TW**-**T-2

BEFORE THE

POSTAL RATE COMMISSION

WASHINGTON, D. C. 20268-0001

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

postal rate and fee changes Docket No. R2006-1
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

DIRECT TESTIMONY OF

HALSTEIN STRALBERG

ON BEHALF OF

TIME WARNER INC.

Concerning periodicals Costs

SEPTEMBER 6, 2006

TABLE OF CONTENTS

  ----- --- ---- -- ----------------------------------------------------------------------------------------------------------------------------- --------------------- -----
                                                                                                                                                  [Page:]{.underline}   

                    AUTOBIOGRAPHICAL SKETCH \...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\.........                                                      1

  I                 PURPOSE OF TESTIMONY \...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...........\...\.....                                             3

  II                SUMMARY\...\...\...\...\...\...\...\...\...\...\............\...\...\...\...\...\...\...\...\...\...\...\..........\...\...                         4

  III               An improved mail flow model for periodicals flats .....                                                                                             8

        1           The Cost Of "Prepping" Bundled Flats In A Separate Operation Is Part Of The Overhead Associated With Automated Flats Sorting                        9
                    And Should Be Included In A Worksharing Related Model \...\...\...\...\...\...\...\.....                                                            

        2           A Mail Flow Model Should Make Realistic Assumptions About How Many Flats Receive Automated Sorting. Miller's Model Does Not                         11
                    ......                                                                                                                                              

        3           A Realistic Model Of The UFSM-1000 Must Recognize The Different Uses Of Its Two Sorting Modes                                                       14
                    ....................................................                                                                                                

        4           The Impact Of Bundle Breakage ..................................................                                                                    19

        5           The Costs Modeled By Miller Occur In More Cost Pools Than Those He Includes In His "CRA                                                             23
                    Adjustment"............................................                                                                                             

        6           Firm Bundles ...........................................................................                                                            26

        7           Miller Fails To Distinguish Between Carrier Route Direct Sacks, Which Do Not Require Bundle Sorting, And 5-Digit Carrier                            26
                    Routes Sacks, Which Do ................................................................................                                             

  IV                extended billing determinants for outside county flats                                                                                              29
                    ..................................................\...\...\...\...\...\...\...\...\.........\.....                                                  

        1           Container Volumes ...................................................................                                                               30

        2           Bundle Volumes .......................................................................                                                              33

        3           Piece Volumes .........................................................................                                                             33

  V                 an extended mail processing cost model for flats .....                                                                                              35

        1           Container Unit Costs ..................................................................                                                             36

        2           Bundle Unit Costs .................................................................\...\...                                                         43

        3           Piece Unit Costs .......................................................................                                                            44

        4           The CRA Adjustment .................................................................                                                                46

  VI                CONCLUSIONS\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\........\........\...                           48
  ----- --- ---- -- ----------------------------------------------------------------------------------------------------------------------------- --------------------- -----

LIST OF EXHIBITS

  ------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------- --------------------- ---------- --
                                                                                                                                                                             [No. Of                          
                                                                                                                                                                             Pages:]{.underline}              

  A      ESTIMATED MAIL PROCESSING COSTS OF OUTSIDE COUNTY FLATS PER RATE CATEGORY UNDER USPS AND PRC COSTING                                                                                      1          
         METHODS.............................................\.......                                                                                                                                         

  B      outside county non-letters expanded billing determinants                                                                                                                                  2          
         ................................................................                                                                                                                                     

  C      outside county non-letters - mail processing unit costs of handling pieces, bundles, sacks and pallets                                                                                    10         
         ...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...                                                                                  
  ------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------- --------------------- ---------- --

LIST OF TABLES

  -------- ------------------------------------------------------------------------ ------------------------------ --------------------- ---------
                                                                                                                   [Page:]{.underline}   

  1        Utilization & Productivity at Different UFSM-1000 Operations. \.....                                                          15

  2        UFSM 1000 Productivities Rates According To LR-L-56 (BOZZO) And LR-L-43                                                       17
           (Miller) .............................................                                                                        

  3        IOCS Tallies Of Outside County Flats at FSM/UFSM-1000. ...\.....                                                              18

  4        Use Of MADC Sacks By Circulation Size ...........................\.....                                                       40

  A1       Presort/Automation Related Mail Processing Unit Costs ............                                                            A-1

  A2       Presort/Automation Related Mail Processing Unit Costs With Presort                                                            A-1
           Levels Held Constant ..............................................                                                           

  A3       Piece Counts By Bundle & Container Presort Level And Piece                                                                    A-2
           Characteristics                                                                                                               
           ..................................................................                                                            

  B1       Outside County Sack & Pallet Counts By Entry Point & Container Presort -                                                      B-1
           TY08 ....................................................                                                                     

  B2       Estimated Counts Of Bundles By Bundle & Container Presort Level - TY08                                                        B-1
           ..................................................................\...                                                        

  B3       TY08 Piece Counts By Bundle & Container Presort Level And Piece                                                               B-2
           Characteristics                                                                                                               
           .........................................................                                                                     

  C1a      Unit Costs Of Sack/Pallet Handling By Entry Point & Container Presort                                                         C-2
           (PRC Costing)..................................                                                                               

  C1b      Unit Costs Of Sack/Pallet Handling By Entry Point & Container Presort                                                         C-2
           (USPS Costing**)**                                                                                                            
           ...................................................\...                                                                       

  C2a      Per-Bundle Unit Costs By Bundle & Container Presort Level - Excludes                                                          C-3
           Weight Related Bundle Costs - Used In Mitchell\'s Rate Design - PRC                                                           
           Costing ......................................................                                                                

  C2b      Weight Related Per-Bundle Unit Costs By Bundle & Container Presort                                                            C-3
           Level - PRC Costing ................................................                                                          

  C2c      Total Per-Bundle Unit Costs, By Bundle & Container Presort Level,                                                             C-3
           Including Weight Related Costs - PRC Costing ...............                                                                  

  C2d      Per-Bundle Unit Costs By Bundle & Container Presort Level - Excludes                                                          C-4
           Weight Related Bundle Costs - USPS Costing ..........                                                                         

  C2e      Weight Related Per-Bundle Unit Costs By Bundle & Container Presort                                                            C-4
           Level - USPS Costing ..............................................                                                           

  C2f      Total Per-Bundle Unit Costs, By Bundle & Container Presort Level,                                                             C-4
           Including Weight Related Costs - USPS Costing .........\....                                                                  

  C3a      Unit Piece Processing Costs By Bundle & Container Presort Level & Piece                                                       C-5
           Characteristics - Excludes Weight Related Costs - Used In Mitchell\'s                                                         
           Rate Design - PRC Costing .....................\....                                                                          

  C3b      Unit Piece Processing Costs By Bundle & Container Presort Level & Piece                                                       C-6
           Characteristics - Weight Related Costs Only - PRC Costing                                                                     
           ....................................................................                                                          

  C3c      Unit Piece Processing Costs By Bundle & Container Presort Level & Piece                                                       C-7
           Characteristics - Includes Weight Related Piece Handling Costs - PRC                                                          
           Costing ..........................................\...                                                                        

  C3d      Unit Piece Processing Costs By Bundle & Container Presort Level & Piece                                                       C-8
           Characteristics - Excludes Weight Related Costs - USPS Costing                                                                
           ...............................................................\....                                                          

  C3e      Unit Piece Processing Costs By Bundle & Container Presort Level & Piece                                                       C-9
           Characteristics - Weight Related Costs Only - USPS Costing                                                                    
           ...............................................................\....                                                          

  C3f      Unit Piece Processing Costs By Bundle & Container Presort Level & Piece                                                       C-10
           Characteristics - Includes Weight Related Piece Handling Costs - USPS                                                         
           Costing ...........................................                                                                           
  -------- ------------------------------------------------------------------------ ------------------------------ --------------------- ---------

## AUTOBIOGRAPHICAL SKETCH

My name is Halstein Stralberg. I am a consultant to Time Warner on
issues related to distribution of magazines through the postal system.
Until June 1999 I was a principal at Universal Analytics, Inc. (UAI), a
management consulting firm in Torrance, California. and manager of its
Operations Research Division.

My academic background is in mathematics, with a master\'s degree from
the University of Oslo, Norway in 1963. I received a bachelor\'s degree
in mathematics, physics and astronomy at the University of Oslo in 1961.
Most of my professional experience is in the area of management science
and operations research. I have directed and performed more than 30
years of postal related studies as well as management studies for other
clients in government and private industry, including production
scheduling and control, corporate planning and finance, investment
analysis, design and optimization of transportation systems, health care
and computer system design.

I have previously presented 21 pieces of testimony before this
Commission on a variety of postal costing and rate design issues: two
rebuttal testimonies on behalf of the Postal Service in Docket No.
R80-1; four testimonies on behalf of Time Inc. in R87-1; four on behalf
of Time Warner Inc. in R90-1; one in MC91-3; two in R94-1; two in
MC95-1; two in R97-1, two in R2000-1, and two on behalf of Time Warner
Inc. et al. in C2004-1.

Since 1987 most of my work has been in support of Time Warner\'s
participation in postal rate cases. Besides presentation of testimony, I
have advised Time Warner on a variety of postal issues and directed the
development of computer models for analysis of postal costs and rate
design. I participated actively as a member of the joint industry/USPS
Periodicals Review Team whose report and recommendations are included in
LR-I-193 of Docket No. R2000-1, as an industry representative in an MTAC
data collection on bundle breakage (LR-I-297), and in a USPS/Time Warner
task force to evaluate the feasibility of tailoring the preparation of
Periodicals mailings to the processing methods and sort schemes used in
each postal facility.

From 1973 until 1987, I directed UAI\'s efforts under several contracts
with the U.S. Postal Service. My activities under these contracts
included:

1.  Design and development of the Mail Processing Cost Model (MPCM), a
    weekly staffing and scheduling computer program for postal
    facilities, with an annualized extension (AMPCM), using linear
    programming for long term staffing planning in a postal facility.

2.  An extensive data collection in 18 postal facilities designed to (1)
    establish a Postal Service data base on mail arrival rates and mail
    attributes affecting costs (subclass, shape, indicia, presort,
    container method, etc.), and (2) develop the model input data needed
    to apply MPCM for each facility.

3.  The \"Study of Commercial Mailing Programs\" under the Long Range
    Classification Study Program. This study involved a detailed cost
    and market evaluation of several rate and classification concepts,
    including various presort concepts, destinating SCF discounts for
    second class, plant loading and barcoding of preprinted envelopes.

4.  A BMC cost analysis which resulted in the establishment of the
    Inter/Intra-BMC parcel post rate differential in R80-1.

5.  Numerous simulation studies requested by USPS management.

My two testimonies on behalf of the Postal Service in R80-1 addressed
the Intra/Inter BMC cost analysis and Dr. Merewitz\'s use of MPCM to
analyze peak load costs.

I conducted a number of classes and seminars on the use of MPCM for
Postal Service employees and interested outside parties. I have made
extensive visits, including many multiple repeat visits, to over 40 USPS
mail processing facilities and have observed all aspects of mail
processing operations on all tours, as well as methods of mail
collection, acceptance and transportation, and various ongoing postal
data collection systems. I estimate that in total I have spent more than
2000 hours on site in postal facilities.

Besides my postal activities, I directed a study for the department of
Health and Human Services of the impact of alternative regulatory
policies used by state Medicaid agencies, which included an extensive
data gathering effort and multiple regression analysis to determine
factors influencing utilization and cost in the Medicaid program.

Before joining UAI I was an Operations Research Analyst at the Service
Bureau Corporation (IBM), where I performed several large-scale
simulation studies, including a design analysis of the Dallas/Fort Worth
Airport\'s people mover system and simulations to improve design and
response time in large interactive computer systems.

As Operations Research Analyst at Norsk Hydro, a Norwegian petrochemical
company, my work included design, development and implementation of
factory production scheduling systems, studies of transportation and
distribution systems and risk analysis of investment decisions.

