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# POSTAL RATE COMMISSION

WASHINGTON, D.C. 20268--0001

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  [Postal Rate and Fee Changes,       Docket No. R2000--1
  2000]{.smallcaps}                   

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RESPONSES OF UNITED STATES POSTAL SERVICE

TO QUESTIONS OF THE OFFICE OF THE CONSUMER ADVOCATE

REGARDING THE PROVISION FOR CONTINGENCIES

The United States Postal Service hereby provides its responses to
questions concerning the provision for contingencies provided informally
by the Office of the Consumer Advocate. These questions were provided as
the result of successful negotiations between the OCA and the Postal
Service to settle two related, outstanding matters. The first is the
OCA's Motion to Compel a Response to OCA/USPS-T9-43(b), filed on April
10, and the second is the OCA's questions following up on the April 11
hearing, which were filed on April 13. The Postal Service and the OCA
have agreed that the attached questions may be answered in lieu of
responding to the above-mentioned items.

Each question is stated verbatim and is followed by the response.

Respectfully submitted,

UNITED STATES POSTAL SERVICE

By its attorneys:

Daniel J. Foucheaux, Jr.

Chief Counsel, Ratemaking

475 L\'Enfant Plaza West, S.W.

Washington, D.C. 20260--1137

\(202\) 268--2999; Fax --5402

May 17, 2000 Scott L. Reiter

**OCA Questions on the Contingency (1).** Please refer to the response
to OCA/USPS-T9-43 (c) and (d). Please confirm that in the course of
considering the various factors, the Postal Service did not assign any
weighting or otherwise attempt to quantify the contingency according to
the factors considered. If you do not confirm, please explain in detail
how the contingency was quantified according to the factors considered.
Provide all related documents.

**Response**

As previously stated in response to OCA 43, the determination of the
contingency involves the subjective evaluation of the reasonableness of
the amount for contingencies required to be incorporated into the Postal
Service's revenue requirement. At the level of the Board of Governors'
decision to approve a particular rate filing, the contingency amount
reflects a fundamental policy judgment regarding the level of risk that
can be tolerated in estimates of future expenses and other revenue
needs. In this regard, the contingency is assessed in relation to the
elements of the entire revenue requirement, as well as to an array of
financial and other policy considerations. While the contingency amount
is grounded in a subjective assessment of future uncertainties affecting
the Postal Service's estimates, the determination of its reasonableness
is considered by the Board in the context of all of the Postal Service's
proposals, including the overall impact of the rate and fee changes, as
explained in witness Tayman's testimony.

The amount of the contingency is typically expressed as a percentage of
the revenue requirement. It is not, however, the product of a
mathematical model or a precise calculation. While consideration of the
contingency is systematic, to the extent it typically involves review of
several core factors and possible future events, no attempt is made in
each case to identify and assess categorically the same comprehensive
list of considerations. Furthermore, the actual contingency amount is
not the result of adding up weighted factors. To the extent quantitative
evaluations are used to aid the decision-making process, they generally
are in the nature of sensitivity analyses showing the financial impact
of variations in revenue or expense relative to various contingency
levels, and the interrelated effects of alternative contingency amounts,
rate levels and designs, and future policy objectives.

**OCA Questions on the Contingency (2).** Did the Postal Service use any
framework for analysis to guide the process of developing the
contingency request? If so, please describe the framework and its
application in detail. If not, why not?

**Response**

As explained above, there is no set "framework" in the form of a catalog
of discrete factors or a mathematical model. Rather, the framework for
assessing the reasonableness of the contingency amount is embodied in a
basic approach to identifying sources of risk in estimating future
needs. Some of these uncertainties are more identifiable than others. To
the extent they can be identified, an attempt is usually made to
evaluate the potential effects on future needs by some order of
magnitude (e.g., calculate the value of various percentage changes in
revenue, health benefits or wages). These potential effects are combined
with a more subjective assessment of the potential for totally unknown
adversities in the current environment.

