OCA-RTJ
Docket No. R2000-1
REBUTTAL TESTIMONY
OF
PAMELA A. THOMPSON
ON B’E,HALF OF
THE OFFICE OF THE CONSUMER AQVOCATE
AUGUST 14.2000
TABLE OF CONTENTS
I.
STATEMENT
II.
PURPOSE
Ill.
A REVIEW OF THE POSTAL SERVICE’S UPDATES FOR FY 99, FY
00 AND FY 01 AFTER RATE COSTS .._....,_..,..,...,..,.........................................
4
TWO POSTAL SERVICE TEST YEAR AFTER RATE PROPOSED
CHANGES BEAR FURTHER EXAMINATION .._._............................................
14
IV.
OF QUALIFICATIONS
_,...,,.,,..,...,..,..,...,..,..,..,..,.............,..,........
Page
AND SCOPE OF TESTIMONY
_.__.,__,..,,..........................................
1
2
UNITED STATES OF AMERICA
Before The
POSTAL RATE COMMISSION
WASHINGTON, D.C. 20268-0001
Postal Rate and Fee Changes,
2000
)
Docket No. R2000-1
REBUTTAL TESTIMONY
OF
PAMELA A. THOMPSON
1
I.
2
STATEMENT
OF QUALIFICATIONS
My name is Pamela A. Thompson.
3
Specialist.
4
more complete
5
submitted
1
I have been employed
statement
SeeTr. 23/10405-06.
by the Postal Rate Commission
of qualifications
earlier in this proceeding.’
I am a senior Postal Rate and Classification
is provided
since March 1990. A
in my testimony,
OCA-T-9,
OCA-RT-3
Docket No. R2000-1
1
II.
PURPOSE
AND SCOPE OF TESTIMONY
The purpose
2
of my testimony
is two-fold.
First, I provide a summary
3
USPS cost data resulting from the updated
4
response
5
tables.
6
USPS witness
7
Patelunas
8
costs for the seven cost effects used in developing
9
presented
to Commission
Table I summarizes
Kashani
(USPS-ST-44)
different
11
Kashani and Patelunas.
12
USPS
(USPS-T-14)
13
requirement
I accomplish
this task by providing
and subsequently
in response
Kashani
cost
forecast responsive
Second, my testimony
made by USPS witnesses
the sources of information
for the
development
used by the
of the
revenue
to Order No. 1294.
responds to the statement,
that offer specific test year revenue
at page 4 of Order No. 1294,
that “participants
16
need to determine
17
cost data.”
18
Patelunas
19
“base year” update did not roll forward FY 99 costs using the more “traditional”
20
of beginning
21
supporting
22
electronic
how to adjust those forecasts
requirement
to incorporate
forecasts
by USPS witness
testimony was filed on July 7. Unfortunately,
with the manual input requirement
report.
the FY 99
method
The Postal Service submitted
as soon as possible; and witness Patelunas’s
files began to be filed on July 12 (USPS-LR-I-406).
-2-
also will
actual FY 1999 CRA
The cost update data for the base year 1999 presented
library references
the
Ill and IV show the
15
in his supplemental
by
by USPS witness
Table II summarizes
Tables
mix adjustments
factors
five
test year, FY 01, after rate costs as
and Patelunas.
Table V summarizes
updated
updated
to Order No. 1294.
test year after rates work-year
in preparing
filed by the Postal Service in
USPS FY 00 costs for the six cost effects presented
by USPS witnesses
10
14
Order No. 1294.
information
of certain
However,
its
supporting
the files I
Docket No. R2000-1
needed
OCA-RT-3
to complete
an update
were not filed until late July.
OCA’s proposals
Instead,
focus
proposed
on three changes
updated the test year forecast-use
reviewed
in my direct testimony
Thus, I was not able to provide a complete
reflecting the changes
I primarily
and the addition
of the OCA model presented
by OCA witnesses
the Postal Service
Smith and Ewen.
proposed
of ECI versus ECI-1, the work-year
of a $200 million “Field Reserve.”
carefully by the Commission
update of the
when
it
mix adjustment,
The three changes
should
be
before being included in the final test year after
rates cost forecast.
-3-
OCA-RT-3
Docket No. R2000-1
Ill.
A REVIEW OF THE POSTAL SERVICE’S
FY 01 AFTER RATE COSTS
In the USPS initial filing, USPS witness
FY 98 as well as forecasted
rates.’
