weight
9
about 10 times as much to load or unload
entry cost mode1.48
12
loads of mail will, of course, mean more containers
(4.0 ounces) contained
11
Mail opening
Precisely
10 trailers
this relationship
14
“container”
15
have to be opened and moved through
16
piece sortation;
17
the point(s) where the containers
18
associated
costs
by the destination
costs. Assuming
example is in Basic presort condition,
each
will have to enter a P&DC, and the mail will
the appropriate
e.g., letter sorting machines,
materials
it probably
as it costs to load or
is captured
empty equipment
that the mail in this hypothetical
pallets)
(0.5 ounces) and the heaviest
in Table B-l for illustration,
and moving
of
type of mail; e.g., letter trays, pallets,
13
(including
up to 16 ounces,
costs. How do weight and cube affect mail handling
costs? More trailer
unload one trailer.
readily
A Mail.
5
10
for the points that will
processing
flat sorting machines,
are opened, empty containers
(i.e., empty “equipment”)
48
centers for
etc. At
and
will accumulate.
The cost to unload a trailer full of mail can and will vary
depending on whether the mail in the trailer is bedloaded (e.g., in sacks),
palletized, or in rolling stock such as OTR containers.
This consideration
is
of no consequence to a weight-cost study, where the concern is about the
effect of weight on cost for any specified method of loading trailers.
B-9
For example,
1
suppose the mail is shrink-wrapped
2
average weight
of each piece in the mailing
3
material
4
weight
5
premises
and, ultimately,
6
between
1 and 10 trailer
I
to wherever
8
cardboard
9
loads of mail will also accumulate
from between
of the pieces) will accumulate
12
handling
13
refuse, such as shrink
14
Obviously,
15
contain no information
16
basis of weight
17
clearly weight-related.
19
disposed of. Similarly,
the empty pallets from
loads of mail will accumulate
trays, the empty non-reusable
weight
1 and 10 trailer
to comprehend
that more
more refuse, and more tallies of “not
(or other tallies for removing
material
mail tallies
or empty cardboard
that are taken during
that could be used to distribute
increment,
consists of letters in
trays from between
mail; moving empty equipment”
not handling
and need to be moved
and need to be moved and disposed of.
causes more empty equipment,
wrapping
upon the
and need to be removed from the
empty pallets are sent. And if the mailing
11
As
shrink-wrapping
loads of mail (depending
One does not need to be a rocket scientist
10
18
1 and 10 trailer
increases,
on pallets.
even though
letter trays).
such operations
them to mail on the
the costs of these operations
are
Direct tallies tend to reflect that when pieces are being handled
individually,
a heavy-weight
piece can be handled
B-10
at approximately
the same
1
rate (and cost) as a lighter-
weight
2
whose cost is obviously
3
removing
4
tallies
5
distribute
6
guaranteed
7
cost. It seems completely
inappropriate
8
piece-handling
to distribute
9
associated
driven by weight
refuse as it accumulates)
of individual
operations
the cost of not handling
to miss completely
operations
tallies),
will be systematically
11
why using the IOCS approach
12
fundamentally
or
from use of direct
(which are used as a proxy to
the end result is virtually
the causal relationship
between
weight
and
to use direct tallies from individual
to weight
increment
with some, if not all, of the not handling
weight
when functions
(e.g., moving empty equipment,
are derived largely
piece-handling
10
13
piece.49 Consequently,
understated.
tallies.
This is another
to study the weight-cost
the costs
The effect of
important
relationship
reason
is
flawed.
When direct tallies
are used to distribute
not handling
tallies
(such as
14
those discussed
above) to the classes and subclasses of mail, the procedure
15
may reasonably
trace cost causation
16
however,
17
increments,
to the subclasses.
most likely does not trace cost causation
for reasons explained
here. Witness
49
The same procedure,
to different
weight
Daniel states that she
The response to AEJA&NAPM.KJSPS-T28-28
(Tr. 4/1188)
indicates that heavier-weight
pieces are more prone to cause machine jams,
which increase cost. This observation is unassailable.
However, the response
to AElA&NAPM/lJSPS-T21-19
(Tr. 7/2938) states that “IOCS does not
separately identify machine downtime due to jams,” hence IOCS would be
unable to pick up any such weight-related
costs associated with single-piece
handling.
B-11
1
allocates
2
CRA allocates costs to subclass and are not assumptions.“50
3
noted, however,
4
costs to subclass is equally
5
increment.
