OCA-RT-2
Docket No. R2000-1
REBUTTAL
TESTIMONY
OF
EDWIN A. ROSENBERG
ON BEHALF OF
THE OFFICE OF THE CONSUMER
AUGUST
14,200O
ADVOCATE
Page
TABLE OF CONTENTS
I.
STATEMENT
II.
PURPOSE
III.
SUMMARY
OF THE UPDATED
TEST-YEAR
REVENUE
AND
EXPENSE ESTIMATES ...__................................................................................
IV.
. . .._........__._................,,............,...............
AND SCOPE OF TESTIMONY
1
..,_._.__._.,..,,.__......,.,..,............,.......,.. 2
THE UPDATED
EXPENSE ESTIMATES
MAY OVERSTATE
REVENUE REQUIREMENT AND THE REVENUE DEFICIENCY
2
THE
. . . . .. . . .. . . . . .. 5
A.
The Use of Conservative Estimates of Cost
from the Breakthrough Productivity Initiative
Test-Year
Overestimate
of
Actual
Requirement, and Revenue Deficiency . . . .
B.
The Shift from ECI Minus One Percent to ECI to Estimate TestYear Wage Increases May Tend to Result in an Overestimate of
Actual Test-Year Costs, Revenue Requirement, and Revenue
Deficiency _.,....___..,..,,...............................................................................
6
No Attempt Was Made To Validate the Updated Rollforward
Estimates of Revenues and Expenses for FY 2000 Against
Actual Realized Revenues and Expenses for FY 2000 to Date
7
The Use of More Recent Forecasts of Revenues, Expenses,
and Inflation Factors Support a Less Generous Contingency
Provision .,..,__.......,___._.....,.,.,,........,..,.........,.,..........,................,..............
9
C.
D.
E.
V.
OF QUALIFICATIONS
Savings Resulting
May Result in an
Costs,
Revenue
. .. .. .. . .. . . .. . . . . . . . . . .. . 5
Although Higher Than in the Past, Fuel Prices Are Not Likely To
Continue Their Recent Rapid Upward Trajectory ..__.____......................... IO
CONCLUSION
. .. . .. .. . ..._.............................................................................
13
UNITED STATES OF AMERICA
Before The
POSTAL RATE COMMISSION
WASHINGTON, D.C. 20268-0001
Postal Rate and Fee Changes,
2000
Docket No. R2000-1
)
DIRECT TESTIMONY
OF
EDWIN A. ROSENBERG
1
I.
STATEMENT
OF QUALIFICATIONS
My name is Edwin A. Rosenberg.
2
since
1991
by The
Regulatory
employed
4
NRRI), which is located at The Ohio State University in Columbus,
5
Association
the NRRI
in
6
1976, and the NRRl’s primary mission is to provide research and advice to members
of
7
NARUC,
8
qualifications
Utility Commissioners
such as the Postal Rate Commission.
is contained
Research
and I have been
3
of Regulatory
National
I am an economist,
(NARUC)
Institute
(henceforth,
Ohio. The National
established
A more complete
statement
of my
in OCA-T-3, which was submitted earlier in this proceeding
OCA-RTZ
Docket No. R2000-1
1
II.
2
PURPOSE
AND SCOPE OF TESTIMONY
The purpose
of my testimony
3
testimony
in this proceeding
4
provision
5
R97-1, should be continued
6
of the updated test-year
7
USPS witness Richard Patelunas
8
9
Ill.
is to reconsider
(OCA-T-3).
That conclusion
of one percent of total estimated
SUMMARY
ESTIMATES
revenue and expense
estimates
UPDATED
TEST-YEAR
original
estimates
of test-year
11
requirement
were
contained
in
12
supplemental
testimony,
13
1999
14
estimates
15
The updated
16
including
17
and test-year
18
estimates
of various inflation factors for 2000 and 2001.
19
estimated
after-rates,
20
and $451.5 million, respectively.
1
witness
of various
in light
in the testimony
of
REVENUE
expenses,
AND
and
EXPENSE
the
revenue
In his
testimony.’
factors
to develop
updated
both for FY 2000 and for the test year, FY 2001.
and expense
estimates
and the use of updated,
test-year
contained
Tayman’s
the use of actual 1999 revenue and expenses
estimates
my conclusion
No.
used actual revenue and expense figures for FY
or forecasts
of revenues and expenses
revenue
revenues,
USPS
Mr. Patelunas
test-year
in Docket
(USPS-ST-44).
