[BEFORE THE]{.smallcaps}

POSTAL RATE COMMISSION

WASHINGTON, D. C. 20268-0001

Docket No. R2000--1

REBUTTAL TESTIMONY

OF

A. THOMAS BOZZO

ON BEHALF OF THE

UNITED STATES POSTAL SERVICE

(CONCERNING ESTIMATES OF COST BY WEIGHT INCREMENT)

**Table of Contents**

List of Tables [ii](#list-of-tables)

Autobiographical Sketch [iii](#autobiographical-sketch)

I. Purpose and Scope of Testimony [1](#purpose-and-scope-of-testimony)

II\. The analysis used by witness Daniel is sufficient for the rate
design for First-Class Mail additional ounces and for piece- and
pound-rated Standard Mail (A).
[2](#ii.-the-analysis-used-by-witness-daniel-is-sufficient-for-the-rate-design-for-first-class-mail-additional-ounces-and-for-piece--and-pound-rated-standard-mail-a.)

III\. Relative standard errors show that data "thinness" is not an issue
for the disaggregated costs used by witnesses Fronk and Moeller.
[7](#iii.-relative-standard-errors-show-that-data-thinness-is-not-an-issue-for-the-disaggregated-costs-used-by-witnesses-fronk-and-moeller.)

IV\. The available data do not permit empirical estimates of the
relationship between weight and volume-variable city carrier route and
load costs, but it is straightforward to place bounds on the
relationship.
[11](#iv.-the-available-data-do-not-permit-empirical-estimates-of-the-relationship-between-weight-and-volume-variable-city-carrier-route-and-load-costs-but-it-is-straightforward-to-place-bounds-on-the-relationship.)

> A. Access cost distribution [13](#a.-access-cost-distribution)
>
> B. Route cost distribution [13](#b.-route-cost-distribution)
>
> C. Load cost distribution [15](#c.-load-cost-distribution)
>
> D. Witness Daniel's cost estimates are much closer to the upper bound
> method for carrier street costs than the lower bound method.
> [15](#d.-witness-daniels-cost-estimates-are-much-closer-to-the-upper-bound-method-for-carrier-street-costs-than-the-lower-bound-method.)

V. Witness Daniel provides cost data that are sufficient for the rate
design for first ounce and additional ounce First-Class Mail and for
piece- and pound-rated Standard Mail (A).
[18](#v.-witness-daniel-provides-cost-data-that-are-sufficient-for-the-rate-design-for-first-ounce-and-additional-ounce-first-class-mail-and-for-piece--and-pound-rated-standard-mail-a.)

VI\. Summary [19](#vi.-summary)

# List of Tables

Table 1. BY98 IOCS-Based Cost and CV Estimates for First-Class Letters
and Sealed Parcels Subclass [10](#__RefHeading___Toc490805364)

Table 2. BY98 IOCS-Based Cost and CV Estimates for Standard Mail (A)
[10](#__RefHeading___Toc490805366)

Table 3. Test Year Unit Volume-Variable Cost (cents), First-Class
Letters and Sealed Parcels Above One Ounce
[17](#__RefHeading___Toc490805369)

Table 4. Test Year Unit Volume-Variable Cost (cents), Pound-Rated
Standard Mail (A) [17](#__RefHeading___Toc490805372)

Table 5. Implicit Cost Coverage for Pound-Rated ECR Using Lower Bound
Costs [17](#__RefHeading___Toc490805375)

# Autobiographical Sketch

My name is A. Thomas Bozzo. I am a Senior Economist with Christensen
Associates, an economic research and consulting firm located in Madison,
Wisconsin. My education and experience are described in detail in my
direct testimony, USPS--T--15.

# Purpose and Scope of Testimony

The Postal Service's methodology for estimating volume-variable cost by
weight category for First-Class Mail and Standard Mail (A) subclasses is
given by witness Daniel (USPS--T--28). The purpose of this testimony is
to rebut criticisms of this analysis by witnesses Clifton
(ABA&NAPM--T--1), Haldi (VP/CW--T--1), Tye (NAA--T--1), and White
(AAPS--T--1).