6
employs,
7
appropriateness.
8
Moving
9
costs “to weight
increment
in a manner
consistent
with how the
It should be
that she assumes that the CR.A methodology
appropriate
This assumption
costs to weight
for allocating
is critical
to the methodology
which she
and for reasons stated herein I would respectfully
mail within
mail will undergo
facilities.
piece sortation
for allocating
After containers
disagree as to its
are opened, the
(e.g., letters on letter sorting
machines,
10
on FSMs or manual).
As the pieces are sorted, they will need to be swept
11
(either
or manual
12
operation.
13
letters
14
are put into larger, intermediate-sized
15
movement
from machines
cases) and then moved to the next
As mail is swept, it is put into relatively
the facility,
wheeled
between
dichotomy
18
handling
19
than one piece of mail is being handled,
20
bundle,
(i) individual
piece-handling
A “bulk operation”
a tray, a tub, a sack, a pallet,
50
fill up they in turn
containers
it is convenient
17
operations.
(e.g.,
suitable
for
such as hampers.
For the sake of this discussion,
16
small containers
in trays, or flats in tubs), and as these containers
within
flats
to establish
operations,
a
and (ii) bulk-
is defined here as one where more
whether
a hamper,
Response to UPS/USPS-T28-2
B-12
it be a handful
of mail, a
an OTR, etc. Thus, when
(Tr. 4/1158) (emphasis
added).
1
pieces of mail are not being sorted, they are handled
2
have a systematic
3
can also affect piece-handling
4
effect on all bulk-handling
As intermediate-size
5
to the next operation,
6
lack any mechanical
1
move mail within
8
comprehend
9
more small containers
handling
Again, it does not require
loads of mail will require
than 1 trailer
11
and move those extra intermediate-size
IOCS mixed mail tallies.
an initial
inside the facility,
14
intermediate-size
15
that various
16
have been commingled.
17
container,
the tally will be recorded
18
container
likely holds pieces of differing
19
distributing
containers,
systems, to
through
filling
to
of
containers
to load
the facility.
After pieces of mail have received at least
13
51
the manual
load, and more labor will be required
containers
currently
a rocket scientist
(e.g., trays and tubs) and intermediate-size
(e.g., hampers)
sortation
all Postal Service facilities
method, such as tray management
10
12
and on occasion it
fill up, they must be moved manually
because virtually
that 10 trailer
operations,
Weight tends to
operations.51
containers
the facility.
in bulk.
and the mail is being moved about in
such as hampers,
pieces of mail, probably
a reasonable
likelihood
of the same shape but of varying
If an employee is tallied
as handling
weights,
B-13
weight,
when moving such a
mixed mail.
Since the
no real basis exists for
such mixed mail tallies on the basis of weight
Response to ARA&NAPM/USPS-T28-28
exists
increment.
(Tr. U1188).
Again, if direct piece handling
1
to weight
increment,
tallies are used to distribute
2
tallies
and if those direct piece-handling
3
little relationship
4
underlying
5
that must be moved manually
6
such movement
7
systematic
8
ECR Mail, 71.5 percent
9
only 28.5 percent were single piece tallies. ” Inappropriate
between weight
causal relationship
11
approach
13
that weight
14
all operations
15
probably
increment
cost of
on cost. For Standard
A
tallies were for mixed mail, and
relationship
of this hypothetical
of containers
and cube. To repeat, the
is yet another
distribution
of
reason why the IOCS
is fundamentally
flawed.53
example is intended
to demonstrate
affects costs in large measure via bulk operations,
which include
that entail moving mail around and through
less so through
individual
piece handling
52
tallies
show
and the additional
the effect of weight
to a study of the weight-cost
The discussion
the number
the facility,
of all mail processing
mixed mail tallies to weight
12
through
that is caused by more weight
10
tallies
and cost, their use will mask the
between weight,
bias is to understate
mixed mail
Response to VP-CWAJSPS-T28-24
represented 22.3 percent of city carrier
the facility,
operations.”
(Tr. 4/1342-44).
in-office tallies.
and
The
Mixed mail
53
See USPST17, pp. 12-17, for more detail and discussion on how
the Postal Service CRA methodology uses direct tallies to distribute mixed
mail tallies and not handling tallies to the classes and subclasses of mail.