6
costs and updated cost projections
7
Kashani presented
actual cost data for
testimony,
USPS witness
Patelunas
presented
FY 99 actual
for FY 00 and FY 01, before and after rates3
In Tables I and II, the column identified as “Original” provides forecasted
8
presented
in USPS
9
identified
as “Revised”
10
FOR FY 99, FY 00 AND
data for FY 99, FY 00 and FY 01 test year before and after
5
In supplemental
UPDATES
supplemental
11
witness
Kashani’s
testimony
and workpapers.
relies upon the costs presented
testimony
in USPS witness
FY 99 actual (Patelunas)
13
forecasts
14
forecast.
column
Patelunas’s
and USPS-LR-I-410.
FY 99 total costs form the basis of the FY 00 cost forecast.4
12
The
costs as
and forecasted
for the six USPS cost effects5
(Kashani)
Table I incorporates
total costs as well as the FY 00
The result is the FY 00 total roll-forward
*
Cost detail by segment and component was provided in USPS witness Kashani’s workpapers
3
Cost detail by segment and component was provided in USPS-LR-I-410.
4
In Tables I and II, the FY 99 actual and forecasted roll-forward
mix adjustment, nor do they contain final adjustments.
5
costs do not include the work-year
Each of the six cost effects is explained in USPS witness Kashani’s testimony.
The six cost
effects are: (1) cost level effect; (2) mail volume effect; (3) nonvolume workload; (4) additional workday;
(5) cost reductions; and (6) other programs.
OCA-RT-3
Docket No. R2000-1
1
Table I shows that actual FY 99 total costs were $147,319,000
2
comparable
3
decrease
costs
originally
of approximately
Cost level changes
4
5
Service.7
6
$70,622,000
7
reductions
8
adjustment.’
9
programs.
10
The
updated
in USPS
witness
refer to price level inputs, or changes
FY 00 total
declined $75,895,000
cost level increase
12
($266,871,000)
13
largest non-personnel
14
Patelunas’s
15
expedited
16
two largest service-wide
17
($77,914,000)
88 percent
of other program cost increases
and (2) service-wide
and
($147,319,000)
and depreciation
FY 00 cost
other program
are summarized
programs
and amortization
in other
The two major
costs ($86,255,000).8
as other headquarters
I was
prior year international
to $696,586,000.
other program
testimony
mail ($94,428,000),
in Table
costs for FY 00 occurred
are (1) non-personnel
other program cost increases
supplemental
in costs to the Postal
shown
primarily due to a $75,700,000
costs increased
categories
testimony-a
in USPS witness Kashani’s testimony.
The single largest increase in forecasted
11
Kashani’s
0.2 percent.’
higher than forecasted
Other program
6
forecasted
lower than the
costs
The three
in USPS witness
($114,602,000),
($30,814,000).‘0
The
other program increases are (1) current workers’ compensation
(2) prior
workers’
+ $62,539,161,000
compensation
= (0.0024) or approximately
7
Docket No. RZOOO-1, USPS-T-14, see footnote at 4.
8
USPS-ST-44,
Exhibit USPS-ST-44Z.
9
USPS-ST-44,
Exhibit USPS-ST-44AA
10
Ibid.
-5-
($64,191,000).
(0.2) percent.
The
largest
Docket No. R2000-1
decrease
OCA-RT-3
in service-wide
other
program
costs
is the
re-pricing
of annual
leave
FY 00 costs
rolled
($35,782,000).”
Netting
forward
the cost update
increases
to FY 01 are $306,215,000
and decreases,
higher (approximately
total
0.5 percent)
than originally
forecasted.
Table I
FY 2000 Forecasted
I
Roll-Forward
Costs ($000)
Cost Category
FY 99 TTL
Cost Level
Mail Volume
Revised
A*
62,391,842
1,969,604
820,907
Original
B+
62,539,161
1,898,982
839,260
Delta
A-B
(147,319)
70,622’
(18,353)
NonVolume Workld
Additional Workday
Cost Reductions
Other Programs
FY 00 Roll Fwd Costs
183,171
44,848
(904,682)
696,586
65,202,276
183,934
44,308
(980,577)
370,993
64,896,061
(763)
540
75,895
325,593
306,215
Sources:
* USPS-LR-I-410, Volume 6
+ USPS-T-14, Workpaper E
6
Table II provides a comparison
of the updated
7
with those presented
8
effects
9
discussion
highlights
10
forecasting
the FY 01 cost level effect
are added
FY 01 test year after rates costs
initially in USPS witness Kashani’s testimony.
to the updated
three
FY 00 total
roll-forward
major areas of change.
resulted
Ibid.
