UPS-ST-2
i;:Z”lVc{1
POSTAL
POSTAL
BEFORE THE
RATE COMMISSION
RATE AND FEE CHANGES,
2000
:
DOCKET
SUPPLEMENTAL
TESTIMONY
OF
”
RALPH’L. LUCIANI
ON BEHALF OF
UNITED PARCEL SERVICE
AllC 111 L/ 33 $
,~~‘:,:~,~,
it/ : ;.;
NO. R2000-1
“03
TABLE OF CONTENTS
&
INTRODUCTION
. .. . .. . .. . .. . .. . .. . . .. . .. . .. . .. .. . .. . .. . .. . .. . .. . .. . .. . .. . . .. . .. . .. . .. . .. . .. .. . .. . .. . .. . .. . .. .. . .. . .
1
BACKGROUND
.. . .. . .. . .. . .. . .. . .. . . .. .. . . .. .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . . .. .. . . .. . .. .. . .. . .. .. . .. . .. . .. . .. . .. . .
1
CHANGES TO PARCEL POST, PRIORITY MAIL, AND EXPRESS
MAIL REVENUES AND COSTS BY UPS WITNESSES . .. . .. . .. . .. . .. .. . .. .. . .. . .. . .. .. . .. ..
4
A.
Base Year 1999 . .. . . .. . .. .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . . .. .. . .. . .. . .. . .. . .. .. . .. . .. . .. . .. . ..
4
B.
Test Year After Rates Results Under Postal Service
Proposed Rates ................................................................................
6
C.
Test Year After Rates - Revised Cost Coverages
8
D.
Parcel Post Volumes.. .......................................................................
9
......................................................................................................
10
CONCLUSION..
............................
INTRODUCTION
1
2
My name is Ralph L. Luciani.
3
the request of United Parcel Service.
4
Testimony filed previously
I am submitting this Supplemental
My background
in this proceeding,
UPS-T-5.
Testimony at
is set forth in my Direct
See Tr. 25/l 1774-75.
5
BACKGROUND
6
A number of costing and revenue projection changes were recommended
7
direct testimony and in the direct testimony of other UPS witnesses,
8
the base year. Since the filing of my testimony,
9
projection of Test Year revenue, volumes, and costs using FYI999
in my
using FYI998
the Postal Service has provided a
as the base year for
10
costs, and FY1999, Quarter 3, through FY2000, Quarter 2, as the source of billing
11
determinants
12
applied the following recommendations
13
Update:
14
15
1.
The correction to FYI999
In this supplem~ental testimony,
of the UPS witnesses
I have
to the Base Year 1999
costs to distribute city carrier regular route
elemental load costs by weight is provided in Exhibit UPS-ST-2A.
2.
16
17
(“Base Year 1999 Update”).
as
The correction to FYI999
costs to assign the cost of sequencing
parcels by city carriers to parcels is provided in Exhibit UPS-ST-2B
18
3.
The correction to FYI999
of
(filed under seal).
costs to assign to Parcel Post the specific fixed
19
costs for Exclusive Parcel Post Special Purpose Routes is provided in Exhibit UPS-ST-
20
2c.
1
2
4.
The correction to the Parcel Post Alaska Bypass and OMAS TYBR and
TYAR revenue in the Base Year 1999 Update is provided in Exhibit UPS-ST-2D.’
3
Due to a change in the final adjustment
process for Parcel Post in the Base Year
4
1999 Update, my recommended
correction to the Parcel Post final adjustments
5
the Base Year 1998 rollforward
is not applied here. Also, in my direct testimony
6
adopted the changes to Test Year advertising
7
Postal Service witness Kay on March 13.2000.
8
Year advertising
9
for each subclass has also changed, as ,shown in Table ST-l, below.
1.
costs contained
costs have dropped considerably,
under
I
in the errata filed by
In the Base Year 1999 Update, Test
and the share of advertising
costs
In Library Reference USPS-LR-I-445, the Postal Service erroneously continues
to project a significant increase in revenues from the Base Year to the Test Year
for Alaska Bypass and OMAS mail at the same time that Alaska Bypass and
OMAS mail volume is projected to decrease significantly. Exhibit UPS-ST-2D
contains a simple, straightforward method that can be used to project Test Year
Alaska Bypass and OMAS revenues using any year as the base year.