54
If direct tallies of individual piece-handling
are not an
appropriate
basis for distributing
the costs of other functions to weight
increment, then the number of direct tallies is of little immediate
consequence to accuracy of the results. In others words, doubling or even
(continued...)
B-14
1
operations
2
precisely
3
document
whose costs are most affected by weight
those operations
that the Postal Service has done the least to
and model.
Modeled
4
cost for commercial
5
reclassification
6
not conform to the categories
7
new categories
8
“bottom
9
categories
11
for roughly
Consequently,
A commercial
of piece-handling
Subsequently,
mail.
cost models for the proposed
The documented
13
essentially
the same models to estimate
14
Mail.
15
Standard
A Nonprofit
16
nonprofit
mail is rather
17
captured
by the models was striking.
18
Nonprofit
A commercial
the cost of Standard
CRA costs. Since the handling
the difference
mail.
the Postal Service used
the modeled costs accounted
similar,
modeled costs
costs, and the costs so modeled accounted
in Docket No. MC96-2,
Mail is somewhat
did
the Postal Service used a
of all CPA costs of Standard
In this instance
In the first
the newly proposed categories
and developed detailed
two-thirds
mail.
for CR4 costs, hence average CRA costs for the
were not available.
of Standard
consisted largely
and nonprofit
case, Docket No. MC95-1,
up” approach
10
12
would seem to be almost
A Nonprofit
for over 80 percent of all
of commercial
and
in the share of CRA costs
The average weight
less than its commercial
of Standard
counterpart,
A
which
“(...continued)
tripling the number of individual piece-handling
tallies would not throw any
light on how weight affects the cost of other “bulk-related”
operations.
See
AFlA&NAPM/USPS-T28-9
(Tr. 4/1174).
B-15
1
could account for most or all of the difference.
2
continued
to pursue and refine the “bottom-up”
3
undertook
in the two reclassification
4
credible
5
study on how weight
Weight-related
6
that can be demonstrated
7
cost avoidance
8
1,600,OOO pieces.
9
addresses,
modeling
efforts which it
dockets, it might have come up with a
affects costs.
presort
cost avoidance.
by the hypothetical
potential
Had the Postal Service
of presortation.
Each mailing
Another
important
example discussed
Consider
above is the
two pairs of mailings
in the first pair is to an identical
each is in Basic presort
condition,
point
of
list of
and the only difference
is that
10
in one, each piece weighs 0.5 ounces, and in the other, each piece weighs 4.0
11
ounces.
12
DDU, hence each will incur weight-related
mail processing
13
moved about and through
but the heavier mailing
14
more such costs.
15
Both mailings
must receive piece sortation
postal facilities,
The second pair of mailings
also contain identical
16
and 4.0 ounces, respectively.
17
concentrated
18
pair of mailings
19
first pair, each of these two mailings
20
reaches the appropriate
21
processing
and presorted
is entered
In this case, however,
to Saturation
costs were incurred
costs as they are
each mailing
upstream
Both will avoid whatever
by the first pair of mailings.
is
that this latter
facility
needs only be cross-docked
B-16
will incur
pieces that weigh 0.5
level. Assuming
at the same originating
DDUs.
prior to being sent to the
as the
until it
weight-related
mail
When the two
1
mailings
2
the heavier-weight
3
mailing.
4
more costs when presortation
5
processing.
6
from the first pair had to be taken into a P&DC for piece sortation,
mailing
Therefore,
avoiding
8
cost avoidance
9
presortation.
more cost than the lighter-weight
the heavier-weight
As the preceding
7
incurred
mailing
enables it to avoid such intermediate
example illustrates,
piece-related
in the second pair will avoid
presortation,
costs, also avoids weight-related
is not recognized
Unfortunately,
in addition
costs. However,
in the per- piece discounts
docket were not designed to study the weight-cost
11
levels of presortation,
12
enable any refinement
13
better recognition
or modification
of weight-related
of existing
studies in this
relationship
and they thus do not provide reliable
presort
this
given for
the Postal Service’s weight-cost
10
to
for different
information
discounts
to
to give
cost savings.
14
15
16
The Effect of Weight on Destination
Destination
entry.
Entry and Mail Makeup
By definition,
17
dispatching
a truck to the destinating
18
transportation
19
any given size of bulk mailing,
20
expand the total weight
is achieved by utilizing
facility.
entry requires
Economic efficiency
a truck to its maximum
increasing
the weight
and cube of the mailing
B-17
-
destination
in truck
capacity.
of each piece will
(as shown in Table B-l),
For
thereby
increasing
a mailer
the number
to which direct shipment
by
is economical.