For three years I was assistant Professor of Mathematics at the
University of Oslo.

## I. Purpose of testimony

My testimony analyzes Periodicals mail processing costs and the
characteristics of Periodicals mailings that drive those costs. My
objective in doing so is to facilitate a rate design that is more cost
based and more beneficial for the long term health and viability of the
Periodicals class than either the current rate structure or the rates
proposed in this docket by witness Tang.

I correct a number of deficiencies and errors in the Periodicals mail
flow model contained in USPS LR-L-43 and supported by witness Miller
(USPS-T-20) and present an alternative model.

As was explained in Docket No. C2004-1, the Time Warner et al. complaint
case, Time Warner believes that the rate categories in current
Periodicals rate design are deficient because they fail to identify
several important drivers of Periodicals costs and therefore make cost
based rates impossible. My current testimony offers an updated version
of the cost model I presented in C2004-1. Model results include test
year per-piece, per-bundle, per-sack and per-pallet unit costs.

I also provide, as I did in C2004-1, an extended set of billing
determinants that identify the Periodicals volumes corresponding to each
identified cost category.

Both the unit costs and extended billing determinants are used by
witness Mitchell (TW-T-1), who proposes an alternative and more cost
based Periodicals rate design that is responsive to the Commission's
order addressing the Time Warner et al. complaint in Docket No. C2004-1.

## II. summary

My testimony in Docket No. C-2004-1 demonstrated that developing
properly cost based Periodicals rates requires viewing Periodicals costs
as driven, not only by pieces and pounds as in traditional rate design,
but also by the bundles, sacks and pallets used in a Periodicals
mailing. It explained in some detail how bundle and container presort
levels, as well as the number of bundles, type and number of containers
and container entry point into the postal system, all influence the
costs incurred by the Postal Service. Additionally, it demonstrated the
cost impact of piece characteristics such as machinability on the
current generation of flats sorting machines.

That discussion is subject to a pending motion to designate it as
evidence in the current docket. Motion of Time Warner Inc. to Designate
Evidence from Other Commission Dockets, filed August 9, 2006. I will not
repeat it here. Instead, this testimony describes my recent work in
preparing cost models and mail volume data that can support either a
traditional Outside County rate design along the lines proposed by
witness Tang (USPS-T-35), or a more cost based and in my opinion
superior rate design such as that proposed by witness Mitchell (TW-T-1).

Section III identifies specific deficiencies and mistakes in the
Periodicals flats mail flow model contained in USPS LR-L-43, sponsored
by witness Miller (USPS-T-20). It presents an alternative model, for the
Commission's use should it decide to retain the traditional rate design
approach. That model, referred to in the following as FlatsModel.xls, is
an Excel spreadsheet contained in TW LR-2. It produces estimates of mail
processing costs per rate category, in the same format as Miller's
model. For convenience, the model can be set to use either PRC or Postal
Service assumptions regarding volume variability of mail processing
costs.

The major corrections and improvements I have made to Miller's mail flow
model, as described in Section III, are:

-   I added the capability to distribute the flats preparation cost pool
    (MODS 035) to rate categories in proportion to how much each rate
    category uses the pool. Miller treats this pool as "fixed" relative
    to worksharing. I demonstrate that it is not "fixed" at all.

-   Miller's model vastly underestimates the degree to which Periodicals
    flats are still being sorted manually. My corrected model shows more
    manual processing but still incorporates an assumption that by the
    test year the Postal Service will have succeeded in moving
    significantly more flats onto flats sorting machines.

-   Miller's model fails to properly distinguish between the sorting of
    machinable and non-machinable flats on UFSM-1000 machines, which use
    dual sorting modes with very different productivities. I correct the
    problem at incoming secondary operations, where it was causing the
    greatest distortion.

-   I have corrected some demonstrably false assumptions in Miller's
    model regarding bundle breakage.

-   I have expanded the "CRA adjustment" used by Miller because the mail
    processing costs he models are incurred in more cost pools than the
    ones he included.

Exhibit A shows the rate category costs, under PRC and USPS costing,
produced by the corrected mail flow model.

Section IV describes the development of extended "billing determinants,"
or mail volume data, needed by witness Mitchell to develop a cost based
rate design that meets the Periodicals revenue requirement.

Development of such volume data was in some ways easier than the similar
task I faced in preparing for C2004-1, due to the availability of more
complete, recent and I hope accurate base year data. The main challenge
was to "simulate" the substantial migration that will occur, forced by
the new 24-piece sack minimum, of sacked pieces and bundles to fewer,
larger and less presorted sacks.

Exhibit B shows the resulting test year volume estimates for Outside
County non-letters and the corresponding bundles, sacks and pallets. The
format is the same as in my C2004-1 testimony (TW et al.-T-2), except
that the OSCF and OAO entry point categories have been combined into
one, due to data limitations.

Section V describes the development of per-piece, per-bundle, per-sack
and per-pallet unit costs, as used in witness Mitchell's rate design.
The results are presented in Exhibit C, which has a format similar to
Exhibit B in my C2004-1 direct testimony.

The cost model used to derive these results is a collection of
inter-linked Excel spreadsheets which include the FlatsModel.xls
described above. It is an updated, improved and substantially simplified
version of the corresponding cost model I used in C2004-1. That model
was itself an updated, improved and simplified version of the LR-I-332
model developed in Docket No. R2000-1 by Christensen Associates.

One significant change relative to the C2004-1 model is in the treatment
of the flow of sacks and pallets from origin facilities through
intermediate and to destinating facilities. New survey data released by
the Postal Service regarding the number of facilities that various types
of sacks and pallets pass through allowed a simplified and presumably
more accurate model logic. The new data indicate that containers entered
far from their destination pass through more intermediary facilities,
therefore causing more handling costs, than my C2004-1 model indicated.

Even with the reduced number of sacks expected in the test year, my
model estimates that, including all piggyback costs, the test year mail
processing costs of handling Outside County bundles, sacks and pallets
(under PRC costing) are about \$640 million, versus about \$497 million
directly associated with piece sorting.[^1] The fact that pieces are
rate elements in traditional rate design, while bundles, sacks and
pallets are not (apart from the container charge proposed in this docket
by witness Tang) already shows that the current rate structure does not
correspond to costs and does not provide mailers with the proper cost
based rate incentives. The rate design being proposed by witness
Mitchell will, on the other hand, assign some (but not all) of the costs
incurred in handling bundles, sacks and pallets directly to the mailers
who use them.

## III. An improved mail flow model for periodicals flats

I have a long history of analyzing and critiquing the mail flow models
that the Postal Service uses to support its rate proposals. Since Docket
No. R87-1 I have focused particularly on the various generations of
models used to determine presort and barcode related cost differentials
for Periodicals flats. The main question I have always asked about these
models is whether they provide a realistic simulation of the way flats
are actually handled and the way costs are actually incurred in postal
facilities.

On occasion, as in dockets R87-1, R90-1 and R2000-1, I have submitted
testimony that supported alternative mail flow models.[^2] In this case
again I present an alternative mail flow model that I recommend the
Commission use. This section describes the major deficiencies I found in
witness Miller's present model, and the corrections I propose.[^3]

Prior to preparing this testimony, I had several conversations with
Sander Glick, who I understand is submitting, on behalf of the Magazine
Publishers of America (MPA), another alternative to Miller's model. Mr.
Glick and I had noticed many of the same problems with the Miller model.
Our ideas for correcting those problems converge in some cases and
differ in others. Our objectives are somewhat different, in that Glick's
model is intended to support a traditional rate design, with a few new
features. My model can also be used for the purpose, but I believe, as
does Time Warner, that the time has come for a departure from the
traditional Periodicals rate design, in favor of one that recognizes all
major factors driving Periodicals costs. The model described in this
section is therefore linked to a more general model, described in
Sections IV and V, that provides the volume and cost input needed for
the rate design presented by witness Mitchell.

I urge the Commission to review closely the model changes proposed both
by Mr. Glick and myself, and to implement those it concludes will make
the model most accurate.[^4]

### 1. The Cost Of "Prepping" Bundled Flats In A Separate Operation Is Part Of The Overhead Associated With Automated Flats Sorting And Should Be Included In A Worksharing Related Model 

The terms "flat preparation," "bundle preparation," or simply
"prepping," refer to an operation intended to facilitate the entry of
flats into a flats sorting machine, so as to maximize the utilization of
the machine. It includes removing the bundling material from a flats
bundle, facing the flats and placing them neatly in a specially designed
cart or other equipment that will be sent to a flats sorting machine.
Since the advent of the AFSM-100, flats preparation has become more
formalized and is recorded under MODS operation 035.

The 035 "prepping" generally is performed for bundled flats that are
intended for machine sorting. Carrier route bundles and bundles of flats
that will be sorted manually bypass that operation. In fact, as
confirmed by Postal Service witness McCrery, the 035 operation is
intended only to facilitate loading the flats into a machine; it is
inefficient to apply it to flats that will be sorted manually.[^5] The
equivalent operation to the part of the 035 that involves removal of
bundling material is typically performed by a manual sorting clerk and
is incorporated in the recorded productivity rates for manual flats
sorting.[^6]

According to Table 3 in witness Van-Ty-Smith's testimony (USPS-T-11),
the mail processing costs attributed to Outside County flats in the 035
cost pool, intended to facilitate entry into the AFSM-100 machines,
actually exceed the costs attributed in the AFSM-100 pool itself.[^7]
Clearly these costs must be considered when evaluating claims of
improved flats sorting productivity. If all flats sorting were still
performed manually, the 035 cost pool would have no reason to exist. Its
costs are therefore part of the cost of using flats sorting machines.

Even though the 035 costs clearly differ among the rate categories he
studies, Miller simply ignores them, as if they were fixed and
irrelevant to presort related costing. Miller acknowledged this in
response to an interrogatory in docket no. R2005-1,[^8] but he continued
to ignore the costs in the present docket.

I propose here a straightforward way to distribute flats preparation
costs in the 035 cost pool among rate categories. The method is
incorporated in my FlatsModel.xls.

Basically, the 035 pool costs should be attributed to the different
flats categories according to how much they use the pool. As confirmed
by McCrery, the pool is used by the flats that subsequently are sent to
a flats sorting machine. Flats that go directly to manual piece sorting,
and carrier route sorted flats that go directly to the carriers, do not
use the services of the 035 pool and should not be charged with its
costs. Response to TW/USPS-T42-30 (Tr. 11/3071-73),

Total test year costs in the 035 pool attributed to Outside County
non-letters (flats and parcels) are, with all piggyback costs included,
an average of 0.99 cents per piece (1.06 cents under PRC costing). But
according to my calculations, only about 37.2% of Outside County flats
encounter the 035 pool. For the flats that do receive machine sorting
and incur 035 preparation costs, the average per-piece costs are then
0.99/0.372 = 2.66 cents per piece (2.85 cents under PRC costing.)

Under this approach, very little of the 035 costs are attributed to
carrier route presorted flats, since few of them encounter the 035
operation. Also, few non-machinable flats are likely to incur 035 costs,
which helps reduce the cost differential between machinable and
non-machinable flats.

### 2. A Mail Flow Model Should Make Realistic Assumptions About How Many Flats Receive Automated Sorting. Miller's Model Does Not.

All large processing plants today are equipped with AFSM-100 machines
able to sort machinable flats much faster than they could be sorted
manually. Enhancements to the AFSM-100 described by McCrery, e.g.,
deployment of automated tray sorters in some facilities, will improve
AFSM-100 productivity even more. USPS-T-42 at 15-17. However, in reality
not all machinable flats are sorted on these machines. That is
particularly true for incoming secondary sorting, which distributes mail
already at the 5-digit level to carrier routes.[^9]

Miller's model assumes that flats that are machinable and come to a
plant that has flats sorting machines will always be machine sorted.
More precisely, as confirmed by Miller, he assumes that a non-carrier
route flat will undergo a manual incoming secondary sort if and only if
at least one of the following four conditions holds:

(1) the flat's 3-digit destination ZIP code is served by a postal
    facility that uses neither AFSM-100 nor UFSM-1000 machines;

(2) the flat is non-AFSM-100 machinable and its 3-digit destination ZIP
    code is served by a postal facility that does not use UFSM-1000
    machines;

(3) the flat was sorted manually in an upstream sorting operation; or

(4) the flat is rejected from an attempt to sort it at an AFSM-100 or
    UFSM-1000 machine.