-2-
1
Table ST-1
2
Change
I
3
4
Source:
in Test Year Advertising
Costs in Base Year 1999 Update
Advertising Costs in
Original Filing (MS)
USPS-LR-I-150,
Advertising Costs in Base
Year 1999 Update (MS)
C/S 16.3.5, and USPS-LR-I-407,
I have not made any modifications
However,
C/S 16.3.5
to the Test Year advertising
costs contained
5
the Base Year 1999 Update.
6
in Test Year advertising
7
Postal Service’s contention that “the Postal Service has identified Advertising
8
portion of the budget in which planned expenditure
9
Response
costs contained
I note that there is no support for the 41% drop
in the Base Year 1999 Update other than the
levels can and should be reduced.”
of the United States Postal Service to interrogatory
Uncertainty
about the Test Year advertising
10
August 7, 2000).
11
of the various mail classes should be a component
12
considerations.
-3-
as a
UPS/USPS-52
costs attributable
in the Commission’s
(filed
to each
cost coverage
in
1
2
3
CHANGES TO PARCEL POST,
PRIORITY MAIL, AND EXPRESS MAIL
REVENUES AND COSTS BY UPS WITNESSES
4
A.
5
UPS witnesses
Base Year 1999
Sellick, Neels, and I recommend
a number of changes to Parcel
6
Post, Priority Mail, and Express Mail costing for Base Year 1998 that also apply to the
7
Base Year 1999 Update, including:
8
1.
9
Revenue,
10
2.
11
12
13
Pieces, and Weight estimates for Parcel Post (Sellick, UPS-T-4);
Use of Postal Service witness Degen’s proposed
Commission’s
3.
Cost Segment 3 cost allocations
improvements
to the
(Sellick, UPS-T-2);
100% volume variability for mail processing
labor costs (Neels, UPS-T-l,
and Sellick, UPS-T-2);
14
4.
15
UPS-T-3);
16
5.
17
Use of the Domestic RPW system as the sole source of Base Year
Segment
18
6.
19
(Luciani);
Reallocation
of dedicated
air network costs in Cost Segment 14 (Neels,
Reallocation
of certain purchased
highway transportation
costs in Cost
14 (Neels, UPS-T-3);
Allocation of city carrier elemental load costs by weight for parcels
-4-
1
2
3
4
5
Distribution to parcels of the cost of sequencing
7.
parcels by city carriers
(Luciani); and
Distribution
8.
of the cost of Exclusive Parcel Post Special Purpose Routes
solely to Parcel Post (Luciani).
As noted, UPS witness Sellick proposes the use of the Domestic RPW system as
6
the sole source of Base Year Revenue, Pieces, and Weight estimates for Parcel Post
7
(Sellick, UPS-T-4 and UPS-ST-l).
8
estimate of FYI999
9
underlying
The Postal Service has not provided a DRPW-only
Parcel Post volumes and revenues.
growth by rate category of volume and revenues in the Postal Service’s
10
hybrid DRPW/BRPW
11
volume and revenues to estimate FYI999
12
shown in Table ST-2, below
approach from FY 1998 to FY 1999 to the DRPW-only
volume and,revenues.
FYI999
Parcel Post Revenue
and Volume
The results are
with DRPW as Sole Source
FYI999
FYI998
15
FY 1998
Table ST-2
13
14
As a result, I have applied the
Revenue
Revenue
Volume
Revenue
Revenue
($000)
Volume
(000)
per Piece
($000)
(000)
Per Piece
Postal Service As
Filed (Hybrid)
947,675
316,148
3.00
1,020,804
318,982
3.20
As Corrected
(DRPW-only)
823,299
I
266,479
3.09
883,379
266,320
3.32
I
Source: UPS-Luciani-WP-Supp-2-1.8
-5-
I have calculated the combined
1
impact for FYI999
2
and Express Mail of all of the changes recommended
3
Commission’s
4
capture the impact of the recommended
5
Segments 3, 7, and 14.’ The results are summarized
costing method.