When an individual
mailing
4
destination
entry economical,
5
possibility.
Small, lightweight
6
mailings
7
weight
8
increasingly
is not of sufficient
consolidation
mailings
and cube of a mailing
increase,
size to make
with other mailings
may sometimes
and be entered deep into the postal network,
is a
piggyback
with large
but in general,
deeper destination
as
entry becomes
feasible.
The conclusion
9
of postal facilities
10
weight
11
supported
12
average weight
13
presort
14
destination
15
presort
from the preceding
general discussion
pieces are more likely to be destination
by data from the billing
determinants.
entered.
This conclusion
of Standard
A Mail.
entry increases uniformly
is
Table B-2 shows the
and percent of mail that received destination
categories
is that heavier
The percentage
entry for four
of mail that receives
with average weight
in 3 of the 4
categories.s5
55
The only slight aberration occurs in the 3/5-digit nonautomation category. There the percentage of pound-rated pieces that
receives destination entry is lower than the percentage of piece-rated flats.
B-18
Table B-2
Standard A Mail
Average Weight and Destination
FY 1999
A. Standard
6
7
8
9
10
15
16
17
18
(1)
Letters
Non-Letters:
Piece-rated
Pound-rated
3/5-digit
Non-Automation
Category
(2)
Average
Weight
(ounces)
Percent
Destination
Entry
0.701
43.6%
2.21 a
5.320
59.7
71.9
1.548
7.634
54.1
47.4
Sources:
A ECR
Saturation Category
0.734
73.5%
0.955
89.3%
2.032
5.094
90.6
95.3
2.934
4.869
96.5
96.0
26
27
28
29
(4)
Percent
Destination
Entry
55.5%
Basic Category
Letters
Non-Letters:
Piece-rated
Pound-rated
(3)
Average
Weight
(ounces)
0.843
8. Standard
19
20
21
22
23
24
25
A Regular
3/5-digit
Automation
Category
11
12
13
14
Entry
Part A, USPS-LR-I-125,
Part B, USPS-LR-I-125,
G-2, pp. l-2.
G-2, pp. 1-2.
B-19
Mail
1
It is sometimes
makeup.
2
weight.%
Exactly
3
well known,
4
percentage
5
letters
6
trays that are usually
7
generally
what this means, however,
8
and packaging,
9
affect the level of presort.
of course, that within
of flats increases
and flats, the makeup
entered
differs; Standard
in bundles on pallets.
increases.
issue is whether
A flats are
weight
of individual
in Docket No. MC95-1,
12
(formerly
13
presortation.
14
qualify
shape constant)
15
pieces could change the makeup.
The role of bundles
16
reduced following
and the revised regulations
17
makeup.
18
given mailing
19
regulations.
regulations,
in a Standard
A
fewer but heavier pieces could
and skin sacks: thus, increasing
reclassification
It is not known whether
continues
pieces can
may also have affected the degree of
Under the previous
as bundles
on shape
it seems entirely
possible that weight
mailing
As between
Beyond the effect of weight
of the pieces (holding
A the
A letters are now entered in
11
third-class)
It is
the 0 to 16 ounce range of Standard
stacked on pallets, while Standard
another
varies with
is not always specified.
as the average weight
Prior to mail reclassification
10
asserted that mail makeup
increasing
the average weight
and sacks was greatly
the weight
to affect the level of presortation
If it is believed that increasing
55
See response of USPS witness
3, Docket No. R97-1 (Tr. 15/7225-28).
B-20
the weight
McGrane
of
for mail
of pieces within
a
under the revised
of the pieces in a
to VP-CWKISPS-ST4C
1
given mailing
can still change the level of presortation,
2
makeup,
3
simulation
4
which a mailing
5
Data Quality
the possibility
seemingly
could be investigated
models used by commercial
will qualify
and hence the
mailers
for presort
readily
to estimate
the extent to
discounts.
Study
In response to a request from the House Subcommittee
6
via one of the
7
Service to conduct an independent
8
ratemaking,
9
prepared
review of the quality
in 1997 the GAO, the Commission
specifications
for a Data Quality
10
out prior studies of the relationship
11
failure.