This evaluation necessarily also involves consideration of historical
circumstances, as well as knowledge of and forecasts for the economy in
general, operational challenges, market trends, and certain
institutional factors, such as the relative unpredictability of the
collective bargaining process. The overall sense of risk that emerges
from this evaluation is balanced subjectively against the other elements
of the Postal Service's proposals and policy choices, such as the impact
of rate increases on customers and the Board's policy regarding equity
restoration.

**OCA Questions on the Contingency (3).** Provide all documents, notes,
etc. relating to (a) each factor for the contingency identified at pages
43 - 45 of Tayman's testimony and (b) any other factor considered in the
course of determining the amount of the contingency request but not
identified in the testimony.

**Response**

Witness Tayman's testimony contains a comprehensive list of factors
considered. Evaluation of the reasonableness of the contingency amount
in the Postal Service's revenue requirement is appropriately made in
relation to what is expressed in the Postal Service's testimony and
documentation filed with the Request. The Board of Governors adopts
these expressions of explanation and justification as the reasoning and
evidence supporting the Postal Service's proposals. Any attempt to
explore a particular path toward those conclusions from a disparate
collection of personal notes, memoranda, or other records that might
have been generated throughout the process of developing the Postal
Service's case would not generally provide a uniformly reliable or
comprehensive picture of support for the particular contingency amount
endorsed by the Board. Rather, without a detailed history and
description of the various deliberative processes involved in the
complex formulation of an omnibus rate case filing, such records might
be misleading and incomprehensible. It is the Postal Service's position
that forays into the privileged documentation produced by and embodied
in its deliberative processes at all levels of preparation of its
Request are unnecessary, would not aid the participants in evaluating
the Postal Service's proposal or developing their own testimonies, would
not be useful to the Commission in formulating its recommended decision,
and could indeed be counterproductive.

The following describes generally the deliberative processes and the
paper record leading up to the Board of Governors' determination to put
forward the Postal Service's filing. It is intended to promote a better
understanding the overall context in which the determination of a
particular contingency amount is adopted.

Over the course of several months, rate case preparation involves
numerous meetings and communications among various levels and
organizational groupings of staff preparing the case. Within this
developmental process, many internal documents are produced and
information recorded, often unsystematically, by a variety of persons
with widely varying roles. Meetings and "brainstorming" sessions
typically take place at all levels to discuss possibilities and outcomes
in an open, uninhibited manner. As one might expect in such a complex
undertaking, personal notes and other documents are often created to
record ideas and concepts that might never be adopted or even seriously
considered. Typically, no thought is given to organizing the ideas and
internal documents generated by this diverse group for presentation
outside of the Postal Service.

In developing the Postal Service's filing in the current case, several
levels of staff from different functional departments participated in
deliberations leading to consideration of the Postal Service's eventual
proposals. Typically representatives from different levels of Finance,
Marketing, the Law Department, Operations, and Corporate Communications
were involved, although not always together or represented at the same
meetings. Within this context, discussions sometimes focused on the
appropriate level of contingency. More often, discussions of contingency
took place in conjunction with discussions of related rate case issues,
for example, the level of the overall rate increase and the legal
framework for considering the Postal Service's revenue requirement.
Depending on the group of issues and level of personnel involved at any
one time, these discussions occurred daily, in some instances, weekly
and biweekly, in other instances, and monthly and bimonthly, in yet
other instances. The meetings commenced roughly nine months before the
rate case was filed and continued right up until the filing date

The substance of these discussions ranged across a wide array of topics
related to the overall purpose for including a contingency amount in the
revenue requirement. These focused on reasons that the contingency is
critical, including various sources of uncertainty in projecting the
future, such as adverse legislative changes, economic changes, weather
and natural disasters, and legal developments. The statutory basis and
history of the contingency were also sometimes reviewed. In this
context, it was sometimes observed that legislative history would
support the conclusion that Congress contemplated a 3 - 5% range as
reasonable, and that the contingency amounts adopted in previous rate
cases, except in extraordinary situations, had tended to fall within
that range. Discussions sometimes focused on particular events that
might occur in the future, and on the general potential for estimates of
future costs and revenues to be wrong.