As a simplification,
on Parcel Post, Priority Mail,
by the UPS witnesses
piggyback factors are used to
changes on cost segments other than Cost
in Table ST-3, below.
Table ST-3
6
7
FYI999
(Commission’s
8
Revenue
and Attributable
Revenue
Priority
Mail
Attributable
cost
Cost
Costing Method, Millions of Dollars)
As Filed
9
10
to the
As Corrected
cost
Coverage
Revenue
Attributable
cost
cost
Coverage
4,533.3
3,132.4
145%
4,533.3
3.305.2
137%
Express
Mail
942.0
655.4
144%
942.0
520.7
181%
Parcel
Post
1020.9
938.0
109%
1,079.3
82%
Source: March 14.2000,
UPS-Luciani-WP-Supp-2.
883.4
Cost and Revenue Analysis, Fiscal Year 1999 - PRC Version;
11
B.
12
Based on a simplified roll forward process, I have estimated the results of rolling
13
forward FYI 999 costs to the Test Year After Rates under the Postal Service’s proposed
2.
Test Year After Rates Results
Under Postal Service
The Postal Service did not provide FYI999
Base Year 1998 piggyback factors.
-6-
piggyback factors.
Proposed
Rates
Thus, I have used
1
rates, Additional
2
above, include:
4
5
A revised Parcel Post Test Year volume projection,
1.
3
changes to the Base Year 1999 Update changes noted on pages 4-5,
Base Year volumes; and
Corrected
2.
Parcel Post OMAS and Alaska Test Year Revenue.
6
The resulting cost coverages
7
Table ST-4, below.
under the Postal Service’s proposed rates are shown in
Table ST-4
8
TYAR Revenue
9
10
(BY 1999 Update, Commission’s
and Attributable
Revenue
13
Cost
Costing Method, Postal Service Proposed
As Filed ($000)
11
12
based on corrected
Attributable
cost
cost
cov.
Rates) ‘~
As Corrected ($000)
~.
Revenue
Attributable
cost
cost
cov.
Priority Mail
5,662
3,641
155%
5,662
3,842
147%
Express Mail
1,055
743
142%
1,055
590
179%
Parcel Post
I,21 1
1,104
110%
1,023
1,240
83%
Source:
UPS-Luciani-WP-Supp-2-1.2,
1.3, and 1.4; Response to POIR No. 16, page 4
(July 27, 2000); USPS-LR-I-442.
Two initial corrections
were made to the Express Mail Test Year revenue and
14
costs as filed by the Postal Service in the Base Year 1999 Update.
15
436 the Postal Service inadvertently
16
revenue in the Test Year After Rates.
First, in USPS-LR-I-
used R97-1 rates to derive the Express Mail
Using the Postal Service’s proposed
-7-
R2000-1
1
rates increases Express Mail TYAR revenue from $1,016.1 thousand to $1,054.9
2
thousand.
3
in Cost Segment 3 under Commission
4
million of “Fixed Attributable
5
reference as attributable
6
Express Mail TYBR attributable
7
Segment 3 Express Mail fixed attributable
8
in the Test Year After Rates (albeit in the “Expedited
9
UPS-Luciani-WP-Supp-2-1.9
Second, the total Test Year Before Rates attributable
costing in USPS-LR-I-424
cost for Express Mail
does not include $23.1
(PRC)” costs in Cost Segment 3 listed in the library
to Express Mail. Including this fixed attributable
cost increases
costs by $23.1 million, before contingency.
These Cost
costs are included in the Express Mail costs
Delivery” -- CS 3.4 -- total). See
for details.
Test Year After Rates - Revised
Cost Coverages
10
C.
11
I have calculated the Priority Mail and Parcel Post rate increases that would
:~
12
result from the cost coverage recommendations
13
shown in Table ST-5, below. Table ST-5 also shows the rate increase needed for
14
Express Mail to cover its revised costs using the Postal Service’s proposed
15
normalized
to the systemwide
coverage.
