UNITED STATES OF AMERICA
Before the
POSTAL RATE COMMISSION
WASHINGTON, D.C. 20268-0001
Postal Rate and Fee Changes, 2000
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Jun 20
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Docket No. R2000-1
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ANSWERS OF THE OFFICE OF THE CONSUMER ADVOCATE
TO INTERROGATORIES
OF UNITED STATES POSTAL SERVICE
WITNESS: ROBERT E. BURNS (USPSIOCA-T2-1-9)
(June 20.2000)
The Office of the Consumer
Burns to interrogatories
Advocate
USPSIOCA-T2-1-9,
hereby submits the answers of Robert E.
dated June 6, 2000.
Each interrogatory
stated verbatim and is followed by the response.
Respectfully
submitted,
TED P. GERARDEN
Director
Office of the Consumer
Shelley S. Dreifuss
Attorney
1333 H St. NW
Washington, DC 20268-0001
(202) 789-6830; Fax (202) 789-6819
v
Advocate
is
ANSWER OF OCA WlTNESS ROBERT E. BURNS
TO INTERROGATORIES
USPS/OCA-TZ-1-9
USPS/OCA-T2-1.
Please refer to your discussion
3-4 of your testimony.
industry at pages
a.
Are insurance
b.
Do those insurance
C.
Does positive equity provides [sic] a cushion against unforeseen
RESPONSE
companies
of the insurance
and utilities are [sic] allowed to earn profits?
companies
that earn profits have positive equity?
events?
TO USPWOCA-T2-1:
Yes.
a.
Insurance
earn profits; however,
companies
the allowed
and investor-owned
utilities are allowed
rate of return of each company,
to
which includes its
return on equity, that is, its profit, is regulated.
It should be noted, however,
that the
vast majority of utilities in number
utilities, cooperatively-owned
utilities,
and federal power authorities
are municipal
that are not-for-profit.
Usually yes. Most typically,
b.
an insurance company
or any other company
that earns a profit has positive equity; however, it is possible for an insurance
or any other company
negative equity.
or entity to earn a profit in any individual
The latter can happen whenever
entity’s income exceeds its expenditures
is negative.
However, an insurance
to maintain capital adequacy.
an insurance
company
year and yet have
company’s
or any other
for the individual year, while its balance sheet
company
is expected to maintain
The latter is necessary
for a Standard
a positive equity
& Poor’s Rating of
BBB or better.
C.
Yes, positive equity provides
a cushion against
cushion is in addition to the initial cushion of a contingency
unforeseen
reserve.
events.
This
ANSWER OF OCAWITNESS ROBERT E. BURNS
TO INTERROGATORIES
USPSIOCA-TZ-1-9
USPSIOCA-T2-2.
Please refer to page 2, lines 19-20, of your testimony, where you
state: “Relying solely on management discretion to pick the contingency reserve will
Also refer to the Postal Service responses to OCA
not guarantee its reasonableness.”
Questions l-3 on the Contingency filed on May 17, 2000.
a.
What approach
to contingency
selection will “guarantee”
reasonableness?
b.
Is it your testimony that the Postal Service did no analysis and relied
solely on management discretion in determining the size of the contingency?
If your
answer is yes, please explain fully.
Do you believe any management discretion is appropriate
the size of the contingency?
If your answer is no, please explain.
C.
RESPONSE
TO USPSIOCA-T2-2:
a.
result
As the Postal
in establishing
reasonableness
guaranteed)
Rate Commission
a contingency
of the
approach
cost variables
b.
conducted
in the past, a reasonable
is much
picking
the
more
likely
contingency
reserve
in the proposed
rates.
unable
I am unable
analysis and whether
whether
was
the Postal
cost variables.
to state whether
contingency.
the
Service
I am
analysis
Thus, due to problems related to asymmetry
the Postal
or not they relied solely on management
the size of the proposed
underlying
the Postal Service relied at all on any objective
that they may or may not have performed.
