USPS-T-9

BEFORE THE

POSTAL RATE COMMISSION

WASHINGTON DC 20268-0001

:

:

POSTAL RATE AND FEE CHANGES, 2000 : Docket No. R2000-1

:

[:]{.underline}

DIRECT TESTIMONY OF

WILLIAM P. TAYMAN

ON BEHALF OF

UNITED STATES POSTAL SERVICE

[CONTENTS]{.underline}

AUTOBIOGRAPHICAL SKETCH iii

I. PURPOSE AND SCOPE OF TESTIMONY AND GUIDE TO SUPPORTING
DOCUMENTATION.................................................. 1

II\. SUMMARY OF FINANCIAL AND OPERATING RESULTS

AND CURRENT FINANCIAL CONDITION 2

III\. TEST YEAR REVENUE REQUIREMENT 10

A. Summary of Test Year Cost Estimating

Procedures 10

1\. Base Year 10

2\. Fiscal Years 1999, 2000 and the Test Year 11

3\. Sources of Change:

a\. Cost level 12

b\. Mail volume effect 12

c\. Non-volume workload effect 12

d\. Additional workday effect 13

e\. Cost reductions 14

f\. Other programs 15

g\. Base year unit cost adjustment. 16

h\. Workyear mix adjustment 16

i\. Final adjustments 18

B. Specific Estimating Elements 18

1\. Labor contract 19

2\. Other salary and benefit changes 20

3\. General price increases 21

C. Revenue Requirement 21

1\. Accrued costs 22

a\. Postmasters (Segment 1) 22

b\. Supervisors and Technical Personnel

(Segment 2) 23

c\. Clerks and Mail Handlers CAG A

through J Offices (Segment 3) 25

d\. Clerks, CAG K Offices (Segment 4) 26

e\. City Delivery Carriers (Segments 6 and 7) 27

f\. Vehicle Service Drivers (Segment 8) 28

g\. Special Delivery Messengers (Segment 9) 28

h\. Rural Carriers (Segment 10) 29

i\. Custodial and Maintenance Services

(Segment 11) 30

j\. Motor Vehicle Service (Segment 12) 31

k\. Miscellaneous Local Operations

(Segment 13) 32

l\. Contractual Transportation of Mail (Segment 14) 32

m\. Building Occupancy (Segment 15) 34

n\. Supplies and Services (Segment 16) 35

o\. Research and Development (Segment 17) 36

p\. HQ & Area Administration & Corporatewide

Personnel Costs (Segment 18) 37

q\. Equipment Maintenance & Management

Training Support (Segment
19)\...\...\...\...\...\...\...\...\...\...\...\...\... 41

r\. Depreciation, Write-offs, Claims, & Interest

(Segment 20) 42

2\. Provision for Contingencies 43

3\. Recovery of Prior Years' Losses 46

IV\. REVENUES BEFORE AND AFTER RATES 48

A. Mail and Special Services Revenues 49

B. Appropriations 49

C. Interest Income 51

V. TEST YEAR REVENUE DEFICIENCY 52

EXHIBITS\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\....
54

Direct Testimony

of

William P. Tayman

AUTOBIOGRAPHICAL SKETCH

My name is William P. Tayman, Jr. and I am the Manager, Budget &
Financial Analysis for the United States Postal Service. I was appointed
to this position in September 1995 and my primary responsibilities
include the development and administration of national operating
budgets.

Prior to this appointment, I was Manager, Strategic & International
Finance and Manager, Revenue, Volume and Cost Analysis. I began my
career with the Postal Service in 1975. From 1975 through 1978, I held
positions at the Postal Service Training & Development Institute and in
the Accounting Division at Postal Headquarters. During the period from
1978 through 1980 I was employed by the Pension Benefit Guaranty
Corporation (PBGC). At PBGC, I held the position of Deputy Controller.

In 1980, I returned to the Postal Service Headquarters as General
Manager and then Office Director of Accounting. In this position, I
served as chief accountant of the Postal Service. In 1991, I was
selected to attend the Sloan Fellows Program at Stanford University
where I received a Master's Degree in Management. I also received a
Bachelor Degree in Business and Public Administration from the
University of Maryland in 1972. After graduation from the University of
Maryland, I was employed at Hoye, Graves, Bailey & Co., a regional
Certified Public Accounting firm.

I am a licensed Certified Public Accountant in the State of Maryland. I
also am a member of the American Institute of Certified Public
Accountants and the Maryland Association of Certified Public
Accountants. In Docket Nos. R87-1 and R90-1, I sponsored testimony
concerning the estimation of workers' compensation and retirement costs.
In Docket No. R97-1, I sponsored the Postal Service's revenue
requirement testimony.

I. PURPOSE AND SCOPE OF TESTIMONY AND GUIDE TO SUPPORTING DOCUMENTATION

My testimony presents the Postal Service\'s revenue requirement for the
Test Year (TY)[^1]. This testimony was prepared in conformance with the
Commission\'s Rules of Practice and Procedure to support the Postal
Service\'s revenue requirement for the Test Year. The attached exhibits
and the material included in Library References I-126, I-127, and I-128
supplement my testimony.

Exhibits A through S are at the end of my testimony and are preceded by
an index of Exhibits. These exhibits provide summary components of the
revenue requirement. Library Reference I-126, "Explanation of Cost
Reductions and Other Programs," supplies the narrative descriptions and
fundamental estimating elements of the cost reduction program savings
and other programs expense built into the revenue requirement. Library
Reference I-127, "Rollforward Expense Factors," supplies the detailed
calculations underlying the revenue requirement. Library Reference
I-128, "Workers' Compensation Expense," supports the projection of
Workers' Compensation liability and expense.

My testimony is organized into five chapters as described below.

Chapter I explains the purpose of my testimony. Chapter II, entitled
\"Summary of Financial and Operating Results and Current Financial
Condition,\" describes (1) financial and operating results over the last
ten years, (2) the current financial condition of the Postal Service,
and (3) service performance and customer satisfaction. This chapter
shows the recent progress the Postal Service has made in improving its
financial position, improving service, and restoring equity. The
material presented supports a proposed level of rate increases
consistent with management\'s goals of continuing to strengthen the
Postal Service's financial position, improve service, and restore
equity.

Chapter III, entitled \"Test Year Revenue Requirement,\" (1) describes
the specific sources of the changes in Postal Service costs which are
included in the revenue requirement, (2) identifies the assumptions used
to project cost increases, and (3) defines the change in the revenue
requirement by cost segment. This chapter also addresses the basis for
estimating the provisions for contingencies and recovery of prior
years\' losses required to support the financial integrity and stability
of the Postal Service. As a departure from prior rate cases, this
section incorporates the Postal Service's testimony on Workers'
Compensation expense.

Chapter IV, entitled \"Revenues Before and After Rates,\" describes the
level of revenue anticipated during the Test Year on a before-rates and
after-rates basis. This chapter provides a comprehensive analysis of our
revenue estimates by combining a discussion of the revenue anticipated
from mail and special services with a discussion of anticipated revenues
from appropriations and investment income.

In Chapter V, entitled \"Test Year Revenue Deficiency,\" I calculate the
overall revenue deficiency and analyze the effect of the proposed rates
on that deficiency.

II\. SUMMARY OF FINANCIAL AND OPERATING RESULTS AND CURRENT FINANCIAL
CONDITION

In this chapter, I discuss financial results over the last ten years,
the current financial condition of the Postal Service, and recent
service performance. Unless otherwise noted, the data used in this
analysis are drawn from the Audited Financial Statements of the United
States Postal Service for Fiscal Years 1989 through 1998.

The financial results for this ten-year period reflect the recent
reversal of the difficulties the Postal Service previously had in
meeting its break-even requirement over time, while providing reliable
service and a reasonable degree of rate stability. During much of that
previous period, the Postal Service dealt with unprecedented financial
burdens as a result of cost transfers in excess of \$13 billion (see
Exhibit USPS-9K), resulting from Omnibus Budget Reconciliation Acts
(OBRAs). There have been no additional cost transfers since the Omnibus
Reconciliation Act of 1993, with the exception of transferring the
requirement for funding Post Office Department Workers' Compensation
expense in FY 1997 under the Balanced Budget Act of 1997. This absence
of additional obligations to the Federal Government, coupled with the
benefits of the 1992 restructuring and debt refinancing, moderate
increases in the cost of labor and other resources, improved service,
and continued growth in mail volume and revenue, have enabled the Postal
Service to reverse the historical pattern of rate cycle losses.

Most recently, however, the delayed implementation and reduced amount of
the Docket No. R97-1 rate increase, is not permitting revenue growth to
exceed cost growth. Costs are estimated to continue to rise more rapidly
than revenues. I will elaborate on the specific reasons postal costs are
estimated to continue to rise through the test year later in my
testimony.

Table 1 presents the net income (loss) and equity by year for the
ten-year historical period.

**Table 1**

Postal Service Net Income/(Loss) and Equity

(\$ Millions)

  ----------------------- ------------------------ ----------------------
  Period                  Net Income/(Loss)        Equity

  FY 1989                 61                       \(402\)

  FY 1990                 \(874\)                  (1,278)

  FY 1991                 (1,469)[^2]              (2,747)

  FY 1992                 (536)[^3]                (3,283)

  FY 1993                 (1,765)[^4]              (5,048)

  FY 1994                 \(914\)                  (5,961)

  FY 1995                 1,770                    (4,191)

  FY 1996                 1,567                    (2,624)

  FY 1997                 1,264                    (1,360)

  FY 1998                 550                      \(810\)

  Cumulative Net Income   \(346\)                  
  (Loss)                                           
  ----------------------- ------------------------ ----------------------

Losses occurred in five of the ten years. Net incomes have been achieved
in each of the last four years, but has declined from a high of \$1.770
billion in FY 1995 to \$550 million in FY 1998. Fiscal Year 1999 net
income dropped to \$363 million and Fiscal Year 2000 net income is
expected to drop to \$66 million.

Despite the fact that this ten year period includes this unprecedented
four-year string of net incomes and the three highest net incomes ever
earned by the Postal Service, a cumulative \$346 million net loss was
incurred. This means the Postal Service failed to make ground against
its prior years' losses recovery objective during the last decade.
Equity declined from negative \$402 million in Fiscal Year 1989 to
negative \$810 million in Fiscal Year 1998. And equity remains negative
with the \$363 million net income reported for FY 1999.

The two year period of Fiscal Year 1994 and 1995 is the only time
revenue growth has exceeded expense growth in consecutive years. As
shown in Table 2, annual revenues have risen a total of \$24.2 billion
or 67.3 percent since Fiscal Year 1989. This is marginally greater than
the \$23.0 billion or 63.0 percent increase in annual expenses over the
same period. The Postal Service has narrowed the cumulative gap between
revenues and expenses as a result of the turnaround accomplished in
Fiscal Years 1994 and 1995.

While recent results are very favorable, it is important to recognize
that equity remains substantially negative and well below the capital
contribution of the U.S. Government. In addition, for the third straight
year, expense growth exceeded revenue growth in Fiscal Year 1998. The
negative revenue to expense growth relationship seen in Fiscal Year 1998
continued into Fiscal Year 1999 and indicates that future losses are
likely unless rates are increased.

Table 2 presents the year-to-year and cumulative percentage increases in
total revenue and expenses for the ten-year period ending September 30,
1998.

**Table 2**

Comparison of Annual Percent Increase in

Revenue and Expense for the Ten Years

FY 1989 - FY 1998

(\$ Millions)

  ------------------- ---------------- --------- ---------------- ---------
  Period              Revenue[^5]      \% Chg.   Expense[^6]      \% Chg.

  FY 1988             35,939                     36,536           

  FY 1989             38,920           8.3       38,859           6.4

  FY 1990             40,074           3.0       40,948           5.4

  FY 1991             44,202           10.3      45,671           11.5

  FY 1992             47,105           6.6       47,642           4.3

  FY 1993             47,986           1.9       49,751           4.4

  FY 1994             49,577           3.3       50,491           1.5

  FY 1995             54,509           9.9       52,739           4.5

  FY 1996             56,544           3.7       54,977           4.2

  FY 1997             58,331           3.2       57,066           3.8

  FY 1998             60,117           3.1       59,567           4.4

  Ten-Year Increase   24,178           67.3      23,031           63.0
  FY 1998 vs. FY 1988                                             
  ------------------- ---------------- --------- ---------------- ---------

With the Docket No. R94-1 rate increases effective in January 1995, the
Postal Service\'s financial position showed unprecedented improvement,
reversing the previous trend of rate cycle losses. The Postal Service
also expects to generate a cumulative net income over the current rate
cycle, which began on January 10, 1999, but these net incomes are
expected to be much less substantial than the net incomes during the
Docket No. R94-1 rate cycle.