-8-
made by UPS witness Sappington,
as
markup ratio
Table ST-5
TYAR Revenue
(BY 1999 Update, Commission’s
and Attributable
Costing Method, Revised Cost Coverages)
As Corrected
As Filed ($000)
Revenue
4
Cost
Attributable
cost
Rate
Increase
Revenue
Attributable
cost
and Revised
($000)
cost
Coverage
Rate
Increase
Priority Mail
5,662
3,641
15%
5,914
3,435
172%
43%
Express Mail
1,055
743
4%
1,223
616
199%
17%
Parcel Post
1,211
1,104
3%
1,047
943
111%
38%
Source: UPS-Luciani-WP-Supp-2-1
.I
Parcel Post Volumes
5
D.
6
In my direct testimony,
I updated Postal Service witness Tolley’s analysis of
7
Parcel Post volumes to reflect Mr. Sellick’s recommendations
by correcting the actual.
8
Parcel Post volume data for Base Year 1998 and rerunning Dr. Tolley’s model to predict
9
Parcel Post volume by rate category for the Test Year Before and After Rates.
I have
10
rerun Dr. Tolley’s model to predict Parcel Post volume by rate category for the Test
11
Year After Rates with the “As Corrected
12
noted in Table ST-5. The results for both the Test Year before and after rates are
13
summarized
in Table ST-6, below.
and Revised” Parcel Post revenues and costs
See UPS-Luciani-WP-Supp-2-2
-9-
for further details.
Table ST-6
Corrected
Projection
of Parcel Post Volumes
(BY 1999 Update, in thousands)
Postal Service As Filed
TYBR
TYAR
TYBR
TYAR
Intra-BMC
28,817
26,254
34,402
24,547
Inter-BMC
51,620
47,638
56,035
40,386
DBMC
298,009
300,203
220,429
169,860
Total
378,447
374,096
310,865
234,793
Source:
UPS-Luciani-WP-Supp-2-2,
page 5; UPS-Luciani-WP-3-2.1,
page 4
CONCLUSION
5
6
As Corrected
The changes recommended
by UPS’s .,witnesses
to the costs, revenue, volumes,
,,
7
and cost coverages of Parcel Post, Priority Mail, and Express Mail, coupled with the
8
actual FYI999
9
estimates),
10
subclasses.
11
costs, and resulting cost coverages
12
Express Mail are indicated in the main body of my supplemental
results (which differ significantly
from the originally projected FYI999
lead to significant changes in the rate increases necessary for these
The impact of these changes on the revenues, volumes, attributable
and rate increases for Parcel Post, Priority Mail, and
-lO-
testimony.
Exhibit UPS-ST-2A
Page 1 of 3
Distribution
Weight
of Parcels
of Elemental
Load for Parcels
by Weight
by Class/Subclass
of Mail for Each City Carrier Stop Type
Base Year 1999, Commission Costing Method
3.17
4482
0.90
10.00
Exhibit UPS-ST-2A
Page 2 Of 3
Distribution
of Elemental
Load for Parcels
by Weight
City Carrier Load Costs for Parcels by Stop Type
Base Year 1999, Commission Costing Method
‘““I
I”’
18133.1
Exhibit
UPS-ST-2A
Page 3 of 3
Distribution
of Elemental
Load for Parcels by Weight
Total City Carrier Load and Street Support Costs
Base Year 1999, Commission
Costing Method
I
2
3
4
5
6
i-7