of information,
to answer
analysis of the volatility of its forecasted
also unable to answer whether
is better
in his testimony
I am, therefore,
an objective
is, the
Such an analysis
Since the Postal Service refused to provide the documents
testimony,
(that
begins with an objective analysis of the volatility of
contained
performed by Dr. Edwin Rosenberg
has stated
reserve
for
when the methodology
the forecasted
Tayman
in determining
However,
Service
did any objective
discretion
given the recommended
in determining
contingency
ANSWER OF OCA WITNESS ROBERT E. BURNS
TO INTERROGATORIES USPS/OCA-T2-1-9
rate of 2.5 percent, the admitted
contingency,
and
contingency
witness
Tayman’s
involves a subjective
individual factors, it appears
management
proposed
discretion,
evaluation
the
determination
of the
that is not based on specific evaluation
that is, managerial
contingency
the forecasted
discretion
gestalt,
in determining
of
the size of the
cost variables
has been completed.
such an objective
contains
analysis
testimony
discretion
must be clearly articulated
the objective
analysis
evidence)
why a reasoned
discretion,
analysis.
without
Again,
for the Postal
no such analysis.
support
contingency
the size of a
analysis of the volatility of
Dr. Edwin Rosenberg
Rate Commission,
while
has
Mr.
Even so, to be useful, managements
and must either support
or must clearly
by the objective
on management
can play a role in determining
reserve; but only after an objective
Tayman’s
indicated
that
for reaching this
that the Postal Service relied very heavily, if not solely, on
Yes, management
reasonable
convincing
statements
framework
contingency.
C.
preformed
lack of any set objective
a result consistent
(that is, support
through
with
clear and
reserve should vary from the result
However, determinations
having as a starting
that heavily or solely rely
point an objective analysis of
the variability of the future costs, can not be relied upon as being reasonable.
ANSWER OF OCA WITNESS ROBERT E. BURNS
TO INTERROGATORIES
USPS/OCA-T2-1-9
USPS/OCA-T2-3.
Please refer to page 3, lines 18-19, of your testimony where you
state: “Contingency reserves are used by the insurance industry for the same purpose,
that is, to offset the effects of misestimates relating to revenue and costs.”
a.
What percentage of total costs, including the amount to cover catastrophic
hazards such as floods and storm damage, are typically used for contingency reserves
in the insurance industry? Please provide the source of your answer.
Please confirm the fact that hurricanes and other catastrophes
b.
in the future is known. If you do not confirm, please explain why.
will occur
Please confirm that the number and severity of such catastrophes
C.
occur in the future is unknown. If you do not confirm, please explain fully.
RESPONSE
a.
TO USPSIOCA-T2-3:
The question
there is no standard
as phrased
does not lend itself to a ready answer because
definition of total costs for the insurance
mind, if one were to presume that a property
combined
ratio of approximately
and casualty
100 percent of premiums,
the typical loss ratio or loss reserve would be between
might be considered
insurance
contingency
that will
Property
equivalent
industry.
insurance
company
had a
which is about typical, then
60% to 80% of premiums.
to 60% to 80% of total costs.
Casualty industry
Keeping that in
See Standard
Survey (New York: McGraw-Hill,
That
& Poor’s
1999), 22. The
reserve is rolled in as a part of this loss ratio or loss reserve
In a recent article, “Enhanced
Criteria To Evaluate
European
Insurers’
Capital
Adequacy,”
what
http://www.standardandpoors.com/ratinqslcriterialinsurance/enhanced/enhancedcrit.htm,
I refer to as a contingency
reserve is closely related to what his referred to in the article
as a reserve risk. As defined in the article, reserve risk arises from the possibility
the actual cost of claims will vary from the expected
cost reflected
that
in the currently
ANSWER OF OCAWITNESS ROBERT E. BURNS
TO INTERROGATORIES USPS/OCA-T2-1-9
reported
loss reserve.
reserves.
required
Rather, it measures
to finance
expected
changes
The reserve risk does not address
the reserve.
level of frequency
in economic,
charges for property
the expected variability
These variations
and severity
of losses,
legal, and social conditions.
the adequacy
of current
in reserve levels and the capital
result from deviations
which
According
from the
can be exacerbated
by
to the article, the reserve
loss would be 22 percent of the loss reserves,
net of reinsurance
recoverable.
Putting
these
two articles
premiums would be approximately
must keep in mind, however,
company
the contingency
reserve
portion
that the business
contingency
company
of the
13 percent to 18 percent of the total premiums.
of a property
and casualty
is insuring against risk. As such, one would expect a reasonable
reserve for an insurance
One
insurance
contingency
to be much larger than what would be a reasonable
reserve for the Postal Service.