Two financial indicators discussed in the Docket Nos. R94-1 and R97-1
revenue requirement testimony as examples of worsening financial
condition are the current ratio and working capital. These indicators
have continued to decline; however, this is mainly due to a financial
policy change, not a fundamental worsening of financial condition. The
Postal Service has implemented a more aggressive cash management program
that emphasizes the economic use of available cash to reduce debt, while
still meeting current liabilities as they come due. This has reduced
cash, reduced debt, and lowered interest expense.

Table 3 compares the ratio of current assets to current liabilities at
the end of each fiscal year since 1989. This comparison indicates that
with the exception of Fiscal Year 1995, the Postal Service\'s current
ratio has declined substantially and consistently since Fiscal Year
1989. Table 4 shows that during the period Fiscal Year 1989 to 1992 the
amount of debt outstanding also increased each year. Taken together, a
declining current ratio and an increasing debt level are often
indicative of worsening financial condition. However, the decline in
working capital that occurred in Fiscal Year 1996 was mainly the result
of changes in debt management, not worsening financial condition. The
decline in working capital since Fiscal Year 1995 is primarily due to
growth in the current portion of long-term debt and use of short-term
revolving credit. After reducing debt five straight years through FY
1997, debt increased in FY 1998. This increase reflects that the most
significant opportunities for optimizing cash management have been
realized. Debt financing is once again required to support the Postal
Service's capital program. The proposed rate increase will mitigate the
level of debt required to fund capital programs.

**Table 3**

Comparison of Current Ratios Since FY 1989

(\$ Millions)

  ------------------ ------------------ ------------------ --------------
  Period             Current Assets     Current            Ratio
                                        Liabilities        

  FY 1989            5,448              5,898              .92

  FY 1990            4,393              6,290              .70

  FY 1991            4,863              7,400              .66

  FY 1992            6,027              9,484              .64

  FY 1993            4,478              10,140             .44

  FY 1994            2,683              11,665             .23

  FY 1995            2,775              11,299             .25

  FY 1996            1,447              12,573             .12

  FY 1997            1,463              13,834             .11

  FY 1998            1,528              14,913             .10
  ------------------ ------------------ ------------------ --------------

**Table 4**

Change in Working Capital and Debt

(\$Millions)

+---------------------+-----------------------+-----------------------+
| Period              | Increase/(Decrease)   | Increase/(Decrease)   |
|                     | In Working Capital    |                       |
|                     |                       | In Debt               |
+---------------------+-----------------------+-----------------------+
| FY 1989             | 318                   | 596                   |
+---------------------+-----------------------+-----------------------+
| FY 1990             | (1,447)               | 494                   |
+---------------------+-----------------------+-----------------------+
| FY 1991             | \(640\)               | 1,470                 |
+---------------------+-----------------------+-----------------------+
| FY 1992             | \(920\)               | 1,484                 |
+---------------------+-----------------------+-----------------------+
| FY 1993             | (2,205)               | \(176\)               |
+---------------------+-----------------------+-----------------------+
| FY 1994             | (3,321)               | \(761\)               |
+---------------------+-----------------------+-----------------------+
| FY 1995             | 457                   | (1,708)               |
+---------------------+-----------------------+-----------------------+
| FY 1996             | (2,601)               | (1,361)               |
+---------------------+-----------------------+-----------------------+
| FY 1997             | (1,245)               | \(47\)                |
+---------------------+-----------------------+-----------------------+
| FY 1998             | (1,014)               | 549                   |
+---------------------+-----------------------+-----------------------+

The ratio of total assets to total liabilities reflects the recent
improvement in financial position. After declining from Fiscal Year 1989
to a low of .73 in Fiscal Year 1994, this ratio has risen to .90. Public
policy changes resulting in reductions in revenue forgone appropriations
and increased OBRA payments for annuitant costs, expenses related to
restructuring, and the refinancing of debt contributed to the decline in
the first half of the ten year period. While the improvement in this
ratio is encouraging, it is important to recognize that the ratio is
still less than one and the rate of improvement has slowed.

**Table 5**

Comparison of Total Assets to Total Liabilities[^7]

(\$ Millions)

  ----------------- ----------------- ----------------- -----------------
  Period            Total Assets      Total Liabilities Ratio

  FY 1989           15,801            16,814            .94

  FY 1990           15,943            17,880            .87

  FY 1991           18,069            21,770            .83

  FY 1992           20,885            25,231            .83

  FY 1993           20,215            26,414            .77

  FY 1994           19,169            26,364            .73

  FY 1995           19,962            25,499            .78

  FY 1996           19,659            23,768            .83

  FY 1997           21,209            24,155            .88

  FY 1998           22,699            25,215            .90
  ----------------- ----------------- ----------------- -----------------

The Postal Service has also achieved consistent service improvements
during the recent period of financial improvement. As reflected in Table
6, key national indicators of service performance from the Residential
Customer Satisfaction Measurement System have all shown improvement
since Quarter II of Fiscal Year 1994. In general, the attributes of
customer satisfaction which make up the Residential Customer
Satisfaction Measurement System have consistently improved at the same
time unprecedented financial results have been achieved.

**Table 6**

Customer Satisfaction Measurement System

Combined Excellent / Very Good Percent Trend

PQ II FY 1994 -- PQ IV FY 1999

![](media/image1.wmf){width="5.790277777777778in"
height="4.469444444444444in"}

First-Class Mail service, as measured by the External First-Class
measurement system (EXFC), has also shown consistent improvement over
this time period. EXFC measures service performance from the time mail
enters the mailstream until it is delivered to a household, small
business, or post office box. EXFC provides quarterly estimates of
destinating First-Class Mail service performance for all Performance
Clusters. Beginning in FY 1999, the number of 3-digit ZIP Codes included
in the measurement was expanded from 301 to 465. This represents
approximately 80% if the nation's destinating First-Class stamped and
metered mail volume. Table 7 shows the improvement in overnight, two
day, and three day service commitments.

**Table 7**

EXFC Performance

![](media/image2.wmf){width="5.798611111111111in"
height="4.133333333333334in"}PQ II FY 1994 -- PQ IV FY 1999

In addition to the costs that are already reflected in the Fiscal Year
1998 results, additional cost increases, more fully described later in
my testimony and in Library Reference I-127, are anticipated to have a
near term adverse impact on the Postal Service\'s financial condition.
These include: (1) increased labor costs specified in current negotiated
and arbitrated labor contracts; (2) increased costs associated with
major program initiatives designed to continue service improvements,
improve responsiveness to customers, maintain and improve our
infrastructure, and reduce costs in the future; (3) increases in health
benefits; and, (4) increases due to general inflation in the cost of
goods and services. Higher costs generally also have an adverse impact
on the amount of cash available for debt reduction, which results in
higher interest expense.

In my testimony that follows, I project the expected results for the
Test Year and discuss the need for a provision for contingencies. The
Test Year deficiency, if the proposed rates are not implemented, will be
approximately \$3.7 billion, which includes prior years' losses
recovery. In my opinion, the Postal Service should not allow a
deficiency of this magnitude to occur. Instead, the Postal Service
should opt for a moderate increase in rates, and a continuation of
equity restoration and strengthening of financial position. Without the
proposed rate increase, the Postal Service cannot meet the Board of
Governors' policy on equity restoration[^8], and will find it
increasingly difficult to fund expenditures critical to the future
viability of the Postal Service. High levels of borrowing would be
required and would add significantly to interest expense.

Planning to operate at a loss, to defer equity restoration, and to
borrow for operations would be to plan for financial failure. In light
of the increasing additional costs which I discuss below, and my
financial projections for the Test Year, I conclude that the most
responsible course of action is to increase Postal Service revenues
through a general increase in rates.

III\. TEST YEAR REVENUE REQUIREMENT

The revenue requirement is developed by estimating changes from a Base
Year in which costs and revenues are known. There are three periods
involved in development of the revenue requirement: The Base Year,
(Fiscal Year 1998), the Interim Years (Fiscal Years 1999 and 2000) and
the Test Year (Fiscal Year 2001).

A. Summary of Test Year Cost Estimating Procedures

1\. Base Year

The Base Year employed by me and by postal cost witnesses in this case
is Fiscal Year 1998. Revenues, expenses, net income and balance sheet
items developed throughout my testimony are consistent with those in the
audited and published financial statements for that year.

2\. Fiscal Years 1999, 2000 and the Test Year

Three estimated fiscal years, i.e., Fiscal Years 1999 and 2000, and the
Test Year, will be treated separately in my testimony, not in the
aggregate. Cost estimating procedures have been applied to each of these
years, as necessary and direct steps in the development of Test Year
costs. Final, audited Fiscal Year 1999 data were available very shortly
prior to the filing of Docket No. R2000-1, but were not available
sufficiently in advance to be incorporated fully into cost estimating
procedures. However, the Fiscal Year 1999 estimates presented herein are
extremely close to the actual financial results. Projected net income
was \$355 million as compared to actual net income of \$363 million.
Actual FY 1999 revenues of \$62.755 billion were used in this filing.
Estimated expenses of \$62.400 billion used in this filing were within
0.06 percent of the actual FY 1999 expenses of \$62.363 billion. The
correspondence of projected and actual FY 1999 financial results
confirms the viability of FY 1998 as the base year and supports the
reliability of the cost estimating procedures used in this testimony.

3\. Sources of change

Sources of change are classified as base year unit cost adjustment, cost
level, mail volume effect, non-volume workload effect, additional
workday effect, cost reductions, other programs, workyear mix
adjustments and final adjustments. These sources of change were
individually computed for purposes of explaining total cost differences
between the Base Year, Fiscal Years 1999 and 2000, and the Test Year in
order to establish the basis for the revenue requirement. My testimony
explains the derivation of sources of change factors with the exception
of base year unit cost adjustments, mail volume, and final adjustments,
including the mail mix adjustment. The rollforward witness utilizes
sources of change factors to run the rollforward model. My Exhibit 9B
contains rollforward model change reports that summarize each of the
sources of change for FY 1999, FY 2000 and the Test Year that result
from the factors developed by me and other Postal Service witnesses. The
total Test Year revenue requirement is determined by adding final
adjustments,[^9] the contingency, and the amount included to recover
prior years' losses, to the amount reflected on the after rates
rollforward model test year change report which has been adjusted for
the workyear mix.[^10]

a\. Cost level

Estimating the increase in the cost of current year resources produces
cost level changes for the subsequent year. Year-to-year price changes
primarily consist of increases in the unit cost of personnel
compensation and benefits and the cost of the previous year's level of
non-personnel resources. As detailed in my Exhibit 9Q, cost level
changes in salaries are estimated to average 3.1% in FY 1999, 3.0% in FY
2000 and 4.0% in the test year. Cost level changes in benefits are
estimated to average 4.8% in FY 1999, 6.5% in FY 2000 and 6.4% in the
test year. The derivation of cost level factors is explained in detail
in Chapters VIII and IX of Library Reference I-127.

b\. Mail volume effect

Mail volume effect is cost changes due to increases or decreases in mail
volume and special services volume. Cost variability due to the mail
volume effect is detailed in the testimony and workpapers of witness
Kashani (USPS-T14).

c\. Non-volume workload effect

These are cost changes that result from variation in measurable workload
characteristics other than mail volume. For example, city carrier street
costs vary with the number of possible deliveries. The most significant
of these in terms of financial impact are the number of possible city
deliveries, the number of rural boxes and route miles, and the amount of
facilities square footage. Non-volume workload factors are summarized in
Table 8. The computation of non-volume workload factors is explained in
Chapter IVd of Library Reference I-127. The application of these factors
to Postal Service costs is explained in the testimony and workpapers of
witness Kashani (USPS-T14).

**Table 8**

Non-Volume Workload Factors

\% Change from Previous Year

  ------------------------------------ ----------- ----------- ------------
                                       FY 1999     FY 2000     Test Year

  No. of Post Offices [^11]            0.3%        (0.0)%      (0.0)%

  Possible City Deliveries             0.6%        0.6%        0.6%

  Rural Route Miles                    2.2%        2.2%        2.2%

  Rural Boxes & Route Miles[^12]       3.0%        3.0%        3.0%

  Contract Stations                    (2.8)%      3.5%        3.3%

  Cag L Post Offices                   (10.8)%     (2.8)%      (2.9)%

  Facilities Sq. Footage (Leased)      2.1%        2.1%        2.1%

  Facilities Square Footage (Interior) 3.1%        3.8%        1.8%
  ------------------------------------ ----------- ----------- ------------

d\. Additional workday effect

Some costs vary according to the number and composition of days in each
Government Fiscal Year. For example, costs are higher on weekdays
(except holidays) than Saturdays, and lowest on Sundays and holidays.
The derivation of the additional workday factor is detailed in Chapter
VII of Library Reference I-127 and the application of these factors to
Postal Service costs is explained in the testimony and workpapers of
witness Kashani. The number of days in each of the relevant years is
shown in Table 9.