$(OOO)
E
“NITS
FOOTNOTES
COLUMN SO”RCEm4OTES
FIRST-CLASS MAIL:
SINGLE-PIECE LETTERS
PRESORT LETTER6
TOTAL LETTERS
SINGLE-PIECE CARDS
PRESORT CARDS
TOTAL CARDS
I
356,553
325,373
661.926
21,923
16,036
37.956
719,884
54.046 1
24,924
116
2,
**
23
24
25
26
27
26
326.793
323.306
652,lOO
21,923
16,036
37,958
690,058
72,760 1
26,016
116
7,666
7.429
63,553
18.716
526
90,661
ILiT
59,666
17,631
495
65,423
(27.759)
(2.067)
(29,626,
(29.626,
18,713 1
1,094
(457)
306,662
175,211
461.693
16,634
6,664
23,316
506,211
28,016
7,083
62
3,632
(3.665) 44,547
(1,065) 10,766
303
(30)
(5,256) 59,447
COMMERCIAL STANDARD:
ENHANCEDCARRRTE
REGULAR
TOTAL CCIMMERCIAL
AGGREGATE NONPROFIT:
NONPROF ENH CARR RTE
NONPROFlT
TOTAL AGGREG NONPROFI
301,619
174,646
476,667
16,634
(4,663)
(362)
(5.226) I
(0)
(0)
(0)
6,664
23.316
499,965
31,295
7,275
62
(5,226)
3,276
192
(537)
43,902
10,576
297
(646)
(4.331)
(1.275)
56,526
1.935
(55)
7,923
Wf)
(7.431)
(6.012)
31
PARCELS
ZONE
RATE
BOUND
PRINTED
MATTER
32
33
SPECIAL
STANDARD
34
LIBRARY
MAIL
35
TOTAL
STANDARD
(S,
36
us
POSTAL
SERVICE
FREE
MAIL
c37
45.314
356,643
21.256
13,183
4.688
823
36
INTERNATIONAL MAIL
39
61
TOTAL
ITOTAL
62
53
ITOTAL VOLUME
OTHER
GRAND TOTAL
I4
WI
[Cl
[Dl
[El
Fl
PI
67,056
1,346 I
MAIL
~.PE~IAL
smwx6
VARIABLE
22,164
1,646.429
1
I
1,719,839
106,426
1,626,265
17.
3,075
469
4.166
1
I
22,164
1.646.429
p. 6, tab cs 7 Detail, cd”nl”
39,949
1,001,666
USPS-LR-I-444 CSO687.xls. tab 7.0.3.1. mlumn 2.
p. 16, ws 7.0.3.1, Letter &SPR, column 2.
WI -[Al
UPS-Luciani-WPSup~l-A,
mlumn 15.
“PS-L”ci~ni-WP-6”ppl-B-1,
3,091
.~
1.719.639
106,426
1.626.265
UPS-LUciani-WP-supp-1-B-1,
IEI ID1
[Cl + [Fl
26.202
(93)l
1
25,605
I 1,0*7,*91
0
825,626
1.652.917
1,286
(80)
37.391
133,229
(35.052,
21,992
3.752
(190)
(5)
(921)
625.626
1.652.916
I
(0)
(0)
(0)
(0)
309,593
1,439 I
W29)
(35.052,
(0)
129,385
160,208
66,173)
(32,622,
(36)
(6.179)
(366)
(3,696)
(49,646,
(53,746,
EXHIBIT UPS-ST-2B:
DIRECT ATTRIBUTION OF
SEQUENCING OF PARCELS -FILED UNDER SEAL
ON AUGUST 14,200O
Calculation
of SPR Specific Fixed Costs
Without Revisions
in Elemental Load and Street Support
Base Year 1999. Commission Costing Method
A
$(OOOl
ws 7.0.3 c23
t
9
$(OOO)
ws OUTPUTS TO
CR.4
36,330
1,788
38.117
1.926
JTAL STANDARD A
rANDARD HAIL II:
3TAL STANDARD (B)
6 POSTAL SERVICE
XEE MAIL
,TERNATlONAL MAIL
DTAL MAIL
PEClAL SEWICES:
--&q-a
3,565
1.638
5,203
195
Exhibit UPS-ST-X
Page 1 of 2
Calculation of SPR Specific Costs
Revised Elemental Load and Street Support
Base Year 1999, Commission Costing Method
Exhibit UPS-ST-X
Page 2 of 2
Exhibit UPS-ST-2D
Correct Method for Projecting
Parcel Post Test Year Alaska and OMAS Revenue
--z The test year revenue estimation for Alaska and OMAS volume in USPS-LR-I-445
decrease in the Alaska and OMAS volume from the Base Year to the Test Year.
