UNITED STATES OF AMERICA

Before The

POSTAL RATE COMMISSION

WASHINGTON, D.C. 20268-0001

Postal Rate and Fee Changes, 2006 ) Docket No. R2006-1

RESPONSES OF OFFICE OF THE CONSUMER ADVOCATE

WITNESS MARK J. ROBERTS TO INTERROGATORIES OF

UNITED STATES POSTAL SERVICE (USPS/OCA-T1-45-47)

(October 20, 2006)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

The Office of Consumer Advocate hereby submits responses of Mark J.
Roberts to interrogatories USPS/OCA-T1-45-47, dated October 6, 2006.
Each interrogatory is stated verbatim and is followed by the response.

Respectfully submitted,

SHELLEY S. DREIFUSS

Director

Office of Consumer Advocate

EMMETT RAND COSTICH

Attorney

901 New York Avenue, NW Suite 200

Washington, D.C. 20268-0001

\(202\) 789-6830; Fax (202) 789-6891

e-mail: <rand.e.costich@prc.gov>

USPS/OCA-T1-45. Please refer to your response to USPS/OCA-T1-14(b). That
question sought information on the composition of your FHP measures by
cost pool---i.e., \"manual letters, OCR, aggregate BCS, manual flats,
FSM 1000, and AFSM 100\"---not by presort level. Please also refer to
your response to USPS/OCA-T1-2, where you agreed that the cost of
sorting a piece of mail in the Postal Service\'s automation mailstream
is lower than that of sorting an otherwise identical piece in the Postal
Service\'s manual mailstream.

\(a\) Please refer to your description of mapsfinal.dta in OCA-LR-2,
file description.pdf. Please confirm that the \"K56\" variable
identifies the cost pools enumerated in USPS/OCA-T1 -14(b). If you do
not confirm, please explain.

\(b\) Please confirm that the groups you list in response to
USPS/OCA-T1-14(b) do not provide a one-to-one correspondence to the cost
pools listed above and in USPS/OCA-T1-14(b). If you do not confirm,
please provide a crosswalk of your categories to cost pool.

\(c\) Please confirm that using the \"K56\" variable, it is possible to
disaggregate your FHP measures to the cost pools listed above and in
USPS/OCA-T1-14(b). If you do not confirm, please explain.

\(d\) If your response to part (c) confirms that producing the
disaggregated FHP by cost pool is possible, please provide the
disaggregated FHP data by cost pool requested in USPS/OCA-T1-14(b).

\(e\) Are the shares of outgoing letter FHP in categories 111-114 you
present in response to USPS/OCA-T1-14(b) intended to fully partition
outgoing letter FHP? If not, why not?

\(f\) Please explain to which of group(s) 111-114 you assign outgoing
manual letter FHP.

RESPONSE TO USPS/OCA-T1-45

\(a\) The K56 variable corresponds to the MODS operations groups listed
in USPS-LR-L56, p. 23 and 24. It is constructed directly from two
variables (operation and VVgroup) supplied in
USPS-LR-L-56\\Section4\\Data\\oper-grp-maps.xls.

\(b\) Confirmed. Both groups aggregate over the three-digit MODS
operations but in different ways.

> \(c\) One problem is that the data in oper-grp-maps.xls does not
> assign the 22 three-digit MODS operations in the OCR group (K56 = 4)
> to incoming and outgoing operations. If you allow me to assign these
> categories then I can do the aggregation you request. I will assign
> MODS operations 046, 831, 832, 841, 842, 881, and 882 to outgoing OCR
> and the remaining 15 operations to incoming OCR.
>
> \(d\) Incoming Letters

+-------------+-------------+-------------+-------------+-------------+
| > Year:qtr  | > FHPIN     | > Share     | > Share OCR | > Share     |
|             |             | > Manual    |             | > Aggregate |
|             |             | > Labor     |             | > BCS       |
+-------------+-------------+-------------+-------------+-------------+
| 1999:1      | 25263       | .089        | .069        | .841        |
+-------------+-------------+-------------+-------------+-------------+
| > 2000:1    | > 26837     | > .077      | > .062      | > .861      |
+-------------+-------------+-------------+-------------+-------------+
| > 2001:1    | > 28225     | > .064      | > .058      | > .878      |
+-------------+-------------+-------------+-------------+-------------+
| > 2002:1    | > 27173     | > .053      | > .050      | > .896      |
+-------------+-------------+-------------+-------------+-------------+
| > 2003:1    | > 27316     | > .042      | > .044      | > .914      |
+-------------+-------------+-------------+-------------+-------------+
| > 2004:1    | > 27432     | > .036      | > .040      | > .924      |
+-------------+-------------+-------------+-------------+-------------+
| > 2005:1    | > 28153     | > .030      | > .037      | > .933      |
+-------------+-------------+-------------+-------------+-------------+