My discussion
of the contingency
was not for the purpose
analogous
together,
reserves established
by the insurance
of saying that the size of insurance
to the size of appropriate
insurance
industry
determine
accurately
associated
with any particular
Postal Service
as a model of the method
the size of its needed
reserves was in any way
reserves.
Rather,
I cited the
that the Postal Service should
contingency
industry
reserve.
use to
The uncertainties
industry and its ability to control costs and revenues
are
unique to each industry.
It would be naive to imagine that the obligations
determine
the size of the reserves
they require,
of the insurance
would
industry, which
be directly applicable
to the
ANSWER OF OCA WITNESS ROBERT E. BURNS
TO INTERROGATORIES USPS/OCA-T2-1-9
Postal
Service.
Rosenberg
The
discusses
Postal
in his testimony,
losses and management’s
insurance
industry.
Service,
has a number
of safety
e.g., the provision
ability to control expenses,
The latter point is important-the
over the catastrophes
Postal
Service
for which
it promises
for recovery of prior years’
that are not available
insurance
compensation
on the other hand, has considerable
nets that witness
to the
industry has no control
to its policyholders.
control
The
over its revenues
and
costs.
The point that I make in my testimony
estimating
“connection
its future liability is far superior to that employed
[is] made between
some past transaction
be a “projected
catastrophic
is that the insurance
the future sacrifice
(represented
by the reserve)
probability
opinion, the Postal Service
performs
assessment
I also point out that “any loading
of occurrence.”
long-term
analysis but disavows
b.
that the insurance
analysis,
for
average of catastrophic
OCA-T-2 at 4.
has failed to perform the type of probability
analysis
In my
and
industry performs and which I cite at page 4
I also note in my testimony
a variance
and
or event (the risks actually insured for)” and, further, there must
losses must be based on a multi-year,
of my testimony.
method of
by the Postal Service, i.e., a
claims with the number of relevant years set by the regulator.”
quantitative
industry’s
that to the extent the Postal Service
it does not base
its contingency
proposal
upon the
it.
Yes, it is known that Atlantic
hurricanes
have occurred in the past and will occur in the future.
and other natural catastrophes
ANSWER OF OCA WITNESS ROBERT E. BURNS
TO INTERROGATORIES USPSIOCA-T2-l-9
While the number and severity of such catastrophes
C.
future is not exactly known, there are forecasting
severity of catastrophes
that will occur in the
groups that forecast the number and
such as Atlantic hurricanes,
earthquakes,
landlmudslides,
and
flood occurrences.
In the case
Forecasting
Team,
hurricane
predictions
the 2000
Hurricane
hurricanes.
of Atlantic
hurricanes,
led by Professor
since 1994.
Season
(Saffir-Simpson
is 71 percent.
Professor
been developed
loss of life.
also become
Category
storms,
8 hurricanes,
that the probability
for
and 4 major
of one or more major
I, II, or Ill) coming ashore along the U.S. coastline
within the last ten years, forecasting
and put in place to better
natural catastrophes,
Hurricane
William Gray’s most recent prediction
is for 12 named
Thus, particularly
State University
William Gray, has been issuing annual Atlantic
The team is also predicting
hurricanes
the Colorado
understand
the variables
methods
have
that influence
so that steps can be taken to mitigate the resultant damage
My point here is this, during the last ten years, forecasting
available
methods
for the Postal Service to use to make an objective
and
have
analysis
of
variables that could affect its future costs as well as to allow the Postal Service to bring
those
costs
management.
contingency
under
control,
Before
one
through
can
risk
mitigation
understand
future
can be set at a level that mitigates
management
with an incentive
to minimize
in the testimony
prudent
costs,
so that
uncontrollable
and
efficient
a reasonable
risk while it provides
costs, one must be able to conduct
objective analysis of the volatility of the forecasted
contained
and/or
of the Postal Service.
cost variables.
No such analysis
an
is
ANSWER OF OCA WlTNESS ROBERT E. BURNS
TO INTERROGATORIES USPWOCA-T2-1-9
USPS/OCA-T24.
How much “profit
rates? Please provide your sources.
RESPONSE
is typically
included
state insurance
in insurance
commission,
rates would require contacting
an activity
I did not undertake.
provide an estimate of the actual earned profit included in insurance
earned profit included in insurance
not negative.