Response to TW/USPS-T20-8 (Tr. 3/280). Under these idealized
assumptions, it follows that only about 20% of Outside County
non-carrier route flats and about 15% of Standard non-carrier route
flats receive manual incoming secondary sorting. Miller response to
TW/USPS-T20-10 (Tr. 3/281). Yet McCrery confirms that, in reality, about
44.7% of all non-carrier route flats are sorted manually in the incoming
secondary. Response to MPA/USPS-T42-1 (Tr. 11/2853).

As McCrery explained, there are many reasons why incoming secondary
flats sorting often is done manually, even if the flats are machinable
and destined to facilities equipped with flats sorting machines.
Response to TW/USPS-T20-9, redirected from witness Miller (Tr.
11/3091-92). Some of those reasons apply to Periodicals but do not apply
to Standard flats, from which one may infer that the percent of
Periodicals non-carrier route flats that receives manual incoming
secondary probably is even larger than 44.7%.[^10]

The Postal Service says, of course, that it is trying to increase the
volume of flats that receive automated sorting, and one must assume that
in the test year some progress will have been made on that front. But
the Postal Service has been saying the same thing for a long time,
certainly at least since the FY99 publication of the report by the
Periodicals Review team, of which I was a member. Additionally, some of
the reasons Periodicals continue to receive manual sorting are not going
to change, such as (1) the fact that zones with only a few carrier
routes always receive manual incoming secondary; (2) service related
issues that apply to Periodicals but not to Standard mail and; (3) the
higher percentage of non-machinable flats in the Periodicals mailstream.

I have given considerable thought to how one could make this model
correspond more closely to the reality in postal facilities. Section
III.3 below describes one change I have made with regard to the
non-machinable flats that Miller's model routes to incoming secondary
sorting on UFSM-1000 machines. That change raises the percent whose
incoming secondary sorting is finalized manually to 29.9%, still far
less than the 44.7% cited by McCrery for all flats (and the still
higher, but unknown, percentage for Periodicals).

My proposed solution for a more realistic model is as follows. For each
flat that would be flowed, based on all the model's other decision
rules, to an incoming secondary sorting by a machine, I assume that it
has an 85% chance of actually being machine sorted, while the remaining
15% will be manually sorted. The 85% can be changed by changing a single
cell in my spreadsheet.[^11] That figure was chosen based on the
following analysis.

I found that setting the percentage to 75% results in 47% of non-carrier
route flats receiving manual incoming secondary. That is probably a
fairly realistic representation of the processing Outside County flats
received in the base year. I recommend setting it to 85%, which brings
the 47% down to 40% and reflects an assumption that the Postal Service
will succeed, before the end of the test year, in significantly
increasing its use of automation in the processing of Outside County
flats.

### 3. A Realistic Model Of The UFSM-1000 Must Recognize The Different Uses Of Its Two Sorting Modes 

I have made one significant change in the way Miller's model simulates
the use of UFSM-1000 machines. In my model, non-machinable flats from
5-digit bundles are not processed on the UFSM-1000, even in facilities
where such machines exist, but are sent directly to manual incoming
secondary sorting. This section explains why I believe such a change is
justified and corresponds more closely to operational reality. It also
explains why, given perfect data, some further model changes would be
justified, and shows that inability to make those additional changes has
the effect of understating the cost difference between machinable and
non-machinable flats.

The UFSM-1000 machines, formerly known as FSM-1000, have undergone
several transformations since their introduction in the 1990's. In the
present configuration, the machines operate in two very different modes.
One is an automatic feed/automatic read mode, similar to the way flats
are sorted on the AFSM-100 (though not as fast and less reliable because
there is no remote video backup.) In the second and much slower mode,
operators at three consoles hand feed flats one at a time and manually
key the address information.

The automatic feed mode is mostly performed under MODS numbers 811
through 817, while the manual keying mode uses numbers 441-448. Response
to TW/USPS-T42-37.[^12]

Table 1 summarizes the MODS hours and TPH, as provided by Bozzo, for the
major sorting modes used on FSM/UFSM-1000 machines.

  --------------------------- --------- ----------- --------------- --------------
  **Table 1: Utilization &                                          
  Productivity At Different                                         
  UFSM-1000 Operations**                                            

  Type Sorting Operation      MODS No.  MODS Hours  TPH             Productivity

  Keying Outg, Inc. Primary   441-445   4,062,281   1,765,926,399   435

  Keying Inc. Secondary       446-448   213,990     71,064,052      332

  Automated Outg, Inc.        881-885   750,414     987,900,737     1,316
  Primary                                                           

  Automated Inc. Secondary    886-887   587,625     917,824,970     1,562

  All FSM/UFSM-1000                     5,778,729   3,792,762,447   656
  Operations                                                        
  --------------------------- --------- ----------- --------------- --------------

As the table shows, for outgoing sorting operations and for incoming
primary, most flats on UFSM-1000 (almost two thirds) are sorted in the
slow keying mode and the predominant use of workhours is devoted to
keying. But for incoming secondary, the sorting operation most relevant
to Periodicals, almost all the volume is sorted in automation mode, and
there is in fact very little keying done, little enough that it may be
done for the rejects from the automation mode.

Why would postal facilities sort so many outgoing and incoming primary
flats in the much slower keying mode rather than automated feed mode?
Obviously, it is because not all flats are suitable for sorting in the
automation mode.

The Postal Service often refers to flats that are not AFSM-100
machinable as UFSM-1000 machinable. Of course they are in the sense that
the manual keying mode where each piece is handfed one at a time can
handle just about any flat. But clearly not all such flats are
machinable in the UFSM-1000 automation mode, since if they all were
there would be no need to use the keying mode to sort them.

That still leaves open the question of whether there are some flats that
are not machinable on the AFSM-100, but can be sorted in the automation
mode on the UFSM-1000. But at least for Periodicals there do not appear
to be many such flats, because when McCrery was asked which mode typical
examples of non-machinable Periodicals flats would be sorted in if sent
to a UFSM 1000, he said they were likely to be keyed. Response to
TW/USPS-T42-37f and g (Tr. 11/3086).[^13]

So the reality appears to be that machinable flats are sorted on the
UFSM-1000 in the automated feed mode, while non-machinable flats are
hand-fed and hand-keyed with much lower productivity. But that is not
how Miller models it. He shows both machinable and non-machinable flats
being sorted in the automated mode, with only rejects sorted by
keying.[^14]

This clearly cannot be true, because if we consider the outgoing and
incoming primary operations, where according to the above table two
thirds of the volume is sorted by keying, Miller's assumption would mean
a reject rate from the automated mode of 67%, in other words an
acceptance rate of only 33%.[^15]

Having in fact combined the flows of machinable and non-machinable flats
on the UFSM-1000, Miller compensates by using productivity rates in the
automated mode that are weighted averages of the productivities in the
keying and automated modes. This is illustrated in Table 2 below, which
compares the two sets of productivity rates extracted from LR-L-56
(Bozzo) with the rates Miller uses.

  ------------------------------ ---------------- ---------- ------------
  **Table 2: UFSM 1000                                       
  Productivities Rates According                             
  To LR-L-56 (BOZZO) And LR-L-43                             
  (Miller)**                                                 

  Sorting Scheme                 LR-L-56                     LR-L-43

                                 Automated        Keying     (Miller)

  Outgoing Primary               1,599            460        570

  Outgoing Secondary             2,115            553        695

  Managed Mail                   1,798            409        549

  Incoming SCF                   1,430            497        732

  Incoming Primary               1,723            490        606

  Incoming Secondary             1,647            513        1,436
  ------------------------------ ---------------- ---------- ------------

Since Miller's assigned task, unlike mine in this testimony, did not
include development of separate costs for machinable and non-machinable
flats, his approach could perhaps be justified if the ratio of
machinable and non-machinable flats his model sends to the UFSM 1000
were the same as the ratio of the automation and keying MODS volumes
that he used to average the productivities. But it is not, because
almost all the flats Miller sends to these machines are non-machinable,
while in reality large numbers of such flats, according to McCrery,
could also have been sorted on the AFSM-100, i.e., they are
machinable.[^16]

The distortion becomes particularly large in the case of incoming
secondary flats sorting. Here Miller uses a high productivity, as shown
in Table 2, because the MODS volumes he used to weigh the two
productivity rates shows almost all incoming secondary being done in the
automated mode, while at the same time Miller's model feeds almost only
non-machinable flats to the machine.

I have therefore changed the model so that non-machinable flats with
5-digit presort are routed to manual incoming secondary sorting, rather
than to a UFSM 1000, even if such machines happen to be available in the
destinating facility. This change appears to be consistent with reality,
as revealed by the MODS data referred to above.[^17]

The MODS data are for all flats sorted on UFSM-1000, not only
Periodicals. To remove any doubt that the above change is also
consistent with how Outside County flats are handled, Table 3 shows the
direct FY2005 IOCS tallies for such flats, along with the MODS numbers,
tally counts and corresponding tally dollars.

  ------------------- -------------------- ------------------------------
  **Table 3: IOCS                          
  Tallies Of Outside                       
  County Flats at                          
  FSM/UFSM-1000**                          

  MODSNo              Tallies              Tally \$

  305                 10                   \$148,167

  306                 2                    \$37,719

  441                 53                   \$4,254,384

  442                 7                    \$551,190

  443                 75                   \$6,480,429

  444                 77                   \$6,864,014

  445                 16                   \$1,433,250

  446                 7                    \$752,934

  447                 2                    \$178,382

  448                 1                    \$76,049

  461                 1                    \$54,629

  811                 3                    \$198,459

  812                 1                    \$74,489

  813                 7                    \$724,523

  814                 15                   \$1,214,029

  815                 1                    \$75,030

  816                 30                   \$2,441,381

  Totals              308                  \$25,559,055
  ------------------- -------------------- ------------------------------

Consider the tallies in the 441-8 and 811-6 series.[^18] For outgoing
and incoming primary (MODS numbers ending in 1 through 5) almost all
tallies show sorting in the slow keying mode, i.e., non-machinable
flats. But for incoming secondary (MODS numbers ending in 6, 7 or 8)
there are many more tallies for the automation mode. Since that mode is
much faster, each of the 30 tallies with MODS number 816 corresponds to
four or five keying tallies in terms of volume handled, indicating that
the few incoming secondary keying tallies probably just represent keying
of flats rejected from the automation mode.

### 4. The Impact Of Bundle Breakage

I am proposing a few simple changes in the way Miller's model handles
bundle breakage. Bundle breakage and its impact on mail processing costs
are complex issues and there is more that could and ideally should be
done. Due to a shortage of reliable data as well as time, I have focused
on fixing the problems in Miller's model that cause the greatest
distortion and were relatively easy to fix.

My direct testimony in Docket No. R2000-1 included a quite detailed
analysis of the dynamics and cost effects of bundle breakage (TW-T-1 at
43-53). I repeat below only as much of that discussion as I believe
necessary to explain my present model.

Bundle breakage occurs during the process of sorting bundles and, in the
case of sacked bundles, during the handling and transportation of the
sacks. The way sorting is performed affects the probability of breakage.
Generally, for reasons explained below, manual bundle sorting causes
less breakage than the high volume, highly mechanized sorting performed
with APPS or SPBS machines in large processing plants.