**Table 9**

Analysis of Work Days by Fiscal Year

  ----------------------- ----------- ----------- ----------- ------------
                          FY 1998     FY 1999     FY 2000     Test Year

  Weekdays                251         251         251         250

  Saturdays               52          52          53          52

  Sundays                 52          52          52          53

  Holidays                10          10          10          10

  Workday Equivalents     293.27      293.27      293.94      292.40

  Total Days              365         365         366         365
  ----------------------- ----------- ----------- ----------- ------------

e\. Cost reductions

Numerous management-initiated cost reduction programs are currently in
progress or planned which will result in significant cost savings.
Headquarter's financial and operating managers, with the assistance of
Area, District, and Plant personnel, develop and implement plans and
monitor performance of specific projects and activities aimed at
reducing operating expenses. Most of the cost reduction savings
impacting FY 1999, FY 2000 and the Test Year derive from automation and
other equipment. Table 10 summarizes the impact of cost reduction
programs in the interim years and the Test Year by cost segment. A
detailed listing of the major personnel cost related cost reduction
programs and the calculation of the workyear and dollar cost savings is
included in Library Reference I-127, Chapter Va. A listing of the major
non-personnel cost related cost reduction programs is included in
Chapter Vg of Library Reference I-127. A narrative description of these
programs and the basis for the resource savings is contained in Library
reference I-126.

**Table 10**

Cost Reductions

(\$ 000)

  -------------------------------------- ---------- ---------- -----------
  Segment                                FY 1999    FY 2000    Test Year

  2\. Supervisors and Technical          \-         45,906     \-
  Personnel                                                    

  3\. Clerks and Mail Handlers, CAG A-J  407,770    441,793    475,374

  6&7. City Delivery Carriers            123,368    400,354    151,374

  11\. Custodial and Maintenance         8,084      13,299     1,673
  Services                                                     

  14\. Purchased Transportation of Mail  130,985    79,225     25,526

  Total                                  670,207    980,577    653,947
  -------------------------------------- ---------- ---------- -----------

Unlike in Docket No. R97-1, significant cost savings are projected for
supervisory costs between the base year and the test year. It is the
Postal Service's position that these are the only appropriate cost
savings projections for supervisors and no additional cost savings
should be estimated. Cost reduction programs have different impacts than
volume and should not be piggybacked. Frequently, cost reduction
programs require additional supervisory time and attention in order to
capture cost savings, to maintain service, and to ensure operating
efficiencies. The potential for supervisory cost savings is addressed in
the FY 2000 cost savings program.

f\. Other Programs

This category includes changes in costs associated with
management-initiated actions other than cost reductions that change the
status quo (e.g., improve service or satisfy administrative or legal
requirements). Some programs satisfy a one-time need and are not
intended to continue indefinitely, while others will add additional
costs that continue indefinitely. The resource costs associated with
cost reduction programs are included under Other Programs. This category
also includes changes in expenses not directly linked to operations,
such as interest, depreciation and corporatewide personnel costs such as
annuitant costs and workers\' compensation. Other Programs also includes
the impact of accounting and reporting changes and other miscellaneous
adjustments that are not appropriate for inclusion in other rollforward
change categories. Table 11 summarizes the impact of Other Programs on
the interim years and the Test Year by cost segment. Summaries of the
major Headquarters Administered Other Programs and the calculation of
depreciation and nationally accrued personnel related costs are included
in Library Reference I-127, Chapters IV-VI. Library Reference I-126
provides a narrative description of each amount included under the Other
Program column and the basis for the estimated cost.

**Table 11**

Other Programs

(\$ 000)

  ------------------------------------- ----------- ----------- -----------
  Segment                               FY 1999     FY 2000     Test Year

  2\. Supervisors and Technical         13,917      -8,493      \-
  Personnel                                                     

  3\. Clerks and Mail Handlers, CAG A-J 209,083     59,839      9,808

  6.&7. City Delivery Carriers          153,922     13,876      19,797

  10\. Rural Carriers                   20,631      \-          \-

  11\. Custodial and Maintenance        22,870      31,994      29,358
  Services                                                      

  12\. Motor Vehicle Service            -136        -5,000      \-

  13\. Miscellaneous Local Operations   -3394       -1,485      990

  14\. Purchased Transportation of Mail 46,392      56,100      18,829

  15\. Building Occupancy               31,382      -18,084     7,116

  16\. Supplies and Services            439,173     -183,822    235,204

  17\. Research and Development         -13,692     -18,238     135

  18\. Headquarters and Area Admin.     409,385     381,639     314,816

  19\. Equip. Maint. & Mgt. Tng.        9,888       -1,083      722
  Support                                                       

  20\. Depreciation, Write-offs,        180,931     63,750      364,651
  Losses, etc.                                                  

  Total                                 1,520,352   370,993     1,001,426
  ------------------------------------- ----------- ----------- -----------

The Other Programs expense growth for FY 2000 and the Test Year are
\$0.4 billion and \$1.1 billion respectively, or a total of \$1.5
billion. This is substantially less that the \$3.7 billion in Other
Programs expense growth estimated for FY 1997 and the Test Year in
Docket No. R97-1. The growth for FY 2000 and the Test Year is
concentrated in corporatewide personnel costs, depreciation and
interest. The remaining expense growth for these two years is more than
offset by cost reductions reflected in Table 10. Reduced program expense
reflects management's commitment to control costs. There is long term
risk, however, in this strategy, as it requires deferral and
cancellation of programs that would otherwise be planned to improve the
quality of service, increase responsiveness to customers, and build and
maintain our infrastructure.

> g\. Base Year Unit Cost Adjustment

This adjustment applies to Fiscal Year 1999 only and is documented in
the testimony and workpapers of witness Kashani.

h.  Workyear Mix Adjustments

    The workyear mix adjustments represent the dollar impact of changes
    in the composition of workyears expected to occur during Fiscal
    Years 1999-2001. The methodology used in the Docket R97-1 filing,
    which reflected the lower cost of new hires as part of the workyear
    mix adjustment, has been changed. The cost savings related to new
    hires is now calculated as an offset to step increases which are
    reflected as part of cost level changes. This approach improves the
    estimate by including the new hire impact of rural carriers and
    other bargaining employees that previously were not estimated. The
    new method is also more accurate because it calculates the savings
    as the difference between employees' retiring at the top step and
    their replacements' being hired at the bottom step. The old method
    calculated the net savings as the difference between the average
    cost of an extended step employee and the overall average personnel
    cost.

    Changes in the workyear mix are estimated to result in greater
    personnel costs for Fiscal Years 1999 through 2001 before rates, and
    a slight decrease in costs for the Test Year after rates. These
    amounts are relative to the personnel costs that would have resulted
    if the workyear mix was assumed to remain the same in each estimated
    year as it was in Fiscal Year 1998 (i.e., the amount of personnel
    cost calculated by the rollforward model before this adjustment).
    The net increases calculated for Fiscal Years 1999 through 2001
    before rates are \$41.3 million, \$33.9 million, and \$0.6 million,
    respectively. The amount calculated for the Test Year after rates is
    a decrease of \$2.7 million.

    City carrier and mail handler overtime is assumed to decrease
    slightly in FY 1999 and continue at the FY 1999 level through the
    Test Year. Clerk overtime is assumed to continue at the FY 1998
    level through the Test Year. Clerk Remote Encoding Center (REC)
    transitional workyears are assumed to decline through the Test Year
    as REC's are closed. Non-REC transitional workyears are assumed to
    increase in FYs 2000 and 2001 in automation impacted facilities.
    City carrier transitionals are assumed to continue to decline, as
    Delivery Point Sequencing becomes more effective. Casuals are
    assumed to continue to be used at the same level as FY 1998 through
    the Test Year. The lower number of clerk transitionals in Fiscal
    Years 1999 and 2000 is the main cause of the increased cost in those
    years. City carrier and mail handler workyear mix changes in Fiscal
    Years 1999 and 2000 are largely offsetting. Workyear mix changes in
    the Test Year are largely offsetting for clerks, city carriers, and
    mail handlers.

    The net impact of the changes in workyear mix is reflected as an
    adjustment to the dollar estimates generated by the rollforward
    model for clerks, city deliver carriers, and mail handlers. The
    workyear mix adjustment is explained in greater detail in Chapter X
    of Library Reference I-127.

    **Table 12**

    Workyear Mix Expressed As a

    Percentage of Straight Time Workyears

  ---------------- ------------ ----------- ---------- ---------- ----------
                   FY 1998      FY 1999     FY 2000    Test Year  Test Year
                   Actual       Estimate    Estimate   BR Est.    AR Est.

  **Clerks A-J**                                                  

  Career-Base      89.8%        90.5%       90.3%      89.7%      89.7%

  Career-Holiday   .7%          .7%         .7%        .7         .7%

  Casual           5.9%         5.9%        5.9%       5.9        5.9%

  Transitional     3.6%         2.8%        3.0%       3.7%       3.7%

  Subtotal St.     100.0%       100.0%      100.0%     100.0%     100.0%
  Time                                                            

  Overtime         8.6%         8.6%        8.6%       8.6        8.6%

  **City                                                          
  Carriers**                                                      

  Career-Base      96.7%        97.4%       97.5%      97.5%      97.5%

  Career-Holiday   .3%          .3%         .3%        .3%        .3%

  Casual           1.8%         1.8%        1.8%       1.8%       1.8%

  Transitional     1.2%         .5%         .5%        .4%        .4%

  Subtotal St.     100.0%       100.0%      100.0%     100.0%     100.0%
  Time                                                            

  Overtime         11.5%        10.3%       10.3%      10.3       10.3%

  **Mail                                                          
  Handlers**                                                      

  Career-Base      88.7%        88.7%       88.7%      88.7%      88.7%

  Career-Holiday   1.3%         1.3%        1.3%       1.3%       1.3%

  Casual           10.0%        10.0%       10.0%      10%        10.0%

  Transitional     N/A          N/A         N/A        N/A        N/A

  Subtotal St.     100.0%       100.0%      100.0%     100.0%     100.0%
  Time                                                            

  Overtime         12.0%        11.5%       11.5%      11.5       11.5
  ---------------- ------------ ----------- ---------- ---------- ----------

i.  Final Adjustments

FY 1998 costs reflect the mail volume mix that existed prior to the
Docket No. R97-1 rate structure changes that went into effect on January
10, 1999. In order to reflect the cost changes due to those rate
structure changes, adjustments were made. The derivations of these
adjustments are explained in testimony and Library References of witness
Daniel. Additional final adjustments are documented in the testimonies
and Library References of witnesses Davis, Kashani, and Robinson.

B. Specific Estimating Elements

In order to predict costs in a prospective year in a complete manner,
all known and certain cost changes must be acknowledged. In addition,
estimates based on reasonable assumptions (for costs which will
certainly change but for which rates of change are not precisely known)
must be made. Examples of known and certain cost changes are
depreciation on existing plant and equipment, interest expense on debt
already outstanding, and the effect of the major labor agreements now in
place. Additional estimating procedures cover other salary and benefit
changes, and general price increases.

1\. Labor Contract

The provisions of labor contracts are used to estimate increases through
the end of the contract periods. Reasonable and conservative assumptions
are made thereafter, setting bargaining unit test year salary expense
increases at the Employment Cost Index for Wages and Salaries for
Private Industry, less one percent, (ECI minus 1) for bargaining units
that do not have contracts effective in the test year. The National
Rural Letter Carriers' Association contract was assumed to track the
NALC and APWU contracts in FY 2000. For the Test Year, carryover cost
increases from the previous contract are netted from ECI minus 1 for all
bargaining units except NALC whose contract extends through the Test
Year. This method results in an effective wage cost increase equal to
one percent less than ECI minus 1 in the test year.

The contract with the National Rural Letter Carriers' Association
expired November 20, 1999. Contracts with the American Postal Workers
Union and the National Postal Mail Handlers Union expire November 20,
2000. On September 19, 1999, an arbitration decision was announced
relative to the National Association of Letter Carriers' (NALC) contract
that had expired on November 20,1998. For the first year of the NALC
contract, most carriers will receive lump-sum payments in lieu of a
retroactive pay adjustment. However, NALC employees who are eligible to
retire by November 20, 2002, will receive a retroactive pay adjustment,
making the pay increase effective on November 20, 1998. The arbitrator
also granted a pay schedule upgrade for NALC employees from Level 5 to
Level 6, and ordered the Postal Service to maintain the existing salary
differential between Level 5 and Level 6 employees. The upgrade is
effective November 18, 2000. The three-year NALC contract expires
November 20, 2001.

The derivation of an FY 2001 Test Year revenue requirement required that
the financial impact of wage changes scheduled to take effect under the
current labor contracts be estimated. The annual and effective base wage
impacts driving personnel cost level increases are summarized in my
Exhibit 9O. Additional details on the derivation of personnel unit cost
changes, which include pay increases, lump sum payments, and cost of
living allowances, can be found in Chapter VIII of Library Reference
I-127. The wage and benefit costs estimated in developing the revenue
requirement are not intended to imply that these costs are reflective of
changes in wages and benefits which might be negotiated in the future.
Equivalent costs could also result from various initiatives including
wage restraint, reductions in workforce, changes in workforce
composition, and increases in productivity.