-6-
The six FY 01 cost
costs,
Updating
in an increase
The following
the factors
used
in
of 24 percent
to
Docket No. R2000-1
OCA-RT-3
1
$2,732,917,000.
2
Personnel
cost reductions
3
change.
Forecasted
4
decline
in non-personnel
5
other program
service-wide
6
non-personnel
other program
7
$145670,000;
(2) a supply chain management
8
an advertising
cost decrease
9
program costs are: (1) an increase of $49,321,000
Cost reduction
increase of $31,836,000
11
current workers’
increased
of ($426,729,000)‘3
other program
10
12
programs
were responsible
costs declined
other programs
8 percent
of $154,741,000
cost increases
cost changes
totaling
for the majority of the
to $918,233,000.
$70,717,000.‘4
cost decrease
A
was partially offset by the
are: (1) an E-commerce
The three major
cost increase
of $113,000,000;
in the CSRS annuitant
liabilities; and (3) a decrease
of
and (3)
The three major service-wide
of $110,200,000.‘5
in contingent
71 percent to ($I,1 18,230,000).12
other
COLA; (2) an
of $41,079,000
in
compensation.”
In the test year, the employee
13
negative $2,658,000
14
original work-year
15
year mix adjustment
work-year
to a positive $213,750,000-an
increased
increase of $216,408,000
from a
from the
I believe the change in the amount of the work-
mix adjustment.”
is significant
mix adjustment
and warrants
12
a more through review than I had time
Ibid. Note that the “ROO-1 Original USPS Filing” for FY 01 other programs was $1,001,426,000
not the $1,125,426,000 shown on exhibit USPS-ST-44AA
Subsequently, the “ROO-1 FY 1999 Base
Update Filing” for FY 01 other programs should be $916.233,000 not $1,042,232,000.
This assumes that
the information provided in USPS-LR-I-410 is correct.
13
USPS-ST-44,
Exhibit USPS-ST-44Z.
14
USPS-ST-44,
Exhibit USPS-ST44AA
/bid.
16
Ibid.
-?-
Docket No. R2000-1
OCA-RT-3
1
to perform.
2
and IV. Table Ill provides the amount of the FY 01 after rate work-year
3
data used by USPS witness Kashani.
4
rate work-year
5
Comparing
6
($6,371,000)
7
increased
8
Handler
9
$29,937,000.
The summarization
mix adjustment
Table
is shown in Tables Ill
mix adjustment
in the update
by USPS
witness
Patelunas.
Ill and IV shows that FY 01 costs for Clerks A-J increased
from $6,451,000
costs
mix adjustment
Table IV provides the amount of the FY 01 after
used
to $162,975,000-an
Updated
10
of the work-year
increased
increase
of $169,346,000;
to $18,100,000-an
increase
from
to
($2,738,000)
represent
a forecast
increase
12
adjustments
13
$67,642,101,000.
14
provision,
total accrued
15
forecasted
cost increase of approximately
of ($320,076,000)
After
of $495,019,000.
results
including
in revised
the 2.5 percent
costs plus contingency
Carrier
of $11,649,000;
$32,675,000-an
FY 01 costs prior to the final adjustment
11
City
from
costs
and Mail
increase
are $67,962,177,000
Incorporating
the
FY 01 total
accrued
USPS
requested
updated
of
and
final
costs
of
contingency
for FY 01 are $69,333,151,000-a
one-percent.
17
For each year, the employee work year mix adjustment is based upon the relationship a given
year has to the base year. Consequently, the employee work-year mix adjustment is not part of the costs
rolled forward. See a/so USPS-T-14 at 6.
-6.
OCA-RT-3
Docket No. R2000-1
Table II
FY 2001 Forecasted
Revised
A*
65,202,276
2,732,917
(36,000)
158,013
(108,782)
(1,118,230)
918,233
213,750
67,962,177
(320,076)
67,642,101
1,691,050
69,333,151
Cost Category
FY 00 TTL
Cost Level
Mail Volume
NonVolume Workld
Additional Workday
Cost Reductions
Other Programs
WorkYr Mix Adj
FY 01 Subtotal
Final Adjustments
Ttl Accrued
Contingency
Ttl Accrued +Cont
Costs ($000)
Sources:
* USPS-LR-I-410, Volumes F and G, and USPS-ST-44,
+ USPS-T-14, Workpaper I and J
Roll-forward
Clerks A-J
(30,178)
-
Transitional
Subtotal Straight Time
Overtime
12,297
(18,472)
12,101
City
Carriers
208,964
1,755
(63,651)
147,068
(140,617)
6,451
WO)
Ttl Chg from 98 Mix
Source:
USPS-LR-I-127,
(6,371)
%Cha
24%
19%
1%
2%
71%
-8%
Exhibit W
Table Ill
Model Work-year Mix Adjustment
($000)
FY 2001 After Rates
Chg. in Career @ Avg.