In Section II, I show that, given how the Postal Service pricing
witnesses use the cost information provided by witness Daniel, witness
Daniel\'s analysis is sufficient for the rate design for First-Class
Mail additional ounces and for piece- and pound-rated Standard Mail (A).
In Section III, I report correctly calculated standard errors to
demonstrate that data "thinness" is not a problem for the disaggregated
costs used by witnesses Fronk and Moeller in developing rates based on
witness Daniel's cost estimates. In Section IV, I show that the
estimated relationship between weight and volume-variable route and load
costs for city carriers provided by witness Daniel falls within
reasonable bounds, and that, for pound-rated ECR, her estimates approach
the upper bound on the weight-cost relationship. In Section V, I show
that witness Daniel provides cost data that are sufficient for the rate
design for first ounce and additional ounce First-Class Mail and for
piece- and pound-rated Standard Mail (A). The testimony is summarized in
the last section.

Library Reference LR--I--456, which is incorporated by reference in this
testimony, contains the background material for the analyses reported in
this testimony. The accompanying diskette contains electronic versions
of the spreadsheets used for the analyses presented herein.

# II. The analysis used by witness Daniel is sufficient for the rate design for First-Class Mail additional ounces and for piece- and pound-rated Standard Mail (A).

Drs. Haldi and Tye dispute the fact that the same method used to develop
CRA cost by subclass can be used to analyze costs by weight increment
within subclasses (Tr. 32/15833 and Tr. 30/14699). Each of their
arguments will be addressed below.

Witness Haldi criticizes the use of "direct" piece handling tallies to
distribute mixed mail tallies and not-handling tallies to weight
increment.[^1] He states that:

> \[I\]f direct piece handling tallies are used to distribute mixed mail
> tallies to weight increment, and if those direct piece-handling
> tallies show little relationship between weight and cost, their use
> will mask the underlying causal relationship between weight, the
> number of containers that must be moved manually through the facility,
> and the additional cost of such movement that is caused by more weight
> and cube...the systematic bias is to understate the effect of weight
> on cost (Tr. 32/15836).

Witness Haldi further states that:

> It seems completely inappropriate to use direct tallies from
> individual piece-handling operations to distribute to weight increment
> the costs associated with some, if not all, of the not handling
> tallies. The effect of weight will be systematically understated (Tr.
> 32/15833).

Neither of these statements reflects a complete and accurate description
of the Postal Service's mail processing cost distribution
methodology.[^2] Consequently, witness Haldi's conclusions are
unfounded.

First, consider the IOCS sample design. At a basic level, IOCS provides
estimates of the proportions of labor time by activity in the sampled
crafts. So, for any two activities represented in the IOCS
questionnaire, if activity A requires more labor time---and hence
cost---than activity B, then there will be more tallies for activity A
than for activity B, at least statistically. On the other hand, if
activity A and activity B require the same labor time, the total tallies
will not differ significantly. Now, to give a more concrete example,
suppose activity A is handling tubs of piece-rated flats, and activity B
is handling tubs of pound-rated flats. In general, these activities will
be recorded as direct tallies in IOCS. From the preceding discussion, it
follows immediately that to whatever extent heavier flats fill tubs
faster than lighter flats, and hence require a disproportionate share of
the flat tub handlings, the relative tally proportions between the two
activities will correspond.

If weight information were available for every handling tally, clearly
there would be no difficulty in estimating cost by weight increment
using IOCS. However, many of the handling mail observations are
mixed-mail tallies in which detailed information on the mail is not
available. In these cases, it is necessary to infer the likely contents
of the mail being handled by subclass and other characteristics. The
mixed-mail tallies contain ample information on shape and, in some
cases, class of mail, to inform the mixed-mail distributions. To use
this information appropriately, the Postal Service's methods, by design,
do not distribute mixed-mail tallies from one type of handling activity
on direct mail tallies from a completely different type of handling
activity, contrary to Dr. Haldi's criticism quoted above. In the
terminology of the distribution key analysis, the Postal Service's
mixed-mail distributions are "stratified" by both the mail processing
operation or "cost pool"[^3] and the type of item or container being
handled. Direct tallies representing single piece handlings would only
appear in mixed-mail distribution keys for observations of loose mixed
pieces of the same shape (as might be found in a hamper, for example).
Mixed-mail tallies that represent what Dr. Haldi might consider
weight-driven activities (e.g., handling trays or pallets) are
distributed using direct tallies from the same type of handling
activity. Since the equipment being handled is usually associated with a
shape, such as a letter or flat tray, and shape conveys information on
weight, there is a reasonable basis for inferring the weight
distribution of the mixed-mail observations. From the IOCS sample
design, the weight-cost relationship for an activity will be reflected
in the proportion of direct tallies by weight category for the activity.
The Postal Service's mixed-mail distribution method ensures that the
mixed-mail tallies have the same relationship.[^4]