> Outgoing Letters

+-------------+-------------+-------------+-------------+-------------+
| > Year:qtr  | > FHPOUT    | > Share     | > Share OCR | > Share     |
|             |             | > Manual    |             | > Aggregate |
|             |             | > Labor     |             | > BCS       |
+-------------+-------------+-------------+-------------+-------------+
| 1999:1      | 13327       | .094        | .483        | .420        |
+-------------+-------------+-------------+-------------+-------------+
| 2000:1      | 13421       | .092        | .471        | .437        |
+-------------+-------------+-------------+-------------+-------------+
| 2001:1      | 13203       | .078        | .420        | .503        |
+-------------+-------------+-------------+-------------+-------------+
| 2002:1      | 12349       | .068        | .383        | .549        |
+-------------+-------------+-------------+-------------+-------------+
| 2003:1      | 11919       | .058        | .386        | .556        |
+-------------+-------------+-------------+-------------+-------------+
| 2004:1      | 11552       | .054        | .375        | .571        |
+-------------+-------------+-------------+-------------+-------------+
| 2005:1      | 109057      | .050        | .346        | .604        |
+-------------+-------------+-------------+-------------+-------------+

Incoming Flats

+-----------+----------+---------+----------+----------+-------------+
| Year:qtr  | FHP~IN~  | Share   | > Share  | > Share  | > Share     |
|           |          | Manual  | > FSM881 | >        | > AFSM      |
|           |          | Labor   |          |  FSM1000 |             |
+-----------+----------+---------+----------+----------+-------------+
| > 1999:1  | > 4662   | > .212  | > .628   | > .160   | > .000      |
+-----------+----------+---------+----------+----------+-------------+
| > 2000:1  | > 4855   | > .206  | > .622   | > .171   | > .000      |
+-----------+----------+---------+----------+----------+-------------+
| > 2001:1  | > 5085   | > .188  | > .480   | > .147   | > .186      |
+-----------+----------+---------+----------+----------+-------------+
| > 2002:1  | > 5071   | > .115  | > .130   | > .088   | > .667      |
+-----------+----------+---------+----------+----------+-------------+
| > 2003:1  | > 5376   | > .076  | > .021   | > .071   | > .832      |
+-----------+----------+---------+----------+----------+-------------+
| > 2004:1  | > 5400   | > .063  | > .008   | > .085   | > .843      |
+-----------+----------+---------+----------+----------+-------------+
| > 2005:1  | > 5461   | > .057  | > .000   | > .086   | > .857      |
+-----------+----------+---------+----------+----------+-------------+

Outgoing Flats

+-----------+----------+---------+----------+----------+-------------+
| >         | > FHPOUT | > Share | > Share  | > Share  | > Share     |
|  Year:qtr |          | >       | > FSM881 | >        | > AFSM      |
|           |          |  Manual |          |  FSM1000 |             |
|           |          | > Labor |          |          |             |
+-----------+----------+---------+----------+----------+-------------+
| > 1999:1  | > 1132   | > .087  | > .700   | > .214   | > .000      |
+-----------+----------+---------+----------+----------+-------------+
| > 2000:1  | > 1151   | > .093  | > .698   | > .208   | > .000      |
+-----------+----------+---------+----------+----------+-------------+
| > 2001:1  | > 1131   | > .091  | > .467   | > .205   | > .238      |
+-----------+----------+---------+----------+----------+-------------+
| > 2002:1  | > 1023   | > .065  | > .104   | > .154   | > .677      |
+-----------+----------+---------+----------+----------+-------------+
| > 2003:1  | > 999    | > .055  | > .015   | > .107   | > .823      |
+-----------+----------+---------+----------+----------+-------------+
| > 2004:1  | > 938    | > .055  | > .006   | > .117   | > .822      |
+-----------+----------+---------+----------+----------+-------------+
| > 2005:1  | > 927    | > .059  | > .000   | > .105   | > .836      |
+-----------+----------+---------+----------+----------+-------------+

(e) Yes. The categories account for all outgoing letter FHP.

\(f\) MODS category 30 (Manual letters, outgoing primary) is assigned to
presort category 111. MODS category 40 (Manual letters, outgoing
secondary) is assigned to presort category 112. The link between each
MODS category and each presort category is given in the data set
OCA-LR-L-2\\DATA\\FHP\\mapsfinal.dta.

USPS/OCA-T1-46. Please refer to your response to USPS/OCA-T1-15.

\(a\) Does the 0.079 R-squared from your OCA-T-1 \"base model\" suggest
to you that your model specification may be failing to include major
factor(s) that explain manual flats workhours? If not, why not?