Consider first the initial bundle sort, for bundles coming out of mailer
prepared sacks or pallets. Sacked bundles must always be dumped on an
opening belt of some kind, whether the sorting will be manual,
mechanized or automated. Surveys, as well as observations by many people
including myself, have shown that a relatively high percentage of the
sacked bundles are already destroyed when they come out of the sack --
in other words the damage must have been done during sack transportation
or handling (e.g., on BMC sack sorters).

For palletized bundles, on the other hand, there is virtually no chance
of damage as long as the bundles stay on the pallet. But the process of
dumping a pallet onto an APPS or SPBS sorting belt, as well as the
rubbing under high stress against other bundles on the belt, does entail
significant danger of breakage. Yet, the only reliable study of bundle
breakage, applied to large numbers of observations in various
facilities, showed that breakage of bundles that had come off pallets
was only about one percent.[^19]

The other mode of bundle sorting is manual. For manual sorting of
bundles on pallets, the pallet is stationary, i.e., there is no pallet
dumping. Bundles are lifted from the pallet one at a time, then thrown
into various receptacles (e.g., hampers, APC's, sacks) that are placed
around the opening area. The only time a bundle can break during this
type of sort is when it lands in the receptacle. But by that time, even
if a bundle has broken, its pieces have already made it to the next sort
level and the breakage therefore has less impact.

To illustrate this point, consider a case where 3-digit, 5-digit and
carrier route bundles are sorted from a 3-digit pallet. If it is a
mechanized/automated sorting, a bundle may break during the dumping
stage. If it cannot be recovered, the pieces from the bundle must then
be sent to a 3-digit (i.e., SCF or incoming primary) piece sorting
operation. If the bundle was a carrier route bundle, its pieces would be
forced to undergo both an incoming primary and an incoming secondary
piece sort, which would have been avoided had the bundle not broken.

Miller's model assumes that when bundles from a 3-digit sack, pallet or
any other container are being sorted and a bundle breaks, then whether
it is a manual, mechanized or automated operation, the pieces from that
bundle will need to undergo both an incoming primary and an incoming
secondary piece sort.

But in a manual sorting operation the bundle will not break until it
lands in a 5-digit container.[^20] Even if the bundle cannot be
recovered, the pieces in that container will be sent to a 5-digit
(incoming secondary) piece sort, and will bypass the incoming primary.

Miller's assumption is corrected in my model. That is, [if a bundle
breaks during a manual sorting operation from a pallet, then its pieces
are assumed to require piece sorting starting at the presort level of
the receptacle the bundle was sorted into. If the presort level of the
receptacle is the same as the presort level of the bundle, then breakage
at that point effectively causes no extra piece sorting.]{.underline}

When the bundle sorting operation is from a 5-digit container, e.g., a
5-digit pallet with carrier route bundles, and the sort is performed
manually, as it almost always is at DDU's, bundle breakage simply does
not occur, as confirmed by witness Kingsley in her response to an
R2001-1 interrogatory.[^21]

Next consider subsequent sorting operations that typically occur from a
hamper or other wheeled container into which bundles were sorted in an
earlier operation. Sorting from the hamper can again occur at either a
manual, mechanized or automated operation. If it is a manual sort, then
just as for bundles on pallets, any breakage will occur only after the
bundle reaches the next sort level. In particular, if it is an incoming
secondary sort, i.e., distribution of carrier route bundles to each
carrier, then bundle breakage simply is not an issue, as confirmed in
the Kingsley answer cited above.

To summarize, the only change I have made in Miller's model of bundle
breakage impact is to assume that when a bundle is broken in a manual
sort from a pallet or wheeled container, the bundle will already have
made it to the next sort level and therefore requires less additional
piece sorting.

There are, however, other issues not addressed in Miller's model that
should be addressed in order to assess the extent of damage caused by
bundle breakage.

One such issue concerns the extensive emphasis postal management has
placed on recovering and restoring broken bundles. When a bundle is
recovered, the cost to the Postal Service is considerably less than if
its pieces simply are removed and sent to piece sorting. McCrery
estimates that over 50% of bundles that break on SPBS machines today are
recovered, but that the percentage may be less on the APPS machines.
Response to TW/USPS-T42-35f (Tr. 11/3080). Miller admits that his model
does not analyze the impact of bundle recovery at all. Response to
TW/USPS-T20-4 (Tr. 3/275). He also admits, effectively, that if a broken
bundle is recovered, the fact that his model does not recognize bundle
recovery has the effect of exaggerating the costs for highly presorted
bundles (particularly carrier route bundles) relative to bundles with
lower presort. Response to TW/USPS-T20-6 (Tr. 3/278).

Finally, Miller assumes that in each subsequent bundle sorting operation
ten percent of the remaining bundles break. I have not changed that
assumption, except as noted above in the case of manual sorting
operations. However, there is no empirical basis for it and I tend to
think it is excessive. Miller justifies his ten percent estimate by
referring back to a "study" presented in LR-I-88. As I noted in my
R2000-1 testimony, the numbers in that study are meaningless and should
not be relied on.[^22] The Commission should urge the Postal Service to
produce a more meaningful study of bundle breakage in downstream
operations. [^23]

### 5. The Costs Modeled By Miller Occur In More Cost Pools Than Those He Includes In His "CRA Adjustment".

It has become established practice that postal witnesses who present
worksharing related mail flow models also include a "CRA adjustment,"
meant to bring a model closer to reality by assuring that the total
modeled costs correspond to the CRA costs for the activities being
modeled.

Miller's adjustment uses CRA unit costs for Outside County flats at each
mail processing cost pool, obtained from library references LR-L-53
(USPS costing) or LR-L-99 (PRC costing), sponsored by witness Smith. He
designates each pool as either "proportional" or "fixed," where
"proportional" means that a given pool performs modeled activities.
Implicit in this approach is an assumption that a given pool is either
100% proportional or not at all. However, in some instances this
assumption clearly does not hold, as explained below:

Miller's model deals with piece and bundle sorting and related support
activities. It does not deal with container handling. It follows that if
a cost pool consists mainly of bundle sorting activity, then it is
"proportional" relative to Miller's model and should be included in his
adjustment, whereas a cost pool that mainly handles containers (e.g.,
the MODS platform pool) is "fixed" relative to Miller's model and should
not be included. But what if the pool includes some container handling
and some bundle sorting? Then it cannot possibly be either fully
"proportional" or fully "fixed." Such a pool is the NonMODS "allied"
pool. As Miller admits, some of the bundle sorting in his model occurs
at DDU's and would be recorded in the "allied" pool at NonMODS offices.
Yet he calls that pool "fixed" relative to his model. Response to
TW/USPS-T20-12 (Tr. 3/284-65). Upon request, witness Van-Ty-Smith
calculated, from IOCS tallies, that 37% of the costs attributed to
Periodicals in that particular pool consists of bundle sorting. I
therefore call it 37% "proportional." Response to TW/USPS-T20-13,
redirected from witness Miller (Tr. 10/2474-75).

I also believe it is a mistake to use only unit costs for flats in this
adjustment. There are very few "parcel shaped" Periodicals; in fact it
is not entirely clear what kind of magazines or newspapers the IOCS
clerks chose to call parcel shaped.[^24] Yet some parcel related costs
for Outside County Periodicals appear at most of the cost pools.
Whatever these "parcels" are, they are probably more like non-machinable
flats than letters. There is no separate mail flow model and no separate
rate structure for Periodicals parcels. Since the flats mail flow model
is all there is, it must be assumed to be a model of "non-letters," and
the proper basis for comparing model costs with CRA costs must therefore
be the CRA costs for Outside County "non-letters," i.e., both flats and
parcels.

As is well known, IOCS clerks record the MODS operation a sampled
employee is logged into, which is not necessarily the one in which the
employee is actually working. This gives rise to the phenomenon of flats
appearing to have been worked at letter and parcel operations, letters
at flats and parcel operations, etc. If, for example, some flats costs
appear at the pool MANL (manual letter sorting), it is because someone
was working with flats while, according to IOCS tallies, logged into the
letter operation.

I have therefore, unlike Miller, included in the CRA adjustment
non-letter Outside County costs recorded at all piece sorting
operations, including letter operations. I do not, on the other hand,
include any letter costs, even those that were recorded at flats
operations.

Costs in the flats preparation (MODS 035) pool are clearly relevant to
worksharing, because they are plainly part of the costs of automated or
mechanized flats sorting. But because, as described above, I distribute
the exact costs in this pool directly to the modeled rate categories,
there is no need to apply a CRA adjustment to it. I therefore apply the
adjustment, modified as discussed above, to all other modeled
costs.[^25]

While I have included pool costs that Miller did not include in his CRA
adjustment, one could argue that I perhaps should have gone further. For
example, there are some pools where one would not expect to see any
Periodicals (e.g., the "Express" pool). That Periodicals were observed
at all in such pools by IOCS tally takers most likely indicates that the
sampled employees were at a Periodicals operation but clocked into a
different pool. Closer examination of IOCS tallies for such pools might
indicate that some of them do relate to piece or bundle sorting. I have,
however, not pursued this issue further.[^26]

Section V.4 describes an additional CRA adjustment, based on the
philosophy indicated above, applied to the extended model that
represents a much greater portion of Periodicals mail processing costs.

### 6. Firm Bundles

In Miller's flowchart for the Nonauto Basic rate category it appears
that for every 10,000 pieces in that category there are 1,204 firm
bundles. Firm bundles are used by classroom publications and by other
Periodicals mailers who wish to send more than one copy to the same
address. Use of firm bundles allows several copies to travel together as
one piece. A firm bundle is not to be opened by postal employees, only
by the addressee.

As I understand it, a firm bundle is processed exactly the same way that
a carrier route bundle is, until it gets to the carrier. That means it
travels as a bundle and is sorted at bundle sorting operations, not at
piece sorting operations.

While it may not have much impact on overall results, I noticed that
Miller's firm bundles are handled both as bundles and as pieces. I
changed that -- as a result, the flowchart for NonAuto Basic shows only
8,798 (10,000 -- 1,204) pieces being finalized in incoming secondary
piece sorting operations.

The net impact of this change, assuming no other change, would be to
slightly lower the estimated cost for the NonAuto Basic rate category.

### 7. Miller Fails To Distinguish Between Carrier Route Direct Sacks, Which Do Not Require Bundle Sorting, And 5-Digit Carrier Route Sacks, Which Do.

Carrier route sacks are sacks that contain carrier route bundles. They
are used mainly by smaller or medium-sized mailers that have six or more
pieces to certain carrier routes but insufficient overall volume to make
pallets. Until recently, there were two kinds of such sacks:

(1) CR or direct carrier route sacks, with bundles only to a single
    carrier route; and

(2) CRs or 5-digit carrier route sacks, sometimes called carrier
    route[s]{.underline} sacks, with bundles to more than one carrier
    route within a given 5-digit zone.[^27]

The operational difference between CR and CRs sacks might seem clear
enough. The first contains bundles to only one carrier and can therefore
be taken directly to that carrier, bypassing all bundle sorting. The
second contains bundles to multiple carriers and must be sorted in an
incoming secondary bundle sort, normally performed manually at the DDU.

But witness Miller evidently does not believe there is any operational
difference between the two types of sacks. Since Docket No. R2001-1, his
flat models have treated CR and CRs sacks in exactly the same way. In
the present docket he even refers to them by a single name and shows
only their combined volumes. An R2001-1 Time Warner interrogatory
inquired about this, but Miller insisted in his answer that his model
was correct and that CR sacks (like CRs sacks) must be dumped at an
incoming secondary operation. Docket No. R2001-1, response to
AOL-TW/USPS-T24-5 (Tr. 6/014-15). That is where things were left then.
Since I am testifying in this case, I think I should point out that
Miller's answer doesn't make sense, for the following reason.