The
estimates
was that the contingency
I have reconsidered
10
and updated
of my previous
costs, which was allowed
in this Docket.
OF THE
the conclusion
revenues
-2-
of changes,
as the basis for the FY 2000
and generally
and expenses
USPS-T-g.
reflect a number
higher, forecasts
or
As a result of the update,
increased
by $252.8
million
OCA-RT-2
Docket No. R2000-1
1
In addition,
the updated
revenue requirement
estimates
were adjusted
to reflect
2
the fact that the Postal Service now projects a net loss in FY 2000 rather than the net
3
income it had originally
4
$65.6 million2 to a projected
5
allowance for recovery of prior years’ losses from $268.3 million to $311.7 million.
6
The original
projected.
shown in Table
8
provision
9
Service in this proceeding.
for contingencies
10
Postal Service
11
Table 1 .4
2
3
1, below.
FY 2000 net income of
FY 2000 loss of $325.5 million3 leads to an increase
and updated
7
The swing from a projected
estimates
of test-year
revenues
in the
and expenses
are
In Table 1, I also show the effect of using a one percent
instead
of the 25%
provision
Please note that the revenues
and that the contingency
amounts
requested
by the Postal
are as requested
are treated
as expense
by the
items in
USPS Exhibit 9L.
USPS Exhibit ST44E.
4
While Table 1 displays the contingency as if it were an expense amount, this is a misleading
approach. It is inappropriate to include the requested contingency provision in a calculation of net income
or, for that matter, the shortfall from the annual or cumulative equity restoration targets (Exhibit USPS ST44G). Including the contingency provision in those calculations may lead to a distorted - and much more
negative - view. The contingency provision is a part of the revenue requirement. It is not, however, an
actual cost that the Postal Service incurs. It is not, therefore, a cost that must be recovered. Rather, the
contingency provision is an amount added to the sum of estimated test-year costs and the allowance for
recovery of prior years’ losses to determine a revenue requirement that offers the Postal Service a
reasonable chance to attain its long-run breakeven goal.
-3-
Docket No. R2000-1
OCA-RT-2
Table 1
Test-Year Revenues, Revenue Requirement
and Net Surplus or (Deficiency)
5
See USPS-T-g, Table 15 and USPS Exhibit 9A,
6
See USPS Exhibit ST-44A. Please note that the Postal Service filed several sets of errata on
August 11, 2000, concerning the “net surplus (deficiency)” figure. For example, in a revised response to
Presiding Officer’s Information Request No. 14, Item 2(b) and (e) Errata, witness Patelunas states: “Had
the $200 million Field Reserve been incorporated into the update as it should have been, certain of the
Operations cost reductions, as well as the Grand Total All Programs, would decrease. The overall Test
Year After Rates impact would be to increase the deficiency shown on Exhibit USPS-ST44A from -$275.3
million to approximately -$475.3 million.” I have not reflected this erratum in my Table 1 because witness
Patelunas has not yet revised his testimony, exhibits, nor the underlying library references.
-4-
OCA-RT-2
Docket No. RZOOO-1
1
2
THE UPDATED
REQUIREMENT
IV.
EXPENSE ESTIMATES MAY OVERSTATE
AND THE REVENUE DEFICIENCY
3
4
5
A.
6
The Postal Service is putting
THE REVENUE
The Use of Conservative Estimates of Cost Savings Resulting from the
Breakthrough
Productivity Initiative May Result in an Overestimate
of
Actual Test-Year Costs, Revenue Reauirement. and Revenue Deficiency
its multi-year
7
into effect.’
8
processes,
employing
technology
9
workforce.
Estimates
or targets of the cost savings
Breakthrough
Productivity
This Initiative includes a number of factors, including
to achieve
savings,
reengineering
and reducing
been in the range of $700 million to $1 billion annually over four years.