\(b\) Do the lower R-squared and/or higher standard errors of the output
elasticities you confirm in response to USPS/OCA-T1-15(e)-(f) indicate
that your flats model developments did not improve your results? If not,
why not?

\(c\) Please compare the R-squared of the manual flats \"base model\"
with that of the manual flats models from your \"USPS Model\"
implementation, reported in Table 1 of OCA-T-1. Please provide output
log(s) to support your answer, or indicate where in OCA-LR-2 the results
may be found.

RESPONSE TO USPS/OCA-T1-46

(a) Using the R^2^ to draw inferences about model specification is
    inappropriate. A low R^2^ does not imply that the model is bad or
    that there are omitted variables. Nor does a high R^2^ imply that
    the model is correctly specified or that the results are not
    spurious. In his textbook, *A Course in Econometrics*, Arthur
    Goldberger states, "In fact the most important thing about R^2^ is
    that it is not important in the CR (classical regression) model. The
    CR model is concerned with parameters in a population, not with
    goodness of fit in the sample" (p. 177). The empirical model of mail
    processing that I have developed is focused on providing consistent
    estimates of the parameters of the labor demand function. It is also
    the case that one has to be careful about the definition of the R^2^
    in panel data models. The value reported for my regressions is the
    square of the simple correlation between the dependent variable and
    the fitted value of the regression, where the latter is constructed
    without using the plant fixed effect. This is what the STATA
    computer software reports as the "overall R^2"^ for the regression.
    If instead we include the plant fixed effect in the fitted value of
    the regression the squared correlation between actual and fitted
    values would increase to .846 in this regression. In either case,
    drawing conclusions about model specification on the basis of
    summary statistics like this is not justified.

(b) This is basically the same model I estimated in my early papers.
    What is different is the sample of data used. In the results from
    OCA-T-1 that are referenced in USPS/OCA-T1-15, the estimation is
    limited to plants that have the AFSM operation in place. The results
    that are referenced from Roberts (2006) included observations from
    1999-2004 and included plants both with and without the AFSM
    technology. The reduction in sample size alone will result in higher
    standard errors for the coefficients in OCA-T-1. The conclusions
    that I draw from these results are discussed in OCA-T-1, p.49, line
    4 to p.50, line 16.

(c) The overall R^2^ from the base model is .079 as discussed in the
    answer to part (a). The R^2^ from the Table 1 models are .012 for
    the plants with AFSM and .345 for plants without AFSM. These results
    are reported OCA-LR-2\\ESTIMATION in the log files threestep.log at
    line 781 and 3stepnoafsm.log at line 223. Neither of these numbers
    include the plant fixed effects in the calculation of the fitted
    value as explained in my answer to part (a). I cannot see any reason
    to compare these numbers and cannot offer any conclusions from them.

USPS/OCA-T1-47. Please refer to your response to USPS/OCA-T1-15.

\(a\) Does the 0.333 R-squared from your OCA-T-1 \"base model\" suggest
to you that your model specification may be failing to include major
factor(s) that explain FSM 1000 workhours? If not, why not?

\(b\) Do the lower R-squared and/or higher standard errors of the output
elasticities you confirm in response to USPS/OCA-T1-15(e)-(f) indicate
that your flats model developments did not improve your results? If not,
why not?

\(c\) Please compare the R-squared of the FSM 1000 \"base model\" with
that of the FSM 1000 models from your \"USPS Model\" implementation,
reported in Table 1 of OCA-T-1 . Please provide output log(s) to support
your answer, or indicate where in OCA-LR-2 the results may be found.

RESPONSE TO USPS/OCA-T1-47

I assume this question is referring to my answer to USPS/OCA-T1-16, not
T1-15.

(a) Please see my answer to USPS/OCA-T1-46. In this case, the R^2^ for
    the regression, if the plant fixed effect were included in the
    fitted value of the demand equation, is .669.

(b) Please see my answer to USPS/OCA-T1-46. Since this and the previous
    question are trying to base inferences on R^2^ comparisons in the
    manual and FSM1000 operations, for completeness it is appropriate to
    recognize that the AFSM operation is also part of the same model. In
    the OCA-T-1 base model (Table 7), the corresponding R^2^ for the
    AFSM demand equation is .856. The corresponding figure from
    Roberts (2006) Table 5, is .884.

(c) The overall R^2^ from the base model is .333. The R^2^ from the
    Table 1 models are .343 for the plants with AFSM and .465 for plants
    without AFSM. These results are reported in OCA-LR-2\\ESTIMATION in
    the log files threestep.log at line 902 and 3stepnoafsm.log at
    line 475. Neither of these numbers include the plant fixed effects
    in the calculation of the fitted value as explained in my answer to
    part (a). I cannot see any reason to compare these numbers and
    cannot offer any conclusions from them.