According to Miller, a CR sack, which could be taken straight to the
carrier, is instead sent to an incoming secondary bundle sort operation
where 18% of the bundles break and their pieces (about 11.5 on the
average) are sent back to an incoming secondary piece sorting operation.
In this way, a form of mail preparation that was supposed to require no
work by mail processing clerks other than handing the sack (or the
bundles in it) to the carrier, becomes instead the source of substantial
inefficiency and extra work. It seems unlikely that a DDU manager would
allow such a situation to exist.[^28]

Because the volume data used by Miller does not distinguish between
pieces in CR and CRs sacks and because the impact of changing this part
of Miller's model would be small, I have not attempted to change it.
However, the extended model described in Sections IV and V does
distinguish between the costs incurred by bundles in CR and CRs sacks.

There are likely to be fewer CR as well as 5-digit CRs sacks in the
future, since many of them contained far fewer than 24 pieces. The
Postal Service has provided a migration path for these bundles to the
recently established categories of 3-digit and SCF sacks with carrier
route bundles. Bundles in such sacks will require more bundle sorting.
The new sack types do not appear in Miller's model, nor in my modified
version of it, but they are considered in the extended model described
in the following.

## IV. extended billing determinants for outside county flats 

This section explains the development of estimates of test year volumes
of Outside County sacks, pallets, bundles and pieces, as summarized in
Exhibit B. These volume estimates, more detailed than conventional
billing determinants, are used by witness Mitchell, who also uses the
unit cost data described in Section V to develop an alternative and more
cost based set of Outside County rates.

The main data source used to develop the piece volumes in Table B3, the
bundle volumes in Table B2 and the container volumes in Table B1, is the
mail characteristics study reported in USPS LR-L-91, sponsored by
witness Loetscher (USPS-T-28).

While he performed a quite comprehensive study of Periodicals mail
characteristics, the results Loetscher made available in LR-L-91 are
limited to the data that other postal witnesses have made direct use of
in their testimonies. But the unit costs developed in this testimony,
and the corresponding Periodicals rates proposed by Mitchell, recognize
many important cost drivers that are overlooked in traditional rate
design. More detailed volume data are therefore needed to develop such
rates.

Loetscher provided much additional information in a series of Excel
tables filed as part of his response to interrogatories TW/USPS-T28-1-11
(Tr. 7/1507-18). In the following, those tables (1 through 17) are
simply referred to as Loetscher's tables. They do in fact provide almost
all the mail characteristics data needed for the base year. However,
because of the 24-piece per sack minimum requirement that recently took
effect there are expected to be many fewer sacks in the test year than
there were in FY2005. Furthermore, the bundles that were in those former
"skin sacks" are expected to "migrate" to larger and in most cases less
presorted sacks. I have developed test year sack and bundle profiles
that reflect this "migration."

Spreadsheet VolumesR2006.xls in TW LR-2 contains the calculations of the
container, bundle and piece volumes presented in Exhibit B. The
methodology used is described below.

### 1. Container Volumes

According to Loetscher's first table (response to TW/USPS-T28-2c \[Tr.
7/1507\]), there are about 98 million Outside County Periodicals pieces
that are letter shaped and are entered in about 817 thousand letter
trays. Periodicals non-letters are generally entered either in sacks or
on pallets. Although the "non-letters" include a very small volume
identified as parcel shaped, I will in the following simply refer to
them as flats.

The cost of a container depends on the container type, its level of
presort and its entry point into the postal network. A breakdown of base
year sack and pallet counts by entry point and presort level can be
obtained from Loetscher's Table 13 or 17. As they are based on different
sample stratifications, they give slightly different results. I have
used the results from Table 13 in order to be consistent with the Postal
Service's own estimate of base year sack volumes.[^29]

The entry point categories used in Docket No. C2004-1 were:

(1) DDU (destinating delivery unit);

(2) DSCF (destinating SCF);

(3) DADC (destinating ADC);

(4) DBMC (destinating BMC/transfer hub);

(5) OBMC (originating BMC/transfer hub);

(6) OADC (originating ADC)

(7) OSCF (originating SCF); and

(8) OAO (originating associate office, station or branch).

However, in the current case the distinction between the OAO and OSCF
categories was eliminated in the answers provided by Loetscher (i.e.,
the two entry point categories were combined into one). A later Postal
Service interrogatory response indicated that very few samples were
found of mail being entered at the OAO. Response to TW/USPS-3b (filed
July 12,2006). Exhibit B therefore shows OAO and OSCF entry as a single
category.[^30]

In Docket No R2005-1 Loetscher reported a Periodicals mail
characteristics study very similar to the one described in LR-L-91 in
this case. The reports made available from that previous study are in
LR-K-91. Comparing the results, it appears that the volume of Outside
County sacks declined from 84 million to 67 million from FY2004 to
FY2005. Furthermore, the LR-K-91 study in R2005-1 identified 50 million
sacks as "skin sacks," i.e., as containing less than 24 pieces. In this
docket Loetscher reports, in LR-L-91, that there were 32 million skin
sacks. In other words, the number of skin sacks already declined by
about 18 million, even before the 24 piece sack minimum took effect.

Since the 24 piece requirement now has taken effect, the remaining 32
million skin sacks will be gone by the test year. Tang assumes a sack
reduction of 65% of the FY2005 skin sack volume; in other words she
assumes that as the 32 million skin sacks disappear they will be
replaced by 35% of 32 million larger and generally less presorted sacks.
Tang does not specify what kind of sacks that will be, though she does
make some assumptions regarding non-auto bundles moving to larger sacks
and thereby qualifying for a lower presort discount. Loetscher declined
to provide any further guidance as to exactly what kinds of sacks will
exist in the test year.

I have developed a simple algorithm, included in spreadsheet
VolumesR2006.xls in TW LR-2, that carries out a skin sack consolidation
and corresponding migration of sacked bundles that is consistent with
the Postal Service's assumptions. The steps followed can be summarized
as follows:

From LR-K-91 I obtained distributions by presort level of all FY2004
sacks and skin sacks. The numbers are changed to corresponding FY2005
numbers using the ratios of Outside County volumes for the two years.
The large FY2004 to FY2005 decline in almost all sack categories except
SCF and ADC sacks is assumed to be due to reduction of skin sacks. The
small increase in SCF and ADC sacks is assumed to be due to
consolidation of bundles from former 5D and 3D skin sacks. This gives an
approximation of the skin sack population in FY2005 by presort level.
The migration of bundles from FY2005 skin sacks is assumed to occur as
follows:

\(1\) bundles from CR skin sacks migrate to CRs sacks;

\(2\) bundles from CRs skin sacks migrate to the new 3-digit or SCF
carrier route sacks;

\(3\) bundles from 5-digit skin sacks migrate to 3-digit or SCF sacks

\(4\) bundles from 3-digit skin sacks migrate to SCF or ADC sacks;

\(5\) bundles from SCF skin sacks migrate to ADC sacks;

\(6\) bundles from ADC skin sacks migrate to MADC sacks; and

\(7\) bundles from MADC skin sacks migrate to larger MADC sacks.

While some of the migration outlined above may be to existing sacks, I
presumed, to be consistent with Tang's 65/35% assumption, that for every
hundred skin sacks eliminated at one presort level, 35 new sacks would
be created at the less presorted level indicated above. In this manner,
I end up with exactly as many test year sacks as are assumed in Tang's
rate design spreadsheet.

Table B-1 (Exhibit B) shows the resulting test year before rates
estimates of sack and pallet counts by container presort and entry
point.

### 2. Bundle Volumes

Based on Loetscher's 14^th^ table[^31] I tabulated the number of bundles
entered by Outside County mailers, per bundle and container presort
level and container type. But because some bundles will transfer to
sacks with different presort levels as a result of skin sack
elimination, it remained to determine how these bundles would be
distributed over container presort levels in the test year. I did this
in the same way that I estimated the migration of sacks.

The precise steps can be inferred from worksheet R2006Bundles in
spreadsheet VolumesR2006.xls in TW-LR-2. Basically, after determining
how many skin sacks will be removed from a given sack presort level, its
bundles being consolidated into sacks with a given lower presort level,
I estimated the number of pieces that would be moved, based on pieces
per skin sack estimates derived from LR-K-91. To determine bundles moved
I then divided by the smallest of: (1) the number of pieces per skin
sack; and (2) the average number of pieces per bundle for the given sack
presort level.

Table B-2 (Exhibit B) shows the resulting test year before rates
estimates of bundle counts by bundle and container presort level.

### 3. Piece Volumes

I used Table 9 in Loetscher's interrogatory answers to Time Warner in
order to extract base year estimates of flats in all required
categories.

One problem with the Table 9 data is that it does not distinguish
between carrier route and carrier route[s]{.underline} sacks. The first
type contains bundles only to a single carrier route and can be taken
directly to the carrier. The second is a 5-digit sack that contains
bundles to more than one carrier within a 5-digit zone, which requires
that the bundles be sorted before they can go to the carriers.
Additionally, in the test year many sacked carrier route bundles will be
in 3-digit sacks, due to the migration caused by skin sack elimination,
as described in the preceding section. To solve this problem I used the
test year distribution of carrier bundles among the three types of sacks
(carrier route, carrier route[s]{.underline} and 3-digit) and applied
the same percentages to distribute sacked carrier route pieces among the
three sack types. [^32]

Additionally, as described above, I adjusted the piece counts for pieces
in non-carrier route bundles in accordance with the estimated migration
of bundles from skin sacks. A total of 295 million pieces were expected
to migrate to a different sack presort level due to the elimination of
32 million skin sacks.

Table B-3 (Exhibit B) shows the resulting test year before rates
estimates of Outside county non-letter pieces by piece characteristics
(machinability and auto/nonauto), bundle presort, and container type and
presort level.

## V. an extended mail processing cost model for flats

The mail flow model described in Section III represents only a subset of
the mail processing costs incurred by Periodicals Outside County
flats.[^33] Furthermore, it identifies only seven cost drivers, namely
the piece volumes for the traditional presort and auto/non-auto related
rate categories. But as explained in my C2004-1 testimony,[^34] piece
handling causes less than half of the mail processing costs attributed
to Periodicals in today's postal facilities. More costs are caused by
the handling of sacks, pallets and bundles, and those costs are affected
by such factors as container presort level and entry point.

The cost model described here produces unit costs for all major drivers
of flats mail processing costs. It is meant to facilitate the
alternative rate design proposed by witness Mitchell in this docket. It
is a modified and improved version of the model I presented in C2004-1.
Rather than repeat the description from my C2004-1 testimony, I will
focus in the following on improvements and updates made in the present
model. They include:

(1) use of current wage rates, piggyback factors and, when available,
    productivity rates from the current docket;

(2) the model is linked to and derives its per-piece unit cost estimates
    from the modified flats mail flow model described in Section III;

(3) extensive changes have been made in the logic to determine the flow
    of sacks and pallets from their entry points through intermediate
    facilities and to the destinating facilities, based on USPS
    interrogatory answers;

(4) inclusion of APPS machines as a bundle sorting option;

(5) an update of the CRA adjustment used in the C2004-1 model to conform
    to the current configuration of mail processing cost pools;

(6) a substantial simplification of the model through elimination of
    many redundant worksheets and formulas;

(7) origin associate office or station/branch (OAO) was eliminated as a
    distinct type of entry point, due to lack of current data and Postal
    Service testimony that this entry point is little used; and

(8) a flag has been included to allow the model to be switched between
    PRC and USPS costing methods.

The model consists of a series of inter-linked Excel spreadsheets,
contained in TW LR-2. Described below is the model's handling of
per-container, per-bundle and per-piece unit processing costs, and the
application of the CRA adjustment to the final results.

Exhibit C shows the unit costs that I provided to witness Mitchell.

### 1. Container Unit Costs

Unless entered directly at the facility where it will be opened, a
mailer prepared sack or pallet must be transferred through one or more
intermediate facilities before reaching its destination. Costs are
incurred at each intermediary as well as at the destinating facility.
The per-container costs determined by my model include all costs
incurred in moving and processing the container, up to and including the
cost of opening the container and, if appropriate, dumping its contents.

