USPS-RT-4
POSTAL RATE COMMlSSlON
WASHINGTON DC 2X68-0001
POSTAL RATE AND FEE CHANGES,
2000
REBUTTAL
RICHARD
TESTIMONY
Docket No. R2000-1
OF
PATELUNAS
ON BEHALF OF THE
UNITED STATES POSTAL SERVICE
CONTENTS
AUTOBIOGRAPHICAL
I.
PURPOSE
II.
SUPERVISOR
SKETCH . .. . .. . .. . .. . .. . .. .. . . .. . . .. . .. . .. . . .. . .. . . .. . .. . .. . . .. . . .. . . ..
OF TESTIMONY
. .. . .. . .. . .. . .. . .. . .. . .. .. . . .. . . .. . .. . .. . . .. . .. . . .. . .. . . .. . .. . . .. . . .. .
1
.. . .. . .. . .. . .. . .. .. . . .. . . .. . .. . .. . . .. . .. . . .. . .. . .. . . .. . .. . . .. . .
1
COST SAVINGS
A. WITNESS BUC’S MECHANICAL ADJUSTMENT
SUPERVISOR COSTS IGNORES OPERATING
Ill.
i.
TO
REALITY
. . . .. . . .. . . .. . . .
1
B. ACTUAL EVENTS PROVIDE EVIDENCE THAT WITNESS
BUC’S SUPERVISOR ARGUMENT IS INVALID .. . . .. . .. . . .. . .. . . .. . .. . . .. . . .. .
3
AFSM SAVINGS
4
. .. . .. .. .. . . .. . .. . .. . .. . .. . .. .. . .. . .. . . .. .. . .. . . .. . .. . .. . . .. . .. . . .. . .. . .. . . .. . . .. . . .. . .
i.
Rebuttal Testimony
of
Richard Patelunas
AUTOBIOGRAPHICAL
My name is Richard Patelunas.
1
I am a Financial Analyst with the U. S.
2
Postal Service and I began as a career employee
3
Headquarters
4
distribution
5
appointments
clerk and window clerk. Prior to that, I had several temporary
between
1974 and 1977.
testimony
before the Postal Rate Commission
7
R90-I,
8
B.A. in Economics
9
and an M.B.A. from Syracuse University (1986).
10
11
12
13
14
15
16
17
18
in 1977. Before coming to
in 1986, I held the craft positions of city carrier, LSM Operator,
I presented
6
SKETCH
MC93-1, R94-1, MC95I,
in Docket Nos.
MC96-3, R97-1 and in this docket.
I have a
from the State University of New York at Binghamton
(1978)
1
L
1
2
I.
Purpose
of Testimony
Witness But (DMA-T-1)
discusses what he terms as two errors in the
3
Postal Service’s
estimated test year expenses.
4
a flaw in the rollforward
5
supervisors.
6
understatement
7
Below I show why witness But’s analysis should be rejected.
methodology
Tr. 22/9547-48.
First, he argues that he corrects
concerning
the cost reduction treatment
of
Second, he argues that he corrects an
of the savings from the AFSM 100 program.
Tr. 22/9549-52.
8
9
II. Supervisor
Cost Savings
10
11
12
A.
Witness But’s Mechanical
Ignores Operating Reality
13
Witness But testifies that supervisor
Adjustment
to Supervisor
Costs
costs should be reduced by $92
14
million to maintain the pre-cost reduction program supervisor
15
argues that cost reductions
16
be accompanied
17
points out that the rollforward
18
clerk, mail handler, and city carrier costs due to mail volume and non-volume
19
workload
20
changes,
Maintaining
for clerks and mailhandlers,
by reductions
ratio. Witness But
and city carriers should
in costs for their supervisors.
Tr. 22/9547.
He
model adjusts supervisor costs for changes in
but not for cost reductions.
Id.
the pm-cost reduction supervisor
21
That ratio does not reflect the program managers’
22
supervisor
23
program.
Because the introduction
24
programs
changes the configuration
ratio is not appropriate.
expert assessment
savings can or can not be captured in conjunction
of automation
equipment
of postal operations,
of what
with each distinct
and other
the ratio of
2
supervisors
to the employees
they supervise also changes.
informed that with more machines,
For instance,
an on-line keying room, the speed of the new
machines, the additional number of sort plans, etc., maintaining
4
supervisors
5
considerably
6
each individual supervisor can be responsible
7
case is consistent
8
determined.
9
in the formulation
10
11
I am
the same ratio of
would mean that each supervisor would be responsible
for a
larger portion of the flow of mail. There is, however, a limit on what
for. The approach
with the way the Postal Service’s operating
Savings calculated
by a mathematical
used in the rate
budgets are
formula, but not considered
of field budgets, will not be realized and are therefore false
savings.
Witness But’s proposed adjustment
is improper.
His method is purely
12
mechanical,
ignoring the reality that most cost reduction programs change the
13
operating
14
responsibilities.
15
proportion
to craft workhour
16
workhours
would only vary directly with clerk workhours
17
all things remain equal. Tr. 22/9595.
18
management
changes the supervisory
19
environment,
the ceteris paribus conditions
20
informed by our program managers that this is in fact the case:
21
reduction
22
Postal Service does not budget for proportional
environment
and result in additional
This limits the opportunity
supervisory
complexities
to reduce supervisor
and
costs in direct
savings. In fact, witness But agreed that supervisory
in an environment
where
Witness But further testified that “if
requirements
programs change the operating
of the new operating
will no longer hold.”
environment
Id. I am
most cost
and consequently,
supervisor
savings.
the
3
Actual Events Provide Evidence
Supervisor
Argument is Invalid
B.
That Witness
Buck
.