Quantitative sensitivity analyses were sometimes conducted as an aid to
evaluating the effects of the various sources of change on the overall
revenue requirement, and on the overall level of rate changes. In this
context, the different contingency amounts were sometimes tested, in
order to assess relationships among the different levels of the revenue
requirement, or in order to more precisely frame decision options. Such
analyses were used for illustrative purposes, and did not represent
reliable explanations of any substantive consideration of the purposes
or uses of contingency. In this respect, they were only tools employed
in deliberations, and not substantive inputs or rationales for a
particular result. Many of these considerations, furthermore, tended to
be recorded, and the records maintained relatively unsystematically.

Key stages of the deliberative path toward recommendations made by
management to the Board of Governors typically involved briefings or
presentations. These occurred at different levels, both within
particular departments and interdepartmentally. Major points of decision
often involved briefings of the Postal Service's Management Committee.
Ultimately, briefings were prepared and presented to the Board of
Governors at several of its monthly meetings. Documentation surrounding
these briefings tended to take the form of copies of slides, with or
without text. A variety of other records also were generated, including
personal notes or handwritten notations on other documents. Such
information did not always reliably reflect the nature of the
discussions, the views of the decision-making body, or the final result
of the deliberations.

The Postal Service strongly opposes disclosure of the records reflecting
these deliberations. As noted previously, the explanations and
rationales supporting the reasonableness of the contingency amount are
presented in the Postal Service's testimony and documentation. These
stand as the bases for the Request approved by the Board of Governors,
who judgmentally adopted the contingency amount as an integral element
of the Postal Service's revenue requirement. In the context of a
lengthy, complicated, and sensitive deliberative process leading to
postal management's recommendations to the Board, reference to any
particular document reflecting that process could mislead analysis of
the Postal Service's case. At the very least, it could require
considerable, unnecessary effort to explain the significance of
information which, at times, might be ambiguous or disconnected.

The reasons for preferring not to disclose such documentation are firmly
rooted in the fundamental justifications underlying privileges for
deliberative process, attorney work product, and the attorney-client
relationship. Ultimately, such disclosure would have a seriously
intrusive, chilling effect on the decision-making process, and would
lead to inevitable alteration of procedures for recording and exchanging
information within the Postal Service. Existing practices that surround
frank and open discussions in the preparation of general rate filings
have evolved because they have proved to be effective and efficient. Any
artificial constraint imposed by the knowledge that the free exchange of
ideas might be subject to subsequent public scrutiny would impede
development of Postal Service filings and could ultimately affect the
quality of its decisions. This reasoning applies almost uniformly to the
full range of the records in question, regardless of the distinction
between "fact" and "advice" that is sometimes employed in the context of
public disclosure laws. First, the overall nature of deliberations
concerning the contingency is speculative and not factual. Furthermore,
in most instances, any references to arguably objective facts in these
records involve selective judgment, and are part and parcel of the
deliberative process.

Finally, it might be argued that the purpose for inspecting these
privileged documents is to test the accuracy of the reasoning expressed
by the Postal Service in testimony and discovery responses supporting
its contingency proposal. Such an argument would be no more sensible
than a requirement by the Governors that, when the Commission provides
its Opinion and Recommended Decision to them, it include copies of all
staff notes and records of deliberations relating to the conclusions
reached in the Opinion. For the above reasons, the Postal Service
declines to provide the documents requested.

**CERTIFICATE OF SERVICE**

I hereby certify that I have this day served the foregoing document upon
all participants of record in this proceeding in accordance with section
12 of the Rules of Practice.

Scott L. Reiter

475 L\'Enfant Plaza West, S.W.

Washington, D.C. 20260-1137

May 17, 2000