In describing
on the Postal
of data used in
and the Postal Service jointly
Study.57 That study has singled
between weight
and to cost as a singular
the issue, it states that
12
13
14
15
16
17
18
The Postal Service has used essentially the same methodology
for estimating the relationship
between costs and weight since
1984... Intervenors
and the Postal Rate Commission have
criticized this methodology.
These criticisms have focused on
both the quality of the underlying
data and anomalous results
that indicate lightweight
postal items across classes cost more to
handle than heavier weight items.
19
Importantly,
the Data Quality
20
can only be obtained
21
less then half of all IOCS tallies.”
57
Summary
Study notes that “[wleight
from mail that is identified
individually,
information
which is now
This is the crux of the problem.
USPS Data Quality Study, Contract
Report, pp. 92-94 (dated April 6,1999).
B-21
When
No. 102590-97-B-1972,
1
IOCS tallies
are the primary
2
source of weight
3
driver in all the non-piece-handling
increment
The Data Quality
4
data source, piece-handling
data, while weight
be a problem. 58 In my estimation,
6
of a red herring.
Tripling
7
improve
one whit.
8
relationship
9
cost relationship
(and cube) is an important
within
cost
a postal facility.
the issue of small sample size is something
or quadrupling
of piece-handling
the sample size is not likely to
The methodology
operations
of bulk handling
10
Under these circumstances,
11
only make the result more precisely
12
pretend
- using the weight-cost
as a proxy to estimate
operations
any precision
- is fundamentally
engendered
the weightwrong.
by a larger sample will
wrong, and it is wilful
self-deception
to
otherwise.
The Data Quality
13
are the chief
Study states that small sample size often appears to
5
matters
operations
tallies
Study concludes its critique
that the Postal Service “Develop
with the appropriate
14
recommendation
15
track weight
16
through
17
parts of the production
18
undertake
19
the process that the Postal Service has not modeled and where IOCS tallies
in conjunction
the entire production
58
engineering
with other mail cost-causing
process.”
characteristics
(Recommendation
process are important,
studies that
No. 45.)59 All
but should the Postal Service
any such study, it should pay particular
attention
to those parts of
See response to NAAKJSPS-T9.
59
The Postal Service has not conducted
response to NAAKJSPS-10.
B-22
any such study; see
1
do not record weight
2
effect of weight.
3
Problems
or provide any meaningful
With Weight-Cost
Studies Proffered
Data from the weight-cost
4
studies of Standard
5
ounce increment
6
one-ounce increments
7
part contains volumes (column
8
3). These data are used to compute a statistic
9
in column 4.
10
concerning
the
in this Docket
A ECR letters by half-
up to four ounces are shown in Table B-3, Part A. Data by
Link relatives
variations
up to 16 ounces are shown in Part B.60 Each respective
11, total cost (column
are statistical
11
illustrating
12
between
13
by division
14
relative
15
defined as the difference
16
1).
17
information
indicators
in a data series.
successive data within
into the starting
known
21, and unit cost (column
as link relatives,
particularly
shown
suited to
They are defined as differences
the series that are put on a percentage
value of each difference.
Algebraically,
basis
the link
associated with any data point a(i) of a series a(l), a(2), . . . , a(n) is
a(i)-a(i-1)
Part A shows link relatives
18
Part B shows link relatives
19
Regardless
of whether
divided into a(i-l),
by half-ounce
that is, (a(i)-a&l)Ya(i-
increments
by one-ounce increments
up to four ounces.
up 16 ounces.
the data in Part A or Part B are used, it can be
USPS-LR-I-92,
Section 2, pp. 14-16.
B-23
1
observed readily
2
it would be reasonable
3
piece increases monotonically
4
percentage
5
and drops; they even turn negative,
6
sizes are smaller,
7
increments
8
signifying
9
unacceptable
that both link relative
to expect that with increasing
and, perhaps,
changes represented
by the link relatives
anomaly.
ounce increments
11
The unit cost data are so unstable
12
ratemaking
13
methodology
purposes
Anomalous
results
show substantial
jumps
where sample
of a piece increases,
a wholly
more stable series of one-
that they should be rejected for
objections
to the underlying
bypassed.
such as those displayed
in Table B-3 are to be
15
expected from raw data which do not control for entry point, presort
16
condition,
17
systematically
18
specifically
19
data nor the methodology
20
increments.