2\. Other Salary and Benefit Changes

Bargaining unit employees receive periodic longevity (step) increases
that affect their average compensation. Similarly, performance-based
increases, incurred as merit increases and lump sum payouts, affect the
average compensation of non-bargaining employees. Estimated effects of
these actions are included in appropriate cost level computations and
are detailed in Chapter VIII of Library Reference I-127. As discussed in
the Workyear Mix section above, the step increase amounts are offset by
savings for new hires who start at the lowest step of the salary
schedule. The estimated net step amounts for selected categories of
employees are shown in Table 13 below.

**Table 13**

Step Increase Unit Costs Summary

  ----------------------------- ------------- ------------ ---------------
                                FY 1999       FY2000       Test Year

  Clerks CAG A-J, Barg.         \$146.17      \$155.24     \$182.75

  City Carriers, Barg.          \$172.93      \$94.92      \$188.56

  Mail Handlers, Barg.          \$565.96      \$459.80     \$488.06
  ----------------------------- ------------- ------------ ---------------

Federal Employee Health Benefit premiums for active employees increased
an average of 3.6 percent in January 1998 and 8.7 percent in January
1999. Premium increases of 9.3 percent and 10.0 percent are expected in
January 2000 and January 2001, respectively. In addition, most employees
will benefit from a change in the methodology for computing the employer
share of health insurance expense. The new weighted average formula,
required under the labor contracts, will shift about 2 percent of the
insurance premium expense from employee to employer effective January
2000. Cost level computations based on these assumptions are detailed in
Chapter VIII of Library Reference I-127.

3\. General Price Increases

The Postal Service is a significant purchaser of supplies for operations
and maintenance, and services such as transportation. Most cost level
changes for these items are based upon projections contained in the
DRI/McGraw Hill[^13] USSIM/Trendlong 1199, and CISSIM/Control 1199.
CPI-W estimates from DRI served as the basis for computation of cost of
living adjustments (COLA) for Fiscal Year 1999, Fiscal Year 2000 and the
Test Year under the existing agreements affecting bargaining unit
employees.

Major indices used in this case are summarized in the Table 14.

**Table 14**

Selected DRI Forecast Factors

(Percent Change From Previous Year)

  ----------------------- ----------- ----------- ----------- ------------
                          FY 1998     FY 1999     FY 2000     Test Year

  CPI-W[^14]              1.41        1.90        2.73        2.02

  ECI[^15]                3.56        4.28        3.22        3.87

  Supplies & materials    (1.46)      (1.35)      3.14        0.48
  ----------------------- ----------- ----------- ----------- ------------

A more detailed list of the indices used, along with the specific
factors for Fiscal Years 1998 through the Test Year, can be found in
Chapter IX Library Reference I-127.

C. Revenue Requirement

The Test Year revenue requirement is presented in the same cost segment
format employed in the testimony of witness Kashani. The total revenue
requirement is the sum of accrued costs for nineteen (19) cost segments,
plus workyear mix and final adjustments calculated outside the
rollforward model (see USPS Exhibit 9R), a provision for contingencies,
and an amount for recovery of prior years\' losses. Test Year revenue
requirements before and after rates are:

**Table 15**

Test Year Revenue Requirement

(\$ 000)

  ------------------------------- ------------------- -------------------
                                  Before Rates        After Rates

  Total Cost Segments             68,046,556          67,190,634

  Provision for Contingencies     1,701,164           1,679,766

  Recovery of Prior Years\'       268,257             268,257
  Losses                                              

  Total Revenue Required          70,015,977          69,138,657
  ------------------------------- ------------------- -------------------

1\. Accrued Costs

Costs for the nineteen (19) cost segments for the Base Year through the
Test Year are:

**Table 16**

Total Cost Segments[^16]

(\$ 000)

  -------------------------------- -------------------- ------------------
                                   Amount               \% Change

  FY 1998                          59,566,516           

  FY 1999                          62,400,368           4.8

  FY 2000                          64,751,757           3.8

  Test Year before rates           68,046,556           5.1

  Test Year after rates            67,190,634           3.8
  -------------------------------- -------------------- ------------------

A summary analysis of cost changes is presented here for each cost
segment. Included in the analyses are specific reasons for significant
cost increases or decreases. A brief description of the costs in each
segment is provided; for a more detailed description, please refer to
Library Reference I-1, the [Summary Description of USPS Development of
Costs by Segments and Components.]{.underline}

a\. Postmasters (Segment 1)

Costs of this segment for the Base Year through the Test Year are:

**Table 17**

Postmasters Cost

(\$ 000)

  ------------------------------- ------------------- -------------------
                                  Amount              \% Change

  FY 1998                         1,710,409           

  FY 1999                         1,757,077           2.7

  FY 2000                         1,803,226           2.6

  Test Year before rates          1,876,320           4.1

  Test Year after rates           1,869,428           3.7
  ------------------------------- ------------------- -------------------

Costs of the segment are the personnel costs for the following
employees:

Postmasters

District manager/postmasters of customer service districts

Some Bulk Mail Center Managers

Officers-in-Charge

Also included is the compensation and benefits for relief or replacement
of postmasters. As reflected in Table 20, Postmaster costs are mainly
impacted by cost level increases that result from estimated changes in
salaries and benefits unit costs. Costs grow more rapidly for Fiscal
Year 2001 than for Fiscal Years 1999 and 2000. Primarily the merit pay
program adopted for Fiscal Years 2000 and 2001 and lump sum payments
drive the pattern of cost increases. More detailed cost level
assumptions and calculations can be found in Chapter VIII of Library
Reference I-127.

**Table 18**

Significant Changes in Cost

Postmasters

(\$ 000)

  ------------------------------------ ----------- ----------- -----------
                                       FY 1999     FY 2000     Test Year
                                                               After Rates

  Cost Level - Personnel Costs         36,903      34,878      73,615

  Mail Volume Effect                   5,807       8,410       825

  Additional Workday Effect            \-          3,224       -7,779

  Non-volume Workload                  4,453       -628        -729
  ------------------------------------ ----------- ----------- -----------

b\. Supervisors and Technical Personnel (Segment 2)

Costs for this segment for the Base Year through the Test Year are:

**Table 19**

Supervisors and Technical Personnel Cost

(\$ 000)

  ------------------------------- ------------------- -------------------
                                  Amount              \% Change

  FY 1998                         3,512,445           

  FY 1999                         3,608,816           2.7

  FY 2000                         3,665,493           1.6

  Test Year before rates          3,821,995           4.3

  Test Year after rates           3,782,609           3.2
  ------------------------------- ------------------- -------------------

Costs of this segment include the compensation and benefits of
supervisors, professionals (non-bargaining, non-supervisory personnel),
managers of Postal installations other than post offices, and some Bulk
Mail Center managers. As reflected in Table 19, Supervisor costs are
mainly impacted by cost level increases which result from estimated
changes in salaries and benefits unit costs, mail volume, non-volume
workload, cost reductions and other programs. FY 2000 costs increase
less than FY 1999 costs mainly due to the impact of significant cost
reductions targeted in FY 2000. The merit pay program, lump sum payments
and mail volume effects also affect the pattern of cost increases. Cost
reductions reflect a management challenge to find new efficiencies in
supervision costs. Final adjustments reflect a shift in the mail mix
toward less costly categories. More detailed cost level assumptions and
calculations can be found in Chapter VIII of Library Reference I-127.

**Table 20**

Significant Changes in Cost

Supervisors and Technical Personnel

(\$ 000)

  ------------------------------------ ----------- ----------- -----------
                                       FY 1999     FY 2000     Test Year
                                                               After Rates

  Cost Level - Personnel Costs         67,839      64,826      135,486

  Mail Volume Effect                   30,063      44,648      -4,291

  Non-Volume Workload - Indirect       2,119       -2,211      2,222
  Effects                                                      

  Additional Workday Effect            \-          3,400       -8,058

  Cost Reductions                      \-          -45,906     \-

  Other Programs                       13,917      -8,493      \-

  Final Adjustments                    -15,591     -4,009      -8,243
  ------------------------------------ ----------- ----------- -----------

c\. Clerks and Mail Handlers, CAG A through J Offices (Segment 3)

Costs for this segment for the Base Year through the Test Year are:

**Table 21**

Clerks and Mail Handlers, CAG A through J Offices

(\$ 000)

  ------------------------------- ------------------- -------------------
                                  Amount              \% Change

  FY 1998                         17,717,255          

  FY 1999                         18,318,646          3.4

  FY 2000                         19,011,163          3.8

  Test Year before rates          19,442,470          2.3

  Test Year after rates           19,118,127          0.6
  ------------------------------- ------------------- -------------------

Costs of this segment include the personnel costs of clerks and mail
handlers at CAG A through J offices, including Processing and
Distribution Plants and Bulk Mail Centers. As reflected in Table 22,
Clerk/Mail Handler costs are mainly impacted by cost level increases
which result from estimated changes in salaries and benefits unit costs.
Other significant increases result from mail volume workload growth and
other programs. Volume related workload growth is more than offset by
cost reductions in Fiscal Years 1999 and 2000. In the Test Year, both
cost reduction programs and the mail volume effect reduce costs. Clerk
and mail handler workyears actually decrease between the base year and
test year. Cost reductions primarily relate to automation and other
equipment. Cost reductions also reflect Local Management Initiatives.
Other program increases relate mainly to non-operational programs and
Fiscal Year 1999 base adjustments. Final adjustments reflects a shift in
the mail mix toward less costly categories. Cost reductions and other
programs are detailed in Chapter Va of LR I-127.

**Table 22**

Significant Changes in Cost

Clerks and Mail Handlers, CAG A through J Offices

(\$ 000)

  ------------------------------------ ----------- ----------- -----------
                                       FY 1999     FY 2000     Test Year
                                                               After Rates

  Cost Level - Personnel Costs         685,308     761,133     763,832

  Mail Volume Effect                   240,396     351,894     -56,578

  Non-Volume Workload Effect           686         765         658

  Additional Workday Effect            \-          9,246       -21,951

  Cost Reductions                      -407,770    -441,793    -475,374

  Other Programs                       209,083     59,839      9,808

  Final Adjustments                    -143,810    -34,426     -73,885

  Base Year Unit Cost Adjustment       -22,080     \-          \-
  ------------------------------------ ----------- ----------- -----------

d\. Clerks - CAG K Offices (Segment 4)

Costs for this segment for the Base Year through the Test Year are:

**Table 23**

Clerks, CAG K Offices Cost

(\$ 000)

  ------------------------------- ------------------- -------------------
                                  Amount              \% Change

  FY 1998                         8,359               

  FY 1999                         8,758               4.8

  FY 2000                         9,273               5.9

  Test Year before rates          9,734               5.0

  Test Year after rates           9,643               4.0
  ------------------------------- ------------------- -------------------

Costs of this segment include the personnel costs for clerks assigned to
CAG K offices. As reflected in Table 24, CAG K Clerk costs are mainly
impacted by cost level increases which result from estimated changes in
salaries and benefits unit costs.

**Table 24**

Significant Changes in Cost

Clerks, CAG K Offices

(\$ 000)

  ------------------------------------ ----------- ----------- -----------
                                       FY 1999     FY 2000     Test Year
                                                               After Rates

  Cost Level - Personnel Costs         370         424         433

  Mail Volume Effect                   29          82          -47

  Additional Workday Effect            \-          7           -18
  ------------------------------------ ----------- ----------- -----------

e\. City Delivery Carriers (Segments 6&7)

Costs for this segment for the Base Year through the Test Year are:

**Table 25**

City Delivery Carriers Cost

(\$ 000)

  ------------------------------- ------------------- -------------------
                                  Amount              \% Change

  FY 1998                         12,076,181          

  FY 1999                         12,670,154          4.9

  FY 2000                         12,989,251          2.5

  Test Year before rates          13,787,141          6.1

  Test Year after rates           13,638,050          5.0
  ------------------------------- ------------------- -------------------

Costs of this segment include the personnel costs of city delivery
carriers. As reflected in Table 26, City Carrier costs are mainly
impacted by the Fiscal Year 1999 base cost adjustment, as reflected in
Other Programs, and cost level increases, which result from estimated
changes in salaries and benefits unit costs. In Fiscal Year 2000 and the
Test Year After Rates, there is a projected reduction in City Carrier
workyears. Aggressive cost reductions targeted for FY 2000 are driven by
phases 4 and 5 of Delivery Bar Code Sorter deployment and Local
Management Initiatives. The final adjustments reflect a shift in the
mail mix toward less costly categories. The increased rate of growth in
costs in the test year relates to the provisions of the arbitrated NALC
contract, and in particular, the advancement of carriers from Grade
Level 5 to Level 6 pay.