Intra-BMC
Inter-BMC
fails to account
for the
DBMC la,
106.464.666
30,930,271
3.44
263.406.101
53350.479
5.26
569.070.560
195,634.852
2.91
USPS-LR-I-445,
USPS-LR-I-445.
121~31
excludes
excludes
OMA.VA/aska
OMAS/Alaska
(b)
(b,
94.559,682
27.495.992
3.44
-0.1%
266,375,081
50,614,551
5.26
0.0%
736.556.634
253J36.747
2.90
-0.1%
USPS-LR-I-445,
USPS-LR-I-445,
excludes OMAS/Alaska
exc,,,des OMAS/Alaska
(b)
(b,
[41/51
wl31--1
TYAR Revenue
TYAR Volume
TYAR Revenue per Piece
Percent lncrea*e from BY
94,921,638
25,050,562
3.79
10.1%
266335.344
46.710.097
5.76
9.4%
750.435.924
255.706,190
2.93
1.0%
USPS-LR-I-445,
USPS-LR-I-445,
WPI
[10]/[3]-1
excludes
excludes
(b)
(b,
[12] Base Year Revenue
[I31 Base Year Volume
[14] Base Year Revenue Per Piece
Iflb%3MC
N&g
12.965.722
1,692,612
6.65
Inter-BMC
Q&f@
II,672544
2.397.612
4.95
USPS-LR-I-435,
USPS-LR-I-435,
PPHybridpxls,
H-l, p. 13
PPHybddp.xp.x% N-l, p, 6 (c,
[II Base Year RPW Revenue
121 Base Year “olwne
[3] Base Year Revenue Per Piece
[4] TYBR Revenue
[5] TYBR Volume
(61 TYBR Revenue per Piece
[7] Percent Increase from BY
[8]
[91
[IO]
[l.i]
[15] TYBR Volume
[I61 TYBR Revenue per Piece
[17] TYBR Revenue
1.321,376
6.84
1
1,005,766
4.95
4.960.332
[Ia] TYAR Volume
1191 TYAR Revenue per Piece
[ZO] TYAR Revenue
I,203857
7.54
-9.077,9911
928.182
5.42
5,026,330
1211 TYBR Revenue As Filed
1221 Correction to TYBR Revenue
[23] Total TYBR Revenue Correction
14.954495
(5.911,121)
13.697,265
(8,716,953)
[24] TYAR Revenue As Filed
I251 Correction to TYAR Revenue
I261 Total TYAR Revenue Correction
15,175,963
(6,097,972)
13.900.135
(8.673.805)
DBMC
Q&f&
3,162
I.‘156
2.73
OMAWAlaska
0MA.VAlask.s
/WP31
928.182
2.76
-5,026,330
USPS-T-36,
Att. D (d)
USPS-T-36,
Att D(d)
If4Iv+[fu
[f8j+[f9]
13,697,265
USPS-LR-l-445
13.900.135
(8.873.605)
1(14,971,777)1
USPS-LR-I-445
[ZO] [24/
-
Notes:
The use of Base Year in this Exhibit refers to the USPS-LR-I-445 base year period of 199903 to ZOOOQZ.
(a) - DBMC excludes DSCF and DDU volumes and revenues.
(b) PPHybridRevr.x$,
tab Revenue Calc.
(c) USPS-LR-I-445 does not pmvide the OMAS volume breakdown between Inter-B/K and DBMC. The base year OMAS volume
breakdown herein was estimated assuming that the OMAS revenue per piece would be pmpafional
to base yearrevenue
per
piece for the inter.BMC and DBMC. If the actual base year OMAS volume breakdown becomes available it should be substituted,
(d) -AN Test Year OMAS volume is assumed lo be inter-BMC in USPS-T-36, since the sum of inter-BMC and OMAS volume
matches total inter-BMC volume in Attachment D of USPS-T-36.