21
distribute
shape, or any other variable
related
the
results for six of the sixteen data ranges.
even if my fundamental
were to be entirely
the cost of a
range dips below zero,
the supposedly
gives anomalous
Whereas
Thus, in the series of half-ounce
decrease as weight
Likewise,
weight
not only at higher weights
(Part A) the 2.5 to 3 ounce weight
that costs actually
unstable.
in a smooth progression,
but also at lower weights.
10
14
series are highly
that may affect cost but is not
in any meaningful
way to weight.
designed to measure the impact of weight
are appropriate
Tallies from non-weight
the costs of weight-driven
functions.
B-24
on cost, and neither
for distributing
driven functions
IOCS data are not
the
costs to weight
should not be used to
1
2
3
4
Table 0-3
Standard
A ECR Letters Test Year Before Rates Mail Processing and Delivery
Costs and Link Relatives by Detailed Weight Increments
Weight
(oz.)
9
1
2
3
4
5
6
7
6
20
21
22
23
24
25
26
27
28
9
IO
11
12
13
14
15
16
17
16
19
20
21
22
23
24
36
37
38
Total Cost
in weight range
6 000)
0 to 0.5
0.5 to 1 .o
1.oto 1.5
1.5 to 2.0
2.0 to 2.5
2.5 to 3.0
3.0 to3.5
3.5 to 4.0
6,002,737,918
4,028,968,606
1,208,061,022
637,085,612
592,087,281
442,638,331
149,904,296
43,560,381
Cal I-3:
Cal 4:
10,031,706,524
1,845,146,634
1,034,725,612
193,464,677
15,309,250
3,941,074
2,231,720
695,295
178,765
202,361
I 19,745
57,499
92,788
63,344
15,182
11,253
Unit Cost
Link
Relatives
(4)
Increments
321,077
287,252
96,270
68,973
66,806
46,576
22,493
8,800
8. One-Ounce
0 to 1
1 to 2
2 to 3
3 to 4
4 to 5
5 to 6
6 to 7
7 to 6
6 to 9
9to10
10to11
11 to 12
12to13
13 to 14
14 to 15
15 to 16
Unit
cost
(2)
A. Half-Ounce
10
11
12
13
14
15
16
17
18
19
::
31
32
33
34
35
Volume
Standard A
ECR “Letters”
(1)
0.053
0.071
0.080
0.106
0.113
0.110
0.150
0.202
33.3%
11.8%
35.9%
4.2%
-2.7%
36.7%
34.6%
0.061
0.090
0.112
0.162
0.159
0.331
0.302
0.271
0.463
0.569
0.858
0.436
0.381
0.326
1.137
10.295
47.7%
24.5%
45.1%
-1.7%
108.2%
-6.6%
-10.3%
70.8%
22.9%
50.8%
-49.2%
-12.6%
-14.4%
246.8%
805.5%
Increments
608,329
165,243
115,382
31,293
2,434
1,304
674
188
63
115
103
25
35
21
17
116
USPS-LR-I-92, Section 2, pp. 14-16
Defined as successive percent changes over starting base of each
change, i.e., lOO’(a(i)-a(i-l))/a(i-I)
B-25
Unit
1
Research Recommendations
2
The focus of the discussion
3
because they constitute
4
research
recommendations
5
indicated
below, however,
6
could merit further
I
here has been on mail processing
a major share of total costs. Accordingly,
investigation
costs and street costs
costs, it is strongly
recommended
8
the Postal Service focus study on the cost of those non-piece
9
functions
that it has not yet modeled.
10
modeling
efforts.
11
engineering
12
time-and-motion
13
effort which the Postal Service undertakes,
14
miscellaneous
15
presortation,
16
sufficient
by the Data Quality
type studies might be appropriate.
with a view towards
ascertaining
an extra weight-based
Study, or simulation
or
As part of any study
on those
that are avoided by
whether
component
the avoided costs are
in presort
discounts.
Daniel admits that “no other studies have been undertaken
18
since Docket No. R97-1 to study the effect of weight
19
costs.“61 Consequently,
20
issue.
witness
on carrier
Daniel has no data whatsoever
She has simply reexamined
61
further
such as the
it should focus attention
and allied labor operations
that
handling
This could be done through
some other methodology,
study recommended
Witness
17
Alternatively,
to warrant
As
as well.
With respect to mail processing
handling
the specific
offered here relate to mail processing.
both in-office city carrier
costs,
previous
assumptions,
See response to AAPSAJSPS-T28-3
B-26
street time
to offer on the
assumed in this
(Tr. 4/1159).