**Table 26**

Significant Changes in Cost

City Delivery Carriers

(\$ 000)

  ------------------------------------ ----------- ----------- -----------
                                       FY 1999     FY 2000     Test Year
                                                               After Rates

  Cost Level - Personnel Costs         430,711     480,034     786,233

  Mail Volume Effect                   126,939     181,784     2,273

  Additional Workday Effect            \-          13,862      -33,820

  Non-volume Workload Increases        28,461      30,092      31,884

  Cost Reductions                      -123,368    -400,354    -151,374

  Other Programs                       153,922     13,876      19,797

  Final Adjustments                    -22,748     -1,903      -9,219
  ------------------------------------ ----------- ----------- -----------

f\. Vehicle Service Drivers (Segment 8)

Costs for this segment for the Base Year through the Test Year are:

**Table 27**

Vehicle Service Driver Costs

(\$000)

  ------------------------------- ------------------- -------------------
                                  Amount              \% Change

  FY 1998                         457,268             

  FY 1999                         469,566             2.7

  FY 2000                         497,568             6.0

  Test Year before rates          523,034             5.1

  Test Year after rates           511,885             2.9
  ------------------------------- ------------------- -------------------

Costs of this segment include the personnel costs of Vehicle Service
Drivers. As reflected in Table 28, Vehicle Service Driver costs are
mainly impacted by cost level increases that result from estimated
changes in salaries and benefits unit costs and by mail volume workload
growth. The final adjustments reflect a shift in the mail mix toward
less costly categories.

**Table 28**

Significant Changes in Cost

Vehicle Service Drivers

(\$ 000)

  ------------------------------------ ----------- ----------- -----------
                                       FY 1999     FY 2000     Test Year
                                                               After Rates

  Cost Level - Personnel Costs         15,646      18,201      18,769

  Mail Volume Effect                   5,446       10,818      3,961

  Additional Workday Effect            \-          439         -1,056

  Final Adjustments                    -8,520      -1,456      -7,357
  ------------------------------------ ----------- ----------- -----------

g\. Special Delivery Messengers (Segment 9)

Costs for this segment for the Base Year through the Test Year are:

**Table 29**

Special Delivery Messenger Cost

(\$ 000)

  ------------------------------- ------------------- -------------------
                                  Amount              \% Change

  FY 1998                         71,133              

  FY 1999                         0                   -100.0

  FY 2000                         0                   \-

  Test Year before rates          0                   \-

  Test Year after rates           0                   \-
  ------------------------------- ------------------- -------------------

Costs of this segment include personnel costs for Special Delivery
Messengers. As reflected in Table 30, Special Delivery Messenger ceased
to exist as a separately identifiable craft by the end of FY 1998. To
accommodate this change, Base Year Special Delivery Messenger costs were
combined with Cost Segment Three, Clerks and Mail Handlers, beginning in
FY 1999.

**Table 30**

Significant Changes in Cost

Special Delivery Messengers

(\$ 000)

  ---------------------------- ---------- ---------- ---------- ----------
                               FY 1998    FY 1999    FY 2000    Test Year
                                                                After
                                                                Rates

  Transfer To Cost Segment 3   71,132     \-         \-         \-
  ---------------------------- ---------- ---------- ---------- ----------

h\. Rural Carriers (Segment 10)

Costs for this segment for the Base Year through the Test Year are:

**Table 31**

Rural Carrier Costs

(\$ 000)

  ------------------------------- ------------------- -------------------
                                  Amount              \% Change

  FY 1998                         3,678,215           

  FY 1999                         3,887,248           5.7

  FY 2000                         4,153,942           6.9

  Test Year before rates          4,399,871           5.9

  Test Year after rates           4,355,648           4.9
  ------------------------------- ------------------- -------------------

Costs for this segment include the personnel costs of rural carriers and
the equipment maintenance allowance (EMA) they receive for their
vehicles. As reflected in Table 32, Rural Carrier costs are mainly
impacted by cost level increases, which result from estimated changes in
salaries and benefits unit costs and estimated changes in the CPI-U for
Private Transportation, mail volume growth, non-volume delivery workload
growth, and a base adjustment in Fiscal Year 1999 as reflected in Other
Programs. The final adjustments reflects a shift in the mail mix toward
less costly categories.

**Table 32**

Significant Changes in Cost

Rural Carriers

(\$ 000)

  ------------------------------------ ----------- ----------- -----------
                                       FY 1999     FY 2000     Test Year
                                                               After Rates

  Cost Level - Personnel Costs & EMA   101,635     156,751     154,882

  Mail Volume Effect                   38,391      51,519      -959

  Additional Workday Effect            \-          5,271       -13,010

  Non-volume Workload Effects          56,157      60,369      64,550

  Other Programs                       20,631      \-          \-

  Final Adjustments                    -7,573      -7,216      -3,757
  ------------------------------------ ----------- ----------- -----------

I. Custodial and Maintenance Services (Segment 11)

Costs for this segment for the Base Year through the Test Year are:

**Table 33**

Custodial and Maintenance Services Cost

(\$ 000)

  ------------------------------- ------------------- -------------------
                                  Amount              \% Change

  FY 1998                         2,304,302           

  FY 1999                         2,449,504           6.3

  FY 2000                         2,635,425           7.6

  Test Year before rates          2,791,854           5.9

  Test Year after rates           2,780,002           5.5
  ------------------------------- ------------------- -------------------

Costs of this segment include the personnel costs for custodial,
operating equipment, and building and plant equipment maintenance. Also
included are expenses for contract cleaning services. As reflected in
Table 34, Custodial and Maintenance costs are mainly impacted by cost
level increases which result from estimated changes in salaries and
benefits unit costs and the DRI index for rent. Custodial and
maintenance services costs are also significantly impacted by growth in
mail volume, facilities floor space (non-volume workload), and other
programs mostly related to the maintenance of automation and other
equipment.

**Table 34**

Significant Changes in Cost

Custodial and Maintenance Services

(\$ 000)

  ------------------------------------ ----------- ----------- -----------
                                       FY 1999     FY 2000     Test Year
                                                               After Rates

  Cost Level Changes                   78,838      92,371      101,467

  Mail Volume Effect                   11,787      16,930      -1,961

  Non-volume Workload Effects          40,829      53,579      27,854

  Additional Workday Effect            \-          4,293       -10,493

  Cost Reductions                      -8,084      -13,299     -1,673

  Other Programs                       22,870      31,994      29,358
  ------------------------------------ ----------- ----------- -----------

j\. Motor Vehicle Service (Segment 12)

Costs for this segment for the Base Year through the Test Year are:

**Table 35**

Motor Vehicle Service Cost

(\$ 000)

  ------------------------------- ------------------- -------------------
                                  Amount              \% Change

  FY 1998                         673,105             

  FY 1999                         682,500             1.4

  FY 2000                         706,752             3.6

  Test Year before rates          724,307             2.5

  Test Year after rates           722,705             2.3
  ------------------------------- ------------------- -------------------

Costs of this segment include the personnel costs of vehicle operating
and maintenance personnel and their supervisors, vehicle operating
supplies, and vehicle hire. As reflected in Table 36, Motor Vehicle
Service costs are mainly impacted by cost level increases. Cost level
increases result from estimated changes in salaries and benefits unit
costs, and the forecasted DRI indices for supplies and materials and
transportation services.

**Table 36**

Significant Changes in Cost

Motor Vehicle Service

(\$ 000)

  -------------------------------- ------------ ------------ ------------
                                   FY 1999      FY 2000      Test Year
                                                             After Rates

  Cost Level Changes               5,901        23,382       15,086

  Mail Volume Effect               1,117        1,893        379

  Non-volume Workload Effects      2,647        2,764        2,822

  Additional Workday Effect        \-           1,055        -2,495

  Other Programs                   -136         -5,000       \-
  -------------------------------- ------------ ------------ ------------

k\. Miscellaneous Local Operations (Segment 13)

Costs for this segment for the Base Year through the Test Year are:

**Table 37**

Miscellaneous Local Operations

(\$ 000)

  ------------------------------- ------------------- -------------------
                                  Amount              \% Change

  FY 1998                         303,683             

  FY 1999                         304,885             0.4

  FY 2000                         314,707             3.2

  Test Year before rates          327,993             4.2

  Test Year after rates           327,831             4.2
  ------------------------------- ------------------- -------------------

This segment includes the personnel costs for the Mail Equipment Shops,
and Facilities and Purchasing Service Centers. Also included are the
cost of contract stations, rental allowance for CAG L postmasters,
carfare, tolls and ferriage, field operations employee awards, and other
miscellaneous expenses. As reflected in Table 38, Miscellaneous Local
Operations are mainly impacted by cost level increases, non-volume
workload, and other programs. Cost level increases result from estimated
changes in salaries and benefits unit costs for the Mail Equipment
Shops, Facilities

Service Offices and Purchasing Service Centers, and general inflation on
contract stations, carfare, tolls and ferriage, field operations
employee awards, and other miscellaneous expenses. Non-volume workload
changes relate to the impact of changes in the number of CAG L post
offices and contract stations.

**Table** 38

Significant Changes in Cost

Miscellaneous Local Operations

(\$ 000)

+--------------------------------+-----------+-----------+-----------+
|                                | FY 1999   | FY 2000   | Test Year |
|                                |           |           |           |
|                                |           |           | After     |
|                                |           |           | Rates     |
+================================+===========+===========+===========+
| Cost Level Changes             | 6,354     | 8,481     | 10,042    |
+--------------------------------+-----------+-----------+-----------+
| Mail Volume Effect             | 150       | 212       | 12        |
+--------------------------------+-----------+-----------+-----------+
| Non-volume Workload Effects    | -1,903    | 2,431     | 2,513     |
+--------------------------------+-----------+-----------+-----------+
| Additional Workday Effect      | \-        | 183       | -433      |
+--------------------------------+-----------+-----------+-----------+
| Other Programs                 | -3,394    | -1,485    | 990       |
+--------------------------------+-----------+-----------+-----------+

l\. Contractual Transportation of Mail (Segment 14)

Costs of this segment for the Base Year through the Test Year are:

**Table 39**

Contractual Transportation of Mail

(\$ 000)

  ------------------------------- ------------------- -------------------
                                  Amount              \% Change

  FY 1998                         4,242,170           

  FY 1999                         4,279,550           0.9

  FY 2000                         4,559,054           6.5

  Test Year before rates          4,755,068           4.3

  Test Year after rates           4,619,553           1.3
  ------------------------------- ------------------- -------------------

This segment includes the cost of non-Postal Service contractual
resources used to transport domestic mail between Postal Service
facilities within the United States of America. Also included are the
costs of transporting international mail between the United States and
foreign countries, and the impact of fluctuations in international
currency conversion exchange rates. As reflected in Table 40,
Contractual Transportation costs are mainly impacted by cost level
changes, mail volume workload, cost reductions, and other programs. Cost
level changes result from the level of inflation forecasted by DRI. Cost
reductions relate to Priority Mail Processing Centers, new efficiencies
in Air System Contracts, Mail Transport Equipment Centers, Prior Year
International Adjustments, parcel dropship savings and a challenge to
absorb inflation. Other programs relate mainly to initiatives that
improve the quality of service by adding new or upgraded transportation
links. In Fiscal Years 1999 through the Test Year, final adjustments
reflects mail mix adjustments as calculated by witnesses Robinson and
Daniel.

**Table 40**

Significant Changes in Cost

Contractual Transportation of Mail

(\$ 000)

  -------------------------------- ------------ ------------ ------------
                                   FY 1999      FY 2000      Test Year
                                                             After Rates

  Cost Level Changes               93,325       86,349       44,297

  Mail Volume Effect               59,900       165,954      31,093

  Additional Workday Effect        \-           1,290        -2,981

  Cost Reductions                  -130,985     -79,225      -25,526

  Other Programs                   46,392       56,100       18,829

  Final Adjustments                18,345       49,036       -5,213

  Base Year Unit Cost Adjustment   -49,597      \-           \-
  -------------------------------- ------------ ------------ ------------

m\. Building Occupancy (Segment 15)

Costs of this segment for the Base Year through the Test Year are:

**Table 41**

Building Occupancy Cost

(\$ 000)

  ------------------------------- ------------------- -------------------
                                  Amount              \% Change

  FY 1998                         1,439,416           

  FY 1999                         1,506,978           4.7

  FY 2000                         1,563,730           3.8

  Test Year before rates          1,633,711           4.5

  Test Year after rates           1,633,711           4.5
  ------------------------------- ------------------- -------------------

Costs of this segment include the non-capital related non-personnel
costs of occupying and maintaining Postal Service owned and rented
facilities. Such costs include rent, heating fuel, building repairs and
alterations, and utilities such as gas, electricity, water, and voice
telephone communications. As reflected in Table 42, Building Occupancy
costs are mainly impacted by cost level increases, non-volume workload,
and other programs. Cost level increases result from estimated changes
in general inflation as forecasted by DRI. Non-volume workload results
from changes in rented facilities floor space. Other programs relate to
changes in Field and HQ Administered Programs. Programs with changes
that impact building occupancy include environmental programs, OSHA
reform, Point of Service, Corporate Call Management and Associate Office
Infrastructure. Segment 15 also receives a base adjustment for building
projects expense. Major non-personnel cost related programs are included
in Chapters V and VI of Library Reference I-127. A narrative description
of these programs and the basis for the resource requirements is
contained in Library Reference I-126.