Witness Haldi's characterization of the implicit distribution of
not-handling costs in witness Daniel's analysis simply ignores important
features of the Postal Service's methodology as well as the
justification of the methodology. First, the Postal Service's
distribution method does not generally distribute the costs associated
with not-handling tallies outside of the operational cost pool in which
the tallies appear. Where mail handlings from sorting operations enter
the distribution keys, most notably in allied labor cost pools, they do
so in recognition of the relationship between allied labor cost pools
and the distribution operations they support, a point on which there is
agreement among multiple witnesses in this docket.[^5] This method is
further validated by the available econometric evidence (see response to
MPA/USPS--T15-1 at Tr. 15/6251-6255). Witness Haldi's examples of
weight-related not-handling activities, such as disposing of pallet
shrink-wrap (Tr. 32/15832), are obviously not significant contributors
to mail processing costs (a few seconds of labor time being "shared"
among hundreds or thousands of pieces).[^6]

In short, witness Haldi has done nothing more than describe a variety of
potential shortcomings of a mail processing cost distribution
system---many of which, indeed, were present in the abandoned LIOCATT
method---that have been overcome in the Postal Service's MODS-based cost
distribution approach. Witness Haldi's arguments are not legitimate
grounds for rejecting witness Daniel's distribution of mail processing
costs to weight increment.

Witness Haldi's numerical analysis of the Standard Mail (A) ECR letter
cost estimates at Tr. 32/15847 does not support his contention that
"tallies from non-weight driven functions should not be used to
distribute the costs of weight-driven functions" (Tr. 32/15846). In his
computation of "link relatives" for ECR letters by one-ounce increment,
the first "anomaly" occurs in the 4-to-5 ounce range (Tr. 32/15847). The
fact that is evident in witness Haldi's table, but which he does not
discuss, is that the zero-to-4 ounce increments contain 99.8 percent of
the Test Year ECR letter piece volume, and 99.4 percent of the
volume-variable costs (per witness Daniel's calculations; see
USPS--LR--I--92). The problem is not with IOCS, *per se*, but slicing
the data too thinly. That there should be a relatively high degree of
sampling variation in the cost estimates for the remaining 0.2 percent
slice of the ECR letter volume hardly indicts the Postal Service's cost
systems as a whole. If anything, it simply highlights the undesirability
of excessive reliance on those individual point estimates that are
subject to relatively high sampling variation---which witnesses Fronk
and Moeller have avoided by considering only trends and relationships
among the data.[^7]

Witness Tye miscomprehends witness Daniel\'s testimony as well. He
incorrectly claims that witness Daniel's "current distribution is
essentially the same as that rejected in Docket No. R97--1"
(Tr.30/14698). To the contrary, the CRA-based method employed by witness
Daniel constitutes a significant advance over witness McGrane's analysis
from Docket No. R97--1,[^8] precisely because it is the first weight
distribution method to recognize the differences in the composition of
handlings between direct and mixed mail tallies (USPS--T--28 at 4).

# III. Relative standard errors show that data "thinness" is not an issue for the disaggregated costs used by witnesses Fronk and Moeller.

Witnesses Tye and Clifton contend that IOCS data "thinness" is a
significant problem for estimates of clerk and mail handler and city
carrier in-office volume-variable cost by subclass and weight
increment.[^9] Witness Tye states that "the number of tallies from which
\[the distribution key analysis\] is derived are far too thin on which
to base such a significant change in rate design" (Tr. 30/14700).
Witness Clifton contends that:

> Witness Daniel's cost data for First Class presort is not
> statistically significant using reasonable tests and assumptions. Her
> IOCS tallies are too few and as a result much of her presort cost data
> is erroneous or statistically insignificant (Tr. 26/12395).