11
million of projected
or targeted cost reductions
12
were
in the updated
13
Service
14
reductions
15
in targeted
16
revenue
does
test-year
not view the exclusion
deficiency
increases
by $205
million
cost reductions.*
provision,’
the estimated
Although
(using
the
the exclusion
test-year
Postal
However,
as “Field Reserve”
of 5200 million of projected
as being a form of contingency
cost reduction
were classified
have
$200
and
the Postal
or targeted
cost
of that $200 million
revenue
Service’s
work
the size of the
resulting from this Initiative
10
not reflected
Initiative
requirement
requested
and
2.5%
7
See “Breaking Through to a New Golden Age of Mail,” Remarks of William J. Henderson,
Postmaster General/CEO
United States Postal Service, at the National Postal Forum, Nashville,
Tennessee, March 20, 2000,” United States Postal Service, Postal News, (undated); Statement of William
J. Henderson, Postmaster General and Chief Executive Officer, United States Postal Service, before the
Subcommittee on Treasury, Postal Service, and General Government Committee on Appropriations,
U.S.
House of Representatives,
April 4, 2000; “Postal Service to Cut 700 Jobs, Reduce Costs by $1 Billion
Annually for Four Years,” PostCorn Bulletin. June 30, 2000; and Statement of William J. Henderson,
Postmaster General and Chief Executive Officer, United States Postal Service, before the Subcommittee
on International
Security, Proliferation, and Federal Services, Governmental Affairs Committee, U.S.
Senate, July 13, 2000.
8
See Mr. Patelunas’s response to OCAIUSPS-ST44-11
concerning errata filed on August 11, 2000.
9
See the Postal Service’s institutional
at Tr. 3916652.
response to OCAIUSPS-ST44-11
(e)
Please see footnote 6
OCA-RT-2
Docket No. R2000-1
1
contingency
provision).
2
year revenue requirement
3
to the extent that the Postal Service is able to achieve
its cost-reduction
4
2001,
and
5
overstated.
the
Using a one percent contingency
estimated
and revenue deficiency
costs,
revenue
6
7
8
B.
9
The Postal Service had previously
are increased
requirement,
by $202 million.
revenue
testThus,
target in FY
deficiency
are
The Shift from ECI Minus One Percent to ECI to Estimate Test-Year
Wage Increases May Tend to Result in an Overestimate of Actual TestYear Costs, Revenue Requirement, and Revenue Deficiencv
based its estimates
10
increases on the rate of growth of the Employment
11
In his updates,
12
of increase in the ECI.“’
This is not an insignificant
13
of total Postal Service
costs, and the increase
14
change is estimated
15
$245 million.”
16
provision, the estimated
Mr. Patetunas
of bargaining-unit
Cost Index (ECI) minus one percent.
deviated from this approach
and used the projected
rate of growth
18
updated test-year
19
the above discussion
in test-year
by OCA witness Pamela Thompson
costs resulting
20
reductions,
21
requirement
expense estimates will tend to be overstated.
to the extent that estimated
and the estimated
of the “Field
Reserve”
costs are overstated,
revenue deficiency
-6-
$230 to
below the
contained
in the
Moreover, as I noted in
from estimated
the estimated
will be overstated
See Mr. Patelunas’s response to AAPIUSPS-ST44-5 and Tr. 35/16796-800.
See OCA-RT-3, p. 15.
from this
to be approximately
in the ECI during the test year, labor cost figures
of the exclusion
rate
shift, as wage costs are a major part
To the extent that the Postal Service is able to hold wage increases
17
wage
cost
revenue
by that amount
OCA-RT-2
Docket No. R2000-1
1
plus whatever
contingency
2
Patelunas
3
commented
4
a $230 million cushion.“”
offered no explanation
on the overestimate.
Although
Mr.
for the shift to ECI from ECI - 1, one observer
has
to give the USPS
No Attempt Was Made To Validate the Updated Rollforward Estimates of
Revenues and Expenses for FY 2000 Against Actual Realized Revenues
and Expenses for FY 2000 to Date
C.
8
The estimate
estimated
is allowed
that, “A cynic might suggest that ECI - 1 was abandoned
5
6
7
9
provision
of test-year
revenues
and expenses
FY 2000 revenues and expenses,
is based on a rollforward
which are based on a rollforward
Estimates
based
on actual
of
of actual
FY 1999 data are
10
FY 1999 revenues
and expenses.
11
generally
preferable
to estimates
12
Financial
and Operating
13
were available by the time the updates were filed, it might have been useful to use data
14
derived
15
Patelunas
16
basis in developing
17
based on estimated
Statements
FY 1999 data.
for 10 of the 13 accounting
the updated
results due to slightly different
19
are likely to be fairly similar.
Mr.