4%.
rates (insurance
My best property-casualty
Here is how the calculation
Casualty
on revenues
(a measure
was done.
of a company’s
operating
income divided by net premiums earned.
to 10%.
However,
rates, it is necessary
Poor’s
industry
typical
net investment
CasuaMy insurance
yield for casualty
rates
I
The actual
is between
Key Rating
profitability)
-3% and
Guide, Property-
is calculated
as pretax
This figure is normally between
yield.
According
(New York: McGraw-Hill,
insurance
yield, one is left with an estimated
included in insurance
rates.
of the actual profit that is included
to net out the net investment
Survey,
Instead,
is typically very small, if
estimate
Best’s
each
inside cover, states that the pretax return
operating
to find an estimate
premiums)
industry-wide
(Oldwick, NJ: A.M. Best, ed. 1999)
investment
in insurance
TO USPSIOCA-T2-4:
Finding the “profit allowance”
individual
allowance”
is 6%.
3%
in insurance
to Standard
1999)
&
19, the
After netting out the net
actual earned profits of -3% to 4% being
ANSWER OF OCA WITNESS ROBERT E, BURNS
TO INTERROGATORIES
USPS/OCA-T2-l-9
USPSIOCA-T2-5.
Please refer to page 7, lines 10-11, of your testimony where you
state: “Postal Service management’s subjective perception of risks must be reasonably
articulated.”
Please also refer to pages 43-46 of USPS-T-g.
a.
Is it your testimony
that Postal Service managements
perception of risks related to the contingency is not reasonably articulated
9? If your answer is yes, please explain fully.
subjective
in USPS T-
b.
With reference to past contingency
amounts proposed by the Postal
Service and accepted by the Commission, please explain which ones were reasoned
and which ones were not reasoned, and why.
For any previous contingency amounts considered by you to be reasoned,
please explain how the support provided by the Postal Service for such contingency
amounts differs from the support provided for the contingency in this docket which you
say is not reasoned.
C.
RESPONSE
a.
TO USPSIOCA-T2-5:
Yes.
First, the Postal Service
risks related to the contingency
objective
starting
perceptions
Without
of risk lack context.
by the Postal
variance
point,
Service
analysis,
witness.
factors.
be reasonably
an objective
articulated
analysis
Second,
where
witness
subjective judgment,
point, subjective
does
present
a
so that he relies
factor that witness Tayman
costs, did not prevent the Postal Service from finishing
volume
is not entirely out of the Postal Service’s
Fourth, management
of
which is not based on specific evaluation
As such, it is evidence
services.
Tayman
any reliance on the analysis,
99 in the black.
growth
perception
unless it has some
as a starting
Third, the one formerly uncontrollable
cited, the Y2K remediation
subjective
No such objective analysis of risk has been presented
he expressly disavows
totally on management’s
of individual
cannot
management’s
that the current contingency
control.
is sufficient.
FY
Third,
They can promote
has input into salary levels, health care benefits,
and
ANSWER OF OCA WITNESS ROBERT E. BURNS
TO INTERROGATORIES USPS/OCA-T2-1-9
labor contracts;
subjective
and can project them fairly accurately
perception
competitive
environment
The uncertainty
speculating
More should
risk that Tayman
articulated
was mostly taken into account
about electronic
than one sentence
volume.
of increased
into the future.
diversion
be required
by detailed volume forecasts.
to clearly
may “be making
articulate
by nothing
inroads”
a subjective
uncontrollable
risk.
uncontrollable
risks in the test year and the $1.68 billion annual contingency
b. and c.
Certainly,
being an increasingly
in the future is supported
that the Internet
Fifth, the one
Postal Service to utilize increasingly
Therefore,
these questions
sophisticated
into mail
perception
there has been a failure to rationally connect
The Postal Rate Commission
of
potentially
request.
has made clear that it expects
objective
more
the
analysis of risks over time.
are irrelevant to the current case; and, worse still, would ask
the witness
to engage
in an anachronistic
unavailable
in the past, to measure
analysis,
using today’s
the reasonableness
tools, which were
of past decisions.
analysis violates logic and has been rejected by courts in other contexts.
Such an
ANSWER OF OCA WTNESS ROBERT E. BURNS
TO INTERROGATORIES
USPSIOCA-T2-1-9
USPWOCA-T2-6.