IExtended Stepvs. Avg.
Delta
A-B
306,215
526,070
(5,805)
1,478
(1,871)
(464,283)
(83,193)
216,408
495,019
(43,552)
451,467
11,289
462,756
Original
B+
64.896.061
2:206:847
(30,195)
156,535
(106,911)
(653,947)
1,001,426
WW
67,467,158
(276,524)
67,190,634
1,679,761
68,870,395
Summary
(Kashani)
MailHandlers
12,642
13,247
(15,985)
Total
191,427
(51,354)
141,843
(2,738)
file name WKYRMXOO.XLS, worksheet SUMMARY.
-9-
1
Docket No. R2000-1
OCA-RT-3
Table IV
Model Work-year Mix Adjustment
($000)
Roll-forward
FY 2001 After Rates
Chg. in Career @ Avg.
Extended Step vs. Avg.
Casual
Transitional
Subtotal Straight Time
Overtime
Ttl Chg from 99 Mix
Source:
1
USPS-LR-I-421,
USPS-LR-I-127.
3
update
4
summarizes
5
forward
6
DRIIMcGraw-Hill
7
personnel
8
DRIIMcGraw-Hill
9
are
In responding
to USPS-LR-I-127
MailHandlers
30,046
114
(27,857)
(12,905)
31,005
18,100
(24,048)
to Commission
(152,040)
(429)
(23,830)
237,581
213,750
I
5,998
26,677
32,675
worksheet SUMMARY.
Order No. 1294, the USPS provided an
with USPS-LR-I-421.
For example,
forecasts.
Total
128,639
expense factor detail was initially filed by the USPS in
the dates of the information
cost factors.‘*
(Patelunas)
City
Carriers
14,838
file name WKYRMXOR.XLS,
The original roll-forward
2
Summary
To the extent
possible,
many of the cost level factors are impacted
Patelunas
indicated
0200
and
the update of non-personnel
ClSSlMlControl
10
USSIMTTrend25Yr
11
updated the data to include March and April information.
12
was updated
0200
file is a quarterly
as of May 2000.20
18
USPS-LR-I-127,
19
Tr. 36116794.
20
Id. at 16822-24.
Section
500.
forecast;
however,
Appendix I and II. See a/so, Tr. 36/16817-29,
-lO-
The two USPS
cost level factors
The
February
the Postal
The ClSSlMlControl
I of Table V provides
by
that the DRI non-
cost level factors were updated with the most current data.”
USSIMTTrend25Yr
V
utilized by the USPS when it updated the roll-
USPS witness
files used in preparing
Table
information
2000
Service
500 file
on what
Docket No. R2000-1
OCA-RT-3
1
DRllMcGraw
2
non-volume
3
change
4
extent that assumptions
5
FY 00 actuals. *’ The dates the forecasts were updated are shown in Table V.
21
22
Hill indexes are included in each file. Mail volumes did not change.
workload
effect was updated to reflect FY 99 actual data.
in the additional
workday
assumptions.
could be reviewed.”
Id. at 16827.
Id. at 16828.
-ll-
Cost reductions
Other programs
The
There was no
were updated
to the
were updated to reflect
Docket No. R2000-1
OCA-RT-3
Table V
Section I - DRUMcGmw Hill Indices
REVENUE REOUREMENT FORECAST FACTORS
FACTOR SOURCE
-12-
DATE OF
FACTOR USED
REFERENCE
Docket No. RZOOO-1
OCA-RT-3
Table V
Section II - Other Sources
REVENUE REOUIREMENT FORECAST FACTORS
DESCRlPTlON OF FACTORS
NO”-“ohle
Workload
FY 99
FACTOR SOURCE
FY00 an* FY0,
-13-
DATE OF
FACTOR USED
REFERENCE
Docket No. R2000-1
1
IV.
OCA-RT-3
2
TWO POSTAL SERVICE TEST YEAR AFTER
BEAR FURTHER EXAMINATION
3
The Postal Service made other changes to its test year estimates that are worthy
4
of note and careful
5
Reserve
6
update.23 Consequently,
7
$475.3 millionz4
8
the forecasted
9
indicated that the Field Reserve was a
10
11
12
13
14
15
16
17
18
examination.