**Table 42**

Significant Changes in Cost

Building Occupancy

(\$ 000)

  -------------------------------- ------------ ------------ ------------
                                   FY 1999      FY 2000      Test Year
                                                             After Rates

  Cost Level Changes               8,980        40,974       41,760

  Non-volume Workload Effects      27,200       32,351       24,761

  Additional Workday Effect        \-           1,511        -3,656

  Other Programs                   31,382       -18,084      7,116
  -------------------------------- ------------ ------------ ------------

n\. Supplies and Services (Segment 16)

Costs for this segment for the Base Year through the Test Year are:

**Table 43**

Supplies and Services Cost

(\$ 000)

  ------------------------------- ------------------- -------------------
                                  Amount              \% Change

  FY 1998                         3,221,612           

  FY 1999                         3,629,009           12.6

  FY 2000                         3,550,632           -2.2

  Test Year before rates          3,814,183           7.4

  Test Year after rates           3,807,497           7.2
  ------------------------------- ------------------- -------------------

Costs of this segment include the personnel cost of employees at the
Label Printing Units and Material Distribution Centers. Also included
are most of the supplies and contractual services utilized by the Postal
Service, including printing and reproduction and postage stock. Supplies
and services included in segments 14 and 18 are identified and are
discussed therein. As reflected in Table 44, Supplies and Services costs
are mainly impacted by cost level increases, mail volume workload, cost
reductions and other programs. Cost level increases result from
estimated changes in salaries and benefits unit costs for the Label
Printing Units and Material Distribution Centers and general inflation
on supplies and contractual services based on the DRI forecast for
supplies and materials and paper and paper products. Cost reductions
result from the opening of Mail Transportation Equipment Support
Centers. Other programs relate to changes in Field and HQ Administered
Programs. Programs with changes that impact Supplies and Services
include Point of Service, Corporate Call Management, Associate Office
Infrastructure, MEI Postal One, Stamp Manufacturing, Maintenance
Technical Support Centers, Delivery Confirmation, Core Process
Management, OWCP cost reductions, Nurses Coordinator Program,
Advertising and Priority Mail Redesign. Cost Segment 16 also receives a
base adjustment and reflects an inflation absorption challenge. Final
adjustments reflect mail mix adjustments supplied by witness Robinson.
Major non-personnel cost related programs are included in Chapters V and
VI of Library Reference I-127. A narrative description of these

programs and the basis for the resource requirements is contained in
Library Reference I-126.

**Table 44**

Significant Changes in Cost

Supplies and Services

(\$ 000)

  -------------------------------- ------------ ------------ ------------
                                   FY 1999      FY 2000      Test Year
                                                             After Rates

  Cost Level Changes               -33,185      92,291       19,509

  Mail Volume Effect               1,837        6,481        -3,016

  Additional Workday Effect        \-           503          -1,103

  Cost Reductions                  \-           \-           \-

  Other Programs                   439,173      -183,822     235,204

  Final Adjustments                \-           13,245       -804
  -------------------------------- ------------ ------------ ------------

o\. Research and Development (Segment 17)

Costs for this segment for the Base Year through the Test Year are:

**Table 45**

Research and Development Cost

(\$ 000)

  ------------------------------- ------------------- -------------------
                                  Amount              \% Change

  FY 1998                         77,137              

  FY 1999                         63,445              -17.7

  FY 2000                         45,207              -28.7

  Test Year before rates          45,342              0.3

  Test Year after rates           45,342              0.3
  ------------------------------- ------------------- -------------------

Costs of this segment include contracts for new and existing technology
development and applications engineering. Personnel and related costs
and other indirect costs are included in other cost segments. As
reflected in Table 46, other programs impact Research and Development
costs. A narrative description of these programs and the basis for the
resource requirements is contained in Library Reference I-126.

Table 46

Significant Changes in Cost

Research and Development

(\$ 000)

  --------------------- -------------- ----------------- -----------------
                        FY 1999        FY 2000           Test Year After
                                                         Rates

  Other Programs        -13,692        -18,238           135
  --------------------- -------------- ----------------- -----------------

p\. HQ & Area Administration & Corporatewide Personnel Costs (Segment
18)

Costs for this segment for the Base Year through the Test Year are:

**Table 47**

HQ & Area Administration & Corporatewide Personnel Costs

(\$ 000)

  ------------------------------- ------------------- -------------------
                                  Amount              \% Change

  FY 1998                         4,575,721           

  FY 1999                         4,998,999           9.3

  FY 2000                         5,414,740           8.3

  Test Year before rates          5,767,208           6.5

  Test Year after rates           5,767,208           6.5
  ------------------------------- ------------------- -------------------

The costs of this segment include personnel costs for Headquarters and
Headquarters related field service units, the money order function, Area
Administration, and Law Enforcement. Also included are the Corporatewide
personnel-related costs of annual leave repricing, Civil Service
Retirement Unfunded Liability Principal, Workers\' Compensation, Annuity
Protection Program, Unemployment Compensation, Retiree Health Benefits,
and CSRS Annuitant COLA principal expense. Remaining costs are supplies
and services related to Headquarters activities and miscellaneous
support costs. As reflected in Table 48, HQ & Area Administration &
Corporatewide Personnel Costs are mainly impacted by cost level
increases, and other programs. Amounts included as other programs are
mainly the year-to-year change in Corporatewide personnel costs. With
the exception of workers' compensation costs, the derivations of
Corporatewide personnel costs are explained in Chapter VI of Library
Reference I-127. The calculation of Workers' Compensation expense is
further explained below.

Cost level increases result from estimated changes in salaries and
benefits unit costs for Headquarters and Headquarters related field
service units, the money order function, Area Administration, and Law
Enforcement, and general inflation on supplies and contractual services
and other miscellaneous items related to Headquarters activities based
on the DRI forecast for supplies and materials and the consumer price
index. Cost Segment 18 also includes a FY 1999 base adjustment in
supplies and services and includes an inflation absorption challenge in
FY 2000.

The Postal Service is projecting an expense of \$764.3 million for
workers' compensation costs in the Test Year. Comparable expenses for
fiscal year 1998 were \$759.9 million. Estimated expenses for 1999 and
2000 are \$633.4 million and \$735.9 million, respectively. These
amounts exclude all costs attributable to Post Office Department
employees injured prior to the establishment of the Postal Service on
July 1, 1971.

The Postal Service is subject to the Federal Employees' Compensation Act
(FECA). Accordingly, the Office of Workers' Compensation Programs (OWCP)
of the Department of Labor (DOL) manages the workers' compensation
program for Postal Service claimants. The Postal Service is billed
annually by the OWCP for reimbursement of all payments made to, or on
behalf of, Postal Service workers' compensation claimants over the
course of the prior OWCP "chargeback year" (July 1 through June 30).
With its reimbursement billing, the OWCP also charges the Postal Service
a pro-rata share of its estimated administrative costs.

The annual Postal Service workers' compensation expense is comprised of
three components: (1) the net present value of the total estimated
long-term liability for those claims which first become active during
the current chargeback year, (2) adjustments to the estimate of the
existing liability for claims that first became active in prior years,
and (3) the pro-rata share of OWCP administrative expenses. Adjustments
in the estimated liability result from changes in the number of active
claims, cash outlays per claim, and the estimated future duration of
claims. Separate liability estimations are made for (1) future costs
arising from payments to be provided as compensation to injured postal
claimants and their survivors ("compensation" claims) and (2) costs
arising from future medical payments on behalf of injured postal
claimants ("medical" claims).

As noted above, Postal Service workers' compensation expense is
estimated to be \$764.3 million in the Test Year. This amount represents
a continuation of a trend towards moderation that has been seen from
fiscal year 1994 forward. This trend towards reductions in, and the
leveling off of, this volatile expense component reflects the effects of
cost reduction efforts undertaken by Postal Service management as a
response to the increases in our workers' compensation expense seen in
the period of fiscal years 1988 through 1993. This trend also reflects
actions undertaken by OWCP. Efforts undertaken by the Postal Service
include the National Workers' Compensation Task Force, the Nurse
Coordination Program, the Duplicate Medical Bill Payment Project,
contractor review of in-patient hospital expenses, and the Limited Duty
Task Force. DOL efforts include their nurse case manager program,
Periodic Roll management review teams, and quality case management
initiatives. Taken together, these efforts have mitigated the trend
towards escalation in postal workers' compensation expense.

In reporting its financial results, the Postal Service uses the workers'
compensation estimation model to determine the year-end liability.
Changes in that liability relative to the end of the prior fiscal year
represent an expense component. In its estimations, the model uses
payment data provided on tape by the OWCP. These data are processed at
the Minneapolis Accounting Service Center to prepare summary data by
year of injury and severity of injury. These summary OWCP data,
including paid claims, average costs per claim, and a distribution of
claimant age at time of injury, are used as estimation model input.

Since Fiscal Year 1991, the Postal Service has used the "extended age"
estimation model. This model uses actual historic claimant transition
ratios, or derivations of the mathematical likelihood of claims being
paid in the next year, to estimate "surviving" claims that will be paid
in future years. These transition ratios are used to estimate surviving
claims for the first twenty-five payment years. After twenty-five years
of payment, claims are deemed to be permanent and the numbers of
subsequent surviving claims are estimated using life annuity tables in
conjunction with the claimant age at time of injury distribution. Prior
to the adoption of the "extended age" model, the Postal Service used a
model that assumed all claims became permanent after eight payment
years.

An important component of the workers' compensation liability and
expense estimation is the net discount factor used to determine the
present value of estimated future payments. For Fiscal Year 1998 the
Postal Service used net discount factors of 0.1% for medical claims and
3.0% for compensation claims. For Fiscal Year 1999, the Postal Service
is using a discount rate of 1.4% for medical claims and a discount rate
of 3.0% for compensation claims. Adoption of the 1.4% discount rate for
medical claims resulted in a decrease of \$131 million in the Fiscal
Year 1999 compensation and benefits expense. The analysis used placed
emphasis on rates of return for five to ten year notes rather than
relying exclusively on rates of return for 90-day t-bills. Postal
management feels that this change in the net discount rate better
reflects the excess of rates of return on government debt instruments of
comparable terms relative to expected medical inflation.

The Postal Service conducts a review of the discount factors on an
ongoing basis to validate their appropriateness. Summaries of discount
rate analyses for medical and compensation claims over the last ten
years are included as Exhibit USPS-9S page 1 and 5. Our most recent
historical and prospective discount rate analyses for medical and
compensation claims are included as Exhibits USPS 9S pages 2 through 4
and 6 through 8. These analyses are based on data published in Standard
& Poor\'s DRI *The U.S. Economy*, and its predecessor publication,
DRI/McGraw-Hill's *Review of the U.S. Economy, Long-Range Focus*. In the
opinion of postal management, the discount rates currently used for
medical and compensation claims represent a reasonable difference
between medical and societal inflation and the rates of return on
government debt instruments of terms comparable to the approximate
likely lives of medical and compensation claims. It is our opinion that
the factors currently used accurately reflect the value of the two
individual liability components and the value of the workers'
compensation liability as a whole.

**Table 48**

Significant Changes in Cost

HQ & Area Administration & Corporatewide Personnel Costs

(\$ 000)

  ----------------------------------- ----------- ----------- -----------
                                      FY 1999     FY 2000     Test Year
                                                              After Rates

  Cost Level                          13,893      34,078      37,710

  Additional Workday Effect           \-          24          -58

  Other Programs (all other not       13,913      1,770       -335
  itemized below)                                             

  Unemployment Compensation           -17,561     9,600       2,800

  Repricing Annual Leave              -13,508     35,294      -5,522

  CSRS Unfunded Liability --          71,286      111,424     60,159
  Principal                                                   

  Retiree Health Benefits             22,631      145,458     108,826

  Annuitant COLA -- Principal         31,122      79,593      74,910

  Workers' Compensation               -126,511    102,516     28,390

  HQ & Field Service Unit Pers. Cost  87,626      \-          \-

  HQ Supplies and Services            116,030     -10,417     6,411

  Misc. Support Cost                  224,357     -93,599     39,177
  ----------------------------------- ----------- ----------- -----------

> q\. Equipment Maintenance & Management Training Support (Segment 19)

Costs of this segment for the Base Year through the Test Year are:

**Table 49**

Equipment Maintenance & Management Training Support

(\$ 000)

  ---------------------------------- ---------------- -------------------
                                     Amount           \% Change

  FY 1998                            36,090           

  FY 1999                            46,652           29.3

  FY 2000                            46,782           0.3

  Test Year before rates             48,522           3.7

  Test Year after rates              48,522           3.7
  ---------------------------------- ---------------- -------------------

Included in this segment are the personnel costs for the Maintenance
Technical Support Center and contractual services in support of
equipment maintenance and management training. As reflected in Table 50,
Equipment Maintenance & Management Training Support costs are mainly
impacted by cost level increases and other programs. Cost level
increases result from estimated changes in salaries and benefits unit
costs for the Maintenance Technical Support Center and general inflation
on contractual services based on the DRI forecast for the consumer price
index. Other program changes relate to changes in Headquarters

Administered Programs and personnel resources at the Maintenance
Technical Support Center.