Please refer specifically
Holder in Docket No. R90-1.
to USPS-T-15,
Direct Testimony
of Charles
a.
Please confirm that the Postal Service determined that a contingency
3.5% was necessary in Docket No. R90-1 and that this amount was recommended
the PRC. If you do not confirm, please explain why.
of
by
b.
Do you consider that managements
subjective perception of risks was
reasonably articulated in Docket No. R90-I?
If your answer is other than yes please
explain why.
Please explain how management’s
subjective perception of risks related
to the contingency in Docket No. R90-1 differs from its articulation of such risks in this
Docket. If your answer is that one is more reasonably articulated than the other please
explain by how much and how you arrived at your conclusion.
C.
RESPONSE
TO USPSIOCA-T2-6,
The Postal Rate Commission
parts a. -c.:
has stated its expectation
that the Postal Service
must study and learn about the risks that it faces over time and that develop and use
increasingly
sophisticated
objective
means
of risk analysis.
methods that were available ten years ago would be considered
Objective
inadequate
risk analysis
today. Any
review of testimony from another case ten years ago would be an anachronistic
time) analysis that lacks relevance to today’s case
(out-of-
ANSWER OF OCA WITNESS ROBERT E. BURNS
TO INTERROGATORIES
USPSIOCA-TZ-l-9
USPS/OCA-T2-7.
Please refer page 9, lines 3 and 4, of your testimony where you
state that “Mr. Tayman devoted less than two pages-and
no supporting
information, data, or studies-to
justify the $1.68 billion annual revenue that the
contjngency
represents.”
How many pages did Mr. Holder devote to this subject in
Docket No. R90-I?
RESPONSE
TO USPS/OCA-T2-7:
See my response
to interrogatory
USPWOCA-T2-6
ANSWER OF OCA’MTNESS
ROBERT E. BURNS
TO INTERROGATORIES USPSIOCA-TZ-1-9
USPWOCA-T2-8.
Please refer to page 10, line 3, of your testimony, where you state:
“Mr. Tayman states that volume growth is below historical norms and that the Postal
Service plans a 1.5 percent workyear reduction in the test year. This is not an area
Is it your testimony that volume growth is
outside of the Postal Service’s control.”
controllable by the Postal Service? If your answer is other than no, please explain how
volume growth can be controlled by the Postal Service and provide the source of your
information.
RESPONSE
TO USPSIOCA-T2-8:
First, the Postal Service
Postal Service can take measures
volumes
by improving
by withdrawing
controls the rate of workyear
to control volume.
service or promoting
service or not advertising
reduction.
Further,
the
The Postal Service can influence
certain services.
It can decrease
volumes
ANSWER OF OCA WITNESS ROBERT E. BURNS
TO INTERROGATORIES
USPSIOCA-T2-1-9
USPSJOCA-T2-9.
Please refer to
that “witness Tayman next cites
Once again, indices and
rates.’
completely outside of management
Health Benefit Program premiums
the source of your information.
RESPONSE
page 11, line 1, of your testimony where you state
health benefit cost increases at ‘near double digit
forecasts exist for such costs, and they are not
influence.” Please explain how Federal Employees
are within postal managements
influence.
Provide
TO USPSIOCA-T2-9:
The amount the Postal Service pays in health premiums
the
Postal
employees
required
workers
Service’s
control,
that it hires.
to process
because
For example,
volumes,
the Postal
Service
is not entirely outside of
controls
if a large number of additional
the Postal Service
workhours
of
are
has two options.
It can hire new
or it can increase the overtime hours of its existing workforce.
If it chooses the
latter, health premium costs will not increase at as fast a rate because
only vary with the number
works.
the number
Other increases
incorporated
of employees,
in health
not the number
care benefits
in the Postal Service’s forecasts,
health premiums
of hours each employee
can be forecasted
and are already
DECLARATION
I, Robert
interrogatories
E. Burns,
declare
USPS/OCA-T2-1-9
correct, to the best of my knowledge,
under
penalty
of the United
of perjury
States
information and belief.
that the answers
Postal Service
to
are true and
CERTIFICATE
OF SERVICE
I hereby certify that I have this date served the foregoing
participants
of record in this proceeding
practice.
Washington, DC 20268-0001
June 20,200O
in accordance
with section
document
upon all
12 of the rules of