As I will demonstrate, relative standard errors show that the weight
interval costs used by witnesses Fronk and Moeller are quite precise.
Hence the arguments of witnesses Tye and Clifton should be rejected.

According to the design of IOCS, proportions of tallies reflect
proportions of labor time spent on the underlying activities. Therefore,
relatively small volume (and/or low-cost) mail categories should
generate relatively few tallies given the overall sample size. For small
mail categories, the data are appropriately thin---the few tallies
correctly reflect the relatively small costs incurred by the associated
mail category. Thus, the problem, if there even is one, would not be the
data thinness, *per se*, but rather the effect it has on the relative
standard errors of some narrowly-defined weight increments. The
solution, when large increases in sample size are impractical (as is the
case here), is to limit the reliance upon individual point estimates
that are subject to large sampling variation. This is exactly what
witnesses Fronk and Moeller do by using relatively large aggregates over
weight increments.[^10] The corresponding cost estimates are, therefore,
not subject to tally "thinness" and unusually large sampling variation.

Since the data thinness "problem" manifests itself in relatively high
standard errors of the cost estimates, criticisms pertaining to it are
appropriately resolved by calculating coefficients of variation (CVs, or
relative standard errors) of the relevant cost estimates. None of the
intervenor witnesses correctly computes coefficients of variation for
the cost estimates actually employed by Fronk and Moeller.[^11] For the
IOCS-based cost estimates used by witnesses Fronk and Moeller, there are
two available methods for computing standard errors, the bootstrap and
the generalized variance function (GVF).[^12] The method I employ to
estimate CVs for the cost estimates used by witnesses Fronk and Moeller
is the GVF, which is also employed by witness Ramage in his response to
ANM/USPS--T2--13 (Tr. 4/1116). Estimated costs and CVs for the
First-Class Mail and Standard Mail (A) weight increments for which
witnesses Fronk and Moeller develop proposed rates are presented in
Tables 1 and 2, below.

**Table 1.**

[]{#__RefHeading___Toc490805364 .anchor}BY98 IOCS-Based Cost and CV
Estimates for First-Class Letters and Sealed Parcels Subclass

  -------------------------------- --------------------- ------------------
                                   Weight Increment      

                                   [0-1 oz.]{.underline} [1+
                                                         oz.]{.underline}

  Estimated cost (\$000)           10,222,417            3,113,956

  Estimated CV                     0.4%                  0.7%
  -------------------------------- --------------------- ------------------

> Source: Response to ANM/USPS--T2--13 (Tr. 4/1116-1117)

**Table 2.**

[]{#__RefHeading___Toc490805366 .anchor}**BY98 IOCS-Based Cost and CV
Estimates for Standard Mail (A)**

  ----------------- -------------------------- ------------------ ------------------
                                               Weight Increment   

                                               [0-3               [3+
                                               oz.]{.underline}   oz.]{.underline}

  ECR               Estimated cost (\$000)     439,038            154,973

                    Estimated CV               1.7%               2.8%

                                                                  

  Regular           Estimated cost (\$000)     1,818,698          842,700

                    Estimated CV               0.9%               1.3%

                                                                  

  Nonprofit ECR     Estimated cost (\$000)     58,957             8,309

                    Estimated CV               4.5%               11.3%

                                                                  

  Nonprofit         Estimated cost (\$000)     470,992            71,739

                    Estimated CV               1.7%               4.1%
  ----------------- -------------------------- ------------------ ------------------

> Sources: GVF, Response to ANM/USPS--T2--13 (Tr. 4/1116-1117). Costs,
> USPS--LR--I--99 and USPS--LR--I--100, total of mail processing and
> window service components and city carrier in-office components,
> respectively.

The estimated CVs for the IOCS-based cost estimates used by witnesses
Fronk and Moeller are generally small, consistent with the relatively
large costs of the rate categories and weight increments at issue. Only
one category, Nonprofit ECR weighing more than three ounces, has an
estimated coefficient of variation (11.3 percent) exceeding 10 percent.
The remaining coefficients of variation range from less than one percent
to less than 5 percent, indicating relatively low sampling error for the
cost estimates due to IOCS. As an indication of the magnitude of the
error in the computations presented in witness Clifton's Workpaper 3,
consider the CV for First-Class Presort above one ounce (as reported
here, using the correct application of the GVF). It is 1.8 percent,
which is approximately 1/35 of the 63 percent CV implied by the results
reported by witness Clifton in his Table 5.