USPS witness
of $200 million was inadvertently
RATE PROPOSED
Patelunas
indicated
CHANGES
that a Field
omitted from his test year after rate cost
the Postal Service now forecasts a test year after rate loss of
The addition of the “Field Reserve” would have the effect of making
cost reductions
less than they otherwise
would be. The Postal Service
budget technique or strategy to leverage further cost reductions during FY
2001. The Field is challenged to achieve greater cost reductions than
called for by the National budget goal. There is a high degree of risk that
the field may not be able to accomplish their aggressive cost reduction
targets.
In those situations, budget relief can be granted, if warranted,
without jeopardizing the national goal. The intent is to push the field to
accomplish as much as possible, while still recognizing the magnitude of
the challenge.z5
23
Revised Response of United States Postal Service witness Patelunas to OCAAJSPS-ST44-1
24
Revised Response of United States Postal Service to Presiding Officer’s Information
14, Item 2(b) and (e) - ERRATA.
25
l(a).
Request No.
Response of the United States Postal Service to OCAIUSPS-ST4Cll(e).
The Postal Service
made this statement in the context of denying that the “Field Reserve” was the same as a contingency
provision. However, the use of the phrases “high degree of risk” and “if warranted” suggests that (at least
in a nonlegal sense) the “Field Reserve” serves the same function es a contingency provision. That is, the
“Field Reserve” is a fund that will be tapped on/y if field management fails to achieve certain goals, i.e., is
contingent on, the occurrence of an adverse financial event. If a “Field Reserve” of $200 million is to be
included in the FY 2001 revenue requirement, then the provision for contingencies should be reduced by
an equal amount,
-14-
Docket No. R2000-1
1
OCA-RT-3
The Postal Service may be overly pessimistic
2
million Breakthrough
3
achieve the full cost reduction.
4
Productivity.
As quoted above, the field is being challenged
The Postal Service also incorporated
5
for FY 01.
6
Using electronic
7
estimate
8
percent
9
ACC-OR.xls
The change
in its ability to achieve the full $744
a change in a key wage rate assumption
relates to the use of ECI versus the previous
files provided
to
Service
in USPS-LR-I-421,
one may
the impact of changing
the USPS employment
wage assumption
from 4.63
(ECI)
(ECI-1).
to 3.63
percent
by the Postal
use of ECI-1.
Comparing
the data
in OCA’s
file with that filed by the Postal Service in USPS-LR-I-421
updated
indicates
that
10
the cost difference
11
test year after rate costs by $230 million above the level that would result from using
12
the historical
13
data files, the file PRFF-OR.xls,
14
are calculated,
15
difference
to approximately
16
estimation
of the impact of changing from ECI to ECI-1 are provided in OCA-LR-I-5.
is roughly $230 million.
ECI-1 calculation.
However,
In other words, the change to ECI increases
in continuing
to update the USPS-LR-I-421
which is where the cost model roll-forward
cost factors
indicates that the impact of using ECI-1 versus ECI increases
the cost
$245 million, 26 A copy of the files I used to prepare
my
Originally, USPS-LR-l-421, file name PRFF-OR.xls, cell 132 was $48,423,495,000.
To change
the USPS assumption of ECI to ECI-1, I updated USPS-LR-I-421, file name UNCST-EXT.xls,
worksheet
COLA-ECI, cell D53. I changed the USPS employment cost assumption from 4.63% to 3.63%. The
change flows through to USPS-LR-I-421, file name UNCST-OR.xls.
Then, I manually updated the
information in USPS-LR-l-421,
file name INPUT-OR.xls,
worksheet PERS UNIT COST. The costs I
manually updated were general pay increases as well as step increases in column F of INPUT-OR.xls,
thereby reflecting the wage changes. After I updated Input-OR.xls for the ECI-1 change, I opened the
USPS-LR-l-421, file name PRFF-OR.xls, worksheet COST FACTOR CALC, and found that the changes
had updated cell 132 to $48,178,490,000.
The difference in the USPS-LR-I421
value filed and my
calculation was approximately $245 million. In OCA-LR-I-5, are copies of the files I updated. Since I did
not include copies of all the electronic files in USPS-LR-l-421, ignore any requests to update links. I did
not have time to examine other electronic files in USPS-LR-I-421 to determine what if any additional
impacts the change to ECI-1 might have on the FY 01 after rate costs.
-15-