Both the sack and pallet unit costs, shown in Table C1, are
substantially higher than those I derived in C2004-1. That is not only
because the TY08 wage rate is 23% higher than the TY03 rate used in that
case, but also because, as described in the following, new mail flow
data available in this docket indicate that containers entered far from
their destination pass though more intermediate facilities, and
therefore incur more costs, than assumed in C2004-1.

Given the high handling costs for containers entered far from their
destination I am concerned that the Postal Service in this case is
proposing to weaken and even eliminate some of the existing dropship
discounts, which in recent years have led to a significant increase in
dropshipping by many mailers, when instead it should be strengthening
the incentives for mailers to dropship.[^35]

Section a below describes methodological changes since C2004-1 in the
way I estimate container unit costs. Sections b and c discuss some
special issues relating to, respectively, 5-digit and Mixed ADC (MADC)
containers. Section d discusses some of the reasons why true container
costs are as high as they are.

### a. Methodological Changes

In C2004-1 I relied on a complex set of flow formulas, developed by the
creators of LR-I-332, that determined the probabilities of a container
of a given type and presort, at a given type of intermediate facility,
flowing next to each type of subsequent facility. Unfortunately, the
method relied on some percentages that turned out to be little more than
guess work. I was able to reduce the guesswork by using the entry point
data presented in Docket R2001-1 by witness Loetscher and contained in
LR-J-114.

In this case, however, a more accurate method has been made possible by
a recent Postal Service "web-based survey," the results of which were
revealed in the responses to MPA/USPS-T25-2b (redirected from witness
Mayes, filed June 19, 2006) and to MPA/USPS-2b (filed July 13, 2006).
They specify, for each sack or pallet and presort level, and for each
type of entry point, the number of facilities such a sack or pallet will
pass through.[^36]

The results of the Postal Service's reported survey are included in
worksheet MPA2b, in spreadsheet Cost_Variables.xls in TW LR-2. The same
worksheet shows the conclusions I drew from this information regarding
what types of facilities a given type of container would pass through.
In response to TW/USPS-3d (filed July 12, 2006) regarding why the
results for OBMC (originating BMC or transfer hub) seemed somewhat
counter-intuitive, the Postal Service answered that there were very few
samples of OBMC pallets in its survey. I therefore chose to ignore the
OBMC results and rely, for this particular entry point, on the
simplified assumption that a container of given type entered at an OBMC
would have the same probability of seeing a DBMC, a DADC, a DSCF and a
DDU as it would had it been entered at the OADC.[^37]

The new Postal Service survey data indicate that non-dropshipped sacks
and pallets on the average pass through [more]{.underline} intermediate
facilities than followed from my C2004-1 assumptions. Consequently, they
receive more handlings and incur more costs than I previously assumed.
For example, the highest pallet unit cost I estimated, after the CRA
adjustment described in Section V.4, is \$73.11, for a 5-digit pallet
entered at the originating SCF (OSCF). In C2004-1 I estimated the cost
of such a pallet to be \$43.07. Similarly, the highest estimated sack
cost is \$6.23, versus \$3.50 in C2004-1.

### b. 5-Digit Containers

### The Postal Service explained that while its special survey assumed that all 5-digit containers are taken to the DDU before they are opened, that assumption is not accurate, because many such containers are opened at the plant level. While no data appear to be available as to exactly how many such containers go to the DDU, I believe the following assumptions are reasonable:

For containers that primarily contain carrier route bundles, such as
carrier route and carrier route[s]{.underline} sacks, one must assume
that the vast majority go directly to the DDU where the bundles are
distributed to carriers. I have assumed for modeling purposes that 90%
go to the DDU. On the other hand, 5-digit containers that primarily
contain 5-digit bundles will be opened at the plant if incoming
secondary distribution for the particular 5-digit zone is done at the
plant. As mentioned earlier, McCrery indicated that over 44% of incoming
secondary flats distribution is done manually, and such manual
distribution is normally done at the DDU's. The percentage is likely
larger than 44% in the case of Periodicals. On the other hand, the
Postal Service is trying to perform more distribution on its machines.
It therefore seems reasonable to assume that in the test year about 40%
of 5-digit (non-carrier route) sacks will be taken to the DDU.

Regarding 5-digit pallets, there are some that primarily contain carrier
route and some that primarily contain 5-digit bundles. Based on
Loetscher's data tables, I estimated that about 78% have primarily
carrier route bundles. Consistent with the above assumptions regarding
sacks, I assumed that 90% of the 78% are taken to the DDU, and that 40%
of the remaining 22% (containing mostly 5-digit bundles) also go to the
DDU. Taking the average for pallets with primarily carrier route and
primarily 5-digit bundles, I estimated that about 79% of 5-digit pallets
are taken directly to the DDU.

[c. MADC Sacks]{.underline}

Mixed ADC sacks are used by publications of all sizes, but as Table 4
indicates, they are mostly used by very small publications. A major
portion of the Periodicals cost reduction initiative, as described by
McCrery, is focused on reducing the considerable costs associated with
the small Periodicals volume that is entered in MADC sacks. Under that
initiative, these sacks will be treated in a different manner than in
the past, and this needs to be considered in order to determine their
test year handling costs.

+------------------------+---------------------+----------------------+
| **Table 4: Use Of MADC |                     |                      |
| Sacks By Circulation   |                     |                      |
| Size**                 |                     |                      |
|                        |                     |                      |
| (Source: Loetscher     |                     |                      |
| tables in response to  |                     |                      |
| TW/USPS-T28-1-11)      |                     |                      |
+------------------------+---------------------+----------------------+
| Pieces/Issue           | \% MADC Sacks       | \% Piece Volume      |
+------------------------+---------------------+----------------------+
| 0 - 1K                 | 45.99%              | 1.88%                |
+------------------------+---------------------+----------------------+
| 1K - 5K                | 8.88%               | 2.48%                |
+------------------------+---------------------+----------------------+
| 5K - 15K               | 8.22%               | 3.90%                |
+------------------------+---------------------+----------------------+
| 15K - 100K             | 18.13%              | 19.72%               |
+------------------------+---------------------+----------------------+
| 100K - 300K            | 8.53%               | 11.62%               |
+------------------------+---------------------+----------------------+
| Over 300K              | 10.25%              | 60.40%               |
+------------------------+---------------------+----------------------+
| Total                  | 100.00%             | 100.00%              |
+------------------------+---------------------+----------------------+

Until recently, all MADC sacks were taken to the nearest ADC where they
were opened and their contents distributed in outgoing bundle and flats
sorting operations. Because of the low volume, these operations were
often performed manually. At other times, such flats were mixed with
First Class flats and ended up traveling to remote locations on
airplanes, even though Periodicals are supposed to travel only by
surface transportation.[^38]

However, under changes recently implemented, there are now two types of
MADC sacks. One contains mail only to destinations to which First Class
mail travels by surface from the facility the sack is entered at. These
are referred to as L201 sacks, after DMM labeling list L201. The other
type of MADC sacks contains mail going anywhere else. The Periodicals in
these sacks need to be kept separate from First Class flats in outgoing
operations in order to avoid being transported by air. They are referred
to as L009 sacks, after labeling list L009, which contains the 36
facilities into which outgoing Periodicals processing (except for flats
in L201 sacks) is consolidated.

The costs incurred by L009 and L201 sacks differ. If a sack of each type
is entered at an SCF that is not an L009 facility, then the L201 sack is
opened at that facility while the L009 sack has to first be transferred,
at additional cost, to another facility. In other words, L201 sacks
generally cost less. I have, however, presented only one MADC sack cost
figure, using the assumption that 40% of them will be of the L201
variety. I believe this assumption is reasonable because many small
Periodicals, the major users of MADC sacks, are mostly local
publications whose mail travels a fairly short distance, mostly to areas
where First Class would travel by surface.

In Table C1 (Exhibit C), the MADC cost at entry point OADC should be
interpreted as the cost of either an L201 type sack being entered at any
SCF or an L009 type sack being entered at an L009 facility. The OSCF
cost should be interpreted as the cost of an L009 sack being entered
anywhere else.

My cost calculations rely on the generally true assumption that when a
sack enters a postal facility it must undergo a sack sorting operation
(manual or mechanized) in order to separate it from other sacks that may
have different destinations. It is possible, however, that by arranging
to have designated drop-off areas on postal platforms for the two types
of MADC sacks, so that the sacks are segregated from the start from
other types of sacks and therefore are able to avoid the sack sorting
step, the cost of MADC sacks could be lower than the figures indicated
in Table C1. For this reason, and because its users are mostly very
small publications, I believe that if in a rate design based on these
costs any tempering were to be considered in the form of lower cost
passthrough, then MADC sacks might be a good candidate for such
tempering.[^39]

[d. Why Container Costs Are So High]{.underline}

It may seem surprising that my estimates of sack and pallet costs are as
high as they are, given that the Postal Service sometimes has released
figures indicating that those costs are considerably lower. For example,
in Dockets No. R2001-1 and R2005-1 the Postal Service proposed and the
Commission approved a per-piece pallet discount. The R2001-1 proposal
relied on a study (LR-J-100) that indicated a per-sack cost of only 87
cents and a per-pallet cost of \$13.23. In the present docket, these
figures have become \$1.15 (USPS costing) or \$1.24 (PRC costing) for
sacks and \$19.57 (USPS costing) or \$21.01 (PRC costing) for pallets.
See LR-L-85 and LR-L-108, both sponsored by witness Talmo.

Additionally, when it stated its intention, in Docket R2005-1, no longer
to allow Periodicals mailers to use skin sacks, the Postal Service
relied on a similarly understated cost per sack to estimate how much
this would reduce Periodicals costs. Docket No. R2005-1, revised
response of USPS witness McCrery to POIR 4, question 6 (Tr. 5/1690-93).

There are two reasons for concluding that the above costs are
understated. First, as Talmo admitted,[^40] his model, originally
developed by witness Schenk in R2001-1, only considers costs incurred in
the destinating facility, where sacks and pallets are opened, and not
the costs incurred in upstream facilities through which sacks and
pallets are transferred, incurring additional costs. And as explained
above, data available in this docket indicate that containers entered
far from their destination go through more intermediate facilities than
previously assumed.

Second, in the case of sacks, Talmo's model does not even include all
the costs incurred in the destinating facility. As Talmo
acknowledges,[^41] his model assumes that sacks are unloaded and then
cross-docked directly to an opening unit where the sack is opened and
emptied. It does not consider that a sack may arrive at a facility with
many other sacks (typically in a hamper or other wheeled container) that
are going to many different places; i.e., some sacks may be transferred
to other facilities or to different opening units. These sacks must
first undergo a sack sorting operation, as confirmed by McCrery.
Response to TW/USPS-T27-3-4, redirected from Talmo (Tr. 11/3093-94). In
today's environment, such sorting operations are almost always performed
manually and, again as confirmed by McCrery, the Postal Service is even
removing the sack sorters now in BMC's, so that sack sorting will need
to be performed manually in those facilities also.[^42]

Pallets also incur substantial transfer costs if entered far from their
destination. Given that the Postal Service estimates costs of over \$20
per pallet just in a destinating facility, my estimates of pallet costs
when entered at OSCF or OADC facilities are reasonable.

To summarize, Postal Service container handling costs are high and are
likely to stay high for a long time. One can hope that the Postal
Service, through network reorganization, will at least succeed in making
its pallet handling more efficient.[^43] But for Periodicals mailers a
more realistic way to avoid those costs is to bypass them, by
dropshipping as deep into the system as possible. The rapidly growing
availability of consolidators, pool shipping, co-palletization programs
and comailing is making the ability to dropship available to all but
some of the very smallest publications. The more mailers that convert to
dropshipping through one of these programs, the more the options that
will be available to even smaller mailers. But for this desirable
development to happen, the Periodicals rate structure must give adequate
recognition to these avoidable costs.