Correct calculation of the coefficient of variation shows that data
"thinness" is not a concern for the First-Class and Standard Mail (A)
rate designs.

# IV. The available data do not permit empirical estimates of the relationship between weight and volume-variable city carrier route and load costs, but it is straightforward to place bounds on the relationship.

In contrast to the IOCS data used to develop clerk and mail handler and
city carrier in-office costs, the data systems used to develop
volume-variable city carrier street costs[^13] (cost segment 7) provide
no information with which to directly estimate subclass cost by weight
increment. In response to criticisms of past Postal Service methods to
disaggregate street costs by weight increment, witness Daniel introduces
a method using RPW weight by subclass and shape to distribute subclass
load costs from the CRA to weight increment. Witness Daniel's analysis
employs distribution keys based on RPW pieces by subclass and weight
increment to distribute route and access costs. As discussed below, the
intervenors' criticisms of witness Daniel's approach do not withstand
scrutiny.

Witness Tye considers the new weight distribution keys for load costs to
be an improvement over past practice, but states that by using
piece-based distribution keys for route and access costs, witness Daniel
did not go far enough (Tr. 30/14699). Witness White also criticizes the
piece-based keys for route and access costs (Tr. 22/9960). Witness
Haldi, in contrast, contends that witness Daniel's weight-based keys for
load time are inconsistent with the CRA methods, and underscores the
need for the Postal Service to develop data to estimate the effect of
weight on city carrier street costs (Tr. 32/15849).

Witnesses Haldi's position that additional data are needed to completely
resolve city carrier street costs by weight increment fails to
acknowledge that the available data do provide useful cost information
in the form of bounds on the street costs by weight increment. That is,
using weight as a distribution key assumes unit costs are proportional
to weight and provides an upper bound on the weight-cost relationship.
In contrast, using pieces (by shape), as was done for the distribution
key for segment 7 in Docket No. R97-1, assumes no relationship between
weight and cost, and so the results provide a lower bound on the
weight-cost relationship. While the assumptions may appear extreme, I
show below that the range of uncertainty between the alternative weight
distributions of street costs is comparable in magnitude to the sampling
error of the unit cost estimates. The difference between the lower and
upper unit cost bounds is small and often statistically insignificant
for the cost estimates employed in the rate design presented by
witnesses Fronk and Moeller.

I also demonstrate that because of the relative size of the pools of
volume-variable route and load costs, witness Daniel's cost estimates
for pound-rated Standard Mail (A) are nearly identical to the upper
bound. Thus, to the extent the actual costs are lower than the upper
bound and witness Daniel's estimates, the cost justification for a
reduction in the pound rate would be strengthened.

# A. Access cost distribution

Neither witness Haldi, witness Tye, nor witness White expressly
criticize witness Daniel's distribution of access costs. Witness
Daniel's access cost distribution is consistent with CRA methods and is
appropriate. Conceptually, access costs are the street costs caused by
actual stops or the deviation from the route to receptacles, as witness
Daniel correctly states (USPS--T--28 at 8). Access costs, therefore, are
volume-variable to the extent that additional volumes require additional
stops to be accessed. The need to access the stop is a function of the
presence of the piece that causes the stop and is not affected by the
weight of that piece. Nor does the time needed to access the stop vary
materially with the weight of the piece that causes the stop---for
instance, the time required for the carrier to access the stop is
essentially the same whether the stop is caused by a one ounce or two
ounce piece.