**Table 50**

Significant Changes in Cost

Equipment Maintenance & Management Training Support

(\$ 000)

+-----------------------+--------------+--------------+--------------+
|                       | FY 1999      | FY 2000      | Test Year    |
|                       |              |              |              |
|                       |              |              | After Rates  |
+-----------------------+--------------+--------------+--------------+
| Cost Level            | 674          | 1,213        | 1,018        |
+-----------------------+--------------+--------------+--------------+
| Other Programs        | 9,888        | -1,083       | 722          |
+-----------------------+--------------+--------------+--------------+

r\. Depreciation, Write-Offs, Claims, and Interest (Segment 20)

Costs of this segment for the Base Year through the Test Year are:

**Table 51**

Depreciation, Write-Offs, Claims, and Interest

(\$ 000)

  ------------------------------- ------------------- -------------------
                                  Amount              \% Change

  FY 1998                         3,533,151           

  FY 1999                         3,718,581           5.2

  FY 2000                         3,784,562           1.8

  Test Year before rates          4,274,769           13.0

  Test Year after rates           4,150,035           9.7
  ------------------------------- ------------------- -------------------

In addition to depreciation on equipment and buildings, this segment
includes the following costs:

Domestic and foreign mail indemnities

Insurance and tort claims

Uncollectible receivables and other write-offs

Interest expense

As reflected in Table 52, Depreciation, Write-Offs, Claims, and Interest
costs are mainly impacted by cost level increases, and other programs.
Cost level increases result from estimated changes in general inflation
on indemnities and claims and losses based on the DRI forecast for the
consumer price index. Other programs consist mainly of estimated changes
in depreciation, interest on debt, and interest on retirement
liabilities. Detailed explanations of how these costs were estimated can
be found in Chapters V and VI of Library Reference I-127.

**Table 52**

Significant Changes in Depreciation, Write-Offs, Claims, and Interest
Cost

(\$ 000)

  --------------------------------- ------------- ----------- ------------
                                    FY 1999       FY 2000     Test Year
                                                              After Rates

  Cost Level                        2,418         3,596       2,708

  Mail Volume Effect                2,120         -1,365      -1,886

  Depreciation Expense              190,246       68,290      290,133

  Disposition of Property           22,870        -13,472     -7,734

  Interest on Debt                  -11,633       28,375      53,100

  Interest on Retirement            -20,406       -19,358     29,096
  Liabilities                                                 
  --------------------------------- ------------- ----------- ------------

2\. Provision for contingencies

Consistent with the statutory requirement, a provision for contingencies
has been included in the Test Year. The amounts included are \$1.701
billion in the Test Year before rates and \$1.680 billion in the Test
Year after rates. These amounts are equal to two and one-half percent of
the total segment expense including final adjustments.

This is greater than the one and two percent amounts included in the
previous two omnibus rate cases and less than the three and one-half
percent included in the previous several cases. This mid-range
contingency balances the Postal Service's desire to keep rate increases
as low as possible with management's assessment of the degree of
financial risk that currently faces the Postal Service. It also keeps
the cumulative rate increases over the last two rate cycles below the
cumulative rate of general inflation. This amount is judged as
reasonable against unforeseen events and forecasting errors, given the
magnitude of the Postal Service's operations and expenses. Recent
financial performance has not been as favorable as in the mid 1990's.
Specifically, in Fiscal Year 1999, the Postal Service fell significantly
short of its revenue plan, with revenue more than \$600 million below
plan. To achieve our net income plan for the year required significant
cost cutting. This was in addition to funding greater than expected
costs associated with the year 2000 computer transition and higher than
planned labor costs.

The outlook for the future is even more challenging. Volume growth is
below historical norms and projections of Fiscal Year 2000 require
workyears be held at the Fiscal Year 1999 level while mail volume and
the delivery network continue to grow. In the Test Year after rates, a
1.5 percent workyear reduction is projected. It will be a challenge to
achieve this reduction. Many other uncertainties exist and there also
appear to be significant new pressures on salary and benefit cost
levels.

At the time of the last rate case, health benefit costs had been
decreasing. Health benefit cost increases have now returned to near
double digit rates. Also, the labor contracts which have become
effective since the last rate filing are significantly more costly than
previous contracts.

When the Postal Service proposed a one percent contingency in the last
rate case, I indicated that this did not represent a permanent change in
management's judgment concerning the level of coverage generally
necessary to protect against unforeseen events and forecasting errors. I
said, "\[I\]n different circumstances in the future, it may very well be
necessary to return to the higher levels of contingency historically
deemed prudent to provide the protection intended by the provision for
contingencies."[^17]

In this case, we are moving closer to the historically normal
contingency of 3.5 percent. Further supporting this judgment is the
increasingly competitive environment in which the Postal Service
operates. In particular, the Internet appears to be making inroads into
the Postal Service's transaction and correspondence mail volume and may
be diverting advertising and marketing revenues from the Postal Service
as well. Our more traditional competitors appear to be more aggressively
pursuing legislative limitations on the Postal Service's ability to
operate in a business-like manner. In addition, foreign postal
administrations have been expanding their operations into the United
States. Finally, the earliest that rates can be implemented is in
January of the Test Year. The rates which include the 2.5 percent
contingency will not begin until the second quarter of the test year.

In deference to the Commission\'s desire to evaluate forecast errors and
their sources, I have included historical variance analyses similar to
those included in past filings. Pages 5 through 8 of my Exhibit 9J
reflect the results of applying the four sets of historical weighted
average cost and revenue variances calculated on pages 1 through 4 of
USPS EXHIBIT 9J, to  Docket No. R2000-1 Test Year before and after rates
cost and revenue estimates. These produce hypothetical Test Year
variances ranging from -2.2 percent, or -\$1.5 billion to 2.3 percent,
or \$1.5 billion. 

I believe historical variance analyses should not be the basis for
determining the need for a contingency or its size. The Postal Service's
financial performance is under much greater pressure and is subject to
substantially greater risks than it was at the time of the last two
omnibus rate cases. No matter what results an historical
variance analysis produces, it is not appropriate to use historical data
to determine the size of the contingency in lieu of management\'s
judgment about the future.

These calculations are included for informational purposes only. To
conclude from any historical variance analysis that a certain level
of unforeseen events will occur in the Test Year would be
both irresponsible and illogical. No one can predict the future, but the
evidence clearly suggests that management\'s past judgment regarding the
size of the contingency required has been good.

I am convinced that variance analysis cannot be relied upon in a vacuum
as the basis for determining an appropriate contingency level.  Variance
analysis can only show us what happened in the past, and should not be
relied upon exclusively to determine the prudent amount of
cushion against unforeseen events in the Test Year. Regardless of what
history shows, management must be allowed to assume its responsibility
to determine the amount of contingency most appropriate for achieving
its goals.

It is also important to realize that the variance analyses reflected in
pages 5 through 8 of my Exhibit 9J attempt to show hypothetically how
future costs and revenues would behave if the individual segment
variances experienced in the past were to be precisely repeated in the
Test Year.[^18]  Since this does not allow for management\'s
judgment regarding the future and the influence of management\'s
subsequent actions, these types of analyses can only serve as
information to be considered by management in setting Postal Service
policy. In consideration of the Postal Service's goals and the risks
involved, a contingency of two and one-half percent has been used for
the purpose of estimating this revenue requirement.

3\. Recovery of Prior Years\' Losses

The revenue requirement provides for the recovery of losses incurred
prior to the Test Year, in accordance with the break-even requirement of
the Postal Reorganization Act and previous Postal Rate Commission
Recommended Decisions. The Test Year revenue requirement includes
\$268.3 million for the purpose of recovering prior years\' losses. This
amount has been computed by summing the net operating income (loss) for
all periods from the inception of the Postal Service to the beginning of
the Test Year, deducting the funds received under Public Law No.
94- 421, and amortizing the total amount over nine years.  Computation
of the amount included in the revenue requirement for recovery of prior
years\' losses is shown in Table 53.

The nine-year amortization period is consistent with the Commission\'s
Recommended Decisions in Docket Nos. R80-1, R84-1, R87-1, R90-1, R94-1
and R97-1. In management\'s judgment, it is a reasonable period: it
is neither so short as to unduly increase the revenue requirement nor so
long as to unduly delay recovery of losses.

Despite recent progress in restoring equity, the Postal Service's equity
position remains negative and below the capital contribution of the
United States Government. Historically, the Postal Service incurred net
losses and experienced a decline in equity over most rate cycles since
Postal Reorganization. The period following the Docket No. R80-1 rate
change from 1981-1984, and, the last two rate cycles have been the
exceptions. Postal Service equity declined from \$1.7 billion, when it
began operations on July 1, 1971, to a negative \$6.0 billion at the end
of FY 1994. The Postal Service has reversed this trend. Much equity has
been restored over the past two rate cycles. Our interim year
projections also show that equity restoration will continue up to the
Test Year. As shown in my Exhibit 9L, which depicts historical net
incomes, losses, and equity, a fifth straight net income was realized in
FY 1999, and a net income of \$65.6 million is estimated for Fiscal Year
2000. This will improve equity to a negative \$380.4 million by the end
of FY 2000.

Notwithstanding this progress, rising cost levels and weak revenue
growth will tend to undermine the Postal Service's equity position in
Fiscal Year 2001. In this regard, the Board of Governors of the Postal
Service has affirmed the Postal Service's commitment to restoring and
maintaining equity over time. In Resolution No. 95-9, adopted on July
10, 1995, the Board issued a policy statement outlining a goal of
restoring equity between general rate increases cumulatively in relation
to the amount included for recovery of prior years' losses in the most
recent rate case.[^19] In connection with that goal, the resolution
further stipulates that, whenever it is projected that restoration of
equity as specified might not be met, the Board and the Postal Service
will take action to reduce costs and/or increase revenues. A report on
equity restoration prepared by Price Waterhouse LLP for the Board of
Governors provides significant advice as background to the Board's
policy Resolution.[^20] The Report recommended that "the Board of
Governors adopt a Policy Statement affirming a commitment to the goals
of breaking even over time and taking actions to improve the Postal
Service's equity position."[^21]

A Fiscal Year 2001 before rates Test Year with a projected net loss of
\$1.7 billion indicates the need for additional net revenue. As
reflected in my Exhibit 9N, the Postal Service projects it will fall
short of the Board of Governor's equity restoration goal if rates are
not increased during Fiscal Year 2001.

Although in the past two rate cycles significant equity was restored,
the Postal Service\'s current equity position is still negative. If
there had been no provision for recovery of prior years\' losses,
however, the erosion of equity would have been even more severe. Without
the provision for recovery of prior years\' losses, the Postal Service
would have no mechanism to ultimately meet the statutory requirement to
break even.

I believe that the recovery of prior years\' losses is essential to the
ultimate, long-term improvement and maintenance  of the Postal
Service\'s financial condition. My judgment in this matter is further
supported by the report on equity restoration prepared by Price
Waterhouse LLP for the Board of Governors referred to above.
The provision for recovery of prior years\' losses proposed in this case
is essential to continuing the Postal Service's progress in restoring
equity and meeting the goals set by management and the Board of
Governors.

**Table 53**

Computation of Prior Years\' Loss Recovery

(\$ 000)

  ---------------------------------------------------- ------------------
  Deficit from Operations since commencement on July   3,843,327
  1, 1971 through September 30, 1998                   

  Less: Actual net income in FY 1999                   363,411

  Less: Estimated net income in FY 2000                65,603

  Less: Funds from Public Law No. 94-421               1,000,000

  Total Recovery Required                              2,414,313

  Annual Increment (1/9)                               268,257
  ---------------------------------------------------- ------------------

The prior years' loss recovery amount has declined from \$936 million in
Docket No. R94-1 to \$377 million in Docket No. R97-1 and \$268 million
in this filing demonstrating that the prior years' loss recovery concept
is working as intended.

IV\. REVENUES BEFORE AND AFTER RATES

The three sources of postal revenues are operating revenue,
appropriations, and interest income. Table 54 provides total revenues,
actual and estimated through the Test Year:

Table 54

Total Revenues

(\$ 000)

  ----------------------------------------- -----------------------------
  FY 1998                                   60,116,759

  FY 1999                                   62,755,251

  FY 2000                                   64,817,360

  Test Year before rates                    66,328,401

  Test Year after rates                     69,116,820
  ----------------------------------------- -----------------------------

A. Mail and Special Services Revenues[^22]

The mail classes, together with special and other services provided to
the public, yield the largest portion of total operating revenues. The
derivation of mail and special services revenue is explained in the
testimony and workpapers of each of the individual pricing witnesses and
summarized in the Testimony of witness Mayes (USPS-T-30).