PFY 2000 data was used only on a limited
between the PFY 2000 results and the FY 2000
time periods.14
Nevertheless,
the PFY and FY results
For example, the API3 year-to-date
net income figures for
See “Short Takes,” Business Mailers Review, August 7, 2000.
See Mr. Patelunas’s response to OCALJSPS-ST-44-6,
PFY 2000 began on September
estimates.
rollfonvard estimates.13
There will be some differences
18
since
periods in PFY 2000
from PFY 2000 to date to check or validate the rollforward
notes that the actual partial-year
However,
Tr. 3W16644-46.
11, 1999; FY 2000 began October 1, 1999.
-7.
OCA-RT-2
Docket No. R2000-1
1
the 1998 and 1999 PFYs were $586.5 million and $348.8 million, respectively,‘5
2
FY 1998 and 1999 net incomes were $550.3
3
Although
4
using partial-year
5
PFY results
6
estimates.
seasonality
8
$436.0
million.
9
magnitude,
revenues,
million and $363.4 million, respectively.
and expenses
must be considered
when
data, the PFY 2000 results to date might have been used to estimate
and thereby
Through
7
in volumes,
while
to assess
the accuracy
and validity
of the rollforward
PFY 2000 API 1, the Postal Service had a year-to-date
Assuming
net income of
that PFY 2000 and FY 2000 net incomes
in order to realize Mr. Patelunas’s
FY 2000 estimated
are similar
in
net loss of $325.5,
10
the Postal Service would have to lose approximately
11
accounting
12
PFY 2000 AP 12 and AP 13 would have to be $132.5 million more than called for in the
13
PFY 2000 Operational
14
losses for AP 10 and AP 11 of PFY 2000 were only $500,000
15
PFY 2000 Operational
16
the recent service-wide
17
the actual loss may end up being less than the $325.5 million shown
18
rollfoward
Plan.
For this to happen, the Postal Service’s
This could happen,
Plan. Moreover,
net losses for
but I note that the combined
directive to control expenses
net
less than called for in the
if Postal Service managers act successfully
and limit discretionary
on
spending,‘”
in the updated
estimates.
In fact, there is some indication that the estimated
19
20
periods of PFY 2000.
$761.5 million over the two final
loss might not materialize
at
all. Postal Service Acting Chief Financial Officer Strasser has recently been quoted as
15
See USPS Financial and Operating Statements,
16
See Postal Bulletin 22029, July 27, 2000, p. 3.
-8-
Accounting
Period 13, PFY 1999, p. 1.
OCA-RT-2
Docket No. R2000-1
standing
by the original projections
Moreover,
for a positive FY 2000 net income of $66 million.”
he stated that, “Concerted
Accounting
management
action, with a surge in revenue
in
Periods 12 and 13 (better than 3%) still make it possible to end the year
with a positive net income.“”
To the extent that the actual net loss for FY 2000 turns out to be less than
$325.5 million, or actual net income is positive, the recovery of the prior years’ losses
component
of the revenue
requirement
included in the RPYL calculation,
9
10
D.
11
Mr. Patelunas
will be overstated
The Use of More Recent Forecasts of Revenues, Expenses,
Factors Support a Less Generous Continaencv Provision
has noted that the revised cost level forecasts,
on more recent forecasts
13
the original tiling.”
14
the forecasted
period, the more accurate its forecasts
15
recent,
therefore
16
environment
during the test year lowers the level of uncertainty
17
contingency
provision than would otherwise be the case.
19
and
and Inflation
which are based
by DRI, are likely to be more accurate than those contained
This makes sense: the closer the Postal Service’s estimates
presumably
OCA witness Thompson
indices
loss is
as will the revenue deficiency.
12
18
if an estimated
used in the revised
more
accurate,
forecasts.
See “Short Takes,” Business Mailers Review, August 7. 2000.
18
Ibid.
19
See Mr. Patelunas’s
-9-
forecasts
of the
economic
and supports a smaller
the extent of the updating
Table V of OCA-RT-3
17
response to OCAIUSPS-ST44-28,
are to
are likely to be. The use of more
provides a table showing
cost-level
in
Tr. 3916670.
of
notes that
OCA-RT2
Docket No. R2000-1
indices
in most cases are current
indices
is very significant
as of April-May
in considering
2000.
The use of more current
the appropriate
level of the contingency
provision to be recommended
4
5
E.