In addition to the facts outlined above, there is other compelling
5
that witness But’s logic is flawed.
6
98 supervisor
7
presented
8
those actual results and the Commission’s
9
in Docket No. R97-1
evidence
The table below clearly shows that actual FY
costs were very close to the Postal Service’s original estimates
in the Docket No. R97-1 filing.
can be accounted
In fact, most of the difference
recommended
amount for supervisors
for by the But adjustment.
Witness But
10
confirms that without his adjustment
11
$3.521 billion supervisor
12
supervisor
13
estimate without the But adjustment
14
docket were very close to actual results, while the But adjusted estimate
15
resulted in a much larger variance.
16
17
18
19
20
21
the Commission
between
would have recommended
costs, which is within $9 million or 0.3% of actual
costs. Tr. 22/9575.
This shows clearly that both the Commission
and the Postal Service’s estimate in the last
Table 1
FY 98 Cost Segment 2
Supervisor Costs
$(Millions)
R97-1 Rate Case
But Adjustment
Adj
Rate Case With out’ due
r
Actual
Over/(under)Actual
% Over/(under) Actual
PRC
Estimate
3.420
I
PRC
Estimate’
3.420
I
3,512
-92
-2.6
3,521
lo1
3,512
-9
-0.3
22
’ Adjusted to remove impact of But adjustment on PRC estimate of supervisor costs.
USPS
Estimate
3.515
.
4
1
In sum, witness But’s adjustment
savings opportunities
should be rejected.
Supervisor
should be reviewed in terms of the functions,
3
and environment
of supervision
- not merely mechanistically
4
direct labor costs. Witness Tayman’s
5
correct approach
6
does not.
direct testimony,
to identify supervisor cost savings;
cost
obligations
piggybacked
USPS-T-g,
on
uses the
witness But’s testimony
7
8
9
Ill. AFSM 100 Savings
Witness But contends that his calculations
10
100 program are conservative
11
more savings than that those calculated
12
conservative,
13
assumptions.
14
estimates
witness But’s calculations
of the savings from the AFSM
representing
at least $199.933
by the Postal Service.
million
Far from being
rely on unrealistic and unattainable
Witness But confirms that he ignored piggyback
costs in his calculations.
15
Tr. 22/9579.
Likewise, he confirms that the AFSM 100 requires more floor space
16
(square feet) than either the FSM 881 or the FSM 1000 and that he made no
17
adjustments
18
Additionally,
19
22/9581.
20
labor costs in his analysis, witness But focuses attention on only the cost
21
savings portion of the operating
22
Focusing on only the cost savings portion of the environment
23
conservative
to the Postal Service’s estimate of floor space.
Tr. 22/9580.
witness But confirms that he has not included allied labor costs, Tr.
By ignoring piggyback costs, additional
estimate.
environment
required floor space, and allied
that results from the AFSM 100.
does not result in a
5
In terms of practice or implementation,
1
2
as he argues because
3
assumptions
4
that the Postal Service will realize 100 percent of the Test Year cost savings that
5
he has calculated.
6
deployment
7
that each and every machine will operate twenty hours per day, six days per
8
week.
9
all Phase I machines will be deployed for the entire test year.
10
--
witness But is not as conservative
his analysis rests on an ideal world where all of his
are fully realized. Witness But confirms that his analysis assumes
Tr. 22/9582.
of 166.5 machines
To achieve this, witness But assumes
in the test year, Tr. 22/9588,
It is my understanding
that this assumption
and further assumes
is not attainable
Even when all of the machines are deployed,
a
because not
these assumptions
are
11
unduly optimistic because they inherently assume that as the deployment
12
new AFSM 100 environment
evolves, change can be precisely planned for and
13
results perfectly anticipated.
Not only that, witness But assumes that the
14
savings are instantaneously
15
formulaic application
16
is unrealistic.
17
program managers
18
facility sizes and configurations.
19
needed to optimize machine utilization may not be present at all facilities.
20
the volume that does exist at a facility is currently processed
21
AFSM 100. These variables demonstrate
22
processing,
23
As such, the deployment
realized and continue uninterrupted.
of a set of assumptions
I understand
Witness But’s
to an evolving deployment
that the real world operating
of this
environment
schedule
faced by
is much more complex; for instance, there are differing
I further understand
that the mail volume
Also,
on other than an
that the change to AFSM 100
and realizing the full savings, are not as easy as flipping a switch.
of any new program undergoes
a learning curve
6
;
1
reflecting the uneven progress of implementation.
2
the program managers
3
complexity
4
Postal Service’s filing.
5
It is my understanding
consider as many variables as is reasonable,
given the
of their task, in estimating the AFSM 100 program savings used in the
Furthermore,
the savings used in the filing are budget savings; thus, they
6
are the result of the Postal Service’s “Catchball”
7
operating
budget.
8
managers
are presented
9
are agreed upon.
10
the field managers
11
to determine
12
must move the mail. Much like the supervisor
13
savings calculated
14
field budgets will not be realized and are therefore false savings.
15
that
the
In this process, the savings estimated by the program
to the field, negotiations
ensue and budgeted
savings
As such, the savings have been subjected to the judgment
of
who must realize the savings and who are in the best position
their reasonableness
Assuming
process used in developing
-these
are the operations
cost savings discussed
over and above the savings considered
that all of the assumptions
managers
who
earlier,
in the formulation
are realized and 100 percent of the
16
highest theoretically
17
conservative
18
cost savings in the test year should be rejected because the assumptions
19
underlying
analysis.
possible savings are recognized
Witness But’s conclusion
that conclusion
of
are simply not realistic.
in the test year is not a’
that there are additional
AFSM