Revenues for mail and special services through the Test Year are shown
in the following table:

**Table 55**

Mail and Special Services Revenue

(\$ 000)

  ----------------------------------------- -----------------------------
  FY 1998                                   60,005,025

  FY 1999                                   62,654,507

  FY 2000                                   64,725,524

  Test Year before rates                    66,234,108

  Test Year after rates                     69,022,527
  ----------------------------------------- -----------------------------

B. Appropriations[^23]

Prior to Fiscal Year 1983, the Postal Service received annual
appropriations for public service costs. However, since Fiscal Year
1982, appropriation revenue has been for revenue forgone only.
Currently, revenue forgone results from providing free mail for the
blind and for overseas voters.

The appropriation revenue included in this filing consists of two
components. The first represents the estimated cost of providing free
mail for the blind and visually handicapped and overseas voting. As
reflected in my Exhibit 9E, this amounts to \$66.473 million for the
test year. The second component is a \$0.620 million adjustment relating
to Fiscal Year 1998 to reconcile the appropriation received to the
amount that would have been authorized if based on the final audited
mail volume. (The FY 1998 appropriation revenue in my Exhibit 9E also
includes a third component of \$10 million relating to earned but unpaid
revenue as higher rates were phased in for certain previously subsidized
categories of mail.)

During Fiscal Years 1991-1993, the amounts appropriated were not
sufficient to fund the services provided by the Postal Service. The
Revenue Forgone Reform Act of 1993, authorized the appropriation of
\$1.218 billion in 42 annual \$29 million payments through Fiscal Year
2035, to reimburse the Postal Service for earned but unpaid revenue
forgone for Fiscal Year's 1991-1993, and for the estimated revenue
forgone during the period Fiscal Year 1994-1998. During FY 1994 -1998,
the revenue forgone appropriation was gradually phased out and reduced
rates were gradually increased until half of the amount necessary to
provide full funding was provided by the rates charged to users for all
previously subsidized categories of mail except free mail for the blind
and absentee overseas voters, which remain fully subsidized. The
remaining one-half of the shortfall is passed on to all mail users
through higher rates that result from the rate-making process. Should
any amount not be appropriated, the Postal Service can adjust the rates
of the subsidized mail categories enough to offset the shortfall.

In recognition of the 42-year extended payment cycle of the Revenue
Forgone Reform Act of 1993, on September 30, 1993, the Postal Service
recorded as a receivable the present value of earned and unpaid revenue
forgone appropriations for FY 1991--1993. During FY 1994--1998
additional amounts were added to this receivable to recognize earned but
unpaid revenue as the higher rates were phased-in for certain categories
of subsidized mail. As each of the annual \$29 million appropriation
payments is received, a portion is recorded as imputed interest income
(because the account receivable was recorded at a present value
discounted at 7%) and the remainder is recorded as a partial collection
of the account receivable.

> Additional details regarding the calculation of these amounts can be
> found in Chapter XIb and XIc of LR I-127.

The following table shows revenue forgone appropriation revenue through
the Test Year:

**Table 56**

Appropriation Revenue

(\$ 000)

  ---------------------------------------------- ------------------------
  FY 1998                                        67,274

  FY 1999                                        71,195

  FY 2000                                        64,436

  Test Year before rates                         67,093

  Test Year after rates                          67,093
  ---------------------------------------------- ------------------------

C. Interest Income

Interest income has two components: investment income and imputed
interest.

Investment income earned by the Postal Service in any period depends
upon prevailing short-term interest rates and the amount of cash
invested. Because the Postal Service has adopted a zero cash balance
goal as one of its financial management policies, minimal investment
income is projected through the test year.

Imputed interest results from the calculation at 7 percent interest of
the present value of future payments related to the Revenue Forgone Act
of 1993. The calculation of these amounts is discussed above under
appropriations and explained in detail in Chapter XIc of Library
Reference I-127.

The following table shows Interest income for Fiscal Year 1998 through
the Test Year:

**Table 57**

Interest Income [^24]

(\$ 000)

+------------------------+--------------+--------------+--------------+
| Period                 | Investment   | Imuted       | Total        |
|                        |              |              | Interest     |
|                        | Income       | Interest     | Income       |
+------------------------+--------------+--------------+--------------+
| FY 1998                | 17,660       | 26,800       | 44,460       |
+------------------------+--------------+--------------+--------------+
| FY 1999                | 2,949        | 26,600       | 29,549       |
+------------------------+--------------+--------------+--------------+
| FY 2000                | 900          | 26,500       | 27,400       |
+------------------------+--------------+--------------+--------------+
| Test Year before rates | 900          | 26,300       | 27,200       |
+------------------------+--------------+--------------+--------------+
| Test Year after rates  | 900          | 26,300       | 27,200       |
+------------------------+--------------+--------------+--------------+

V. TEST YEAR REVENUE DEFICIENCY

The Postal Service\'s total revenue deficiency in the Test Year at
present rates would be approximately \$3.688 billion. Changes in postal
rates and fees proposed in this filing will eliminate the deficiency as
illustrated below:

**Table 58**

Test Year Revenue Deficiency [^25]

(\$ 000)

  --------------------------------------------------- -------------------
  **Present Rates**                                   **Test Year**

  Total Revenue Requirement [^26]                     70,015,977

  Less: Total Revenue [^27]                           66,328,401

  Total Revenue Deficiency                            3,687,576

  **Proposed Rates**                                  

  Increase in Revenue                                 2,788,419

  Decrease in Revenue Requirement                     877,320

  Change in Revenue Deficiency                        3,665,739

  Revenue Surplus (Deficiency)                        (21, 837)
  --------------------------------------------------- -------------------

The financial impact of present and proposed rates in the Test Year, as
represented in the equity section of the balance sheet, is demonstrated
in Table 59.

Table 59

Analysis of Changes in Equity [^28]

(\$ 000)

+-------------------+-----------+-----------+-----------+-----------+
|                   | FY 1999   | FY 2000   | Test Year | Test Year |
|                   |           |           |           |           |
|                   |           |           | Before    | After     |
|                   |           |           | Rates     | Rates     |
+-------------------+-----------+-----------+-----------+-----------+
| Beginning Balance | (809,403) | (445,992) | (380,389) | (380,389) |
+-------------------+-----------+-----------+-----------+-----------+
| Net Income/(Loss) | 363,411   | 65,603    | (3        | 246,419   |
|                   |           |           | ,419,319) |           |
+-------------------+-----------+-----------+-----------+-----------+
| Ending Balance    | (445,992) | (380,389) | (3        | (133,970) |
|                   |           |           | ,800,158) |           |
+-------------------+-----------+-----------+-----------+-----------+

**EXHIBITS INDEX**

STATEMENTS OF REVENUE AND EXPENSE

FY 1998 - TEST YEAR AFTER RATES USPS-9A

ROLLFORWARD SOURCE OF CHANGE SUMMARIES,

FY 1998 THROUGH THE TEST YEAR AFTER RATES USPS-9B

MAIL VOLUME, FY 1998 THROUGH THE TEST YEAR

AFTER RATES USPS-9C

MAIL AND SPECIAL SERVICES REVENUE, FY 1998

THROUGH THE TEST YEAR AFTER RATES USPS-9D

APPROPRIATION REVENUE, FY 1998 THROUGH

THE TEST YEAR USPS-9E

STATEMENT OF CASH FLOWS, FY 1999 THROUGH THE

TEST YEAR AFTER RATES USPS-9F

INTEREST INCOME, FY 1999 THROUGH THE

TEST YEAR AFTER RATES USPS-9G

REVENUE REQUIREMENT, SUMMARY ANALYSIS

OF INCOME AND EXPENSES USPS-9H

COMPARATIVE STATEMENTS OF REVENUE AND

EXPENSE, TEST YEAR VS. ACTUAL (DOCKET R97-1) USPS-9I

COMPUTATION OF WEIGHTED AVERAGE PERCENTAGE

REVENUE AND COST VARIANCES USPS-9J

OMNIBUS BUDGET RECONCILIATION ACT (OBRA) COSTS USPS-9K

SUMMARY OF NET INCOME (LOSS) & EQUITY USPS-9L

SUMMARY OF CHANGES IN ACCRUED COSTS BY SOURCE USPS-9M

NET INCOME (LOSS) GAP FROM EQUITY RESTORATION

TARGET USPS-9N

SUMMARY OF UNIT LABOR COSTS FOR MAJOR

EMPLOYEE GROUPS USPS-9O

SUMMARY OF CHANGES IN WORKYEARS BY SOURCE USPS-9P

ANALYSIS OF CHANGES IN PERSONNEL COSTS USPS-9Q

ADJUSTMENT OF ROLLFOWARD COST FOR WORKYEAR USPS-9R

MIX AND FINAL ADJUSTMENTS

WORKERS' COMPENSATION DISCOUNT RATE ANALYSES USPS-9S

[^1]: ^/^ The various fiscal or other periods discussed in this
    testimony include the following:

    The Test Year (FY 2001) - October 1, 2000 to September 30, 2001

    Fiscal Year 2000 - October 1, 1999 to September 30, 2000

    Fiscal Year 1999 - October 1, 1998 to September 30, 1999

    The Base Year (FY 1998) - October 1, 1997 to September 30, 1998

[^2]: ^/^ Includes OBRA 1991 extraordinary retroactive assessment for
    employee benefits (\$1,810 million).

[^3]: ^/^ Includes restructuring costs of \$1,010 million.

[^4]: ^/^ Includes OBRA 1993 (\$857 million) and debt refinancing
    premium (\$536.5 million).

[^5]: ^/^ Includes interest income and appropriations.

    ^[6]{.underline}/^ Includes interest expense and all extraordinary,
    unusual, and non-recurring expenses.

[^6]:

[^7]: ^/^ Excludes the asset Deferred Retirement Costs and the long-term
    liability Amounts Payable for Retirement Benefits. The current
    liability portion of Amounts Payable for Retirement Benefits has
    been included as a liability.

[^8]: Docket No. MC96-3, Library Reference SSR-112.

[^9]: Final adjustments are calculated by other witnesses and summarized
    and sourced in witness Kashani's Exhibit USPS-14I.

    ^10^ Exhibit 9B, page 9.

[^10]:

[^11]: Weighted by Postmaster salaries by class.

[^12]: Weighted average.

[^13]: ^/^ DRI/McGraw Hill is a leading economic forecasting service.

[^14]: ^/^ CPI-W is the Consumer Price Index for all Urban Wage Earners
    & Clerical Workers

[^15]: ^/^ ECI is the Employment Cost Index for Wages and Salaries,
    Private Industry. The ECI growth factors used in this testimony
    reflect the September index over the previous September index, with
    a one-year lag.

[^16]: Includes workyear mix and final adjustments. Excludes contingency
    and recovery of prior years' losses.

[^17]: Docket No. R97-1, witness Tayman USPS-T-9, page 38, revised
    8/22/97.

[^18]: General ledger account classifications were realigned in FY 1995.
    Material shifts were made among segments 16, 18, and 20. Weighted
    average historical percentage variances which are impacted by FY
    1995 data were therefore based on the variances for these three
    segments in total.

[^19]: ^/^ Docket No. MC96-3, Library Reference SSR-112.

[^20]: ^/^ Id.

[^21]: ^/^ Id.

[^22]: ^/^ Volumes by class of mail and the attendant revenues for FY's
    1999, 2000, and the Test Year before and after rates are shown in my
    Exhibits 9C and 9D. The development of volume estimates is included
    in the testimonies and workpapers of witnesses Tolley, Thress, and
    Musgrave (USPS-T-6,7, & 8). After rates volume adjustments that
    result from market research or special studies are explained in the
    testimony of the appropriate pricing witness and are summarized in
    the testimony of witness Mayes (USPS T-30).

[^23]: ^/^ My Exhibit 9E shows the components of appropriation revenue
    for the relevant years.

[^24]: ^/^ Estimated cash flows for FY 1999, FY 2000 and the Test Year
    before and after rates, along with projected investment income, are
    shown in my Exhibits 9F and 9G.

[^25]: ^/^ An analysis of changes in income and expenses comparing
    before and after rates is included in my Exhibit 9H.

[^26]: ^/^ From Table 15, the Test Year revenue requirement before and
    after rates reflects, total accrued cost segment expense, final
    adjustments, contingency and recovery of prior years' losses.

[^27]: ^/^ From Table 54, revenues for the Test Year at present rates.

[^28]: ^/^ The contingency is included and the prior year loss recovery
    is excluded from test year costs when determining net income (loss)
    and equity.