# B. Route cost distribution

Witness Daniel's characterization of route costs as "the time spent by
the carrier traversing the course of the route without deviating to make
stops" (USPS--T--28 at 8) is substantially correct. Witness Daniel
concludes that the volume-variable portion of route cost should not vary
significantly with weight, so she distributed route costs to weight
increment using pieces. Witness White criticizes witness Daniel's
approach as inconsistent with his experience in running a delivery
business (Tr. 22/9960).[^14]

Prior to Docket No. R97-1, route costs were treated as fully
institutional. However, since the time spent by the carrier traversing
the course of the route without deviating to make stops is not directly
observable---instead, one observes the actual driving time when there is
mail. Therefore, route time as measured includes a portion of driving
time that is volume-variable to a small degree. Driving time varies
somewhat with the number of dismount points required on park-and-loop
routes. Since the required number of dismounts depends in part on the
amount (specifically, the total weight) of mail to be delivered on a
particular loop, route costs are partly volume-variable due to the
volume-variability of the dismounts (see Docket No. R97-1, USPS-T-10).
Nevertheless, the vast majority of route costs are simply
non-volume-variable. It is my understanding that the Postal Service is
presenting evidence that route costs are properly treated as fully
institutional.

# C. Load cost distribution

For load costs, witness Daniel specifies the weight distribution by
subclass and shape to disaggregate the load time costs. Witness Daniel
suggests that the weight distribution key may overstate the cost-weight
relationship for load costs, but that its use would offset the use of
pieces as the route and access distribution keys (USPS--T--28 at 8).
Witness Haldi compares the CRA methodology to witness Daniel's weight
distribution key and argues that her approach is not valid (Tr.
32/15849). The purpose for which witness Daniel used the weight
distribution key, however, was to disaggregate subclass cost by weight
increment, thereby illustrating the upper bound of the weight-cost
relationship for the pound rate pricing exercise. Thus, by using weight
as a distribution key, witness Daniel adopted a conservative assumption
with respect to the proposal to lower the ECR pound rate.

# D. Witness Daniel's cost estimates are much closer to the upper bound method for carrier street costs than the lower bound method.

In using pieces as the distribution key for route costs and weight as
the distribution key for load costs, witness Daniel employs the lower
bound on the cost-weight relationship for the route costs and the upper
bound for the load costs. Bounds on the cost estimates used by witnesses
Fronk and Moeller can be computed simply by specifying the lower- or
upper-bound distribution method for both cost components. In Tables 3
and 4 below, I present the bounds on the Test Year cost estimates
provided by witness Daniel to Fronk and Moeller, as well as those
employed by witness Tye for pound-rated mail (Tr. 30/14709). The
supporting calculations, which are derived from material presented in
USPS--LR--I--91 and USPS--LR--I--92, are provided in USPS--LR--I--456.

To the extent load costs vary with weight to a lesser degree than that
assumed by witness Daniel, as witness Haldi's testimony seems to imply,
the "true" costs would be closer to the *lower* bound than the upper
bound. In that case, the implicit Standard Mail (A) cost coverages
reported by witnesses Moeller and Tye for pound rated mail would be
*over*stated, particularly for ECR. Substituting the lower bound costs
into witness Moeller's after rates implicit cost coverage calculations
increases the implicit cost coverage for pound rated ECR considerably,
to nearly 250 percent. See Table 5. Since witness Daniel's cost
estimates approach those produced with the upper bound method, the
likely direction of any error would, if anything, strengthen the
cost-based justification for reducing the ECR pound rate.

**Table 3.**

**Test Year Unit Volume-Variable Cost (cents),**

[]{#__RefHeading___Toc490805369 .anchor}First-Class Letters and Sealed
Parcels Above One Ounce

  -------------------------- --------------- ------------ ---------------
                             Lower Bound     Daniel       Upper Bound

  First-Class Letters &      46.5            47.5         47.6
  Sealed Parcels                                          

  Single Piece               50.0            50.9         51.0

  Presort                    31.5            33.0         33.1
  -------------------------- --------------- ------------ ---------------

> Source: Daniel, LR--I--91. Lower and Upper Bounds, LR--I--456.