### 2. Bundle Unit Costs

My model estimates all costs involved in the handling of bundles from
the time they are removed or dumped from the sacks and pallets in which
mailers have placed them until the time the bundles themselves are
broken. Once a bundle is broken, the further processing costs are
incurred by individual pieces, not bundles. Firm bundles are not broken
by the Postal Service and are treated as bundles throughout. Similarly,
carrier route bundles are not opened (unless by accident) before they
get to the carriers.

As in C2004-1 (TW et al.-T-2, at 26 \[Tr. 44\]) I distinguished between
bundle costs that are directly related to bundle sorting and those that
I term "weight-related." The latter are costs related to the movement of
bundles between bundle operations, or from bundle sort to piece sorting
or "flats preparation." And as in C2004-1 I recommended to witness
Mitchell that only the costs related directly to bundle sorting be used
as a basis for rate design. Were Mitchell's rate design to also include
the weight related bundle costs, his bundle rates would be, on the
average, more than twice as high.

The major model change affecting bundle sorting is the inclusion of the
APPS machines as a bundle sorting option. While their use in the base
year was still quite limited, the Postal Service expects extensive
deployment in the test year. I have used witness Miller's coverage
factors to determine the relative use of APPS, SPBS/LIPS and manual
bundle sorting at each container presort level. Consistent with
McCrery's answers, I have assumed that the APPS is not used in incoming
secondary bundle sorting. Response to TW/USPS-T42-13(e) (Tr.
11/3049-50).

### 3. Piece Unit Costs

Piece related costs measured by the model are basically all processing
costs that occur between the time that bundles arrive at a piece sorting
or flats preparation operation and the time that the finished sorted
product is presented to the carriers, who then do their own additional
processing before delivering the mail. Piece related costs include the
cost of flats preparation performed in the 035 cost pool as well as the
preparation performed at the piece sorting operations themselves.

As in the case of bundles, the model distinguishes between pure piece
sorting costs and those that I have labeled "weight related." The latter
category includes the costs of moving partially sorted pieces between
piece operations and from the incoming secondary sort to the carriers.
Unlike costs for bundles, the weight related costs for pieces are a
relatively small portion of the total piece related costs. For reasons
similar to those applied to bundles, witness Mitchell uses only the
costs related directly to piece sorting as a basis for his recommended
piece rates.

The piece sorting costs are obtained via a link to the flats model
described in Section III, which is a modified version of the model
proposed by witness Miller.[^44]

The resulting costs, shown in table C3a (Exhibit C), are higher than the
corresponding piece costs I calculated in C2004-1. There seem to be
several reasons for this, including:

\(1\) the TY08 wage rates used are 23% higher than the TY03 rates used
in C2004-1;

\(2\) I have added the costs of flats preparation (MODS 035) that could
not be quantified in the earlier docket; and

\(3\) the CRA adjustment applied to piece sorting costs, described in
the following section, had a different outcome.

The cost differentials between machinable and non-machinable flats at
different presort levels have also increased since my C2004-1 estimates,
even though the cost of flats preparation in the MODS 035 cost pool was
added mostly to machinable flats. In my opinion, the true difference may
be even larger. It would have been larger in my model had I not, as
explained in Section III.3, kept witness Miller's averaged productivity
rates on the UFSM-1000, even though in reality there is a wide gap
between that machine's productivity rates for machinable and
non-machinable flats.[^45]

### 4. The CRA Adjustment

The CRA adjustment I applied to the extended model is similar to that
described in Section III.5, except that many more cost pools are
involved.

As in C2004-1, I calculated a separate CRA adjustment for the purely
piece-sorting related costs, since those are fairly easy to isolate in
the piece-sorting related cost pools. This gave a CRA factor equal to
1.083 for piece sorting, versus only 0.893 for the bundle, sack and
pallet costs. The average factor is 0.971.

Applying the above adjustment factors would have meant multiplying the
piece related costs by 1.083 and other modeled costs by 0.893. For
reasons explained below, I chose instead to use a factor of exactly one
for the piece related costs, which caused the factor for remaining costs
to become 0.951. Consequently, the piece related costs in Table C3 are
exactly equal to the unadjusted model costs. The bundle and container
costs in Tables C1 and C2 are, on the other hand, the result of
multiplying the modeled costs by 0.951.

The piece related CRA factor was calculated as the ratio between CRA
costs for non-letters at all piece sorting related cost pools and the
modeled piece sorting costs. The reasons I chose to reduce it from 1.083
to 1 were: (1) to avoid too large a gap between the adjustment applied
to piece costs and that applied to other costs; and (2) because it is
reasonable to assume that some of the modeled bundle and perhaps even
container handling costs were incurred by employees who were logged into
piece sorting operations, particularly at smaller offices where
employees commonly move frequently between different tasks.

Details of the adjustment are shown on worksheet "CRA" in
CostsVolumes.xls, contained in TW LR-2 The adjustment excludes a total
of \$125 million (PRC costing) in Outside County mail processing costs
that are in the pools assumed "to be non-proportional."[^46] It could be
argued that some of those costs should have been included, which would
have raised the bundle and container costs in Exhibit C. For example,
Periodicals costs appear in some pools where Periodicals should not be
found at all, such as the Priority and Express pools, and examination of
the IOCS tallies for such pools might reveal that some of the processing
that my model represents is being done by employees who happen to be
logged into those other pools. One might argue that portions of the
costs the 1Support and 1Misc pools, which are attributed on top of costs
in other pools, should also have been included in the CRA adjustment.
Doing so would have led to higher unit costs than those shown in Exhibit
C.

## VI conclusions 

This testimony has sought to achieve two main objectives.

The first was to identify and correct some deficiencies in the LR-L-43
Periodicals flats mail flow model that is the basis for the Postal
Service proposed Periodicals rate design. In addition to its failure to
include costs obviously related to worksharing, including flats
preparation costs, I found that the Postal Service model, sponsored by
witness Miller, is simply not consistent with the reality described by
operational witnesses such as McCrery and Kingsley, or with my own
observations in numerous postal facility visits, or in some cases with
available MODS and IOCS data. If the Commission decides to continue to
accept a rate design built around the traditional Periodicals piece rate
categories, I recommend that the it base its recommendation on the
alternative mail flow model that I have labeled FlatsModel.xls, rather
than the Postal Service's version.

My second objective, as it was in Docket No. C2004-1, was to present a
set of unit cost estimates that reflect, as accurately as possible with
available data, how Periodicals mail processing costs vary with the
number of pieces, bundles, sacks and pallets, as well as with piece
characteristics, bundle and container presort levels and container entry
points relative to the destinating facility. I have also identified the
piece and bundle related costs that are most appropriate to consider as
weight related.

This information, presented in Exhibits B and C, provides a foundation
for the development of Periodicals postal rates that are truly cost
based and therefore can give mailers the most accurate price signals.
Postal rates consistent with this information, such as the rates
proposed by witness Mitchell, will give mailers strong incentives to
prepare their mail in a manner that reduces the Postal Service's costs
of handling it.

The cost model I used to develop the unit cost data provided to witness
Mitchell is an updated, improved and simplified version of the model I
used in C2004-1. I believe some of the data available in the current
docket to be generally more accurate than what was available in Docket
No. C2004-1, including the volume data obtained from witness Loetscher's
data collection and the Postal Service's new data on facilities through
which non-dropshipped sacks and pallets are transferred. But the model
data are of course still not perfect, for example, much of the
productivity data is still the same very old data that Postal Service
witnesses have been relying on for many years and even decades.[^47]

These imperfections notwithstanding, the cost and mail flow data
presented here provide a much more accurate and realistic picture of the
factors that determine Periodicals costs, and a better basis on which to
build a Periodicals rate structure, than the information provided by the
Postal Service in this docket.

[^1]: This estimate considers "flats preparation" costs to be piece
    sorting related.

[^2]: In Docket No. R2000-1, the last rate case in which I presented
    testimony, I pointed out certain errors in the Postal Service's
    flats mail flow model, then sponsored by witness Yacobucci. The
    Commission in that case adopted the alternative model I had prepared
    as the basis for calculating presort related worksharing cost
    avoidances.

[^3]: Some of these deficiencies were already present in the model's
    R2001-1 and/or R2005-1 versions. My C2004-1 testimony described some
    improvements I believed could be made to the R2001-1 version. See TW
    et al.-T-2, pp. 17-36 (Tr. 35-54).

    I believe some of the improvements I am proposing would also apply
    to Miller's Standard and First Class flats models. I have, however,
    not studied those models in sufficient detail to be able to propose
    specific changes.

[^4]: In response to MPA/USPS-3, the Postal Service in this case has
    filed an alternative mail flow model for Outside County flats, as
    LR-L-153. I reviewed that model closely and concluded that it has
    some features that Miller's current model lacks, but that it also
    has its share of problems.

[^5]: In Docket No. R2005-1, McCrery listed the duties performed by 035
    personnel as including:

    > 1\. Removal of strapping or banding from flat bundles that are
    > processed on flat sorting machines or in manual flat cases.
    >
    > 2\. Separating, facing and loading flats into mail transport
    > equipment that will be sent to flat sorting machines or manual
    > flat cases.
    >
    > 3\. Securing flats into an AFSM 100 Flat Mail Cart that will be
    > sent to an AFSM 100.

    Response to TW/USPS-T11-6, redirected from Van-Ty-Smith. (Tr.
    5/1715-16) However, in response to further questions in the present
    docket, McCrery clarified that the operation is not used for flats
    that will be sent directly to manual sorting, and that it would be
    inefficient to do so. See response to TW/USPS-T42-30. (Tr.
    10/3071-73).

[^6]: Similarly, for a carrier route bundle, the cost of breaking the
    bundle is part of the segment 6 unit cost for carrier route
    presorted flats, as determined by IOCS.

[^7]: \$62.9 million versus \$61.7 million. Flats preparation costs
    appear to be significantly higher for Periodicals than for other
    flats. Overall, AFSM-100 costs are more than twice as large as the
    035 flats preparation costs, but for Periodicals the 035 costs are
    larger. I don't know why this is so, but I suspect one reason is
    that employees in the 035 operation often are asked to produce a
    given number of feet of prepared flats per hour. Because Periodicals
    flats are thicker, this productivity goal is reached more easily
    than for thinner Standard or First Class flats.

[^8]: Docket No. R2005-1, responses to TW/USPS-T19-2-6 (Tr. 6/1800-08).

[^9]: Incoming secondary sorting is of particular importance in the
    study of Periodicals and Standard flats costs, because most such
    flats are presorted either to the 5-digit or carrier route level and
    bypass all sorting operations that precede the incoming secondary.

[^10]: In my visits to postal facilities over the years, I have always
    been given the impression that Periodicals flats are much more
    likely than Standard flats to be sorted manually, for many reasons,
    including those cited by McCrery.

[^11]: This percentage can be found in cell 'coverage factors'!D52 in
    FlatsModel.xls, which is my version of Miller's model. It is applied
    in cells c83:c87, I83:I87 and n83:n87 in each of the flowchart
    worksheets. This method differs from and should not be confused with
    the somewhat similar method used in the alternative LR-L-153 model.

[^12]: Some other MODS numbers are also used, but according to the data
    provided by witness Bozzo, the above MODS ranges account for 98.68%
    of the volume sorted on these machines and 97.15% of the clerk
    hours. Each sorting mode accounts for about half of the total
    volume, but the slower keying mode accounts for 74% of the clerk
    hours. See Bozzo response to TW/USPS-T11-1b-c, redirected from
    witness Van-Ty-Smith (Tr. 10/2562-87). Bozzo also provided MODS data
    for the various UFSM-1000 sort schemes in LR-L-56.