1
docket that elemental
2
this different
assumption
3
compensating
errors.*62
4
ratemaking
purposes.
level costs are weight-related,
her results will be “blessed by the Cod of
Such an approach
is hardly
satisfactory
for
The Postal Service should conduct an empirical
In response to the question
5
and hoped that by using
“Is it more costly to handle an eight-ounce
6
bound catalog or an eight-ounce
7
single sheets of glossy paper inside a supermarket
8
states that to her knowledge
9
of the degree to which mail is loose or bound affects costsf13 Since the
shared mail set with numerous
brochure,”
average weight
11
sets with coupons and single sheets inside a supermarket
12
related
13
Recommendations
Daniel
any study
of shared mail
brochure,
this is a
study.
for the Commission
should not rely on any of the weight-cost
15
Standard
A Mail that the Postal Service has submitted
16
the Postal Service’s own admission,
17
important
variables,
witness
flat is less than the average weight
issue which also deserves empirical
The Commission
coupons and
the Postal Service has not conducted
10
14
of a typical
study.
such as presort,
studies of
in this Docket.
By
the studies do not control for any of the
that drive weight-related
62
costs. The
The Postal Service apparently does not consider witness Daniel’s
assumption to have any validity, and does not use it for the CRA. See
response to OCA/USPS-TlP11.
63
Response to AAPSKISPS-T28-1
B-21
(Tr. 4/1157).
I
results
are too fraught
2
a reliable
with inconsistencies
basis for ratemaking
The evidence strongly
3
4
processing
costs. Further,
5
methodology,
6
the cost of bulk-handling
I
distributed
8
weight.
to constitute
purposes.
suggests that there are weight-related
in the Postal Service’s current
a bias exists to understate
functions
greater presortation
mail
cost-identifying
these weight-related
costs because
most likely to be driven by weight
using direct piece-handling
Finally,
9
and other problems
are
tallies that are far less affected by
helps avoid some or even all weight-
10
related
mail processing
costs, yet none of this cost avoidance
11
presort
discounts.
12
entry.
13
Commission
14
bypassed
and any weight-related
15
Although
the data in this docket do not suffice to incorporate
16
element in any presort
discount,
17
situation
the passthrough
18
entry discounts.
19
Commission.
is recognized
in
-
.-
Presortation
When presorted
mail is entered
can have confidence
by increasing
is of course a prerequisite
I strongly
at a destinating
that upstream
mail processing
the Commission
recommend
for destination
facility,
operations
the
have been
costs have been avoided.
a weight-related
can help rectify the
used to compute the destination
this course of action to the
B-28
Appendix
1
UNIT CONTRIBUTIONS
AND
COVERAGES, 1997.2001
2
3
Table C-l presents
4
5
C
contributions
the detailed
the discussion
of unit
and coverages in Section lV of the text.
The data have been compiled
6
data underlying
7
the Commission’s
Opinion
8
Actual
9
1998, and 1999. Projections
from a number
and Recommended
of sources, beginning
with
Decision in Docket No. R97-1.
data from the Services’ Cost and Revenue Analysis
are used for 1997,
for the year 2000 have been taken from Docket
10
No. R2000-1,
11
the year 2001 are the Postal Service’s figures for Test Year Before Rates and
12
at the Service’s proposed rates, for Test Year After Rates, respectively.
13
as noted in the source listing
appended
to the table.
Data for
Coverage is defined as total revenue over total volume-variable
14
both given in $ million.
The ratio is expressed in percentage
15
total contribution
is the algebraic
16
volume variable
cost, in $ million.
17
derived by dividing
18
pieces. The resulting
19
to cents per piece by multiplying
the respective
quotients,
difference
between
terms.
cost,
The
total revenue and total
Unit costs and unit contributions
are
totals by the total volume, in millions
obtained
in dollars per piece, are converted
them by 100.
C-l
of
All data are shown for both ECR and Regular
1
2
row blocks.
The differences
3
case as ECR minus Regular,
4
negative
numbers
5
analytic
significance.
6
total revenues and total volume-variable
1
than for ECR, which indicates
the respective
are presented
figures,
in a third
defined in each
7-line block.
They simply
The
show that total volumes and therefore,
broader
costs, are larger for Regular
usage by the mailing
and analyzed
differences
in unit costs (rows 7-21 in column 6) are negative,
10
differences
in unit contributions
11
that ECR has lower unit costs than Regular
12
are greater.
public.