**Table 4.**

**Test Year Unit Volume-Variable Cost (cents),**

[]{#__RefHeading___Toc490805372 .anchor}**Pound-Rated Standard Mail
(A)**

  -------------------------- --------------- ------------ ---------------
                             Lower Bound     Daniel       Upper Bound

  **Based on costs for                                    
  pieces above 3 ounces**                                 

  ECR                        7.83            9.01         9.22

  Regular                    24.76           25.5         25.7

  Nonprofit ECR              10.42           12.05        12.26

  Nonprofit                  27.22           28.63        28.93

  **Based on costs for                                    
  pieces above 3.5 ounces**                               

  ECR                        7.79            9.16         9.41

  Regular                    27.31           28.16        28.44

  Nonprofit ECR              10.95           12.86        13.1

  Nonprofit                  30.5            32.21        32.55
  -------------------------- --------------- ------------ ---------------

> Source: Daniel, LR--I--92. Lower and Upper Bounds, LR--I--456.

**Table 5.**

**Implicit Cost Coverage for Pound-Rated ECR**

[]{#__RefHeading___Toc490805375 .anchor}**Using Lower Bound Costs**

  ------------------- ---------- ------------ ------------ ---------------
                      After      Cost (lower  Implicit     Implicit Cost
                      Rates      bound        Cost         Coverage
                      Revenue    method)      Coverage     (Moeller)

  3.0-oz dividing     0.19472    0.0783       248%         216%
  line                                                     

  3.5-oz dividing     0.19472    0.0779       250%         213%
  line                                                     
  ------------------- ---------- ------------ ------------ ---------------

Source: Cost, Table 4. Revenue and Moeller Cost Coverage, USPS--T--35 at
24.

# V. Witness Daniel provides cost data that are sufficient for the rate design for first ounce and additional ounce First-Class Mail and for piece- and pound-rated Standard Mail (A).

From the great effort that witnesses Clifton, Haldi, and Tye expend on
criticism of some of the finely disaggregated cost data presented in
witness Daniel's supporting documentation, one could lose sight of the
fact that neither witness Fronk nor witness Moeller relies upon the
detailed costs by weight increment. Calculation of proposed rates does
not require determination of the effect of every factor that might
impact the cost of that mail category. In the case of the data witness
Daniel supplies to witnesses Fronk and Moeller, it is true, but
irrelevant, that witness Daniel's data do not clearly identify the
precise effect of mailpiece weight on cost in isolation from other
factors. She needed only determine the cost of the mail subject to the
First-Class additional ounce rate and Standard Mail (A) piece and pound
rates in the aggregate. For this purpose, the available cost data are
sufficient, for all the reasons I describe above.

The adequacy of the cost data and the goals of the rate design are
linked. The criticisms of the Postal Service's data on cost by weight
increment in witness Haldi's testimony and in the Data Quality Study
(which witness Haldi cites) suppose the need for data measuring the
effect of mailpiece weight on cost *in isolation from other factors*.
However, neither witness Haldi nor the authors of the Data Quality Study
ever establish the need (in the ratemaking context) for data measuring
the isolated effect of mailpiece weight on cost. In the case of the
First-Class additional ounce rate, witness Fronk makes clear that the
additional ounce rate is not designed to reflect cost differences based
solely on weight and it would not necessarily be desirable to do so
(USPS--T--33 at 25--26). In the case of Standard Mail (A), the rate
design does not distinguish potential cost differences due to factors
such as origin-destination pairs (due to length of haul, processing
patterns, etc.) and takes limited account of shape and even weight
itself. Furthermore, even witness Haldi indicates that he is "not sure
what purpose is achieved by costing separately letter-shaped pieces
above the breakpoint" (see response to USPS/VP--CW--T1--20(a) at Tr.
32/15932)---that is, controlling for DMM shape. As a result, the cost
data needed to support the additional ounce and pound rates need not
satisfy the excessively stringent requirements suggested by witness
Haldi.

# VI. Summary

As I have clearly demonstrated, the criticisms of witness Daniel's
weight-cost analysis put forth by witnesses Haldi, Clifton, Tye, and
White discussed in this testimony do not withstand scrutiny. Data
"thinness" is not an issue for the disaggregated costs used by witnesses
Fronk and Moeller---the relative standard errors show that weight
interval costs are quite precise. Witness Daniel's city carrier street
cost distribution yields costs that fall within reasonable bounds of the
weight-cost relationship. I have demonstrated that witness Daniel
provides cost data that are sufficient for the computation of proposed
rates for first ounce and additional ounce First-Class Mail and for
piece- and pound-rated Standard Mail (A).