Although Higher Than in the Past, Fuel Prices Are Not Likely To Continue
Their Recent Rapid Upward Traiectorv
6
In the updated
inflation indices, *Othe component
showing
the largest difference
7
is the index for gas and oil. The original filing reflected FY 2000 and FY 2001 increases
8
in that index of 17.66% and -2.1 I%, respectively.
9
and
FY 2001
IO
difference
11
for FY 2001.
13
OPEC
14
Gasoline
15
moderates
16
in that
index
of 30.69%
and 6.13%,
and oil prices are volatile,
policy, the behavior
prices
of individual
sometimes
take
responding
to changes
OPEC members,
sudden
The
upturns,
in such factors as
and weather
but the
fluctuations.
rate of increase
often
or turns negative after a major rise.
DRl’s July 2000 forecast estimates
17
2000
18
Energy’s
19
of regular unleaded
20
2001,
and 2001 to be 28.1%
the rate of increase
and -1.2%,
Energy Information Administration
gasoline will increase
Similarly, the EIA forecasts
respectively.”
in gas and oil prices for
The U.S. Department
of
(EIA) forecasts that the average retail price
by 22.9% in 2000 and decline by 11.0% in
that the retail price of No. 2 diesel fuel will increase
See USPS Exhibit ST-44AB.
21
respectively.
between the original and revised filings is +13.03% for FY 2000 and +8.24%
Gasoline
12
increases
The revised filing reflects FY 2000
See DRI, Standard & Poor’s, The U.S. Economy 200017, July 2000, p. 29
-lO-
Docket No. R2000-1
OCA-RT-2
1
by 26.8% in 2000 and decline by 9.2% in 2001 and that the retail price of No. 2 heating
2
oil will increase by 38.6% in 2000 and decline by 12.3% in 2001. ‘*
The Postal Service may point to fuel price volatility as the sort of uncertainty
3
that
4
justifies the requested
5
figures, however,
6
more recent July 2000 forecast.
7
fall back after a sharp increase.
8
retail price of regular
9
based on the average of the monthly prices through JuIY.‘~ Figure 2 shows the monthly
2.5 percent contingency
would overstate
unleaded
provision.
Use of the May 2000 DRI
these test year expenses
compared
to use of the
Available data also indicates that fuel prices frequently
Figure 1 shows the time path of the annual average
gasoline
from 1976 to 2000.
10
time path of the average retail price of regular unleaded
11
August 2000.24
22
See EIA. Shoti-t-Term Energy OuNook, August
htto:Ilwwweia.doe,oov/emeulsteolpub/4tab.html.
23
24
gasoline from January
2000, Table 4.
Data from EIA’s Month/y Energy Review, Table
http://www.eia.doe.oovlpublenerov,overview/monthlv.enerav/mer9-4).
9.4.
The 2000 estimate
Accessed
Accessed
August
August
is
1998 to
8, 2000 at
8. 2000
at
July 2000 value estimated from EIA weekly data. The August 2000 value is the weekly value for
August 7, 2000.
Data accessed August 8, 2000 at htto://www.eia.doe.aov/oub/oil
aas/oetroleum/
data oublications/weeklv
retail oasoline orices/currenVtxt/rtIqas.txt.
-II-
Docket No. R2000-1
OCA-RT-2
Figure 1
Regular Unleaded Gasoline Retail Price
(annual average 1976 - 2000e)
2.00
Monthly
Figure 2
Average Retail Price of Regular Unleaded
(January 1996 -August 2000e)
Gasoline
2.00
1.75
5
:
m
$
!
1.50
1.25
Jan98
Apr98
Jul98
Ott98
Jan99
Apr99
Jul99
Month - Year
-12-
Ott99
Jan00
Apr00
Jul00
OCA-RT-2
Docket No. R2000-1
V.
CONCLUSION
Using the estimated test-year
costs presented
may tend to be overstated,
a one percent
above,
estimated
revenue surplus of $739.4 million.
2000 net loss is less than estimated
be even greater.
forecasts
estimates,
inflation factors
contingency
which, as noted
provision
allows
If costs are lower than estimated,
(or a positive income is realized),
Based on the foregoing
of test-year
by Mr. Patelunas,
discussion,
that a contingency
percent of total estimated costs be used in this proceeding.
-13-
or if FY
the surplus will
and the fact that more recent
have been used to update
I maintain my previous recommendation
an
the test-year
cost
provision of one