13
roughly
14
ECR are roughly
while the
(rows 7-21 in co1 7) are positive.
In terms of orders of magnitude,
the unit costs of ECR are
The unit contributions
more by half than those of Regular Mail.
points to a near-anomaly
c-2
This shows
Mail, but its unit contributions
less by half than those of Regular Mail.
The contrast
Mail
in the text is that the ECR - Regular
9
15
7-
in rows 15-21 of columns (l), (2), and (5) have no special
What is noteworthy
8
between
Mail, in two separate
in the rate structure.
of
Table
Effective
Unit
of Standard
TObil
Revenue
($, million)
(1)
Yeal.
Standard
1
2
3
4
5
6
7
Contributions
and Coverages
A ECR and Regular
Mail
Total
Coverage
(percent)
(3)
Volume
Contribution
($, million)
(4)
Unit
Pieces
(million)
(5)
unit
Cost
(cents/pc)
(6)
Contribution
kentefpc)
(7)
A ECR
1997PRC
1997 Actual
1998 Actual
1999 Actual
2OOOPmj’d
2OOlBR
2001 AR
Standard
8 1997PRC
9 1997 Actual
10 1998 Actual
11 1999 Actual
12 2000 Pmj’d
13 2001 BR
14 2001AB
Difference
15
16
17
18
19
20
21
TatalValL
vbl. Cost
($, million)
(2)
C-l
1997 PRC
1997 Actual
1998 Actual
1999 Actual
2000 Pmj’d
2001 BR
2001AR
4,280
4,552
4,948
4,827
4,896
6,037
5.162
2,108
1.683
1,999
2,336
2,288
2,528
2.472
203.0
241.7
247.8
206.6
214.0
199.2
208.8
2172
2,669
2,952
2,491
2,608
2,509
2,690
28,759
31,505
34,111
32,756
32,691
33,631
32,828
7.330
5.977
5.860
7.132
6.999
7.517
7.530
7.552
8.472
8.660
7.605
7.978
7.460
8.194
5,956
4,406
5,104
5,851
6,885
7,125
6,824
134.6
153.8
141.5
135.6
122.9
121.4
132.9
2,061
2,371
2,119
2,084
1,580
1,528
2,246
37,858
32,528
35,257
38,996
41,674
42,764
40,999
15.732
13.545
14.477
15,004
16,521
16,653
16.644
5.444
7.289
6.010
5.344
3.791
3.571
5.478
111
298
835
407
1,028
981
444
-9,099
-1,023
-1,146
-6,240
-8,983
-9,153
-6,171
-6.403
-7.568
-8.616
-7.873
-9.622
-9.137
-9.114
2.108
1.183
2.650
2.261
4.186
3.889
2.716
ARegular
8,017
6,777
7,223
7,935
8,465
8,653
9,070
Between
-3,737
-2,225
-2,270
-3,108
-3,569
-3,616
-3,908
Standard
A ECR and Regular
-3,848
-2,523
-3,105
3,515
-4,597
-4,597
-4,352
68.4
87.9
106.3
71.0
91.0
77.8
75.9
1997 PRC
1997 Actual
1998 Actual
1999.4ctual
Zoo0 Pmj’d
2001 BR
2001 AR
Rates, Docket No. R97-1, Op. L? Rec. Dec., Appendix G, p.1.
Cost and RevenueAnalysis.
Cost and Revenue Analysis.
Cost and Revenue Analysis.
Revenues and Volume, USPS-T-32, Exhibit USPS-32C. p.l; Volume Vtible
Cost, USPS-T-14,
Exhibit USPS-14E, Cost Segment Summary, ECR, total.
Docket No. R2000-1, Revenues and Cost, USPS-T-32, Exhibit USPS-32A, p.1; Volumes USPS-T-6,
5.
Docket No. R2000-1, Revenues and Cost, USPS-T-32, Exhibit USPS-32B, p.1; Volumes USPS-T-6,
5.
c-3
p.
p,
ORIGINAL
RECEIVED
CERTIFICATE OF SERVICE
hr
22
6 19 I
I hereby certify that I have this day servedthe foregoing document upon all participants
POSTAL H,+lE c”wn
of record in this proceeding in accordancewith Section 12 of the Rules of Practice.
OFFICE OF THE SECT
May 22,200O