[^1]: When an IOCS tally is taken, the activity performed by the sampled
    employee at a randomly selected point in time is recorded. The
    classification of the recorded tally depends on the observed
    activity of the sampled employee. As defined by the proposed Docket
    No. R2000-1 cost distribution methodology, a tally is classified as
    a direct tally if the employee is observed handling mail that may be
    attributed to a single class. This occurs when an employee is
    recorded handling a single piece of mail, an item or container with
    identical pieces of mail, or an item where the top piece rule has
    been applied. The top piece rule directs the tally taker to record
    the characteristics of the top piece from a bundle, letter tray, or
    flat tray containing non-identical mail. A direct tally also results
    from items, such as pallets, small parcel trays, and sacks, whose
    entire non-identical contents are counted by subclass and shape.

    A mixed mail tally is recorded when an employee is observed handling
    mail which may not be attributed to a single class of mail. This
    includes items containing non-identical mail that is not counted.
    Containers containing non-identical mail are also classified as
    mixed mail. Employees handling empty items or containers are also
    recorded as mixed mail tallies because subclass or shape may be
    inferred from the item or container type (defined by the proposed
    Docket No. R2000-1 cost distribution methodology).

    If a tally is classified as neither a direct or mixed mail tally, it
    is considered a not-handling tally. Not-handling tallies convey no
    shape or subclass information.

[^2]: I limit the discussion below to mail processing, since the city
    carrier in-office component consists largely of a single
    activity---manually casing non-DPS mail---so criticisms related to
    cross-activity cost distribution are inapplicable.

[^3]: The main exception is that mixed-mail observations in the MODS
    Platform cost pool are distributed using direct tallies of the same
    item or container type in all allied labor cost pools.

[^4]: Even though witness Haldi's criticisms hinge on the contention
    that tallies from "weight driven functions" are inappropriately
    distributed using tallies from supposedly non-weight related
    functions, he was unable to specify which cost pools represented
    such functions, or how the distribution methods for those cost pools
    relate to his criticisms (Tr. 32/15926).

[^5]: See Postal Service witness Degen (USPS--T--16 at 74) and Time
    Warner witness Stralberg (TW--T--1 at 30).

[^6]: Witness Haldi also cites activities such as obtaining and staging
    empty equipment (Tr. 32/15832). It should be noted that the
    associated tallies are treated as handlings in the Postal Service's
    cost distribution method, and thus receive the appropriate weight
    distribution for the equipment type.

[^7]: Alternatively, one could employ a technique such as regression to
    estimate the underlying cost relationship from the "noisy" detailed
    data.

[^8]: Witness McGrane applied the weight distribution of direct tallies
    (without adjustment for the composition of handlings between direct
    and mixed-mail tallies) to distribute subclass costs (see Docket No.
    R97--1, Exhibit USPS--ST-44 (USPS LR-H-182) at 3).

[^9]: In contrast, witness Haldi states that "the issue of small sample
    size is something of a red herring" (Tr. 32/15844).

[^10]: The weight groupings of mail for which witnesses Fronk and
    Moeller develop rates are relatively large.

[^11]: Witness Clifton attempts to do so for some First-Class Mail
    groupings, but commits a serious error by misinterpreting measures
    of the variation in cost from one weight increment to another as
    measures of the IOCS sampling variation in the cost estimates for
    First-Class Mail above one ounce (see Clifton Workpaper 3,
    ABA&NAPM--LR--1).

[^12]: Both techniques represent approaches for computing standard
    errors when the sample design and/or the mathematical form of the
    estimators are too complicated to permit the use of closed-form
    variance formulas. As was the case for witness Ramage, the bootstrap
    is too time- and computation-intensive to be employed here (See
    Response to ANM/USPS--T2--13 at Tr. 4/1116).

[^13]: Street costs are composed of route costs (costs associated with
    walking the route without making stops), access costs (costs
    associated with making the stop excluding load costs), and load
    costs (costs of loading the box).

[^14]: Witness White also provides an example showing how a 6-2/3
    percent increase in weight caused his carriers to walk an additional
    50 miles over a one year period (Tr. 22/9960), though the example
    omits the critical detail of what percentage increase in walking
    distance the 50 miles represents.