[^13]: The definition of what is machinable is somewhat fluid for both
    types of machine. As I reported in my Docket No. C2004-1 testimony,
    I have observed flats considerably heavier than the stated
    machinability limit being fed into the AFSM-100 without any apparent
    problem. But I have later been told that this is possible if only a
    few overweight pieces are fed at a time, but if too many of them are
    fed at the same time both productivity and acceptance rates drop
    significantly. Similarly, when I observed a UFSM 1000 machine a few
    years ago I was told that the automatic feeder works fine on pieces
    that are also AFSM-100 machinable. When the machine was fed AFSM-100
    non-machinable pieces on the other hand, many of them went through,
    but reject rates quickly became unacceptably high.

[^14]: See for example worksheet "Basic NonAuto Model," or the
    worksheets for each of the other rate categories, in Miller's
    spreadsheet. Column G shows the volumes that Miller assumes end up
    being sorted in keying mode. But those volumes are small and, as can
    be verified by examining the formulas used, only flats that first
    are processed in the automated mode and then rejected would find
    their way to be sorted in keying mode.

[^15]: MODS data show an average acceptance rate in the UFSM 1000
    automated mode of 89.7%. Miller's model assumes 99.87% for barcoded
    flats, whether or not they are machinable, and 73.63% for flats
    without barcodes, whether or not they are machinable. In the case of
    outgoing primary sorting, only about 25% of the volume is finalized
    in the automation mode. That would mean, if Miller's assumption were
    true, an acceptance rate of only 25%.

[^16]: Only for the 7% that destinate in facilities with UFSM-1000 but
    without AFSM-100 (according to Miller's "coverage factors"), does
    Miller's model flow any machinable flats (except for AFSM-100
    rejects) to the UFSM-1000.

[^17]: It is also consistent with the assumptions in the Postal
    Service's alternative model, contained in LR-L-153. Note that this
    change does not keep all non-machinable flats away from incoming
    secondary sorting at the UFSM-1000. That is because both types of
    sortation are performed on the UFSM-1000 in upstream sorting steps,
    and the flats from automated and keyed sorting on the same machine
    will be mixed, machinable and non-machinable flats, in the output
    flats trays that then may be passed on to a further sorting step on
    a similar machine.

[^18]: The fact that 12 tallies are associated with MODS numbers for
    international mail (MODS 305-6) suggests that some UFSM-1000 costs
    perhaps should not have been attributed to Outside County
    Periodicals at all.

[^19]: LR-I-297, reporting a study performed in the fall of 1999. About
    a year earlier, as member of the Periodicals Review team, I visited
    a number of postal facilities where mechanized pallet dumpers had
    been installed fairly recently. It appeared then that careless use
    of these dumpers, e.g., dumping too much on the belt too soon, could
    lead to significantly higher breakage percentages. During the
    LR-I-297 study it appeared that the dumping machines were being
    operated more carefully and the damage was limited.

[^20]: According to Miller's "Coverage Factors," about 25% of all sorts
    from 3-digit containers are done manually. From 5-digit containers,
    93% of all sorts are done manually.

[^21]: See Docket No. R2001-1, response to AOL-TW/USPS-T39-14 (Tr.
    2179-80). In response to a question about sorting of carrier route
    packages from a 5-digit pallet or hamper to carrier route, Kingsley
    stated that: "Packages are typically not thrown into a hamper or
    U-cart for each carrier route. The packages are typically placed
    into flat tubs or other containers where breakage should not be an
    issue at this point." Yet Miller's model shows considerable breakage
    at this point and large numbers of carrier route presorted pieces
    being sent back to incoming secondary piece sorting, after a bundle
    sort in which breakage simply does not and cannot occur.

[^22]: A "study team" asked managers in various facilities what percent
    of bundles they believed break. Most managers gave thoughtful
    answers but a few chose to spout off meaningless numbers, up to 80%
    for sacked bundles and 40% for pallets. Those few excessive
    estimates drove up the averages reported in LR-I-88, whose results I
    believe should just be ignored. See Docket No. R2000-1, TW-T-1 at 47
    (Tr. 24/11394).

[^23]: The Postal Service has placed great emphasis on reducing bundle
    breakage in recent years. Yet it appears that it still:

    Doesn't know how effective its various measures (including complex
    regulations for bundle preparation, mailer awareness campaigns,
    etc.) have been;

    Has no empirical data at all on bundle breakage in subsequent bundle
    sorts; and

    Has no reliable information on how successful its program to recover
    broken bundles is.

    Responses to TW/USPS-T42-35 (Tr. 11/3079-80), MPA/USPS-T20-2a (Tr
    11/2853), MPA/USPS-T42-1 (Tr. 3/258). It is also puzzling that in
    Docket No. R2000-1 the Postal Service supported the belief that by
    TY01 significant Periodicals cost reduction would be achieved
    through the program to recover broken bundles, which then had just
    started but today appears to have enjoyed some success. Yet now, six
    years later, the Postal Service has no idea how much it is saving by
    bundle recovery, and its mail flow models assume no reduction in
    breakage and no savings from bundle recovery.

[^24]: It is, however, possible that these "parcels" that IOCS clerks
    observed simply were extra heavy issues of magazines like "in
    Style." Such magazines are non-machinable flats and their costs in
    bundle and piece sorting operations are clearly among the costs that
    Miller models.

[^25]: Stated differently, I first apply the CRA adjustment to all other
    costs, then add the flats preparation costs. See the table in cells
    B32:H47 on the first worksheet in FlatsModel.xls.

[^26]: Another example might be support function pools such as "1MISC"
    and "1Support." Under the Postal Service's costing method, these are
    combined into one "piggyback" pool called "1Supp F1," whose costs,
    according to witness Van-Ty-Smith, are attributed to subclasses on
    the basis of all other Function 1 (MODS plants) costs. Response to
    MPA/USPS-T11-1 (Tr. 5/2454-55). One could argue that the portion
    which is distributed over the cost pools included in the CRA
    adjustment then should also be included.

[^27]: A related category is carrier route 5-digit scheme sacks, which
    contain carrier route bundles to two or more 5-digit ZIP codes whose
    mail is delivered from the same delivery unit (DDU). They are
    handled the same way that 5-digit carrier route sacks are handled.

[^28]: Another improbability in this scenario is that pieces from a
    broken bundle would be sent back to the incoming secondary, often
    performed at the main office rather than the DDU, instead of simply
    being recovered and taken from the opening belt directly to the
    carrier. Postal management has repeatedly stressed the importance of
    recovery when dealing with broken bundles. At a DDU manual bundle
    sort operation, such recovery should be easier and much more
    probable than in large mechanized bundle operations in large
    facilities.

[^29]: The difference between the two tables produced by Loetscher is
    that Table 17 splits up the sampling strata for Periodicals with
    circulation under 5,000 by segregating in separate strata those with
    circulation under 1,000. That yields an estimate of 68,075,913
    outside county sacks in FY2005, versus the 67,371,060 obtained from
    the Table 13 data. The latter figure is cited in Tang's rate design
    spreadsheet and is the one I have used, although I believe the Table
    17 figure may be more accurate. A large portion of the total number
    of sacks is used by very small publications. For example, almost
    half of all MADC sacks in FY2005 were used by publications with
    circulation less than 1,000. It therefore seems likely that a finer
    stratification of the samples of the smallest publications would
    give more accurate estimates of sack volumes.

[^30]: The Postal Service's claim that there is hardly any OAO volume is
    not quite consistent with the findings reported in LR-J-114 from
    Docket No. R2001-1. Nor is it consistent with my C2004-1 analysis of
    small local newspapers, many of which have such small volumes that
    taking their mail to an often distant SCF makes no economic sense.

[^31]: See response to TW/USPS-T28-9 (Tr. 7/1517).

[^32]: This problem is reflected also in Miller's mail flow model, as
    discussed in Section III.7.

[^33]: Miller's CRA adjustment assumes his modeled costs to represent
    slightly less than 50% of the processing costs for flats. In my
    version of the CRA adjustment, which recognizes more pools as
    including modeled costs, the percentage is 61% under USPS costing
    and 63% under PRC costing. However, many of those costs are incurred
    handling bundles, sacks or pallets, rather than individual mail
    pieces.

[^34]: TW et al.-T-2, at 5-12 (Tr. 23-30).

[^35]: It is true that the discounts being eliminated are on a per-piece
    basis and therefore flawed because the costs saved by dropshipping
    are not incurred on a per-piece basis. Nevertheless, those discounts
    clearly have had an effect. If eliminated, they should be replaced
    by more cost based incentives, such as the cost based rates being
    proposed in this docket by witness Mitchell.

[^36]: The "number of facilities a container passes through" is defined
    as the total number of handling facilities minus one (i.e., it is
    zero if the container is brought directly to the facility where it
    will be opened). The Postal Service emphasized that the survey
    assumed that all 5-digit containers are opened at a DDU and that
    this is not always the case. Therefore its estimates of the number
    of facilities a 5-digit container passes through may be excessive.

[^37]: This assumption happens to result in fewer sack handlings and
    more pallet handlings (i.e., lower sack costs and higher pallet
    costs) than if I had used the Postal Service's OBMC survey results.
    According to Loetscher's data tables there were, in FY2005, more
    that 5 million Periodicals sacks entered at OBMC's.

[^38]: See Docket No. R2001-1, Responses of USPS to AOL-TW/USPS-11-12,
    25-26 (Tr. 2689-93, 2720-2724).

[^39]: Additionally, McCrery has indicated that other alternatives, such
    as entering small outgoing flats volumes in tubs or hampers, from
    which they can be dumped directly onto an outgoing sorting belt, may
    be made available in postal facilities. See LR-L-49 at 20 and
    USPS-T-42 at 20. As I noted in my C2004-1 surrebuttal testimony,
    entering low volumes of flats or flats bundles via tubs may cost
    less than if they are entered in sacks, which take time to open and
    then need to be stored and recycled. TW et al.-RT-2, at 22-23 (Tr.
    5/1561-62).

[^40]: Response to MPA/USPS-T27-1 (Tr. 13/3611-12).

[^41]: Response to TW/USPS-T27-1 (Tr. 13/3613-14).

[^42]: McCrery indicates that by the end of the test year only 12 BMC's
    will still have sack sorters. Response to TW/USPS-T42-1 (Tr.
    11/3023).

[^43]: As indicated in my C2004-1 direct testimony, I suspect that the
    productivity rates I use for pallet unloading, cross-docking and
    loading, which are the same rates that postal witnesses use, are on
    the conservative side, since they were measured in BMC's where
    pallet transfer, at least in the traditional BMC configuration, is
    fairly inefficient. TW et al.-T-2, at 29-30 (Tr. 47-48). As the
    BMC's are modernized, removing the space consuming sack sorters and
    facilitating cross-docking of pallets and rolling containers, actual
    pallet costs may become lower than they are today.

[^44]: The last six worksheets in Flatsmodel.xls provide the information
    needed by the extended model.

[^45]: A further consequence of fully disaggregating the UFSM-1000
    productivity rates for machinable and non-machinable flats would be
    a virtual disappearance of the auto/non-auto cost differential for
    non-machinable flats. Those flats do not receive machine sorting,
    except in the sense that they may be keyed manually on the
    UFSM-1000. But the manual keying is not affected by the presence or
    absence of a barcode. In other words, the barcode on these pieces is
    really useless. However, the discipline of maintaining good address
    quality that is required of a mailer in return for the automation
    discount may still have value (even if the barcode itself doesn't).
    For example, it may reduce the amount of UAA mail, so that such a
    discount may be justified even for non-machinable flats.

[^46]: Under Postal Service costing, the "non-proportional" costs come
    out higher, at \$143 million, even though the Postal Service overall
    attributes fewer costs. As a result, the various CRA adjustment
    factors described above take on somewhat lower values than under PRC
    costing.

[^47]: As in C2004-1, and consistent with the practice established by
    USPS witnesses, I addressed the problem of imperfect data, in the
    aggregate, by a "CRA adjustment" that assures that the total
    Periodicals processing costs predicted by the model are consistent
    with the rolled forward test year costs presented by witness Smith.